Transit SILO Deal Update: Negotiations Continue
November 13, 2008
Washington D.C.’s Metro transit agency continues its second day of negotiations with Belgian bank KBC Group, although they reportedly have stalled. The parties will appear again before Judge Rosemary M. Collyer tomorrow.
Bond Buyer wrote up an excellent piece on the transit agency/SILO situation that is affecting some thirty transit agencies nationwide. It references the Tax Foundation’s piece on the subject and provides a few more numbers.
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. Our report concluded:
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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