Help might be on the way for cash-strapped city transit agencies seeking relief from the lame duck Congress.
As ProPublica and others reported recently, the meltdown of insurance giant AIG could leave more than 30 public transit agencies on the hook for up to $3 billion in payments to banks. The problem stems from the recent failure of longstanding financing deals that gave banks sizeable tax breaks and the agencies much-needed cash up front. AIG guaranteed about 75 percent of these so-called tax shelters – until its credit rating was slashed in September, sending the deals into default.
With many banks lining up to collect heavy termination fees, the agencies this week dispatched lobbyists and top transit officials from 11 cities to Capitol Hill. It looks like their work is paying off.
Transit officials told ProPublica that they had "hopeful" discussions with lawmakers on a plan to discourage banks from demanding payment. The plan would slap banks with a tax, up to 100 percent, on money they collect past what the transit authorities already promised to pay.
As part of the now-defaulted deals, banks bought transit equipment from cities and then leased them back to the transit agencies to use at a discount. Today, many agencies are willing to hand over to banks money they set aside years ago for lease payments.
"The money is there," we were told by Rob Healy, vice president of government affairs for the American Public Transportation Association, which is leading the negotiations with Congress. "It’s not a loss to the transit agencies."
But some banks are looking to recoup millions more in tax benefits they would have enjoyed had the deals not collapsed. The new plan floated this week essentially would eliminate any of these benefits banks collect. Likely to be introduced in the new Congress in January, the idea came from a meeting with staff for Sens. Charles E. Grassley (R-IA) and Max Baucus (D-MT) of the Senate Finance Committee.
Still, time is not on the side of transit authorities. "A lot of these deals are coming due in the next couple weeks," Healy told us, making January possibly too late to take action.
We contacted press staff for Grassley and Baucus, but they weren’t working on the proposal and so couldn’t immediately discuss whether it might be applied retroactively.
Transit officials, meanwhile, are holding out hope that the Federal Reserve will intervene to replace AIG as the guarantor of the deals. Because the federal government approved and once promoted (PDF) some of the tax shelters in its "innovative financing handbook" (PDF), the officials argue that the government is obliged to help.
The U.S. Treasury Department already balked at helping, despite heavy lobbying from transit advocates. Treasury Secretary Henry Paulson said at a news conference last week that aiding the transit agencies is "not the focus" of the government's $700 billion bailout. The Treasury also is said to be reluctant to get involved in deals that allowed banks to shelter millions in income from taxes. These tax shelters are now banned by the IRS.
Transit agencies also struck out with another strategy: secure a bailout through a stimulus package pending in Congress. The package now appears to be dead.
If the new congressional proposal also fails, and the government does not intervene, the hundreds of shelter deals remaining nationwide could end up in court. If the banks win in court, transit agencies have suggested they’ll have to make significant cuts to services. Agencies in Los Angeles, Washington, D.C., San Francisco, Chicago, Atlanta, Philadelphia, San Diego, New Jersey and several other cities and states could face cuts.