Meltdown Hits Transit Agencies

Recent news report indicate that up to 30 transit agencies may need to cut service in order to meet payments demanded by banks because of the financial meltdown. These payments are a part of “sell/leaseback” arrangements the transit agencies entered into over the last decade or so as a way to “creatively finance” some of their capital improvements.

Under federal tax law, a private company can get tax advantages from depreciating its capital investments. Public transit agencies are not taxpayers, so they get no such advantages. So, about two decades or so ago, somebody had a great idea: why not sell buses and trains to private investors? They can get the tax benefits from depreciation, and meanwhile they can lease the equipment back to the transit agencies at a rate that accounts for the tax benefit. The investors and transit agencies effectively split the tax benefits.

As described in detail by the FTA, the benefit to the transit agency is about 3 percent of the value of the equipment. So if the agency “sells” $100 million worth of buses or railcars to a bank, the agency nets $3 million. Typically, the agency puts $97 million in an escrow account to pay the lease and pockets the $3 million for capital improvements.

Who did many of the agencies pick to safeguard the escrow account? None other than the nation’s biggest insurance company, AIG. Uh oh.

Under the contracts, if AIG’s credit rating fell below a certain level, the transit agencies would have to repay the remaining lease in full. Now that AIG is, effectively, bankrupt, its credit rating is falling and banks have notified some transit agencies that they would like their millions of dollars next month.
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The good news is that the IRS has changed the tax rules that allowed this to happen. After all, sell/leasebacks were extremely costly to taxpayers. If a $100 million sale netted $3 million for the transit agency, it netted about the same for the bank. In other words, a $3 million gain for public transit cost taxpayers $6 million. It would have been better for taxpayers to just give $3 million more to the transit agencies.

Our bureaucratic form of government is based on the presumption that agencies and bureaus make decisions in the public interest. This is just one more proof that they do not.

“Hey, let’s spend $6 million of the public’s money to get $3 million worth of capital improvements!” “Great idea — we won’t even have to go through appropriations.”

The killer is that, to get $3 million, the agencies put themselves at risk of having to repay the whole $97 million in one lump. Despite the risk and the waste, such sale/leasebacks quickly became a routine part of transit capital financing.

It would be nice to think that, if some public transit agencies get burned by this, it would teach them a lesson. But since they will no doubt be bailed out one way or another, the only lesson they are likely to learn is that they can speculate with public funds without having to worry about the risks.

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About The Antiplanner

The Antiplanner is a forester and economist with more than fifty years of experience critiquing government land-use and transportation plans.

13 Responses to Meltdown Hits Transit Agencies

  1. the highwayman says:

    ROT are trying to claim this as some sort victory that you helped to cause over the years of lobbying against transit?

  2. John Thacker says:

    the highwayman,

    Certainly you see that the transit agencies would have the same incentive to do this regardless of how much money they were appropriated? How many government agencies have you ever known to say, “No thanks, we have enough money?”

  3. Dan says:

    China to invest $445bn in rail system

    From correpondents in Beijing Reuters October 25, 2008 06:08pm

    China will invest nearly $A445 billion (US$ 280 billion) in its overburdened rail system as a stimulus measure aimed at blunting the impact of the global financial crisis.

    The investment is part of plans to extend the country’s railway network from the current roughly 125,502km to nearly 160,900km by 2010, Shanghai’s Oriental Morning Post reported.

    The Beijing News quoted a rail official as saying that, while the network needed extending, the massive investment was also intended to help lift the nation’s economy as it suffers amid the global woes.

    “New rail investment will become a shining light in efforts to push forward economic growth,” railway ministry spokesman Wang Yongping said.

    DS

  4. the highwayman says:

    I saw that story too, it’s amazing how proactive the Chinese are being, we have a very long way to catch up with them!

  5. the highwayman says:

    John Thacker wrote:

    “Certainly you see that the transit agencies would have the same incentive to do this regardless of how much money they were appropriated? How many government agencies have you ever known to say, “No thanks, we have enough money?””

    How many people in any sector have ever said they have enough money.

    It’s like that old joke:

    “Money isn’t the problem, it’s the lack of money that is!”

  6. Francis King says:

    highwayman wrote:

    “I saw that story too, it’s amazing how proactive the Chinese are being, we have a very long way to catch up with them! ”

    China is building more heavy rail. The USA has heavy rail, but prefers air travel. Most people in China cannot afford to travel by air. Spending $445 on heavy rail is okay, but what else can you buy for that money?

  7. Francis King says:

    Antiplanner wrote:

    “These payments are a part of “sell/leaseback” arrangements the transit agencies entered into over the last decade or so as a way to “creatively finance” some of their capital improvements.”

    This is a problem with all government finance. Sometimes these authorities make money from clever investment, and sometimes they lose money. The problem is that when they lose money they come back to the taxpayer for more money. I can guarantee that the taxpayer is very much more aware of being asked for money than of any savings.

  8. the highwayman says:

    Francis King wrote:

    “China is building more heavy rail. The USA has heavy rail, but prefers air travel. Most people in China cannot afford to travel by air. Spending $445 on heavy rail is okay, but what else can you buy for that money?”

    Well that is some what of a carriage before the horse argument. Remember that just over half the railroad network in the USA is missing too.

    America has fallen behind a lot of other places in the world when it comes to transportation and transport policy for that matter.

    http://news.xinhuanet.com/english/2008-10/07/content_10159285.htm

  9. prk166 says:

    I see no reason to call this risk and waste. I want these agencies to be ran as efficiently as possible. As little as 3% means, it’s these so-called little things that add to efficiencies.

    Yes, it may cost taxpayers money. But this is a one-off payout. How many times is this going to happen? once? thrice in a 100 years? Hindsight’s 20-20. It was worth it for the taxpayers.

  10. prk166 says:

    “Remember that just over half the railroad network in the USA is missing too” —

    Highway man, is missing? I’m curious what this is based on & what it means. I’m assuming it doesn’t literally mean yesterday BNSF and NS just went missing yesterday.

  11. Ettinger says:

    Apparently for some planners aspiring to European levels of collectivism is not enough. There’s a new ideal to follow: China. Perhaps they forget who has to catch up to whom. When a country is so far down the prosperity ranks as China was and still is, even modest amounts of libaralization will yield improvement, even if, at the same time, you partially insist on hanging on to the fallacy of communist era 5 year plans.

  12. the highwayman says:

    BTW, roads are a form of collectivism too.

    Also GDP alone won’t always tell you the whole story about the wealth of a nation.

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