Credit woes may put squeeze on transit agencies

Million-dollar repayments loom for some

By Brian Westley, Associated Press  |  October 25, 2008

WASHINGTON - Transit agencies around the country may have to come up with billions of dollars to repay investors as long-term financing deals disintegrate, a result of the global credit crisis that could eventually affect millions of commuters.

The problems stem from the collapse of insurance giant American International Group, which had guaranteed financing deals between transit agencies and banks. Officials say about 30 transit agencies across the country have entered into these types of deals, including those in Atlanta, Chicago, Los Angeles, San Francisco, and Washington. The fallout could mean less money for new trains and buses at a time when ridership in many areas has been steadily climbing because of high fuel prices.

Rob Healy, vice president for government affairs at the American Public Transportation Association, said some agencies could be forced to increase fares, cut bus routes, and delay long-term capital improvement projects.

"You've got agencies struggling to meet increased demand, they are hamstrung by the higher cost of fuel . . . and this is exposing them to additional costs," Healy said.

In a once-common practice that the IRS has ended, many transit agencies entered into arrangements in which they sold equipment such as rail cars to banks. The banks then leased the equipment back to the transit agencies.

Both sides benefited. The transit agencies were given a large sum of money up front, which could pay for various infrastructure upgrades. And the banks were able to rely on frequent lease payments while also writing off taxes on the depreciating property.

Washington's Metro transit agency made 16 of the deals, selling 600 rail cars worth more than $1.6 billion. In return, the agency made $100 million.

AIG, which collected fees paid by Metro and other transit agencies, guaranteed that lease payments to the banks would be made on time. But AIG's financial problems have triggered a clause that allows the banks to demand their money all at once.

The Internal Revenue Service has offered a settlement to banks if they end these agreements by the end of the year.

Metro's chief financial officer, Carol Kissal, said yesterday that the agency is being asked to pay $43 million by next week. She said that under a worst-case scenario, Metro could be forced to make $400 million in payments.

She said owing millions of dollars all at once could hurt Metro's ability to borrow money from other banks and eventually could affect service.

Marc Littman, spokesman for the Los Angeles County Metropolitan Transportation Authority, said the agency participated in eight so-called sale-in, lease-out financing deals insured by AIG. The total value of the deals was $1 billion.

Under the agreements, the agency sold buses, train cars, five maintenance divisions, a parking garage, and bus plaza to private equity investors and then leased the facilities from them, Littman said.

"Worst-case scenario is we'd have to come up with $100 million to $300 million very quickly. That would be problematic for us," he said, adding that cutting services or raising fares would be a last resort.