The Wall Street Tax Shelter That Crashed Your Local Transit Agency

redline.jpgThe scene of Monday’s Metro crash in D.C., where the local transit agency still has 15 outstanding "SILO" tax deals. (Photo: AP)

The D.C. Metro accident that killed nine riders this week has renewed calls for rail safety upgrades and reminders that car travel remains far riskier than transit. But the crash is also shedding light on a problem that goes beyond Washington: tax shelter deals between banks and struggling transit agencies — deals that were given a retroactive pass by Congress.

The tax shelters at issue are called "sale in, lease out" deals, also known as SILOs. Starting in the 1980s, local transit agencies began selling rail cars and other equipment to Wall Street firms, which would then turn around and lease the goods back to the agencies.

Why would either side want to get into such arrangements? Sarah Lawsky, an associate professor at George Washington University Law School, has explained the situation in detail. But the short answer is that banks got tax write-offs for their newly leased transit equipment, while local agencies got a cash benefit for giving away tax deductions they could not use.

Congress outlawed SILOs in a 2004 tax bill sponsored by Sen. Chuck Grassley (R-IA). His original language was retroactive, Grassley’s office said yesterday in a release, "but was watered down during conference negotiations to apply only prospectively."

That exception for existing SILO deals was added by Congress amid fierce lobbying by both Wall Street and urban transit agencies, as the Wall Street Journal reported at the time.

The Internal Revenue Service declared SILOs illegal in 2005, prompting some banks to accept lower payments in settlement deals with transit officials. However, Lawsky noted in an interview that some banks — inspired by the congressional exemption –have decided to try their luck in court with transit agencies.

"Some people want to settle and take 20 cents on the dollar," she said. "Some people want to say no … we entered into these deals before the statute."

It remains to be seen whether the SILOs played a role in this week’s D.C. Metro crash. But when federal safety inspectors asked the WMATA, which runs the D.C. Metro, in 2006 to replace its aging Rohr series rail cars — the model that crumpled in this week’s crash — the agency declined.

WMATA was "constrained by" SILO leases from phasing out the Rohr cars, it said.

And that’s just the beginning of the fallout from the tax deals, which have affected transit systems all across the country.

AIG served as a guarantor for many SILO deals, and its collapse late last year prompted several banks to seek "termination payments" from transit agencies that were otherwise up to date with their SILO leases. D.C.’s WMATA, in fact, was one of those transit networks fighting legal battles over AIG’s unraveling.

A report released by Moody’s Investors Service in March found that 17
of 25 major transit agencies embroiled in SILOs had lowered their risk
by renegotiating with banks in the aftermath of the credit crisis. But
that doesn’t mean urban transit systems are all out of the woods
— Atlanta’s MARTA transit agency was left with a $390 million exposure
even after unwinding many of its SILOs, according to Moody’s.

According to the DC-based Tax Foundation, New York MTA made SILO deals involving $2.389 billion in assets, but declined to disclose its current liability.

Meanwhile, congressional Democrats are still trying to convince the federal government to step in as a guarantor for the transit deals. After former President Bush declined to hear their appeals, Reps. Jim Moran (VA) and Chris Van Hollen (MD) inserted language into a January bailout-reform bill that would give Treasury backing to SILOs, but the bill was never taken up by the Senate.

Sen. Robert Menendez (D-NJ), whose home-state transit agency faces $150 million in looming bills from SILOs, introduced a bill this week that would impose a 100 percent windfall-profits tax on any payments requested by banks. In a statement on his proposal, Menendez said:

Development of our
mass transit systems is going to help us get out of this economic crisis and
create long term economic security. If some of the nation’s
most heavily-used transit systems were forced to pay tens of millions of
dollars to banks seeking a windfall, that would not only hit millions of
commuters today, it would slow the wheels of our economy.

  • bikerider

    This is irresponsible and erroneous reporting. The term of the lease was for the expected life of the railcar. Even if the lease was not in place, Metro had no plans, no funding, and absolutely no reason to replace the cars, which have an expected lifespan of at least 40 years.

  • > deals that were given a retroactive pass by Congress

    Article 1 Section 9; Congress shall make no ex-post-facto law.

  • Ian Turner

    bikerider, that’s not entirely true. In the linked article to the linked article, it is explained that the NTSB recommended replacing or retrofitting the rolling stock, and one of the excuses provided by WAMTA at that time was that they could not due to the terms of the leasing agreement.

  • J:Lai

    SILO deals are really not the culprit here, at least from a transportation point of view (different story if you are talking about pro/con of tax shelters . . .)
    Anyway, it doesn’t seem surprising that municipal transit agencies would engage in restrictive lease agreements in return for steady revenue. They are starved for funding and need to monetize whatever they can just to provide basic service.
    The real issue is that so little funding is allocated to transit.

  • Niccolo Machiavelli

    Where is Larry Littlefield with the Generation Greed angle on the story?

  • Ian Turner

    Kaja, the Supremes have ruled that current taxation on past income is not ex post facto, because the tax is payable only after the law is passed. The prohibition on ex post facto lawmaking does not mean that congress is cannot consider the history of an entity or its finances. To look at it a different way, if Morgan Stanley today refused to pay taxes from last year’s tax law on last decade’s deal, the law that Morgan Stanley is breaking was still made in the past.

  • bikerider

    “The NTSB recommended replacing or retrofitting the rolling stock.”

    Ian:
    Federal regulators are still stuck on the very antiquated notion that the best way to survive accidents is to build stiffer and heavier traincars. This accomplishes nothing, except higher operating costs and poor braking/acceleration performance.

    By contrast, European and Japanese approach to railway safety is accident avoidance; i.e. improved track maintenance and signaling systems (note that the Metro accident was most likely caused by the latter).

    If the NTSB were to examine any Japanese passenger railcar, it would declare those to be “unsafe” too, even though Japan has the world’s best safety record.

  • clever-title

    To blame the bankers for this accident would be like blaming a mortgage lender for a roof failure on a house where the owner didn’t perform the necessary maintenance.

    Like any other lending deal, there would be provisions to terminate the SILO agreement if WMATA offered the bank a payoff of the principal.

  • Larry Littlefield

    “Where is Larry Littlefield with the Generation Greed angle on the story?”

    All these deals have up front benefits to hand out with long term costs, disguised as mere “risks.” It was to prevent future generations greed from wrecking the state that specific provisions were added to the NYS Constitution, requiring referendums for debt for example.

    Unfortunately, given that the political clubs appoint the elected judges, they forgot to add the all important “and we’re not kidding” clause.

    I wonder how those pension fund investments in hedge funds at working out? Given the up front fees, I’m sure they worked out fine for the hedge fund managers.

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