Officials Call for Investigation of Rail Car Deal

A business venture that Los Angeles transit officials launched with anonymous Japanese investors in the Cayman Islands came under fire Tuesday from local and federal officeholders.

Transit officials contend that by selling and leasing back 54 commuter rail cars through an offshore company, they will generate a $3.4-million windfall for taxpayers.

The Times found that the expenses of the transaction wipe out any savings and are projected to cost the Los Angeles County Transportation Commission $3.9 million over the 16-year life of the deal.

Judy Hathaway Francis, a member of the commission, said she will ask the panel at a meeting today to authorize an independent audit of the $81-million transaction.

Rep. John J. Duncan Jr. (R-Tenn.), whose House surface transportation subcommittee oversees federal transit expenditures, said he has asked the General Accounting Office to look into the matter. The GAO and the FBI already are investigating the transit agency’s expenditures.

Duncan questioned whether it was proper for a public agency to promote a foreign tax shelter by doing business in the Cayman Islands. He also criticized such deals because they penalize American makers of transportation equipment.

William J. Agee, the chief executive officer of Morrison-Knudson Co. in Boise, Ida., said in an interview that so-called cross border leases put U.S. manufacturers, including Agee’s company, at a disadvantage. He said these lease arrangements allow foreign firms to offer incentives that domestic manufacturers cannot match under U.S. tax law.

About a dozen public transit agencies in the United States during the last decade have entered into such leases, with varying success. Los Angeles transit officials defend their deal, saying it was designed solely to save taxpayers’ money. They say they are considering a second lease involving 15 more cars.

Franklin White, director of the new Metropolitan Transit Authority, said he will review the first lease deal before authorizing similar transactions. The agency is absorbing the Southern California Rapid Transit District and the Los Angeles County Transportation Commission.

The 11-member commission is composed of Mayor Tom Bradley, members of the County Board of Supervisors and other officials. Several commissioners said Tuesday that they want an independent audit of the lease deal.

Commissioner Nick Patsaouras, a candidate for mayor of Los Angeles, said the audit should not be done “to put an aspersion on anybody, but to find out whether (the deal) was a wise thing to do and whether we should repeat it.”

Los Angeles Councilman Joel Wachs, also running for mayor, endorsed “an outside independent audit.” He criticized the deal as “the kind of sleight of hand that has shaken the public’s confidence in the Transportation Commission and raised serious questions about how our tax dollars are spent.”

The commission is responsible for building a regional mass-transit network. In 1987, officials purchased 54 rail cars from Sumitomo Corp. to operate on the Blue Line linking downtown Los Angeles with Long Beach.

Before the cars were rolling, the commission sold them to anonymous Japanese investors and immediately leased them back. The transaction was designed as a tax shelter for the Japanese, who passed along some of their savings to the transit agency.

The Times found that the savings have been wiped out by the transaction’s expenses and an unusual $26.4-million bond issue that the agency is obligated to pay off.

Tax attorney Schuyler M. Moore, who examined the transaction for The Times, projected that the bonds will cost the transit agency millions of dollars over 16 years.

Moore said the bonds, issued as tax-exempt securities by a Cayman Islands company, also expose the agency to millions of dollars in tax liability. The commission’s own attorneys warned in a legal opinion that there was no guarantee that the securities could withstand a challenge from the IRS.

Ray Remy, Bradley’s alternate to the commission, criticized staff for not flagging the questionable tax status of the bonds. Superviser Ed Edelman’s alternate, Marvin L. Holen, called for a “careful financial analysis” to assess the commission’s tax exposure.