Los Angeles County Public Transit Could Face Blowback from Credit Crisis

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Add another potential victim to the long list of those already claimed by the rolling credit crunch: Los Angeles County's Metropolitan Transportation Authority (MTA). Yes, in another sign of the financial crisis's pervasiveness, the public transit authority could be forced to slash services for its 1.5 million customers because of a series of (now toxic) deals it made with insurance giant American International Group.

Steve Hymon and Martin Zimmerman of the Los Angeles Times report that the agency may need to quickly raise hundreds of millions of dollars to repay investors. The financial woes will likely extend to other major transit agencies, such as Metrolink, that made similar deals in the past -- deals that were encouraged by tax laws until the early 2000s. Here is how the deals worked:

Between the late 1980s and 2003, the MTA sold its rail equipment, more than 1,000 buses, a parking garage and maintenance facilities to investors that included Wells Fargo, Comerica and Phillip Morris in separate deals.

Lease-back deals are a common way to raise money in the corporate world. A manufacturer, for example, could sell its factory to investors and then lease it back. The manufacturer gets a large chunk of cash and the investors get a steady stream of lease payments as well as a tax break for their depreciating property.

Such deals worked well when the U.S. economy was still bathed in cheap credit and liquidity was still flowing. Now that banks are reining in their loans and being notoriously tight-fisted about making additional ones, even large companies and agencies with substantial assets and good credit are finding it hard to get cash. According to James LaRusch, the chief counsel for the American Public Transportation Association (APTA), most of the country's largest agencies -- roughly 30 -- will be affected.

In the MTA's case, things started taking a turn for the worse when AIG had its credit ratings downgraded -- the result of losing billions in ill-advised transactions in the deflating housing market -- which triggered a clause in the lease-back deals that require the agency to either find a new suitor to guarantee the deals or to pay back investors. The latter scenario could cost the MTA anywhere between $100 and $300 million. (To put this in context, $100 million pays for about 10 percent of the MTA's bus service.)

Not surprisingly, the agency has not yet found a taker. So what might be the worst-case scenario for the beleaguered transit agency? Hymon and Zimmerman explain:

Under a worst-case scenario, Matsumoto said, the bill could rise to $1.8 billion, more than half the MTA's annual budget for this year. "There is no practical way we could ever pay that back," he said.

The agency has met with congressional staffers and asked the U.S. Treasury Department for help, hoping to get a piece of the $700-billion bailout package recently approved by Congress. Some of that money is to be used to buy troubled assets.

Forget the financial bailout. How about bailing out our infrastructure and public sector services for once?

Via : Associated Press: LA public transit faces dilemma due to AIG demise
More about mass transit in Los Angeles
Metro Bringing Tweaked Congestion Pricing Plan to Los Angeles
Pining for a Subway to the Sea (and other Public Transit Projects)
Public Transit Looking More Attractive in the Face of Record Gas Prices

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