Feinstein asks Paulson to look into lease-back deals

U.S. Sen. Dianne Feinstein (D-Calif.) sent a letter to Treasury Secretary Henry M. Paulson on Monday, asking him if the federal government can intervene in lease-back deals that threaten to cost transit agencies across the nation millions of dollars.

One of the agencies involved is the Metropolitan Transportation Authority. The MTA, like many other agencies, sold much of its equipment to investors, who leased it back to the agency, with American International Group both financing and insuring some of those deals.

Now that AIG's credit rating has slipped, investors want a new guarantor and are saying the deals are technically in default. I know Measure R is a big deal because of the billions of dollars it could raise over 30 years, but I wouldn't underestimate this story, which in the short term could cost the MTA millions and force service cuts, agency officials say.

I posted the first page of the letter here -- you can click on it to see a larger image. The second page is after the jump.

In the letter, Feinstein says there were 87 separate "projects" -- as in deals -- in 25 different cities. Others have said that about 30 transit agencies are involved. Feinstein also notes that Congress eliminated the tax benefit for the lease-back deals in 2003. Many of the transit agencies say that the Federal Transit Administration encouraged the deals, meaning you have one arm of the federal government helping corporate America find deals to provide tax breaks (the breaks were for depreciation of the equipment) The transit administration says it only oversaw the deals.

Curious who owns the MTA's equipment? Here's the list, as provided by the MTA:

BNY Leasing Corporation - rail cars

CIBC – rail cars

Wells Fargo – rail cars

Comerica – rail cars

Agilent – maintenance yards and storage facilities for buses and rail cars

Comerica – rail cars

Textron – Patsaouras Transit Plaza and parking garage

First Hawaiian – rail cars

Philip Morris – buses

Fleet – rail cars

Related: L.A. Times story on lease-back deals, Washington Post story on leaseback deals there that are threatening the agency.

--Steve Hymon

Judge blocks Washington Metro from huge payout in AIG mess

A federal judge in Washington today gave the Metro mass transit system in the nation's capital a 10-day reprieve from having to pay $43 million to a Belgian bank trying to collect money in a lease-back deal gone awry, reports the Washington Post. The problem: The middleman in the deal was American International Group, the financing giant whose credit rating has slipped.

This is a story that should resonate here: The Los Angeles County Metropolitan Transportation Authority (the MTA or Metro) could be in the same pickle. It has sold much of its rail and bus equipment to investors over the years and then leased it back. AIG provided financing and insurance for the deal, and now that AIG's credit has fallen, the MTA could default on those deals unless it finds a new middleman.

That could lead the MTA to have to pay millions of dollars in penalties. Such costs would almost certainly trigger significant service cuts, MTA officials say.

From the Post's story about the events in D.C.:

If Metro loses its case Nov. 12, the agency could be forced to immediately slash more than $25 million from its capital budget. That would mean less money for much-needed capital projects, including overhauling escalators, fixing tunnel leaks, upgrading train communication equipment and buying buses.

Metro estimates that it could pay as much as $435 million to banks if its other agreements go into default.

Members of Congress say the potential for damage is even broader. The more than two dozen other transit agencies that have similar financing agreements stand to lose $1.5 billion to $4 billion.

The Post also notes that the U.S. Treasury Department is reluctant to help with the deals. Why? The lease-back deals are advantageous to investors because they provide a tax break -- the banks that own the MTA's equipment get a big tax break for depreciation. The Internal Revenue Service has been fighting such deals, and the Treasury Department doesn't want bailout deals that can be viewed as gaming the tax laws.

I posted on Thursday that Los Angeles Mayor Antonio Villaraigosa has asked Sen. Dianne Feinstein for help with the issue. Also, here's a link to The Times' recent story on the lease-back deals.

--Steve Hymon

Mayor asks for Feinstein's help with MTA's leaseback deals

Hoping to avoid mass transit service cuts because of the financial situation on Wall Street, Los Angeles Mayor Antonio Villaraigosa on Thursday asked Senator Dianne Feinstein for federal intervention to help 31 transit agencies, including the Metropolitan Transportation Authority. Click on Villaraigosa's letter to view it as a larger image.

In the past 20 years, the MTA has sold much of its equipment to investors, who then leased the equipment back to the MTA. Investors got a tax break for depreciating the equipment and the MTA got an injection of cash and favorable financing deals. Here's a link to a story I recently co-wrote about the deals and their potential impact.

But American International Group financed and insured the MTA's deals. With AIG's credit rating slipping, the MTA now must find a new middleman to keep the deals together or face penalties and possible repayments of its leases that could cost hundreds of millions dollars in a worst-case scenario. The MTA's chief financial officer has said that would likely result in service cuts.

In his letter to Feinstein, Villaraigosa notes that at least 31 transit agencies in the U.S. have similar deals that are now at risk. The mayor didn't ask for cash. Press secretary Matt Szabo said that the hope is that the federal government may also be able to solve the problem with regulatory action.

"The mayor's view is that if we're going to invest all this money building up the banks that have failed, we certainly shouldn't leave commuters holding the bag," Szabo said.

-- Steve Hymon

Metro's elevator contract: bloated or sensible?

Transit officials across the U.S. are frequently complaining how little money there is for mass transit. They often make a persuasive case.

That said, I ask you to consider item No. 25 on today's Metro Board agenda: It's a five-year contract for nearly $2.1 million for Mitsubishi to maintain thefour escalators and 19 elevators in the headquarters building for Metro.

In its report from staff, Metro says its own workers aren't qualified to work on the escalators and elevators. This sounds reasonable enough until you consider this: Metro's own staff is running light rail trains and a subway and all sorts of other techie stuff! Perhaps -- just perhaps -- the solution is to hire an elevator repair person!

Just my two cents.

--Steve Hymon

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.”

BREAKING NEWS: AIG woes could result in Metro service cuts

Between the late 1980s and the early 2000s, Metro (a.k.a. the MTA) sold its rail cars and more than 1,000 of its buses to private investors and then leased the equipment back. The middleman in those deals -- which netted the Metropolitan Transportation Authority about $65 million in profits -- was the financial giant American International Group.

AIG got caught up in the housing slump and was recently bailed out by the federal government. AIG's bond ratings have slipped and now -- to simplify a very complicated story -- Metro is on the hook to find another middleman, a proposition that could potentially cost it tens of millions of dollars.

“I’ve lost a lot of sleep over this,” Terry Matsumoto, the chief financial service officer and treasurer for Metro, told me earlier today. He said it's almost certain that service cuts would occur if Metro had to restructure its deals.

My colleague Martin Zimmerman and I have a story for Saturday's editions that is currently being edited. When it's ready for publication later this evening, I'll post it here.

In the meantime, here's a link to Metro's report on the issue.

— Steve Hymon

State budget could cut MTA funding

Just a quick update on the state budget that Gov. Arnold Schwarzenegger has said he will veto: Metro (also known as the MTA) spokesman Marc Littman says the budget would cut funding for the agency, the largest in the Southland, by $89 million and there would be an additional $13.8 million in cuts to transportation programs in the rest of the county.

I don't have information on cuts to the other counties in Southern California. If you work for one of the other agencies and you get the numbers, please send them over.

-- Steve Hymon

Caltrans director not a happy camper over state budget

Caltrans' media office called me Thursday afternoon and asked if I would like to chat with Will Kempton, the director of Caltrans. Sure, I said. I try never to pass up a chance to complain about traffic to public officials.

Kempton wanted to talk about the state budget, or the lack of one. He was steamed -- although polite -- about the fact that the Legislature may borrow gasoline tax revenues to help erase the $15-billion budget deficit, setting off a chain reaction of delays for Caltrans road and rail projects.

"I sure wish we'd get a budget, it's as bad as I've ever seen it and I've been in and around state government for 35 years," Kempton said. "And it's certainly not helping us with our transportation" plan.

The gist of the problem, Kempton said, is that the California Transportation Commission has approved about $500 million for a variety of projects, and the agency wants to go forward with construction. But they can't because the Legislature needs to budget the money.

And what if the Legislature decides to suspend Prop 42, the voter-approved initiative to ensure the state gas sales tax is used for transportation needs? A cascade of delays for those projects, Kempton said. In particular, he said that 20% of next year's projects would be delayed, 70% of the projects scheduled for 2009-10 would be pushed back and 90% of the 2010-11 projects would be started at a much later date.

Why the state budget matters when it comes to transportation

The California Transportation Commission just released a list of another $190 million in projects it wants to fund from the $19.9-billion transportation bond that California voters approved in 2006.

This sentence from the release that should give you pause -- or make you want to phone state elected officials:

These allocations are contingent upon passage of the 2008-09 state budget. Depending on the budget's handling of transportation funds, some of the allocation actions could be withdrawn.

Full release is after the jump.

-- Steve Hymon

The proposed sales tax for roads and transit, continued

Los Angeles Mayor Antonio Villaraigosa this morning said that he would like to see voters in November consider a half-cent sales tax hike in Los Angeles County. It's not a done deal yet, but this is the first time that Villaraigosa has publicly said that he supports raising the tax, which is currently 8.25%.

I caught up with the mayor on the subway, which he was riding to North Hollywood for an Metropolitan Transportation Agency press conference on new rapid bus routes. He was his usual chatty self, talking with riders about their commutes and posing for photos. Several reporters were on hand and I finally got the chance to ask Villaraigosa if he could tell the passengers in the car if one day they'll be able to take the subway to the beach.

"We're going to need to pass a half-cent sales tax initiative if we want to build a subway to the sea," the mayor said.

No argument there. The project is estimated to cost $5 billion to $7 billion and so far there's no money for it.

He added: "I'm trying to get everybody on the same page in this county, which isn't always easy.... I'd like to get a sales tax initiative on the ballot, but we have to build a consensus on that first. I'm working on that as we speak."

He reiterated the same point at the news conference, when I asked him who the holdouts were. He provided me a toothy smile and declined to answer.

It is estimated that such an increase would raise $30 billion to $40 billion over the next three decades. In the world of highways and mass transit, that's not a ton of money -- the MTA says it has $60 billion worth of projects it would like to build in the county. But it would give L.A. County spending power it doesn't have and mean that the county wouldn't have to beg the state and federal government for transportation money.