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1 Joseph Henchman, Transit Agencies in Bind due to SILO Deals and AIG Collapse 1 (2008)

handle is hein.taxfoundation/ffbfdxz0001 and id is 1 raw text is: FISCAL

FACT

October 2008
No. 153

Transit Agencies in Bind Due to SILO Deals
and AIG Collapse
By Joseph Henchman
Federal Officials Encouraged Leasebacks, Then Made Them Worthless for
Creditors
Introduction
Major newspapers are reporting on a financing crisis that is hitting many transit systems in the
United States late this month. The situation is a result of (1) a series of leaseback transactions
these agencies conducted which included heavy termination penalties, (2) federal policy first
to encourage and then to discourage them, and (3) the collapse of insurer AIG. As a result,
approximately 30 agencies nationwide may face serious financial shortfalls absent action by
the U.S. Treasury Department.'
On October 29, 2008, the Washington Metropolitan Area Transit Authority (WMATA)
sought an injunction in U.S. District Court against KBG Group, a Belgian bank that is
demanding $43 million in termination fees by October 31.2 Metro warned that unless the
injunction was granted, the agency might be forced into default.
Transit Agencies Used Leaseback Transactions to Supplement Funding
When a private company builds an asset, they are permitted under federal income tax law to
deduct from their taxes the depreciation (wearing out) of the asset over time, reducing their
overall tax bill. Cities and transit agencies also build and own assets, but because they are
governmental instrumentalities, they are exempt from federal income taxes. Given that they
don't pay taxes, these reductions in taxes owed are worthless to them.

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