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Credit Crisis May Force Metro to Pay Millions

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By Lena H. Sun and Binyamin Appelbaum
Washington Post Staff Writers
Friday, October 24, 2008

Metro and 30 other transit agencies across the country may have to pay billions of dollars to large banks as years-old financing deals unravel, potentially hurting service for millions of bus and train riders, transit officials said yesterday.

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The problems are an unexpected consequence of the credit crisis, triggered indirectly by the collapse of American International Group, the insurance giant that U.S. taxpayers recently rescued from bankruptcy, officials said.

AIG had guaranteed deals between transit agencies and banks under which the banks made upfront payments that the agencies agreed to repay over time. But AIG's financial problems have invalidated the company's guarantees, putting the deals in technical default and allowing the banks to ask for all their money at once.

In Metro's case, the regional transit agency could face up to $400 million in payments, the system's chief financial officer, Carol Kissal, said in an interview yesterday. One bank, KBC Group of Belgium, has told Metro that it needs to pay $43 million by next week. Metro officials confirmed the details but declined to name the bank.

Transit agencies have met with the Treasury Department to request federal help. The government could back the deals instead of AIG, or it could change tax policy to help the banks and keep them from demanding payments.

Treasury spokesman Jennifer Zuccarelli declined to comment, except to say, "Treasury is aware of this situation."

Metro officials said they are prepared to fight the demands in court, forestalling an immediate effect. But they say suing one bank could impair the agency's ability to borrow money from other banks for much-needed capital improvements. Metro has said it needs more than $11 billion over 10 years to maintain, expand and improve train, bus and paratransit service. In the Washington region, more than 1.2 million trips are taken on Metrorail and Metrobus on an average weekday.

In addition to Metro, affected agencies include transit systems in Los Angeles, San Francisco, Atlanta and Chicago.

The deals in question are vestiges of an elaborate tax-avoidance plan that the IRS has since ended. It involves government agencies, such as Metro, helping private companies to avoid federal taxes.

Profit-making businesses are allowed to shelter income from taxes based on the declining value -- or depreciation -- of such equipment as rail cars. But transit agencies don't pay federal taxes, so they sold their rail cars and other equipment to banks, allowing the banks to shelter income while "their" rail cars depreciated. Then the transit agencies leased the cars back from the banks at a discount that effectively split the value of the tax break with the bank. Metro said it used the money for capital improvements, including buying rail cars.

Metro made 16 such deals, primarily with U.S. banks, between 1997 and 2003, selling 600 rail cars worth more than $1.6 billion and making $100 million.

All of the deals were approved by the Federal Transit Administration. Transit officials say they were encouraged by the government to pursue the tax deals.


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