Transit Agencies Helped by Auto Bailout

The $14 billion measure to keep U.S. automakers in business also has a provision to keep the nation's rail and bus systems on track.

The legislation would provide federal guarantees for complex financial transactions between major transit agencies and investors. Many of these deals are in danger of default owing to the credit crisis, exposing transit agencies to billions of dollars in payments at a time when they are trying to cope with growing riderships.

Transit agencies and their allies in Congress have warned that rail and bus systems could be crippled without the federal backup. But the provision met with sharp criticism from several key lawmakers.

"This provision aimed at protecting transit agencies really just helps the banks that entered into these sham transactions in their attempts to avoid taxes," said Senate Finance Committee Chairman Max Baucus, D-Mont.

Baucus told reporters Wednesday that he would oppose the auto bailout bill if the transit provision stayed in it.

That panel's leading Republican, Sen. Charles Grassley of Iowa., said that after fighting to eliminate the tax schemes, "allowing parties to these transactions to reap these benefits without taxpayer dollars would be a perverse result."

The transactions, called sale-in/lease out (SILO) and lease-in/lease out (LILO), involve the practice of transit agencies selling rail cars and other equipment to banks and then leasing them back at a discount. The transit agencies get large infusions of capital for investment while the banks could write off taxes on the depreciating property.

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In 2004, Baucus and Grassley succeeded in moving legislation that denied the deduction of losses from these transactions, ending the tax benefits of entering into SILO transactions.

But last October, House Transportation Committee leaders, including chairman Jim Oberstar, D-Minn., and ranking Republican John Mica of Florida, wrote to the administration urging the federal government to assist those transit agencies still liable from SILO deals reached before the change in the law.

"These transit contracts, when in vogue, were touted as an inventive way to allow public transportation agencies to fund their payment obligations for rail and bus equipment purchases," said their letter, also signed by highways and transit panel chairman Peter DeFazio, D-Ore. Defaults, they said, "could threaten their very existence and the financial stability of the state and local governments that fund them."

In August, the Internal Revenue Service offered settlements to some corporations if they agreed to terminate existing SILO and LILO transactions.

But last month leaders from transit agencies warned that 31 of the nation's largest transit systems could face at least $2 billion in payments in the coming months because the credit crunch had put many of these deals in jeopardy. Insurers such as American International Group Inc., had backed the deals, but downgrades of AIG's credit put many of the transactions in default, allowing banks to demand early termination fees and other penalties.

The Washington (D.C.) Metro system last month reached a settlement with a Belgian bank that had sought $43 million after the near collapse of AIG.

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