(The Associated Press distributed the following article on October 21.)
WASHINGTON — Cities such as Boston, Chicago and Washington are reaping millions of dollars leasing their mass transit systems to private companies that use them as tax shelters, an anonymous witness told Congress, testifying Tuesday behind a screen with his voice electronically distorted.
“Faced with local budget deficits, state and local governments are leasing off infrastructure assets at a record rate,” said the witness, dubbed Mr. Janet , who was described as a former leader in the leasing industry.
“The subway systems of Boston, Chicago and Washington, D.C., have been leased and leased back to U.S. corporations,” he said.
Officials in the three cities said they use leasing transactions and described them as a revenue boon for transit agencies often strapped for cash to make upgrades.
“They are common throughout the transit industry,” said Jonathan Davis, the financial officer and deputy general manager at the Massachusetts Bay Transportation Authority.
Michael Fleming, president of the Equipment Leasing Association, said the transactions can be compared with home equity loans — a way for cities to borrow against their assets to raise much needed capital.
But Senate Finance Committee Chairman Charles Grassley, R-Iowa, said the practice crosses a line.
“Roads and bridges built with tax dollars are leased out to shelter promoters so major corporations can get a phony tax deduction,” Grassley said. “Even the subway system of Washington, D.C., our nation’s capital, has been leased as part of a shelter scheme. We need to shut down this type of tax shelter and all others in the process.”
Transit systems, however, have found a cash cow in the deals.
Davis said his agency, which runs Boston’s transit system, has generated $53 million since 1995 in lease transactions that included, among others, the Bank of New York. A spokeswoman for the bank declined to comment.
The Chicago Transit Authority has gathered $115 million in eight deals since 1995, with transaction fees ranging from $200,000 for buses to more than $40 million for rail cars, said spokeswoman Noelle Gaffney.
Those transactions involved, among others, Wachovia Corp., which declined to comment. Gaffney said her agency is considering another lease deal for more buses next year.
Washington has made $100 million on several transactions, said Lisa Farbstein, spokeswoman for the Washington Metropolitan Area Transit Authority.
“It’s considered a pretty entrepreneurial approach to generating needed funds,” she said.
Officials said they see nothing wrong with the deals, pointing out that many must be approved by the Federal Transportation Authority. Farbstein said the approach is even outlined in a 1995 FTA brochure for transit systems titled “Innovative Financing Handbook.”
Officials in Boston and Chicago said they adjusted their leases when the IRS ruled certain transactions illegitimate in 2002.
Those transactions were known as “lease-in, lease-out,” or LILOs. A city would lease its asset to a company in exchange for a payment. The company then leased the asset back to the city and took a tax deduction based on the asset’s depreciation.
Tuesday’s anonymous witness, Mr. Janet, said new variations that rely on service contracts treated as leases, called SILOs, are no more legitimate.
Fleming, speaking for the leasing association, disagreed. He said companies no longer use the lease-in, lease-out transaction. “As far as we’re concerned, they’re history,” he said. “They’re done.”
Current leasing practices, he said, have been long used by tax-exempt entities like cities and hospitals to acquire financing for and use of equipment. “The service contract model is based on a privatization arrangement commonly used and not regarded as abusive,” he said.
Members of the Senate panel have proposed legislation that would disallow the newer leases involving service contracts.