Metro's Credit Crisis

By U.S. Rep. James Moran
October 28, 2008

Metro is facing a crisis and quick action by the U.S. Department of Treasury is needed to avert sending the economic and commuter transit system that drives our economy into bankruptcy. The global credit crisis affects states, local governments and public agencies – with major implications for the commuting public and taxpayers. 

Earlier this week, I led the the Washington area delegation (Reps. Hoyer, Davis, Van Hollen, Wolf, Norton and Donna Edwards) in sending a letter to Treasury Secretary Paulson and Fed Reserve Chairman Bernanke, requesting they step in immediately and act as the insurer of last resort for so-called “sale lease-back transactions.” These transactions -- in which transit agencies purchased rail cars, sold them to select banks who then leased them back to the agencies -- have become technically insolvent because of the lowering of insurance giant AIG’s credit rating. The sale lease-back arrangements were contingent on the transactions’ insurer maintaining an AAA credit rating.

It's a confusing financial arrangement, one designed to provide Metro with an upfront cash infusion while giving banks a depreciable asset for tax purposes and a steady stream of lease payments.

Our Metro system has until Thursday to find a solution to this crisis or it could face up to $400 million in direct payments to banks on 16 sale-leaseback transactions that were completed and reviewed by the Federal Transit Administration between 1997 to 2003. Metro does not have access to such large amounts of capital in the near term because of the international credit crisis and could face insolvency if forced to pay.

Metro, however, will merely be the first system tested by this crisis. 31 transit agencies, from LA to Atlanta, face similar if not worse emergencies.  How we deal with the situation in our nation’s capital will provide the guidance for how we proceed in dealing with the other 30 transit agencies around the country.

Allowing these agencies to default in these sale lease-back transactions would cost state and local public transit systems hundreds of millions of dollars, forcing sharp reductions in transit services and potentially large fare increases, deferred maintenance and a halt to new construction projects (think Dulles Rail) in the nation’s largest urban areas. It would also have large repercussions for state and local credit markets…even as these governments confront the bleakest revenue situation in the last half-century.

The Treasury Department has been responsive to this crisis even as they are focused on getting the TARP rescue plan implemented. On Tuesday they planned to meet directly with Metro and APTA, the Association for Public Transit Agencies. I am confident they will do the right thing and step in to insure these contracts to keep Metro and other transit systems across the nation from defaulting on their financial obligations. Troubled times call for measures that would normally be less than preferable. But we cannot allow our transit system to be grounded. The impact of inaction would grind our economy to a halt. Our regional delegation is following this issue intensely and will do what is necessary to keep Metro running at full speed.