AS LEASE-BACK DEALS ARE RAISED AS ISSUE IN METRO CRASH, MENENDEZ SAYS LEGISLATION CAN HELP UNWIND DEALS

WASHINGTON – Yesterday, U.S. Senator Charles Grassley (R-IA) raised the issue of lease-back deals between banks and transit agencies with respect to the recent crash on Washington’s Metrorail system in a letter to House of Representatives Majority Leader Steny Hoyer (D-MD). Today, U.S. Senator Robert Menendez (D-NJ) wrote Rep. Hoyer to offer to suggest that the passage of Menendez’s Close the SILO/LILO Loophole Act (S.1341) would remove the ability of banks to seek windfalls off of these deals and increase the incentive for transit agencies and banks to unwind the deals.

“I believe this legislation could help protect WMATA and other transit agencies who are being threatened by banks seeking to gain a windfall from the current economic climate while potentially putting transit agencies at risk,” wrote Menendez. “The bottom line is that, in order to help prevent such a tragedy in the future, we must ensure that transit agencies have adequate resources to keep passengers safe. As part of that, I strongly believe that we must protect transit agencies from banks who are seeking to exploit a technicality that would result in agencies having to pay banks millions of dollars that could otherwise be used to shore up equipment and ensure safe operations, even though they have not missed a single payment to the bank. Once we remove this threat, the door will be open to terminating these transactions in a fair and equitable manner.”

The Close the SILO/LILO Loophole Act would levy a 100 percent excise tax on windfall proceeds that banks are demanding from these agencies. Background

The lease deals in question are known as Sale-in/Lease-out (SILO) and Lease-in/Lease-out (LILO) deals. They involve transit other public agencies selling equipment or infrastructure (such as rail cars) to banks to raise quick capital, then immediately leasing that equipment or infrastructure back from the banks. In these deals, a third party guarantor with a AAA credit rating, such as AIG at the time, was required to guarantee the lease payments.

Banks also would derive tax benefits from these deals, writing off the depreciation of the equipment or infrastructure they had purchased. However, in 2003, Congress found this to be a tax avoidance scheme, and the tax benefits were ended, though the lease deals remained in place.

Now that AIG and other guarantors have lost their AAA ratings, banks are claiming their contracts with public agencies are in “technical default” and are demanding that the agencies compensate them immediately with the cost of future tax benefits they would receive through these deals, even though those benefits have been prohibited.

This threatens agencies with large payments – the head of NJ Transit has said his agency would owe $150 million, which would disrupt service, cause fare hikes and put future projects in jeopardy.

PDF of letter from Menendez to Hoyer, plus attachments: http://menendez.senate.gov/pdf/06262009SILOLIO&WMATA.pdf

Text of letter:

June 26, 2009

The Honorable Steny H. Hoyer

Majority Leader

U.S. House of Representatives

H-107, The Capitol

Washington, DC 20515

Dear Majority Leader:

I write to offer my help and to extend my sincere condolences on the Red Line Metro crash Monday. I know it must be a difficult time for you and your constituents, and my thoughts are with the victims of this tragedy.

I also wanted to offer my support in funding improvements to the Washington Metropolitan Area Transit Authority (WMATA) system to help ensure that this accident is not repeated. To that end, I wanted to alert you to legislation I introduced yesterday called the Close the SILO/LILO Loophole Act (S.1341). I believe this legislation could help protect WMATA and other transit agencies who are being threatened by banks seeking to gain a windfall from the current economic climate while potentially putting transit agencies at risk.

As you know from the letter you received from my esteemed colleague, Senator Grassley, he has expressed concerns that this accident may have been caused by implications from a SILO/LILO transaction and not decades of federal neglect of public transportation and inadequate federal funding of our nation’s transit systems. The bottom line is that, in order to help prevent such a tragedy in the future, we must ensure that transit agencies have adequate resources to keep passengers safe. As part of that, I strongly believe that we must protect transit agencies from banks who are seeking to exploit a technicality that would result in agencies having to pay banks millions of dollars that could otherwise be used to shore up equipment and ensure safe operations, even though they have not missed a single payment to the bank. Once we remove this threat, the door will be open to terminating these transactions in a fair and equitable manner.

Please find attached a copy of my legislation as well as a short document explaining how the legislation works. I commend you for rising to the challenge this tragic accident has posed and for marshalling federal resources to protect your constituents and the residents of the District. Do not hesitate to enlist my help in this endeavor.

Sincerely,

ROBERT MENENDEZ

United States Senator

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SENATOR ROBERT MENENDEZ can be reached via email at afshin_mohamadi@menendez.senate.gov.