What started in the 1980s as a tax shelter for investing banks and a cash cow for transit agencies now threatens the financial stability of at least 30 transit agencies across the nation.
Leaseback transactions allowed transit agencies to lease real property such as buses to banks and other private investors, who could then use depreciation deductions to reduce their taxes over time. By 2003, the Treasury Dept. denied all depreciation deductions under these leasebacks, after determining that $4.4 billion was being lost in revenue as a result of the deals. So now they were worthless to the banks, and they were looking for ways to escape the deals.
From a Tax Foundation report last year:
"The escape route that the banks have needed since 2004 opened up when
American International Group (AIG), an insurer that had guaranteed many
of the deals, neared bankruptcy due to heavy defaults on
mortgage-backed securities it had guaranteed. In mid-September 2008,
AIG's credit rating fell and then it was bailed out by the U.S.
government. The lowering of the guarantor's credit rating triggered a
clause in the SILO agreements that placed them in technical default,
requiring the transit agencies to either find a new guarantor or pay
very large termination fees to cancel the agreements. The credit crisis
has eliminated the option of finding a new guarantor."
Now that AIG and other guarantors have lost their AAA ratings, banks
are claiming their contracts with public agencies are in "technical
default" and are demanding that the agencies compensate them
immediately with the cost of future tax benefits they would receive
through these deals, even though those benefits have been prohibited, according to a press release from Sen. Robert Menendez (D-NJ). Menendez this year introduced a bill that would levy a 100 percent excise tax on windfalls collected by
banks through the SILOs.
The CTA has executed about $1.1 billion in leaseback agreements over the years, though the amount owed if the contracts were terminated would be a fraction of that amount depending on when the deal was made.
Let's hope Congress passes legislation to protect the CTA and other transit agencies. The last thing the CTA needs is deeper budget holes.