Creative Financing Bites Muni

San Francisco Muni may have to pay $68 million to banks and insurers as a result of some “creative financing” done 8 and 9 years ago. As previously described in the Antiplanner, in the early 2000s the Federal Transit Administration encouraged transit agencies to sell their equipment to banks and then lease it back. The banks would get the tax advantages of depreciating the equipment (which, as government agencies, the transit agencies wouldn’t get), and the banks and agencies would split that advantage.

As the Antiplanner noted before, this meant that, for each $100 million worth of capital purchases, transit agencies would get about $3 million more, but the cost to taxpayers would be about $6 million (because the banks would get the other $3 million). The problem today is that the transit agencies also insured the lease payments and the funds were tied to the insurer’s credit ratings. IF and when those ratings fall, the transit agencies are on the hook to repay the entire amount to the banks.
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The good news is that the IRS ruled such tax shelters illegal in 2004. The bad news is at least 30 transit agencies are in the same boat as Muni and may be scrambling for funds to cover their bets. This so-called creative financing was nothing but a dirty little scam that the FTA and local transit agencies played on unwilling taxpayers–just one more reason to privatize transit.