U.S. Transit Agencies Ask Congress For Help in Averting Service Cuts

By Lena H. Sun
Washington Post Staff Writer
Wednesday, November 19, 2008

Leaders of 11 transit agencies appealed to Congress yesterday for help in averting service cuts for millions of subway and bus riders across the country because of a financial emergency triggered by the global credit crisis.

Transit officials from New York, Boston, Washington, Los Angeles and Chicago were among those who gathered in Washington yesterday to lobby lawmakers and their staff. They warned that 31 of the country's largest transit systems, through no fault of their own, could face $2 billion in immediate payments in the coming weeks as hundreds of long-term financing deals with banks and other private investors collapse.

The deals are souring because they hinged on the credit rating of insurance titan American International Group and other insurers, which guaranteed the agreements. AIG's recent troubles put the deals into technical default, allowing banks and other investors to demand early termination fees and immediate payment from the transit agencies.

Transit officials want lawmakers to request that the U.S. Treasury or the Federal Reserve step in to replace the insurers and guarantee the deals. Officials are also seeking legislative solutions.

Late yesterday, transit industry officials reported a "very encouraging" development that could lead to a solution by week's end. The remedy would remove the incentive for banks to demand payment from transit agencies, at no cost to taxpayers.

Sources said the idea came up during a meeting with staff for Sens. Charles E. Grassley (R-Iowa) and Max Baucus (D-Mont.) on the Senate Finance Committee. The fix being considered would slap banks with a 100 percent excise tax on payments they try to get from transit agencies as a back-door way to recoup lost tax benefits.

"Time is not our friend," said Beverly Scott, chief executive of Atlanta's system and chair of the industry group, the American Public Transportation Association. The Atlanta system has some deals that are going into default this week, she said.

The transit deals in question were made from the late 1980s to 2003. Once common, they were outlawed by the Internal Revenue Service several years ago.

Many transit agencies were encouraged by the Federal Transit Administration to enter into "innovative financing" arrangements, officials said. Transit agencies agreed to "sell" their rail cars in paper transactions to banks, which then leased the equipment back to the transit agencies. The transit agencies received upfront cash for capital projects and made regular lease payments to the banks, which received billions in tax breaks by claiming depreciation on the rail cars.

Treasury officials are reluctant to back the deals because they do not want to be seen as rewarding tax shelters for banks, which have obtained millions in tax breaks, sources familiar with the agency's thinking have said.

The transit agencies have been making their regular lease payments, but the default allows banks to ask for all their money at once. Most banks have given transit agencies extensions. Last week, a Belgian bank that had been seeking $43 million from Washington's Metro transit agency reached a negotiated settlement after Metro went to federal court to stop the action.

The IRS has reached agreements with dozens of banks, allowing them to keep 20 percent of their tax benefits in the deals if they agree to settle with the government by year's end. Transit officials said the banks are seeking to end the lease-back agreements so they can collect the rest of the tax benefits.

Staff researcher Meg Smith contributed to this report.

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