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Transit agencies in financial straits over AIG collapse

Posted on January 8, 2009 by Alex Roman, Managing Editor

More than 30 transit agencies are on the line for an estimated $2 billion to $4 billion due to the collapse of insurance giant American International Group Inc. (AIG).

Despite numerous pleas, including a meeting between 11 of the nation’s
top transit agencies with congressional leaders in November, the federal government has yet to step in and help.

On the brink of bankruptcy, AIG received a federal bailout in September to the tune of $85 billion. The company’s failure resulted in the loss of their AAA-bond rating, forcing transit agencies to look for another insurer as well as making them accountable for millions to investors for balances on leases.

AIG was the insurer for several transit leasing agreements known as sale-in/lease-out and lease-in/lease-out (SILO/LILO) transactions, which were promoted by the FTA from the late 1980s through 2003, as an innovative, legal way for public transit systems to gain additional revenue.

“Basically, the transit agencies would essentially sell to investors (banks) capital assets, such as railcars, the investors would pay the agency for the railcars and the agency would lease the railcars back from the owner,” says Rob Healy, VP, government affairs, for APTA, of the SILO/LILO transactions. “At the end of the lease term, the assets would default back to the transit agency, which was all part of the contract.”

Healy added that the agencies would make about 5 percent to 10 percent off the total deal, which they would put into Treasury bills that were then used to make the payments back to the investors. Those securities needed to then be guaranteed by an AAA-rated insurer — in many cases AIG. But the deals, which enabled banks to shelter large amounts of income from federal taxes, have been banned by the government since 2004, with the IRS giving firms until the end of the year to terminate these tax shelters. Therefore, with agencies going into technical default because of the lack of insurance, many banks are trying to collect as much money as possible from those agencies, in some cases hundreds of millions.

“Eight of our ten lease transactions involve AIG and seven are affected by the downgrade,” explains Terry Matsumoto, chief financial officer for the Los Angeles County Metropolitan Transportation Authority. “Our total exposure, if they went badly, would be $165 million plus legal expenses.”

Following unfavorable insurance quotes and pressure to immediately pay back $43 million after going into technical default, the Washington Metropolitan Area Transit Authority (Metro) and Belgian bank KBC Group reached an undisclosed settlement, essentially helping Metro avoid cutting services or raising fares, which is what many agencies say they would have to do if forced to pay the entire sum of their remaining deals.

Still, the contingent that met with congressional leaders in November say that the best chance of ending this saga is for the U.S. Treasury to back the loans, especially since the FTA itself approved and promoted the deals in its “Innovative Financing Handbook,” originally circulated in the 1990s.

Along with the FTA’s condoning of these deals, Matsumoto feels that it makes sense for the federal government to back a deal since they already own 80 percent of AIG, there is little risk and there is no additional cost to taxpayers.

“Those Treasury bills that were put on deposit are sufficient to meet the obligations, as long as the deals stay in place and are allowed to run until the end of their course,” Matsumoto said. “There would be neither further cost on behalf of the transit agency nor to the government if the government would simply step in and guarantee these deals. The government doesn’t have to come up with any money and is taking little or no risk.”

No solution has yet been reached.

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