NJ Transit and SEPTA are among 30 transit agencies scrambling to rescue multi-million-dollar deals threatened by the collapse of American International Group, the insurance giant that U.S. taxpayers recently rescued from bankruptcy.
New Jersey's two U.S. senators yesterday asked Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke to intervene.
"If the Treasury and Federal Reserve do not act quickly, public transit agencies around the nation could become financially crippled, and several banks could enjoy unjustified windfalls," said Sens. Robert Menendez (D., N.J.) and Frank Lautenberg (D., N.J.) in a letter also signed by Sens. Richard Durbin (D., Ill.) and Barbara Boxer (D., Calif.)
Nationwide, transit agencies could face bank demands for $1 billion to $2 billion in payments.
NJ Transit is facing demands of $100 million to $300 million. SEPTA has a $21 million exposure.
NJ Transit might have to cut service or raise fares if forced to make the payments. SEPTA officials said they expect to find a new insurer before a Jan. 15 deadline and anticipated no impact on service or fares.
The trouble stems from leasing arrangements made years ago between transit agencies and lenders in which the banks bought transit equipment and facilities, such as railcars and stations, and leased them back to the agencies.
The transit agencies got much-needed cash, and the banks got tax benefits. In 2003, the tax benefits from those kinds of transactions were prohibited by the IRS.
AIG served as the insurer of many of those deals. The collapse of AIG downgraded its credit rating, allowing the lenders to demand full payment from the transit agencies if the agencies did not quickly find other insurers.
"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," the senators wrote. "This is a time when we should encourage mass transit use, and a financial blow to our transit agencies such as this one is a major setback to that effort."
The senators did not specify what action they wanted Paulson and Bernanke to take, but the federal government could be asked to guarantee the leases, according to a person involved in the discussions in Washington.
"Obviously, this is a serious concern, and we're working closely with Sen. Menendez," said Penny Bassett Hackett, spokeswoman for NJ Transit. She said NJ Transit had leased "equipment and facilities" in a number of deals.
SEPTA entered into a 28-year leaseback deal in 2001 for 219 new Market-Frankford Line cars for $21 million, chief financial officer Richard Burnfield said yesterday. He said the money was used for capital projects and some still remained.
"We don't expect to face any problems," Burnfield said, noting that the deadline for finding a new insurer has been extended from Oct. 31 to Jan. 15.
Nationwide, transit agencies in Atlanta, Chicago, Los Angeles, San Francisco and Washington face bank demands for payment. The fallout could mean less money for new trains and buses at a time when ridership in many areas has been steadily climbing because of high fuel prices.
Rob Healy, vice president for government affairs at the American Public Transportation Association, said some agencies could be forced to increase fares, cut bus routes, and delay long-term capital improvement projects.
"You've got agencies struggling to meet increased demand; they are hamstrung by the higher cost of fuel ... and this is exposing them to additional costs," Healy said.