D.C. Metro SILO Contract May Have Obligated Them to Run Outdated Railcars

June 25, 2009

In the news this week has of course been the tragic Metrorail collision in Washington, DC. Officials continue to investigate what went wrong, with the National Transportation Safety Board emphasizing their previously-ignored recommendation that the D.C. Metro retire or strengthen a series of 30+ year old railcars (the "1000 series") dating from the system's founding. Metro, which estimates the cost of buying new cars to replace the 1000 series at $800 million to $1 billion, claims it didn't have the money. (Metro receives over half a billion dollars a year in operating subsidies, not counting capital subsidies of several hundred million dollars more.)

Now comes a revelation that Metro may have signed contracts requiring them to keep these old railcars in service until 2014. Sarah Lawsky at Concurring Opinions, drawing a quotation in the Washington City Paper, IRS records, and previous Tax Foundation research, put the dots together:

They appear to be standard sale-leaseback transactions, in which WMATA sold equipment, including train cars, to another party and now leases it back.  The other party gets various tax advantages (depreciation, credits, and so forth) associated with owning the equipment, and WMATA, which as a tax-exempt organization cannot use these advantages, gets cash.  But apparently the leases did not include language that permits WMATA to break the leases if newer, safer equipment comes along.

Thus sale-leasebacks, which are purely tax-motivated transactions, may have locked Metro into using outdated and unsafe equipment and thus made this crash even more deadly than it might otherwise have been.

Our previous report on these transactions is here. We researched the issue because Metro (and many other agencies) were put into default on the agreements after the collapse of their insurer, AIG. Most of the agreements are now in a holding pattern, with transit agencies continuing to make payments and negotiating with the foreign banks that technically own the railcars purchased with public funds.

It's hard to say more since most of these agreements are under wraps. Transit agencies, Metro included, have been secretive about the agreements and reporters have had difficulty getting answers. It remains to be seen if Metro signed a contract obligating them to run railcars long past their expected service life.

(Hat Tip: Tax Prof Blog and Tax Notes)

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