October 30, 2008
DC Metro, Other Transit Agencies Could Soon Find Themselves in Default
After AIG Collapse, Report Shows DC Metro, Los Angeles MTA in Bind Because of "Sale In, Lease Out" Deals Federal Government First Encouraged, Then Discouraged
Washington, DC, October 30, 2008 - A new Tax Foundation study reports that the Washington Metropolitan Area Transit Authority (WMATA) and other public transportation agencies could soon find themselves in default as the result of government policy on leaseback transactions and the collapse of American Insurance Group (AIG).
In Tax Foundation Fiscal Fact No. 153, "Transit Agencies in Bind Due to SILO Deals and AIG Collapse," Tax Foundation Tax Counsel Joseph Henchman explains that the situation is a result of a series of leaseback transactions these agencies conducted which included heavy termination penalties, federal policy first to encourage and then discourage them, and the collapse of insurer AIG. Now approximately 30 agencies nationwide may face serious financial shortfalls absent action by the U.S. Treasury Department.
On October 29, 2008, WMATA sought an injunction in U.S. District Court against KBG Group, a Belgian bank that is demanding $43 million in termination fees by October 31. Metro warned that unless the injunction is granted, the agency might be forced into default.
"Faced with the choice of paying huge termination fees or finding a new guarantor, some agencies like WMATA are demanding that the U.S. Treasury become the new guarantor," says Henchman. "WMATA estimates that it would cost $400 million to pay the termination fees, money that neither it nor any other agency had budgeted. Los Angeles's MTA estimates that the fees would be $1.8 billion, half its annual operating budget."
Henchman further explains that while the situation shows some of the problems with the federal budgeting process, whereby "tax cuts" are seen as more palatable than "spending" even in a case where they are pretty much the same thing, finding the solution to the crises that transit agencies are facing is not so simple.
"Bankruptcy protection is possible, but a bankruptcy court would likely prioritize continued operation of the transit systems over allowing creditors to seize assets they technically own," Henchman argues. "At the same time, these agencies just don't have the cash to terminate these agreements into which they freely entered. The agencies are seeking congressional and Treasury help and it is from there that the next move will come."
Fact No. 153 can be found at http://www.taxfoundation.org/publications/show/23882.html
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
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To schedule an interview to discuss the financial crisis hitting transit agencies, please contact Matt Moon, the Tax Foundation's Manager of Media Relations, at (202) 464-5102.
