Transit must be run for investors, not riders

[JeffreyS]

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/09/06/ED7O19FKDI.DTL

Transit must be run for investors, not riders

Sunday, September 6, 2009

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/09/06/ED7O19FKDI.DTL#ixzz0RH07rGfo

Wall Street banks, and Wall Street investors, have already spirited away $700 billion worth of taxpayer bailout money. But it's not enough. They want more and more of your money - and they're willing to leave you literally stranded, without a bus or rapid transit car in sight.

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/09/06/ED7O19FKDI.DTL#ixzz0RH0DPaQ4

If it sounds like a nightmare, that's because it is. And without congressional action, local transit agencies like BART, S.F. Muni and Caltrain could be bankrupted by obscure financial agreements they entered into long ago with these banks and investors.

It doesn't matter that the deals have been sworn off by federal officials and invalidated by the Treasury Department. And it certainly doesn't matter that taxpayers, businesses and cities rely on these transit systems to keep life moving.

What matters is a tax shelter.

Beginning in the 1980s, a variety of government agencies (primarily urban transit agencies and rural electric co-ops) entered into complicated sale-leaseback transactions with private banks and companies. In the contracts, the government agencies "sold" their assets (railway cars, electric lines, a 911 system) to the private companies, and then leased them back. San Francisco's Muni, for instance, sold its light-rail fleet for $460.7 million. The purpose of the sale was to allow the private companies to obtain a hefty tax deduction via asset depreciation. (Government agencies cannot depreciate their assets because they do not pay taxes. That's why the asset depreciation section of the tax code is useless to them.) In exchange, these private companies would give the agencies between 5 and 7 percent of the entire sale in cash - which the cash-strapped agencies usually used to fund operations, maintenance or capital investments.

Never mind that this enterprise was clearly a blatant abuse of taxpayer money - federal transit officials supported the deals for many years. The agency that balked was the Treasury Department, which estimated about $4.4 billion in lost revenue from these sham sales in 2004 alone. Starting that year, the Treasury denied all depreciation deductions for these deals, making them worthless to the banks and investors. So the investors simply found another way to get their money - buried in the fine print of the contracts.

One of the provisions of the deals was that if the government agencies' guarantor (an insurance company, often AIG) went bankrupt or came close to it, the agencies themselves either had to find a new guarantor or pay enormous termination fees to cancel the agreements. Well, guess who came close to bankruptcy in recent months? AIG. And the devastation in the rest of the insurance industry, along with continued instability in the financial markets, made it impossible for the government agencies to find new guarantors. So the agencies are left with enormous bills, for millions of dollars, that they cannot pay.

The agencies have two choices: fight the fees in court, or beg Congress to do something, fast. Fighting the fees in court carries an enormous risk.

"If they lose, they'd have to come up with an amount they can't possibly come up with," said Joe Bankman, Ralph M. Parsons Professor of Law and Business at Stanford Law School. "And if they're in default in this agreement ... they could see all their other financing arrangements dry up."

Fortunately, there is legislation pending in Congress. Sen. Robert Menendez, D-N.J., and Rep. John Lewis, D-Ga., have introduced legislation that would levy a 100 percent excise tax on any proceeds private companies reaped from the leaseback deals. It's not the most elegant solution, but it would provide investors with enough of a disincentive to leave the agencies alone. And it's the only possible relief for transit agencies, and the commuters who rely on them, around the country.

That doesn't mean it will pass. The financial industry hates it, and had the clout to crush a mild bill to crack down on the shelters earlier in this decade. This time around, the stakes are even higher. If Congress wants to keep the trains running, they must pass it.

This article appeared on page F - 10 of the San Francisco Chronicle

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/09/06/ED7O19FKDI.DTL#ixzz0RH0JVfS7

[buckethead]

I'm no lawyer but it sounds like a contract was written between the feds and private banks that the feds would like to be absolved. Does Congress have such authority?

[JeffreyS]

It seems dirty all the way around. I wish the article mentioned how long ago these deals where made.

[CS Foltz]

Article said "Starting in the 80's" JeffreyS and yes I think it would behoove us to do something along those lines! I have no problem with investors making a return off of their investment but darn it man.........there needs to be a reasonable limit! Not a question of having a legal solution but a moral one and mankind is not ready for that yet!

[FayeforCure]

Not So Public Transit Authorities
A fair percentage of our nation's public transportation assets aren't owned by the public.  They've been sold and are being leased back.  That supposedly unlocks the value of the real estate.  But, guess who bears the risk when things go wrong.

Between the late 1980s and 2003, the Los Angeles County Metropolitan Transit Authority (MTA) sold its rail equipment, more than 1,000 buses, a parking garage and maintenance facilities to investors that included Wells Fargo, Comerica and Phillip Morris in separate deals.

Lease-back deals are a common way to raise money in the corporate world. A manufacturer, for example, could sell its factory to investors and then lease it back. The manufacturer gets a large chunk of cash and the investors get a steady stream of lease payments as well as a tax break for their depreciating property.

"It's a great way to get a shot in the arm in terms of cash without actually divesting yourself of your property," said Bill Holder, an accounting professor at USC.

Many of the nation's largest transit agencies participated in such deals. Among them are the San Francisco Muni system, the BART rail system in the Bay Area, the Chicago Transit Authority and the Washington, D.C., Metro system.

Metrolink, the Southland's commuter rail agency, also sold most of its train cars and locomotives in four lease-back deals--three of which involved AIG--and made a $35.5-million profit as a result, said spokesman Francisco Oaxaca.

MTA made $65 million.  However, AIG isn't the company it once was. 

In the case of the MTA deals, AIG provided $1 billion in loans to finance the transactions. The company, in return for fees paid by the transit agency, also guaranteed that the lease payments to investors would be made on time.

Things started to go downhill when AIG ran short of cash after running up billions in losses tied to the housing slump. Its credit ratings were slashed and the firm was on the verge of collapse last month when it was bailed out by the federal government.

The lower credit ratings triggered a clause in the lease-back agreements that require the MTA to either find a new firm to guarantee the deals or reimburse investors for their down payments and lost tax benefits, a scenario that could cost the transit agency between $100 million and $300 million.

As a frame of reference, Matsumoto said that $100 million equals about 10% of the MTA's bus service. However, the MTA board has not yet discussed what cuts might be made.

The MTA has not found a replacement for AIG, Matsumoto said.

Little wonder...the credit market seized up.  Plus, MTA just lost $133 million in state funding because of California's budget nightmares.  And, one would certainly expect sales tax revenue to drop with the sagging economy.  Thus...

The next potential victims of the nation's credit crunch: nearly 1.5 million people who ride buses and trains each weekday in Los Angeles County. Transit officials say riders could soon be facing serious service cuts.

That won't help the air quality there.

http://roguepundit.typepad.com/roguepundit/2008/10/not-so-public-transit-authorities.html