A Bailout for Metro

THE CREDIT crisis has pushed transit agencies to the brink of financial catastrophe. At least 30 transit agencies, including the Washington Metropolitan Area Transit Authority, are at risk of defaulting on billions of dollars of loans, a calamity that could lead to services being slashed and fares being increased for millions of riders. The transit agencies, led by Metro, are clamoring for federal help. We've argued before that federal bailouts are justified when the benefits to the financial system as a whole outweigh the potential costs. In this case, there is a possibility that transit agencies in key centers of commerce, including Los Angeles, Chicago and Atlanta, would have to reduce services, crippling local economies and paralyzing mass transit. Once again intervention by the Treasury Department is justified.

From the late 1980s to 2003, cash-strapped transit agencies, including Metro, raised money by selling their rail cars to banks, then leasing them back. The arrangement provided banks with a tax shelter and transit agencies with upfront money for capital projects. Metro entered into 16 such agreements, leasing out about 600 rail cars and netting $100 million. The deals, prohibited by the Internal Revenue Service in recent years, hinged on the credit rating of the guarantor, American International Group (AIG). The insurance giant's collapse this year invalidated the guarantees, allowing banks to collect their money at once. Most banks have taken a wait-and-see approach, but one of Metro's lenders, KBC Group of Belgium, has demanded $43 million. A court will decide Wednesday whether the bank can collect immediately. A decision in favor of KBC could start a chain reaction in which lenders to transit agencies across the country call in their loans. Metro, which has already requested an increase of $11 billion in funding over 10 years, could face $400 million in payments alone.

Transit agencies, and most Washington area politicians, have called on the Treasury Department to guarantee the deals. They argue that doing so comes at no cost to Treasury, unless transit agencies can't meet payments. Treasury is hesitant to step in, concerned that bailing out transit could open the floodgates to requests by state and local authorities for federal funds. Treasury is also wary of backing deals that promote a form of tax evasion. These are legitimate concerns, but it doesn't make sense to bail out AIG and then let the public transit agencies that relied on the insurer founder. That punishes the millions of commuters who rely on mass transit each day.