We have all followed the saga of the bailout for the banks and now the bailout for the auto industry. NJ Transit isn't seeking a bailout, but they are seeking backing from the government so that they don't go into default:
NJ Transit's executive director, Richard Sarles, also joined the leaders of nearly a dozen national transportation agencies educating Congress about an outgrowth of the failure of mega-insurer AIG.
About $150 million to $200 million worth of NJ Transit's trains, buses, light rail cars and maintenance garages were financed through a "lease-buyback" program that involved banks putting up the cash and NJT paying it back through a Triple-A rated insurer, which was AIG
The root of the problem is deals made before 2003 in which agencies like NJ Transit turned buses, rail cars or stations over to for-profit banks, then leased them back in re turn for up-front payments.
Banks liked the deals because they profited from the lease payments and from the ability to reduce their tax bills by taking credit for the depreciation of the equip ment and buildings. For public agencies, the deals meant extra funds and less expensive equipment.
But the Internal Revenue Service ruled in 2005 that the deals violated tax rules. It gave the banks and other investors until the end of this year to pay back most of the tax breaks or face penalties.
That made the long-term leases a bad bargain for the investors. But now the collapse of the financial markets has given them a way to get their cash back quickly.
When AIG was downgraded, NJ Transit suddenly needed a new AAA insurer. However given the current economic climate, they have been unable to find one willing to cover them. Follow me below the fold for the rest of the story.
The senators, who represent states with major public transit systems, called on the Treasury and Federal Reserve to each appoint senior officials to work with the Department of Transportation and large transit agencies in developing a solution that will avoid a fiscal crisis for the agencies. The issue stems from leasing arrangements between transit agencies and banks in which the banks purchased transit infrastructure and leased it back to the agencies. AIG served as an intermediary in these transactions. The collapse of AIG left its credit rating in tatters, which banks have exploited to invalidate the deals and demand full payment up front from the transit agencies.
NJ Transit and others in the same situation are trying to get the Treasury Dept. to guarantee that payments will be paid because the banks are already trying to collect:
one bank has declared NJ Transit in default and asked for an immediate payment of $4 million. The state asked for a delay until January, but if every NJ Transit creditor wanted a full payout, the bill would approach $200 million.
While we will focus on NJ Transit for obvious reasons, they're not alone:
"Thirty-one transit agencies nationwide used these leverage lease actions to finance assets," said Rob Healy, vice president of government affairs for the advocacy group American Public Transportation Association.
It's not that the securities changed, but the downgrade in the rating seems to change everything. NJ Officials are saying, think about the commuters:
"The federal government has an opportunity to protect commuters and taxpayers by addressing the economic exposure of mass transit agencies such as NJ Transit that resulted from lease-back transactions with AIG," said Kris Kolluri, the commission of the New Jersey Department of Transportation.
These agencies have already been struggling with higher fuel costs, so it probably wouldn't be the best time to see public transportation experience further difficulties. If NJ Transit had to make the payments, they would either be forced to cut services or raise fares. We do need to remember that NJ Transit certainly does bear some responsibility here because they got the cash for projects up front and received the tax benefits at the time of the transaction. While they may claim they are a victim of circumstances, this is the chance they took to get the up front benefit.
On the other hand, it wasn't a lack of payments that put these agencies potentially into default, but the insurer who isn't eligible to cover any more. At least until these agencies are able to get private coverage once again, the Federal Government may need to serve as the insurer.
