http://www.taxfoundation.org/publications/show/23882.html
Transit Agencies in Bind Due to SILO Deals and AIG Collapse
by Joseph Henchman
Federal Officials Encouraged Leasebacks, Then Made Them Worthless for
Creditors
Introduction
Major newspapers are reporting on a financing crisis that is hitting
many transit systems in the United States late this month. The situation
is a result of (1) a series of leaseback transactions these agencies
conducted which included heavy termination penalties, (2) federal policy
first to encourage and then to discourage them, and (3) the collapse
of insurer AIG. As a result, approximately 30 agencies nationwide may
face serious financial shortfalls absent action by the U.S. Treasury
Department.1
On October 29, 2008, the Washington Metropolitan Area Transit Authority
(WMATA) sought an injunction in U.S. District Court against KBG Group,
a Belgian bank that is demanding $43 million in termination fees by
October 31.2 Metro warned that unless the injunction was granted, the
agency might be forced into default.
.....
Conclusion
Broadly, this shows some of the problems with the federal budgeting
process, whereby "tax cuts" are seen as more palatable than "spending"
even in a case where they are pretty much the same thing. Federal
transportation officials wanted to encourage transit capital projects
but not to fund them on the spending side, so they championed the use
of SILO financing, in effect funding them through the federal tax code.
Treasury never favored the arrangement, and in late 2003 they prevailed.
By reversing course, the federal government stopped providing a flow of
taxpayer funds that were being split between local transit agencies and
private investors. That left the existing agreements without a source
of funding and it gave the banks who had already signed SILO deals
every reason to try to get out of them. With the failure of AIG, the
banks are now presenting their demands to local transit officials who
had foolishly signed contracts with termination fees they knew they
couldn't pay.
In the short term, it's hard to say what the best
option is. The SILO deals are a tax shelter, and it's likely that the
U.S. Treasury won't support any action that doesn't unwind these deals.
Also, more and more people are beginning question the number of
obligations the federal government is guaranteeing. Bankruptcy
protection is possible, but a bankruptcy court would likely prioritize
continued operation of the transit systems over allowing creditors to
seize assets they technically own. At the same time, these agencies
just don't have the cash to terminate these agreements into which they
freely entered. The agencies are seeking congressional and Treasury
help and it is from there that the next move will come
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