Los Angeles Times: MTA may have to cut commuter service

[marmar]

MTA may have to cut commuter service
It may not be able to keep trains and buses running if it has to quickly pay investors in AIG-related lease-back deals.

By Steve Hymon and Martin Zimmerman, Los Angeles Times Staff Writers
October 18, 2008


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's because the Los Angeles County Metropolitan Transportation Authority might have to quickly come up with hundreds of millions of dollars to pay investors under terms of deals it made involving American International Group, the troubled financial and insurance giant.

"I've lost a lot of sleep over this," said Terry Matsumoto, the chief financial service officer and treasurer for the MTA. He said it was "absolutely" certain the agency would have to cut service if the deals sour.

The problem, Matsumoto said, could extend beyond the MTA to other large transit agencies that entered into similar deals between the late 1980s and 2003, when tax laws were changed to discourage such transactions. Among those is Metrolink.

The news comes at a tough time for the MTA.

The agency recently lost $133 million in state funds, and declining sales tax revenues mean it will have less money to help keep its buses and trains rolling.

An AIG spokesman declined to comment, citing the confidentiality of deals with its customers.

Between the late 1980s and 2003, the 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. .......(more)

The complete piece is at: http://www.latimes.com/news/local/traffic/la-me-transit18-2008oct18,0,5713299.story

[nxylas]

1. Is the MTA "too important to fail"?

Or isn't getting Joe Lunchpail to work a priority for Paulson et al?

[KamaAina]

2. Don't We The People now own AIG?

Wouldn't its (that is, our) credit rating now be good enough to guarantee the deals?

And why are transit agencies having to, in effect, mortgage their assets to pay operating expenses in the first place? :banghead: Oh, right, I forgot. If you don't have a driver's license, you aren't really a citizen. So who cares if you have to stand in a human sardine can for an hour to get to work? :sarcasm:

[KamaAina]

3. More on this mess from DC Metro

http://www.wmata.com/faqs/preview.cfm?faqID=49

What type of agreements are we talking about?
These agreements are leases. In these agreements, Metro leased railcars to the banks. The banks would provide Metro with payment up front. Some of that money could be used by Metro to fund its capital improvement program. The rest of that money bought the guarantees from companies like AIG. Then, Metro would lease-back the railcars, and the payments to the banks came from funds in those guaranteed accounts.

Each of these agreements had to be approved by the Federal Transit Administration, which also promoted the lease agreements. Another requirement of the agreements was that the payments from the trust account be guaranteed by an insurer with a high credit rating, such as AIG.

The benefit to Metro was money for capital improvement, which helped pay for, among other things, railcars.

This was a tax shelter for the banks. The banks were able to claim the depreciation of the railcars as a tax deduction and they received income from the lease payments coming from the guaranteed accounts.

How many lease-back agreements did Metro enter?
In the late 1990s and the early 2000s, Metro entered into 16 lease-back agreements. Metro leased out about 600 railcars, worth more than $1.6 billion, and received about $100 million up front for capital improvements.

If the banks are getting their payments from the guaranteed accounts, why would they want to end the agreements?
In 2004, a law went into effect that would no longer allow tax deductions to the banks for these lease agreements. This year, the Internal Revenue Service offered a settlement to the banks who had entered into these agreements if those banks end the agreements by the end of the year.

If the banks are allowed to declare a technical default, they can take advantage of the IRS settlement offer, which allows them to keep 20% of their former tax deductions, and ask taxpayers to give them millions via termination fees paid by transit agencies like Metro. Bottom line, the out-of-pocket cash termination payment is the banks' attempt to recover their tax benefit. In short, the banks want to immediately recoup the disallowed tax credits they would have received over 20-30 years on top to the 20% tax credit the IRS is offering in the settlement.

So, let me see if I've got this straight. The banks are in no danger of not getting paid. They just want to take advantage of a loophole to get back some tax breaks they lost when the law changed a few years ago. And in order to get them, they're willing to screw transit riders around the country, possibly including their own employees (even Charlotte just built light rail)!

:grr: :banghead: :nuke: