Transit services across U.S. threatened by deals with AIG

By Steve Hymon and Martin Zimmerman, Times staff writers

The next potential victims of the nation’s credit crunch: nearly 1.5 million people who ride buses and trains each weekday in Los Angeles County. Transit officials say riders could soon be facing serious service cuts.

That’s because the Los Angeles County Metropolitan Transportation Authority might have to quickly come up with hundreds of millions of dollars to pay investors, under terms of deals it made involving American International Group, the troubled financial and insurance giant.

“I’ve lost a lot of sleep over this,” said Terry Matsumoto, the chief financial service officer and treasurer for the MTA. He said it was “absolutely” certain the agency would have to cut service if the deals sour.

The problem, Matsumoto said, could extend beyond the MTA to other large transit agencies that entered into similar deals between the late 1980s and 2003, when tax laws were changed to discourage such transactions. Among those is Metrolink.

The news comes at a tough time for the MTA. The agency recently lost $133 million in state funds, and declining sales tax revenues mean it will have less money to help keep its buses and trains rolling.
An AIG spokesman declined to comment, citing the confidentiality of deals with its customers.

Between the late 1980s and 2003, the MTA sold its rail equipment, more than 1,000 buses, a parking garage and maintenance facilities to investors that included Wells Fargo, Comerica and Phillip Morris in separate deals.

Sale-Lease-back deals are a common way to raise money in the corporate world. A manufacturer, for example, could sell its factory to investors and then lease it back. The manufacturer gets a large chunk of cash and the investors get a steady stream of lease payments, as well as a tax break for their depreciating property.

“It’s a great way to get a shot in the arm in terms of cash without actually divesting yourself of your property,” said Bill Holder, an accounting professor at USC.

Many of the nation’s largest transit agencies participated in such deals. Among them are the San Francisco Muni system, the BART rail system in the Bay Area, the Chicago Transit Authority and the Washington, D.C., Metro system.

Metrolink, the Southland’s commuter rail agency, also sold most of its train cars and locomotives in four lease-back deals — three of which involved AIG — and made a $35.5-million profit as a result, said spokesman Francisco Oaxaca. Metrolink, like MTA, must now find another firm to replace AIG.

“The potential is pretty horrendous across the industry,” said James LaRusch, the chief counsel for the American Public Transportation Assn., a trade group for transit agencies. “It’s typically going to impact the largest transit agencies, because they were the ones that had the kind of assets necessary to get into these kind of deals.”

LaRusch said about 30 of the largest transit agencies in the nation have some involvement in such deals. “Any time you take money from the agency, you are going to cause a cutback in service,” he said.
In the case of the MTA deals, AIG provided $1 billion in loans to finance the transactions. The company, in return for fees paid by the transit agency, also guaranteed that the lease payments to investors would be made on time.

Things started to go downhill when AIG ran short of cash after running up billions in losses tied to the housing slump. Its credit ratings were slashed and the firm was on the verge of collapse last month when it was bailed out by the federal government.

The lower credit ratings triggered a clause in the lease-back agreements that require the MTA to either find a new firm to guarantee the deals, or reimburse investors for their down payments and lost tax benefits, — a scenario that could cost the transit agency between $100 million and $300 million.

As a frame of reference, Matsumoto said that $100 million equals about 10% of the MTA’s bus service. However, the MTA board has not yet discussed what cuts might be made.

The MTA has not yet found a replacement for AIG, Matsumoto said. “With the current state of the markets, there are no people who are willing to provide a replacement for AIG at any price,” Matsumoto said.

The agency has started talking to some investors in hopes of getting them to accept terms more favorable to the MTA, but Matsumoto said he doesn’t know if investors are willing to renegotiate.
Under a worst-case scenario, Matsumoto said, the bill could rise to $1.8 billion — more than half the MTA’s annual budget for this year.

“There is no practical way we could ever pay that back,” he said.

The agency has met with congressional staffers and asked the U.S. Treasury Department for help, hoping to get a piece of the $700-billion bailout package recently approved by Congress. Some of that money is to be used to buy troubled assets.

“They didn’t tell us to go fly a kite; that’s hopeful,” Matsumoto said. “But I don’t know how practical it is. We weren’t talking to decision-makers.”

MTA Board member Richard Katz  said: “The feds need to be concerned. If they bailed out the companies, they also need to bail out the public agencies impacted by the companies’ actions.”

The credit crunch has eased a bit in recent days as interest rates for inter-bank loans have inched downward and short-term lending to corporations has picked up. But it’s unlikely that conditions will improve fast enough to provide significant relief to the MTA.

Both Matsumoto and LaRusch said the Federal Transit Administration encouraged transit agencies to make lease-back deals as a way to make extra money. The MTA said it made about $65million on the deals.

But an FTA spokesman disagreed. “FTA was not a cheerleader for these transit lease-back agreements,” agency spokesman Dave Longo wrote in an e-mail. “We reviewed lease-back agreements submitted to us by transit agencies in terms of their compliance with federal transit law requirements. When we determined those agreements met the requirements, we approved them from that perspective.”

Comments

[Kymberleigh Richards]

"Leasebacks" do not constitute the type of behavior prohibited by the state Constitution.

The rest of Rocky's rant may be taken with the appropriate grain of salt.

[Rocky]

California public agencies from the state government on down are not supposed to borrow money without approval from the voters. It says so in the California constitution (Article XVI, Section 1).. But that has not stopped these agencies in the past. So now it up to a judge to tell the investors that the the transit agencies had no legal capacity to enter into these financing transactions without voter approval, which was never given. Let the investors sue their legal advisers for giving them bad legal advice. Shame on the banks for being a party to these sham transactions. They should have known better.

Somehow, I don't think the investors will be repossessing the light rail cars anytime soon. More likely, they will just pretend that the AIG downgrade never happened and they will hope that that AIG pays off on its investment contracts as scheduled.

So how safe is the stable value fund in your 401K and do you have any idea what it is invested in? Many of these investments are tied to insurance company guarantees and contracts, perhaps with companies like AIG. It seems like the whole financial fabric of the US is unraveling. May God have mercy on our wicked souls.

[Anon.]

"Leasebacks" were basically bonds on the cheap: a way to get cash now, in exchange for having to pay later.

With the leaseback falling apart, the lump-sum is due, and the only logical way to repay it is -- with bonds, getting cash now and paying it later.

Transit agencies have had to use every trick they could think of to come up with money, so I don't begrudge them doing the stupid leaseback schemes. If they had a sufficiently large steady source of funds -- like sales, gasoline, or income tax revenue -- they wouldn't have been tempted.

[Kymberleigh Richards]

Financial mismanagement?

Did you read the entire article?

Metro is not the only agency that engaged in this type of leaseback arrangement. Here's a quote from Steve's report above, since you apparently missed it:

Many of the nation’s largest transit agencies participated in such deals. Among them are the San Francisco Muni system, the BART rail system in the Bay Area, the Chicago Transit Authority and the Washington, D.C., Metro system.

Seems to me Metro is in pretty good company here. And also take note of the last sentence of the paragraph, where a federal official says the deals were reviewed for compliance with FTA requirements.

Sorry, but you can't blame Metro for this one.

[J in Pasadena]

> How long before MTA management tries to make its customers pay?

Let me answer that: Today! What do you think Measure R really is all about? This bond act which is supposed to build and enhance our infrastructure will be misappropriated to pay for mismanaged and poorly thought out transportation schemes. That is why MTA is threatening massive bus line cuts if it doesn't pass. Measure R really was never about doing the right thing. It is about supporting the corrupt status quo in LA transportation: the extravagance, perks and posh lifestyle of MTA leadership. This is why Rick Caruso, mega developer and LA power broker, called the MTA a "joke" in a recent interview. We've had 30 years to build a great regional transportation system that could have been built in five years, and this is all they come up with.

Furthermore, is it surprising to anyone that the MTA is involved with mega-financial failure AIG? Hymon writes about this lease-back Ponzi scheme where MTA pockets ghost money from "selling" its assets to these companies that have no stake in LA transportation infrastructure. It's a scam where money is traded to our "public" transportation agency to essentially buy tax breaks. Outside the fact that a public agency should not be involved in helping edgy investors skirt their tax obligations, it is just poor, poor business management. The CFO of MTA should be fired immediately.

Unfortunately, that will never happen. The MTA flaks on this board, like Kymberleigh Richards (Google her resume), are cool with the status quo and never call MTA on the carpet. Instead, they are willing to sell out all our souls for tiny little spans of poorly planned and executed rail lines whether those lines are built efficiently and safely or not. Los Angeles really owes a debt of gratitude to the brave souls willing to stand up to MTA hijinks -- people like community activist Damien Williams who fight the steamroller of political expediency to challenge unsafe construction plans knowing that monies available for safety are being blown like this.

[David Pettit]

How long before MTA management tries to make its customers pay for this latest piece of financial mismanagement?