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Audit: MARTA made $15 million from risky AIG-backed leaseback deals
MARTA’s risky venture into complicated leaseback transactions with insurance giant AIG and others has turned a $15 million profit, at least so far, state auditors said in a report released today.
Atlanta’s rapid-transit agency was one of dozens across the country that took part in so-called LILO (lease-in, lease-out) deals, initially with the encouragement of the federal government.
The deals involved leasing the system’s South and East rail lines, 391 rail cars and its Avondale maintenance yard — assets collectively valued at $2.3 billion — to private investors, then leasing them back. The investors benefited from a tax shelter by depreciating the equipment, and MARTA got extra cash that could be used for other purposes.
The transactions were regarded as safe as long as AIG and other financial institutions backing the deals remained solvent.
Then, a year ago, AIG lost its AAA credit rating and nearly tanked completely. That placed the SILOs and LILOs in “technical default” and left MARTA holding the bag for either guaranteeing the deals or paying huge termination fees, potentially as much as $391 million.
Said the auditors:
“Although MARTA had a potential liability for millions of dollars in fees and penalties, the LILO agreements that have been terminated or remediated to date have actually netted MARTA a profit of approximately $15 million. As of the end of October 2009, through negotiations with its equity investors, we confirmed that MARTA has successfully terminated two LILO agreements and remediated a third LILO agreement which represented 66% of MARTA’s total potential exposure…”
MARTA believes it could earn another $8 million once it unwinds the remaining LILO agreements, but auditors said they could not confirm that estimate.
MARTA crowed about the audit findings in a news release issued late this afternoon:
“Today’s release of the state auditor’s report — which was ordered by the Georgia General Assembly’s MARTA oversight committee — only confirms the obvious: There are no deficiencies or improprieties in how the Authority is handling its finances. That’s true despite a glaring lack of state funding that MARTA and other transit providers desperately need to support the thousands of Georgians we proudly serve every day.
Despite the woefully inaccurate allegations that were leveled against MARTA when the audit was requested, the fact is the Authority made a net profit of $15 million as a result of the lease-in, lease-out deals that had been publicly encouraged by federal transit officials and approved by MARTA’s Board of Directors.”
For more background, here’s a link to the Tax Foundation’s summary of the problem last year.