The deficit is the result of lease deals that were insured by the massive AIG Company, which received an $85 billion federal bailout in September reports the Inland Valley Aily Bulletin.
The company’s failure triggered clauses in the deal that now leave the MTA faced with the need to find a new financial partner with a strong credit rating to take AIG’s place.
With few companies looking to guarantee new debt, MTA officials believe their best prospects might be with the federal government.
“Because the federal government now owns over 80percent of AIG shares, they would be the logical candidate to guarantee those deals,” said MTA spokesman Marc Littman.
The MTA is one of dozens of transit agencies nationwide that are in Washington this week seeking help because of troubles with similar deals.
The MTA’s deals originated in the late 1990s and early 2000s, when it sold off a huge number of buses and trains to corporate investors, including Phillip Morris and Comerica.
It then entered into long-term leases to use the equipment. The sales netted about $65million to put toward operating costs, said Littman.
“Essentially, they were tax shelters,” said Joseph Henchman of the Washington-based Tax Foundation, a taxpayer rights organization that opposes guaranteeing the leases. “They were a way to get short-term revenue that was never appropriated.”
The Tax Foundation estimates that agencies across the country owe $2billion to $4 billion in such lease deals, while California lawmakers have estimated that agencies around the state owe $700 million.
With the threat of the state losing so much money, Sen. Barbara Boxer, D-Calif., as well as a number of members of the California congressional delegation, have been some of the most vocal in Congress for the government to take action.
“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,” Boxer wrote in a letter to the Treasury Department.
For the MTA, being forced to pay back the deficit could mean a fare raise or borrowing money with new sales-tax funds from Measure R as collateral, though Littman said either scenario is premature.
“Right now we are hoping to resolve this by getting a new guarantor,” said Littman. “It is much to soon to be talking about borrowing money.”
If the transit agencies can find a guarantor, like the U.S. government for those deals, they will pay that back over years or decades. Without a guarantor, their investors can demand that money at any time.
If the government acts as guarantor, it would not cost taxpayers anything unless the agencies were unable to make their payments, a fact emphasized in a letter by the California congressional delegation.
“We note that this assistance does not involve a cash payment to Caltrans or the transit agencies, as banks and the auto industry have recently received,” reads the letter signed by Rep. Grace Napolitano, D-Santa Fe Springs, who is on the Transportation Committee.
Staff for Rep. Adam Schiff, D-Pasadena, said he was in favor of federal action for the agency, though he was not notified about the delegation’s action.
Henchman said his organization’s concerns are that the Treasury Department would not go for the deal, and the agencies would next focus on a direct congressional bailout. He added that any extra transportation funding should come through the normal budget process.
“We don’t want to see these deals used as a substitution for the appropriations process,” he said.
In the MTA’s case, AIG insured the deals with the agreement that if AIG ever lost its triple-A bond rating, the agency would have 60 days to find a new insurer. Otherwise, investors could legally claim repayment of the leases.
In September, as the value of its shares plummeted, AIG lost its rating. Now, the MTA is officially over the 60-day period and its investors can demand the $165million remaining balance on the leases at any time.