November 4, 2012

The Legislation Enabling the 38 Studios Guarantee Didn't Magically Push Itself Through the Legislature

Carroll Andrew Morse

Based on some chatter in the Twittersphere over the weekend, it appears the claim is still alive and well that Rhode Island Speaker of House Gordon Fox didn't know that the state's Economic Development Corporation would consider awarding $75M in loan guarantees to a single company (that eventually went under), utilizing a $125M pool that had been authorized by the legislature during his watch.

Let's review the timeline on this.

1. Governor Donald Carcieri and the Rhode Island Economic Development Corporation, at the start of 2010, had proposed a $50M program for state-government loan guarantees to businesses in Rhode Island. Here's a description of the original program from WPRI-TV's (CBS 12) Tim White and Ted Nesi...

Carcieri and the EDC had proposed a new $50 million Job Creation Guaranty Program that would provide loan guarantees to local high-tech companies with soft assets such as intellectual property, as opposed to hard assets such as factories and equipment.
Keep the number $50M in mind.

2. According to Mike Stanton of the Projo (h/t Monique), a meeting between 38 Studios founder Curt Schilling and Governor Carcieri at a March 2010 fundraiser led to meetings with EDC Chairman Keith Stokes and Rhode Island Speaker of the House Gordon Fox...

One week later, the new executive director of Rhode Island’s Economic Development Corporation, Keith Stokes, said that both Carcieri and Fox, the House speaker, told him in separate conversations that he should meet Schilling.

On March 16, Stokes and Fox met Schilling and 38 Studios director Tom Zaccagnino at the downtown Providence law office of Michael Corso, a friend and campaign supporter of Fox’s who was working with 38 Studios, sold tax credits, and had helped rewrite Rhode Island’s historic-preservation tax credit law.

Six days later, Stokes met again with Schilling and Zaccagnino, this time with EDC officials. 38 Studios said it was looking for about $75 million, so Stokes said he went to legislative leaders and suggested they add $75 million to a planned $50-million financial credit program for companies that create “soft assets” — such as computer software and other intellectual property.

On April 6 — one month after Schilling and Carcieri first met —House Finance Chairman Steven Costantino inserted the $125-million Job Creation Guarantee Program into the supplemental budget.

Note $75M being added to an original $50M.

3. Eventually, the "Job Creation Guaranty Program" was approved by the House in May of 2010, authorizing the Economic Development Corporation to issue $125M in debt in support of "Rhode Island's economic development strateg[y] of continuing to optimize its knowledge economy assets such, as the sciences, technology, digital media, innovative manufacturing and other technologies". It was then approved by the Senate and signed by the Governor.

4. In July of 2010, Schilling's company was awarded a $75M loan guarantee by the EDC.

So was the extra $75M added to the original $50M loan guarantee program targeted for one company, right from the start, during the legislative phase of the process?

5. House Finance Committee Chairman Stephen Costantino had this to say on the subject of the loan-guarantee program, to Denise Perreault of the Providence Business News in June of 2010 -- that's before the EDC had made its decision to award 38 Studios one chunk of $75M...

Rep. Steve Costantino, chairman of the House Finance Committee and a candidate for mayor in Providence, sponsored the legislation creating the $125 million loan-guarantee program. He said he had heard that 38 Studios was interested in moving to Rhode Island, so he set the guarantee ceiling at $125 million specifically to allow other businesses to take advantage of the funding, too.
Let's work through the numbers here. Suppose Chairman Costantino thought that 38 Studios might receive an amount equal to a whole fifth of the original fund ($10M), and that wouldn't leave enough for others. If that was the case, the program could have been increased to $60M, which would have allowed it to accommodate everyone it could have prior to 38 Studios' interest, plus 38 Studios for $10M. Or suppose he thought that 38 Studios might ask for an amount up to half of the size of the original program ($25M). Then, the sensible thing would have been to increase the size of the loan guarantee fund to $75M, allowing $25M to go to one place and $50M to everyone else.

Instead, so that the program could involve both 38 Studios and "other businesses", a choice was made to increase the size of the loan guarantee program to $125M, suggesting that $75M was going someplace where all of the "other businesses" eligible for the program would not be able "to take advantage of the funding", i.e. the one business mentioned by name by Finance Chairman Costantino was expected to get the $75M.

6. Of course, the fact that the House Finance Chairman pretty clearly knew where the money was going when he spoke prior to the EDC vote doesn't automatically mean the Speaker did. Maybe Stephen Costantino had gone rogue, and was throwing numbers into the budget and making promises without consulting anyone, and Speaker Fox was too busy with other things to notice. Just keep in mind, that's as about as good a claimas there is that the Speaker didn't know the $75M spike in the Job Creation Guaranty Program ceiling wasn't intended specifically for 38 Studios.

As for supporters of Speaker Fox running in Tuesday's election, whether their better argument is "we assumed the Speaker knew where the money was going" or "we know he didn't really know where the money was going, but we voted like he told us to anyway" is not as clear.

Comments, although monitored, are not necessarily representative of the views Anchor Rising's contributors or approved by them. We reserve the right to delete or modify comments for any reason.

Something like twenty five years ago, I was associated with the formation of the first union sponsored bank in Massachusetts, First Trade Union S.B. Being a new bank, a president was required. It was determined that a former Red Sox player should be selected (I am not a baseball fan and do not recall the name). The bank organizers were ecstatic over the idea and went around slapping each other on the back of over the wisdom of the selection. Within a year, the ball player was overwhelmed and gone. I thought the organizers felt some reflected glory in having their picture taken with the ball player. I wonder.

Posted by: Warrington Faust at November 4, 2012 8:36 PM

"Maybe Stephen Costantino had gone rogue, and was throwing numbers into the budget and making promises without consulting anyone, and Speaker Fox was too busy with other things to notice."

HAHAHAHAHA!!! Thanks for a good laugh, Andrew!

Posted by: Monique at November 4, 2012 8:40 PM

"Carcieri and the EDC had proposed a new $50 million Job Creation Guaranty Program that would provide loan guarantees to local high-tech companies with soft assets such as intellectual property, as opposed to hard assets such as factories and equipment."

What could possibly be higher risk than "soft assets" and intellectual property. Let us recall that Alexander Bell's invention of the telephone was practically simultaneous with another. It was a very close thing.

As to the parties involved with this "Every dog will have his day, every hog will have his Martinmas." Why do I not suspect that blood will run in the gutters?

Where did we ever get the idea that government should, or could, "create jobs". Is this some New Deal legacy? Some years ago, PBS ran a show which featured a history professor reading old newspapers and explaining the background of stories. Some may recall the CCC (Civilian Conservation Corp) an agency formed to employ you men during the Great Depression. A PBS segment I recall was the professor reading a newspaper from 1942, or 1943 (mid WWII, full employment). The story examined was the CCC seeking additional funding to carry on its work of providing employment. I wonder if Rosie the Riveter got that days paper.

Posted by: Warrington Faust at November 4, 2012 8:59 PM

Anybody else get the sensation that this is all very Rhode Island? We're trying to prove beyond a shadow of a doubt something that we all knew to be true... before the truth became inconvenient with people in power.

Posted by: Justin Katz at November 4, 2012 9:07 PM

Fox, Carcieri, Constantino, Stokes... large loans, medium loans, small loans... the individuals and amounts involved are irrelevant. Pointing fingers only allows progressives to muddy the narrative while plodding along with their mad experiment of publicly funding private companies. 38 Studios is just a particularly harsh illustration of the lesson that central economic planning doesn't work.

All of the incentives were in place through the EDC for this loan to happen, and all of the same incentives remain in place today to repeat the disaster. Nothing has changed. Central economic planning can only have one end - exactly what occurred with 38 Studios, Capco Steel, and all the other failed loans of the RIEDC and PEDC. Until Rhode Island returns to a private profit and loss system and levels the field for businesses, the planned economy of Rhode Island will continue to rot from the inside out and fail.

Posted by: Dan at November 4, 2012 10:10 PM

Sgt. Schultz will be played by Gordon Fox.

Posted by: John at November 5, 2012 6:33 AM

I know noTHING. I see noTHING. Subject change! Gay marriage! I'm submitting the bill first thing this January!

(By the way, great analysis, Andrew.)

Posted by: Monique at November 5, 2012 6:55 AM

BTW, will Steve C. be allowed to keep his job when the Governor finally figures out that the Finance Chairman was fully informed about this bad deal all along?

Posted by: John at November 5, 2012 10:25 AM
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