Editorial -- Transit Systems May Get a Reprieve From Loan Repayments

Thursday, November 27, 2008

TRANSIT AGENCIES on the brink of financial collapse may have been granted a reprieve. Following a federal judge's recommendation, the Washington Metropolitan Area Transit Authority settled with KBC Group, a Belgian bank seeking to collect $43 million. The compromise should deter creditors from collecting billions of dollars in loans from transit agencies nationwide, including more than $300 million from Metro -- nearly half of its capital budget. But more loans are set to come due for repayment, and transit agencies need federal intervention.

Transit agencies entered into creative (to use a polite term) financing arrangements known as lease-back lending starting in the late 1980s. Officials sold the equity in their rail cars and buses to banks, then leased them back. The practice, initially approved by the Federal Transit Administration but prohibited by the Internal Revenue Service since 2004, provided millions of dollars for capital projects and a tax shelter for banks. American International Group guaranteed many of the arrangements; the financial giant's collapse invalidated the deals, giving creditors an opening to collect on the loans and demand additional fees.

KBC is the first creditor known to have issued such a demand, and its claim against Metro was seen as a bellwether. If U.S. District Judge Rosemary M. Collyer had awarded the bank the full amount, it is likely that other creditors would have flooded transit agencies with similar requests. The compromise engineered by Judge Collyer seems to have satisfied both parties, but it is a one-time fix. There are at least 100 similar deals to resolve nationwide; Metro alone has 14. Settling all such deals around the country would be too expensive for transit agencies.

Treasury officials are unlikely to rescue transit entities, worried that doing so would overextend the department and encourage other requests. The Federal Reserve, which could back the loans, has been more receptive to transit agencies' pleas. Key members of the Senate Finance Committee are also considering legislation that would impose severe penalties on banks that put the loans into default. Either way, officials should act soon. Otherwise, transit agencies will have to make deep cuts in service that will inconvenience millions of riders.

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