PREVENTING A PUBLIC TRANSIT CRISIS: SENATORS CALL ON TREASURY TO STOP LOOMING FISCAL DISASTER FOR TRANSIT AGENCIES

WASHINGTON – Today, U.S. Senator Robert Menendez, along with Senators Richard Durbin (D-IL), Frank Lautenberg (D-NJ) and Barbara Boxer (D-CA) are calling on Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke to prevent a potentially crippling financial situation that transit agencies are facing as a result of the credit crisis. The collapse of insurance giant AIG has caused deals between banks and transit agencies to fall apart, allowing banks to demand billions of dollars from the agencies.

“Any reduction or degradation in transit service could mean that our constituents will struggle getting to work or school, squeezing our state economies and family budgets even further,” wrote the senators. “This is a time when we should encourage mass transit use and a financial blow to our transit agencies such as this one is a major setback to that effort”

The senators, who represent states with major public transit systems, called on the Treasury and Federal Reserve to each appoint senior officials to work with the Department of Transportation and large transit agencies in developing a solution that will avoid a fiscal crisis for the agencies. The issue stems from leasing arrangements between transit agencies and banks in which the banks purchased transit infrastructure and leased it back to the agencies. AIG served as an intermediary in these transactions. The collapse of AIG left its credit rating in tatters, which banks have exploited to invalidate the deals and demand full payment up front from the transit agencies.

PDF of letter: http://menendez.senate.gov/pdf/102408TreasuryLILO.pdf

            Text of letter:

October 24, 2008

The Honorable Henry Paulson
Secretary of the Treasury
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220                                                                       

The Honorable Ben Bernanke
Federal Reserve Chairman
Federal Reserve System
Twentieth and Constitution Avenue, NW
Washington, DC 20551

Dear Secretary Paulson and Chairman Bernanke:

We are seeking your assistance to address a critical issue facing many of the nation’s large public transit agencies in the wake of the current financial crisis.  As discussed in yesterday’s hearing before the Senate Committee on Banking, Housing and Urban Affairs, if the Treasury and Federal Reserve do not act quickly, public transit agencies around the nation could become financially crippled and several banks could enjoy unjustified windfalls.
 
As you may know, from the late 1980’s to 2003 mass transit agencies (and other public agencies) entered into Lease-In/Lease-Out and Sale-in/Lease Out (LILO/SILO) Transactions with several banks.  The transactions provided these agencies with much needed resources for capital intensive projects and the banks were able to gain tax benefits.  In 2003, the tax benefits from these transactions were prohibited. 

AIG was used as a go between in many of these transactions.  Now the banks that are parties to these transactions are using AIG’s credit downgrading to terminate these transactions in terms favorable to them.   As a result, the banks may have the opportunity to gain 100 percent of the tax benefits which have been disallowed, and in turn devastate transit agencies.  Any reduction or degradation in transit service could mean that our constituents will struggle getting to work or school, squeezing our state economies and family budgets even further. This is a time when we should encourage mass transit use and a financial blow to our transit agencies such as this one is a major setback to that effort.

We believe such dire consequences can be avoided without significant cost or risk to the bailout program and we urge you to take measures to address this critical issue.  In particular, we ask you to immediately delegate a senior Treasury and a senior Federal Reserve official to work with the Department of Transportation and a small number of the large transit agencies to develop a solution to this pressing problem thus avoiding a financial catastrophe for those least able to pay.

Thank you in advance for your consideration.

Sincerely,

_______________________                                                                   _______________________
ROBERT MENENDEZ                                                                        RICHARD J. DURBIN
United State Senator                                                                                     United State Senator

_______________________                                                                   _______________________
FRANK R. LAUTENBERG                                                                 BARBARA BOXER
United States Senator                                                                                   United States Senator