Since our October report on the subject, we’ve been looked to as an authority on the unraveling of transit agencies’ SILO transactions and their request for a federal bailout.
Quick primer: From 1988 to 2003, transit agencies entered into sale/leaseback transactions whereby the government agencies realized taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. savings by selling $16 billion worth of railcars and other assets banks and investors, who could then take tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. s on the depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. . Federal transit officials pushed the deal as a way to get more funding without having to go through the normal appropriations process, but federal treasury officials opposed the deals as a tax shelter and disallowed them in 2004. With their deductions disallowed, banks had an incentive to get out of their contracts, and the collapse of insurer AIG permitted this because AIG guaranteed many of the deals. Transit agencies are now asking the federal government to guarantee the deals to prevent their default, since they agreed to pay huge termination fees that they cannot possibly pay.
Well since transit officials trooped up to Capitol Hill asking for a bailout, the SILO guarantee has been quietly added to the auto bailout bill pending before Congress. Yesterday, Sen. Charles Grassley (R-IA) sent a letter objecting to their inclusion as just preserving a tax shelter that should never have existed in the first place:
Because I have fought so hard to eliminate the benefits of LILO/SILO transactions, allowing parties to these transactions to reap these benefits with taxpayer dollars would be a perverse result.
That’s a good reason to object. Unfortunately, Grassley goes on with a xenophobic reason:
It is even more offensive that many of the corporations that would benefit from the guarantee proposed in [the auto bill] are foreign corporations. Taxpayer dollars certainly should not be used to bail out foreign corporations who knowingly entered in questionable transactions for the sole purpose of tax evasion.
It shouldn’t matter whether the entity who signed a stupid agreement is foreign or not. It’s a distraction from the bigger issue of what to do now.
- A first step is that every transit agency needs to come forward publicly with what they owe and to whom they owe it. (Some have thus far refused to disclose despite asking for a bailout.) The Hartford Business Journal has an excellent editorial outlining the reasons for disclosure.
- It would also be nice if every transit official who agreed to the termination fee clause in these contracts, while fully knowing that they could never perform, be fired.
- If transit agencies need additional funding (including covering their liabilities), it should go through the normal appropriations process for better transparency and to avoid giving benefits only to agencies that entered into these dumb agreements.
The current proposal, by contrast, just pays everyone off, lets everyone keep their job, and pretends like nothing happened.
Past blog posts on the topic:
- SILO Update: Belgian Bank Settles, Transit Agencies Lobby for Bailout, November 18, 2008
- Transit SILO Deal Update: Negotiations Continue, November 13, 2008
- Metro Seeks Court Order on SILO Payments, November 12, 2008
- 30 Transit Agencies in Bind Due to SILO Deals; Belgian Bank Holds Off Collection Pending Hearing, October 31, 2008