WASHINGTON - Almost a dozen transit agencies are pressing Senate Finance Committee leaders to severely limit what banks and other investors in leaseback deals can obtain from them as the transactions unwind because of insurer rating downgrades.
They are hoping committee chairman Max Baucus, D-Mont., and ranking minority member Charles Grassley, R-Iowa, will introduce tax legislation early next year to help the transit agencies after the Treasury Department declined to step in as guarantor on these deals in place of American International Group Inc. AIG was guarantor of many of the deals, but its rating was downgraded, throwing them into technical default.
The Treasury has resisted supporting the leaseback deals because it considers them tax shelters. The Internal Revenue Service designated the lease-in/lease-out or sell-in/lease-out deals as abusive tax shelters in 2000 and 2005, respectively, even though the Transportation Department had initially approved them in the 1990s.
The transit agencies want the lawmakers to introduce legislation that would impose 100% excise taxes on any tax break money the investors obtain from the transit agencies in unwinding the deals. They say if assistance is not provided, some 31 transit agencies could be required to pay more than $2 billion to banks.
The legislation would be an ideal remedy because it would prevent the banks and other investors from obtaining the tax breaks they were to receive under the leaseback deals, in line with the Treasury's stance that the deals were abusive because they were designed only to provide the tax breaks.
Sources said that of the $43 million termination payment that KBC Bank NV of Belgium recently demanded from the Washington Metropolitan Area Transit Authority after the leaseback deal it entered into in 2002 went into technical default because of the AIG rating downgrade, $25 million represented the tax breaks the bank was to receive under the deal. Only $18 million was from the defeasance account. WMATA sued KBC Bank over the payment demand but last week settled the litigation. Details of the settlement week not disclosed.
Under these tax-advantaged leaseback transactions, which were mostly done from the late 1980s through 2003, transit agencies, counties, and cities sold or leased assets such as transportation equipment to banks and private companies in exchange for cash, usually about 3% to 6% of the assets' value. The transit agencies would get an upfront payment. The banks and companies would use the depreciation costs of the equipment to decrease their federal taxes while leasing the asset back to the transit agency.
The transit agencies made their plea to lawmakers after meeting with House and Senate leaders and key members of the transportation committees or their staff yesterday.
Agency representatives said the legislators were "sympathetic" to their plight, but said that a stimulus package is unlikely to pass before the next Congress and President-elect Barack Obama take office.
"People were supportive, they understand and were stunned, but they are not optimistic anything will get out in the lame duck session," said John Catoe general manager of WMATA.
Other transit agencies have deals with KBC and are looking for federal protection rather than risk settlement fees in court, sources said. "We're looking for a no-cost solution to this," said Roger Snoble, general manager of the Los Angeles Metropolitan Transit Authority.
The Metropolitan Atlanta Rapid Transit Authority could be KBC's next target, Catoe said.
The 11 transportation agencies that canvassed Capitol Hill were WMATA, New York's Metropolitan Transit Authority, the Santa Clara Valley Transit Authority, the Sacramento Regional Transit District, LAMTA in Los Angeles, the Metro Transit Authority of Harris County in Houston, MARTA in Atlanta, New Jersey Transit, the Massachusetts Bay Transit Authority in Boston, the St. Louis Metro, and the Chicago Transit Authority.
The top 10 transit issuers who pursued the most SILO/LILO deals are now beholden to leases held by at least 23 foreign and domestic banks, and at least one private company.
