The Wall Street Tax Shelter That Crashed Your Local Transit Agency

redline.jpgThe scene of Monday’s Metro crash in D.C., where the local transit agency still has 15 outstanding "SILO" tax deals. (Photo: AP)

The D.C. Metro accident that killed nine riders this week has renewed calls for rail safety upgrades and reminders that car travel remains far riskier
than transit. But the crash is also shedding light on a problem that
goes beyond Washington: tax shelter deals between banks and struggling
transit agencies — deals that were given a retroactive pass by
Congress even though the IRS considers them illegal. 

The tax shelters at issue are called "sale in, lease
out" deals, also known as SILOs. Starting in the 1980s, local transit
agencies began selling rail cars and other equipment to Wall Street
firms, which would then turn around and lease the goods back to the

Why would either side want to get into such
arrangements? Sarah Lawsky, an associate professor at George Washington
University Law School, has explained the situation
in detail. But the short answer is that banks got tax write-offs for
their newly leased transit equipment, while local agencies got a cash
benefit for giving away tax deductions they could not use.

outlawed SILOs in a 2004 tax bill sponsored by Sen. Chuck Grassley
(R-IA). His original language was retroactive, Grassley’s office said
yesterday in a release, "but was watered down during conference
negotiations to apply only prospectively."

That exception for existing SILO deals was added by Congress amid fierce lobbying by both Wall Street and urban transit agencies, as the Wall Street Journal reported at the time.

Internal Revenue Service declared SILOs illegal in 2005, prompting some
banks to accept lower payments in settlement deals with transit
officials. However, Lawsky noted in an interview that some banks —
inspired by the congressional exemption — have decided to try their
luck in court with transit agencies.

"Some people want to
settle and take 20 cents on the dollar," she said. "Some people want to
say no … we entered into these deals before the statute."

remains to be seen whether the SILOs played a role in this week’s D.C.
Metro crash. But when federal safety inspectors asked the WMATA, which
runs the D.C. Metro, in 2006 to replace its aging Rohr series rail cars
— the model that crumpled in this week’s crash — the agency declined.

WMATA was "constrained by" SILO leases from phasing out the Rohr cars, it said.

And that’s just the beginning of the fallout from the tax deals, which have affected transit systems all across the country.

served as a guarantor for many SILO deals, and its collapse late last
year prompted several banks to seek "termination payments" from transit
agencies that were otherwise up to date with their SILO leases. D.C.’s
WMATA, in fact, was one of those transit networks fighting legal battles over AIG’s unraveling.

A report released by Moody’s Investors Service in March found that 17
of 25 major transit agencies embroiled in SILOs had lowered their risk
by renegotiating with banks in the aftermath of the credit crisis. But
that doesn’t mean urban transit systems are all out of the woods
— Atlanta’s MARTA transit agency was left with a $390 million exposure
even after unwinding many of its SILOs, according to Moody’s.

congressional Democrats are still trying to convince the federal
government to step in as a guarantor for the transit deals. After
former President Bush declined to hear their appeals,
Reps. Jim Moran (VA) and Chris Van Hollen (MD) inserted language into a
January bailout-reform bill that would give Treasury backing to SILOs,
but the bill was never taken up by the Senate.

Robert Menendez (D-NJ), whose home-state transit agency faces $150
million in looming bills from SILOs, introduced a bill this week that
would impose a 100 percent windfall-profits tax on any payments
requested by banks. In a statement on his proposal, Menendez said:

Development of our
mass transit systems is going to help us get out of this economic crisis and
create long term economic security. If some of the nation’s
most heavily-used transit systems were forced to pay tens of millions of
dollars to banks seeking a windfall, that would not only hit millions of
commuters today, it would slow the wheels of our economy.

  • And the sad part is all these quick fixes and piecemeal approaches wouldn’t be necessary if we just funded transit better.

  • Erik G.

    These 1000-series Rohr cars were completely rebuilt by Breda (now Ansaldobreda) from 1993 to 1996. After this rehab they were good as new, and so must be considered to be only 13 to 16 years old.

    New York retired their IRT “Redbird” cars in 2003 after having them in service since 1959 (and giving them a mid-life rebuild). There are still a number of R32’s in service today, and they were delivered in 1964!

    San Diego’s origianl Duwag U2’s are coming up on their 28th anniversary in service and have never had a rebuild. Boston’s Red Line has cars dating from 1969 still in use with no replacement on the order books yet.

    One of the benfits of rail transit is the ability to keep rolling-stock in service for an average 40 years, unlike buses which rarely last more than 8 years.

    Now, if we want to have a discussion about the merits of the policy of trying to beat swords into plowshares in the 1970’s by having Rohr and Boeing make transit vehicles when their experience was in building lightweight flying-machines, perhaps we need to page Noam Chomsky (or Pat Buchanan)?

    P.S. Just for kicks, check out the builders plate on the next Northwest Airlines DC-9 you happen to fly on.

  • Wad

    Erik G. wrote:

    One of the benfits of rail transit is the ability to keep rolling-stock in service for an average 40 years, unlike buses which rarely last more than 8 years.

    FTA requires all buses purchased with its money to last 12 years. Most agencies, like Metro, tend to keep them around a few years longer than that.

  • Erik G.


    Thanks. I knew it was something between 8 and 12.

    And yes, the Metro RTS fleet needs to go!

  • Wad

    Erik G. wrote:

    And yes, the Metro RTS fleet needs to go!

    They’re on the way out, though I’ll be sad to see them go. The 1200s were the very last sets of buses the RTD bought. The 1200s also represent what had become the decline and now coma of the RTS line. L.A. played a huge part in killing off the bus, well before low-floor buses gained a market foothold.

  • Frank d

    I live near the Metro Orange Line. I think it’s ruined my community (mainly because of the giant intersections) but that’s another story. I’d be interested to know why Wad says “L.A. played a huge part in killing off the bus.” Is it the lack of hours of service? I tried taking the bus to school (CSUN) during 2008 and had to walk 5 miles on 4 separate nights–one time was in heavy rain–because the buses had stopped running.

  • I feel that what may be missing from is the mention of the AIG fiasco, which is the SILO agreement that helped get Metro into its mess. What little transit trouble Measure R might have mended, has been greatly offset by the AIG scandal—one about which former Metro CEO Roger Snoble knew was coming and which may well have been why he elected to not only retire early, but leave office even earlier than what he originally announced.

    The AIG snafu was neither accidental nor unannounced, although those who attempted to warn of the impending disaster were publicly chastised by many L.A. transit advocates that have since come round to exhibiting some hindsight as if they were the only ones with any foresight. But the Metro SILO deal with AIG was done back when everyone thought nothing would ever happen, that real estate would perpetually expand, that they would always have multiple motor vehicles, that they would never have to ride the shame train. Now it is too late, and as more and more people struggle to hold on to their cars as homes (meaning they are living in them) and the CA unemployment rate rises almost exponentially (the only ones counted as “unemployed” are those who demean themselves and waste great amount of time standing in line at the welfare offices—and don’t think Detroit cannot happen in L.A.) to 12% as admitted by the government, the shame train is being wrecked by years of collective neglect even as it has become a national issue.

    Welcome aboard—now get out and push.

  • Wad

    Frank, I was talking about the RTS bus model specifically. It had to do with the fiasco of the methanol experiment in the early and mid-1990s.



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