Rhode Island General Treasurer Frank Caprio, who said the possible failure of AIG could affect the state budget, was pleased with the news of a federal bailout.

The Providence Journal / Connie Grosch

PROVIDENCE –– State agencies have more than $130 million locked in investment accounts managed by the insurance giant American International Group, the latest financial Goliath struggling to survive amid volatile markets and a weakening national economy.

State officials yesterday formed a “SWAT team” to avert a worst-case scenario in which Rhode Island would lose access to its money, jeopardizing tens of millions of dollars needed for construction projects already under way.

AIG’s future was very much in doubt yesterday afternoon, as key state officials monitored falling stock prices. Late yesterday, the Federal Reserve agreed to an $85-billion bailout that would give the government an ownership stake in AIG.

Earlier in the day, General Treasurer Frank T. Caprio acknowledged that an AIG collapse might place a new burden on state and federal taxpayers.

“In a worst-case scenario, the meltdown of some of the financial giants of our country will cause strain on Rhode Island’s budget and every other state budget in this land,” Caprio said. “It may require, in a worst-case scenario, action from Congress and assistance from the federal government. And after that, it may require additional resources from state and local governments.”

Reached last night, the treasurer’s spokesman said the federal bailout was a positive development for Rhode Island.

State officials were scrambling yesterday to determine how many state agencies — and cities and towns — had money tied up in “guaranteed investment contracts” with AIG. They found at least $131 million in two agencies, but that figure may grow in coming days.

Rhode Island’s predicament depends largely on AIG’s financial health. The insurer’s credit rating was cut Monday and its stock price plummeted nearly 80 percent over the last five days.

The New York-based international company released a statement yesterday afternoon attempting to ease the fears of states and other entities that stand to lose a projected $180 billion in a collapse: “The AIG companies are fully committed to maintaining required capital levels in all of its subsidiaries and to meeting the needs of their customers around the world,” it read.

State budget officer Rosemary Booth Gallogly played down concern that Rhode Island would lose its money, citing “contractual protections.” Director of Administration Jerome Williams, who joins Gallogly and Caprio on the “SWAT team,” added: “Right now the intent is to make sure the state is protected…. We’re doing everything we can.”

State officials plan to brief Rhode Island’s congressional delegation today, according to the governor’s spokeswoman, Amy Kempe.

AIG, in this case, acts as a bank for state agencies that manage large capital projects paid for with bond revenue.

The Department of Transportation and the Rhode Island Clean Water Finance Agency parked tens of millions of dollars for the new relocated interstate roadway known as the Iway, and the Narragansett Bay Commission’s underground tunnel project, in AIG investment accounts known as guaranteed investment contracts.

The notion: AIG would invest the borrowed money, helping to cover interest payments, until it was needed.

The DOT has approximately $91.6 million left in one of these AIG accounts, according to Gallogly, noting that the fund initially contained $195.3 million.

The clean-water finance agency has another $40 million in an account, according to director Anthony Simeone, whose financial advisers contacted AIG yesterday to ask for the return of their money. There was no immediate response from AIG.

As to what would happen if his agency could not access the funds easily, Simeone said: “At this particular point, we are not quite sure in the sense we are in uncharted territory right now.… We were surprised at the velocity with which this took place. Friday we all went home and it was just another week. Monday morning it was like, ‘What happened?’ ”

The state is locked into the contracts with AIG for a fixed period of time, according to Gallogly. “We can’t break the contract without their consent,” she said.

But the contracts have some safeguards tied to AIG’s credit rating.

A substantial rating drop was unthinkable for the massive company with an AAA credit rating when it was selected to manage state dollars in a competitive bidding process. But what happened Monday evening triggered a contractual provision requiring AIG to post collateral for its investments within 10 days, according to Gallogly.

Facing a similar requirement to post collateral for billions of dollars in contracts around the nation, it’s unclear if AIG has that ability. A federal aid package could change that, according to Gallogly.

“Certainly, if there’s a federal loan package providing them with liquidity, that may change the picture,” she said, before news broke last night of federal intervention.

Meanwhile, Caprio yesterday said the negative financial news on Wall Street would not substantially impact the state-run pension system, although numbers have fallen considerably in recent months.

The fund dropped from $8.4 billion at the beginning of this year to $7.725 billion on Aug. 31 — and then to $7.38 billion Monday, according to the state treasurer’s office, as Wall Street reacted to convulsions in the marketplace.

There is no imminent risk to state employees nearing retirement — or pensioners — under the state’s defined benefit plan. If investment earnings fall short of what is needed to pay their retirement benefits, the current system puts the onus on taxpayers to make up the difference, but the state’s actuaries take a long view of how much is needed to meet those pension obligations.

In their calculations, they average the ups and downs of pension-fund earnings over a five-year period.

By Caprio’s calculations, however, state and local taxpayers are already paying close to a half-billion dollars each year in “employer contributions” to public employee pensions. “And the issue going forward is how sustainable is it for the taxpayers of the state and the cities and towns … for a $500,000,000 of resources each year to go to the pension fund when it could be used in other areas of our state and cities and towns, like infrastructure, education.”

kgregg@projo.com