(The following story by Jennifer Moroz and Frank Kummer appeared on the Philadelphia Inquirer website on March 22.)
PHILADELPHIA — Before state taxpayers even had a chance to try out their $1.1 billion light-rail system last Sunday, NJ Transit officials were considering selling the line’s sleek European rail cars to a foreign bank in a complex financial deal.
If the state gets its way, that moneymaking proposal to sell, and then lease back, the trains on South Jersey’s new River Line could still become reality.
But similar deals across the country have been put on hold amid a crackdown on what local government agencies call creative financing but what federal officials say is nothing more than a tax scam.
The Bush administration and some powerful members of Congress are on a campaign to stamp out the majority of these so-called sale-in, lease-out (SILO) agreements, which have been widely used for years by NJ Transit, SEPTA and other agencies to raise quick cash.
Under the deals, the agencies “sell” assets – rail cars, buses, even sewer lines and San Antonio’s Alamodome – to a private corporation, which then turns around and leases them back. At the end of the lease period, ownership reverts back to the agency.
The agencies say it’s a win-win situation: The company gets to write off the depreciation, while the agency, which itself cannot take advantage of that tax break, makes an up-front profit – typically about 5 percent or 6 percent of the “sale.”
“This has been of substantial value to us,” said Charles Wedel, chief financial officer of NJ Transit. “People who don’t like these leases call them abusive tax shelters… . It depends on which side you’re on. You can make them sound as terrible as you want.”
Federal transit officials once promoted the practice as an innovative way for cash-strapped transit agencies to raise funds. But now the federal government, itself mired in deficits, is cracking down on what it now says amounts to tax fraud. Federal officials estimate that over the next decade, the Treasury would lose more than $33 billion from the tax breaks of companies buying assets they never intended to operate.
Without knowing it, riders of Philadelphia’s Market-Frankford line likely have traveled in rail cars “bought” by what was then First Union Bank.
“If the transaction… is merely a transfer of tax benefits to a U.S. taxable corporation, we object,” said Greg Jenner, the Treasury Department’s acting assistant secretary for tax policy. “We believe it’s an unwarranted raid on the U.S. Treasury.”
What the companies make in breaks, federal officials say, dwarfs the benefits to local governments.
Nationwide, transit agencies have made about $850 million through the lease transactions, according to the American Public Transportation Association. NJ Transit says it has benefited to the tune of $150 million. SEPTA officials estimate that they have raised $39 million.
“We’re going into next fiscal year with a $70 million deficit,” SEPTA spokesman Jim Whitaker said. “These [deals] allow us to acquire extra funding.”
Agencies may soon have to find a new source of funds.
President Bush’s 2005 budget proposal contains a provision banning most of the transactions. And leaders of the Senate Finance Committee are pushing legislation to end what Chairman Charles Grassley (R., Iowa) called “trickery at the taxpayers’ expense.”
Meanwhile, the Federal Transit Administration has ordered 15 deals across the country put on hold, pending a full review of tax impacts. Those include SEPTA’s proposed sale of Broad Street subway cars to Bank of America Corp. for $333 million and two NJ Transit deals to sell $230 million worth of rail cars to companies in France and the United Kingdom.
Any River Line deal would be exempt from the FTA review, officials said, because the project did not receive federal funding.
Dan Duff, vice president of government affairs for the American Public Transportation Association, called federal officials hypocrites for pulling the plug on needed funding.
“It’s important to recognize that the government has encouraged this,” he said.
And agencies have jumped at the opportunity. According to SEPTA, roughly a quarter of the authority’s 2,300 buses and rail cars – about $750 million worth – are under leaseback agreements. Over the last 13 years, NJ Transit has entered into lease agreements on at least $2.13 billion worth of assets, including about half its fleet, according to records.
And if the agency prevails, Standard Chartered Bank of the United Kingdom could be the proud new owner of cars on the River Line, which links Camden and Trenton.
Such a deal likely would escape the recent crackdown. Federal officials are concerned about arrangements in which domestic – and domestically taxable – companies are the ones doing the “buying.” Particularly egregious, Treasury officials say, are deals in which domestic companies buy foreign infrastructure – subway cars in Germany or air traffic control equipment in Canada. In those cases, the Treasury loses out, but local governments don’t reap any benefit.
NJ Transit officials point out that recently, they have sought foreign companies as partners.
“We get the benefit and it has no impact on the U.S. Treasury,” said Wedel, the agency’s CFO.
The agency says it will pursue negotiations with Standard Chartered, though officials could not say how much any resulting deal would be worth.
As long as it doesn’t affect the U.S. Treasury, it’s fine by the federal government.
Grassley said that what foreign companies do is out of his hands: “It’s up to the governments of other countries to decide whether they will tolerate the financial loss to their treasuries.”