LA Public Transit Faces Dilemma Due to AIG Demise

October 20, 2008

Two public transportation agencies in Southern California are facing a financial dilemma and possible service cuts after a major lender fell victim to the nationwide economic crisis.

Los Angeles County Metropolitan Transportation Agency officials said their deal to lease trains and buses from investors is in jeopardy because American International Group Inc. — which loaned the agency $1 billion to finance the transactions — recently ran short of cash and nearly collapsed.

Now MTA must find another lender or pay back hundreds of millions of dollars to investors to keep all its commuter services running for its 1.5 million riders.

“I’ve lost a lot of sleep over this,” Terry Matsumoto, MTA’s chief financial officer, said in a Los Angeles Times story posted on its Web site.

“With the current state of the markets, there are no people who are willing to provide a replacement for AIG at any price.”

Metrolink, a commuter rail agency in Southern California, also must find a find a replacement for AIG, said spokesman Francisco Oaxaca.

Other large transit agencies in San Francisco, Chicago and Washington, D.C., have entered into similar lease-back transactions.

“The potential is pretty horrendous across the industry,” said James LaRusch, the chief counsel for the American Public Transportation Association, a trade group for transit agencies. “It’s typically going to impact the largest transit agencies, because they were the ones that had the kind of assets necessary to get into these kind of deals.”

Matsumoto said the MTA’s board has not discussed possible cuts, but a loss of $100 million would equal about 10 percent of the agency’s bus service.

Transit officials have met with congressional staffers and asked the federal Treasury Department for help, hoping to get some of the $700 billion bailout package that is earmarked to buy troubled assets.

“The feds need to be concerned,” MTA board member Richard Katz said. “If they bailed out the companies, they also need to bail out the public agencies impacted by the companies’ actions.”

Between the late 1980s and 2003, the MTA sold its buses, rail equipment and facilities to investors such as Wells Fargo & Co. and Comerica Inc. to raise money. The investors then leased them back to MTA, with AIG providing the money to finance the deals. AIG, in return for fees paid by the transit agency, also guaranteed that the lease payments to investors would be made on time.

The company’s near collapse and the subsequent federal bailout slashed its credit ratings, triggering a clause in the lease-back agreements that requires the MTA to reimburse investors $100 to $300 million for their down payments and lost tax benefits, or find a new firm to guarantee the deals.

Metrolink also sold most of its train cars and locomotives in four lease-back deals — three of which involved AIG — and made a $35.5 million profit, Oaxaca said.

An AIG spokesman said its customers’ deals are confidential and declined to comment.

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