SILO Update: Belgian Bank Settles, Transit Agencies Lobby for Bailout
November 18, 2008
We’ve been tracking a situation hitting 30 transit agencies across the country, as they face huge termination penalties from European banks due to the unravelling of “Sale In Lease Out” (SILO) deals they entered into from 1988 to 2003. A quick summary from our longer report:
When a private company builds an asset, they are permitted under federal income tax law to deduct from their taxes the depreciation (wearing out) of the asset over time, reducing their overall tax bill. Cities and transit agencies also build and own assets, but because they are governmental instrumentalities, they are exempt from federal income taxes. Given that they don’t pay taxes, these reductions in taxes owed are worthless to them.
Enter the SILO. Transit agencies sell their assets (usually purchased with taxpayer dollars) to a private investor (often a European bank for most of the outstanding transactions). The bank uses the depreciation deductions to lower its tax bill. Not needing railcars or buses, the bank leases them back to the agency, often for a rent equivalent to their monthly “purchase payments.” Such a transaction seems to have no economic purpose—just two entities swapping assets of identical value—but federal taxpayers were providing the hidden profit. The depreciation tax deductions provide the profit that is usually split between agency and investor.
Federal transit officials supported these deals as a way to reduce on-budget transit operating and construction subsidies. The Treasury Department did not, and in 2004, disallowed all the deductions and made the deals worthless. The overseas banks, stuck in the contracts, looked for any opportunity to get out of them, and that came about when insurance company AIG (the guarantor of many of the SILO deals) collapsed just before being bailed out by the U.S. government. The lowering of the AIG’s credit rating triggered a clause in the SILO agreements that placed them in technical default, requiring the transit agencies to either find a new guarantor or pay very large termination fees to cancel the agreements. The credit crisis has eliminated the option of finding a new guarantor.
All told some $16 billion in taxpayer-purchased assets were sold to banks and investors, and now agencies face termination penalties of somewhere between $2 billion and $4 billion. Today transit agency heads are heading to Capitol Hill to request a bailout. (The reception from Congress might be chilly; the phrase “bailout fatigue” is creeping into news articles.) Over the last few weeks, we’ve received numerous calls and e-mails from reporters and activists who have had trouble getting information from their local agency. In a refreshing change, many of these agencies are now coming clean about the liabilities associated with agreeing to termination fee clauses that they never intended to pay:
- Los Angeles MTA: approx. $165 million
- DC WMATA: approx. $400 million (this week, WMATA settled with one of its 16 SILO creditors, Belgian bank KBC Group. KBC had invoked a $43 million termination fee penalty, but the two settled for $17 million.)
- Chicago Transit: $76 million (PACE did not use AIG as a guarantor and is thus not affected. Metra has restructured its deals at a cost of $75,000.)
- New Jersey Transit: $150 million
- San Francisco BART: $40 million
- Atlanta MARTA: $391 million
- Philadelphia SEPTA: $21 million
A full list of agencies involved is in our report. Some agencies, such as New York’s MTA and Seattle’s Sound Transit, have specifically declined to disclose their liability.