MTA might have to cut transit service
The next potential victims of the nation’s credit crunch: nearly 1.5 million people who ride buses and trains each weekday in Los Angeles County. Transit officials say riders could soon be facing serious service cuts.
That’s because the Los Angeles County Metropolitan Transportation Authority might have to quickly come up with hundreds of millions of dollars to pay investors under terms of deals it made involving American International Group, the troubled financial and insurance giant.
“I’ve lost a lot of sleep over this,” said Terry Matsumoto, the chief financial service officer and treasurer for the MTA. He said it was “absolutely” certain the agency would have to cut service if the deals sour.
The problem, Matsumoto said, could extend beyond the MTA to other large transit agencies that entered into similar deals between the late 1980s and 2003, when tax laws were changed to discourage such transactions. Among those is Metrolink.
The news comes at a tough time for the MTA. The agency recently lost $133 million in state funds, and declining sales tax revenues mean it will have less money to help keep its buses and trains rolling.
An AIG spokesman declined to comment, citing the confidentiality of deals with its customers.
Between the late 1980s and 2003, the MTA sold its rail equipment, more than 1,000 buses, a parking garage and maintenance facilities to investors that included Wells Fargo, Comerica and Phillip Morris in separate deals.
Lease-back deals are a common way to raise money in the corporate world. A manufacturer, for example, could sell its factory to investors and then lease it back. The manufacturer gets a large chunk of cash and the investors get a steady stream of lease payments as well as a tax break for their depreciating property.
“It’s a great way to get a shot in the arm in terms of cash without actually divesting yourself of your property,” said Bill Holder, an accounting professor at USC.
Many of the nation’s largest transit agencies participated in such deals. Among them are the San Francisco Muni system, the BART rail system in the Bay Area, the Chicago Transit Authority and the Washington, D.C., Metro system.
Metrolink, the Southland’s commuter rail agency, also sold most of its train cars and locomotives in four lease-back deals -- three of which involved AIG -- and made a $35.5-million profit as a result, said spokesman Francisco Oaxaca. Metrolink, like the MTA, must now find another firm to replace AIG.
“The potential is pretty horrendous across the industry,” said James LaRusch, the chief counsel for the American Public Transportation Assn., a trade group for transit agencies. “It’s typically going to impact the largest transit agencies, because they were the ones that had the kind of assets necessary to get into these kind of deals.”
LaRusch said about 30 of the largest transit agencies in the nation have some involvement in such deals. “Any time you take money from the agency, you are going to cause a cutback in service,” he said.
In the case of the MTA deals, AIG provided $1 billion in loans to finance the transactions. The company, in return for fees paid by the transit agency, also guaranteed that the lease payments to investors would be made on time.
Things started to go downhill when AIG ran short of cash after running up billions in losses tied to the housing slump. Its credit ratings were slashed and the firm was on the verge of collapse last month when it was bailed out by the federal government.
The lower credit ratings triggered a clause in the lease-back agreements that require the MTA to either find a new firm to guarantee the deals or reimburse investors for their down payments and lost tax benefits, a scenario that could cost the transit agency between $100 million and $300 million.
As a frame of reference, Matsumoto said that $100 million equals about 10% of the MTA’s bus service. However, the MTA board has not yet discussed what cuts might be made.
The MTA has not found a replacement for AIG, Matsumoto said. “With the current state of the markets, there are no people who are willing to provide a replacement for AIG at any price,” Matsumoto said.
The agency has started talking to some investors in hopes of getting them to accept terms more favorable to the MTA, but Matsumoto said he doesn’t know if investors are willing to renegotiate.
Under a worst-case scenario, Matsumoto said, the bill could rise to $1.8 billion, more than half the MTA’s annual budget for this year. “There is no practical way we could ever pay that back,” he said.
The agency has met with congressional staffers and asked the U.S. Treasury Department for help, hoping to get a piece of the $700-billion bailout package recently approved by Congress. Some of that money is to be used to buy troubled assets.
“They didn’t tell us to go fly a kite; that’s hopeful,” Matsumoto said. “But I don’t know how practical it is. We weren’t talking to decision-makers.”
MTA board member Richard Katz said: “The feds need to be concerned. If they bailed out the companies, they also need to bail out the public agencies impacted by the companies’ actions.”
The credit crunch has eased a bit in recent days as interest rates for inter-bank loans have inched downward and short-term lending to corporations has picked up. But it’s unlikely that conditions will improve fast enough to provide significant relief to the MTA.
Both Matsumoto and LaRusch said the Federal Transit Administration encouraged transit agencies to make lease-back deals as a way to make extra money. The MTA said it made about $65 million on the deals.
But an FTA spokesman disagreed. “FTA was not a cheerleader for these transit lease-back agreements,” agency spokesman Dave Longo wrote in an e-mail. “We reviewed lease-back agreements submitted to us by transit agencies in terms of their compliance with federal transit law requirements. When we determined those agreements met the requirements, we approved them from that perspective.”