Update, see below
I never expected the financial crisis to have such a direct impact on transit, but according to the Washington Post, transit agencies could be forced to come up with billions in cash due to AIG’s failure and take-over by the fed. Apparently, some transit agencies are leasing equipment from banks, and AIG has been providing insurance that the agencies will make their payments. AIG’s takeover triggered a clause in the contracts that allows the banks who own the leases to demand immediate repayment, and many of them need the money to stay solvent due to the credit crunch. Double-Whammy. Weak, and AIG spent how much on lavish parties and excutive retreats?

Here’s how WaPo describes the deals :

In a once-common practice that the IRS has ended, many transit agencies entered into arrangements in which they sold equipment such as rail cars to banks. The banks then turned around and leased the equipment back to the transit agencies.

Both sides benefited. The transit agencies were given a large sum of money up front, which could pay for various infrastructure upgrades. And the banks were able to rely on frequent lease payments while also writing off taxes on the depreciating property.

The deals were approved by the Federal Transit Administration, which promoted the lease agreements, transit agency officials said.

AIG, which collected fees paid by Metro and other transit agencies, guaranteed that lease payments to the banks would be made on time. But AIG’s financial problems have triggered a clause that allows the banks to demand their money all at once.

More than 30 agencies have entered into the deals, including King County Metro, though I don’t know exactly how big the problem with Metro is. I’ll get back to as soon as I know.

The metro mentioned in the article is DC Metro, sorry if that is confusing. But KC Metro is affected, according to this site, as is Sound Transit.

Update 2:
According to Rochelle Ogershok at KC Metro, Metro no longer has any of those AIG deals, which is very welcome news. I was worried about nothing.

7 Replies to “AIG’s troubles hurt transit systems, including Metro”

  1. This is just financial idiocy. Typical short term financial thinking that’s been running rampant over the last twenty years at all levels of society. Why the heck would anyone buy their equipment outright, than turn around and sell it to an entity and rent it forever from the same entity. Why would anyone or any agency/corporation WANT to make payments forever instead of paying the loan/bond off/piece of equipment off and own it outright????.

    1. The transit agency can fund the equipment one of two ways: issuing bonds, or entering into a “capital lease” with an AIG or a bank. Either way, the agency benefits from a tax-exempt rate of interest (the bond purchaser or lessor pays no income tax on the interest received, so it can offer a lower rate).

      If the agency issues bonds, however, it can’t take advantage of the tax benefits of the equipment’s depreciation, as the transit agency is a tax-exempt entity. An AIG or a bank can, though, and it passes these benefits on to the agency in the form of an even lower interest rate.

  2. Depends on what the agency/corporation gets out of it. If the interest rate that Metro got from AIG was cheaper than the interest rate they’d get from issuing bonds to pay for equipment (since there’s no way a public funded agency (or even most corporations) would have the capital to pay for it all up front), then I’d argue this looked like a good move at the time.

    That said, it does make me wonder how Metro decides when the agency needs to replace buses and how buses compare with streetcars on this count. It seems like they do a pretty good job of squeezing life out of old vehicles (the current set of articulated trolley buses have to be nearly 20 years old, right?), but streetcars are reputed to last longer. Ignoring labor, what’s the yearly cost of running a bus all day vs. running a streetcar all day?

  3. I think the Metro problem might be a BIG one, if the leasing companies call in their notes.
    Every registration I’ve looked at on a Metro coach shows a Leasor on the certificate, not King County – but I’ve never had a fetish of looking at all the registrations either, so I could be FOS.

    1. Apparently they have stopped the practice for the most part, and they never used AIG, so that’s good news.

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