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Transit systems join long line for federal bailouts

The CTA and 10 other transit agencies went hat in hand to Congress Tuesday, asking for the Feds to guarantee long-term financing deals that have soured recently with the global credit meltdown, Crain's Chicago Business reports.

Last week, Crain's reported:

"The Chicago Transit Authority has asked a judge to intervene in a contract dispute that threatens to shut down the agency’s Green Line and force the agency to pay $76 million in damages.

"The CTA has an agreement with EntreCap Public Financial Holdings LLC of Connecticut and two other organizations to lease back property, railway tracks and train stations on its Green Line. When the 45-year contract was signed in 1998, the CTA’s payments were guaranteed by American International Group Inc.

"Two months ago, AIG’s credit rating was cut amid the U.S. mortgage meltdown that claimed several financial institutions and forced a federal bailout of the former insurance industry powerhouse.

"AIG’s rating cut triggered a clause in the CTA leaseback contract that required the already cash-strapped transit agency to find another backer in 30 business days or face a $76-million penalty, along with the end of the deal with EntreCap."

Tuesday the transit agencies asked the Treasury Dept. to guarantee these deals instead. Crain's had a great quote from a Maryland congressman: "I made the point that it would be wrong to ride to the rescue of private Wall Street firms and then leave public transit agencies out in the cold," Rep. Chris Van Hollen, D-Maryland, told The Associated Press last month. 

Comments

A "bailout" or a "subsidy" is public help for private interests. Public transit is not a private interest, it is a public investment that benefits all business, consumers, and society in general.

so where do I sign up to have my poor investments covered by the govt?

For the record: I agree that that bailout of certain industries should continue as the benefits outweigh the costs, but one can already see the precedent this is setting up. American investment firms, manufacturers, and apparently public transit entities are all lining up with their hands out to the government like 30 year old loser living in his parent's basement always asking for "gas money". What do the three types of businesses that need bailing out have in common? Poor management, or at the very least, a strong history of poor management (Kruesi comes to mind).

While I agree with johnson on some points, as fpteditors pointed out, public transit agencies are not the same as private entities. The CTA is a government service, so the government has an interest in funding it to keep it running.

It's not like the CTA made some wild gamble for which they're being punished. Before the financial meltdown, AIG was widely viewed as one of the most prestigious and stable insurance companies in the world -- that's why their credit rating was good enough for the CTA to be able to use them as a guarantor. It's not like the CTA has access to special information that the ratings agencies don't have.

If I understand this correctly, this isn't exactly a bailout. It's just that the CTA lost the insurance for the Green Line. The insurance existed to help the creditors extend credit to the CTA to run the Green Line. It's not a bailout, we just need an insurer. AIG was the biggest and now they for all purposes don't exist.

Can't we just have the State of IL or someone else guarantee the payments here?

This was just an extension of a type of financing that railroads have used for decades.
I used to see various ownership plates on the sides of the bilevel coaches of the C&NW prior to Metra. Currently the plates read "Owner: Metra".
The loss of insurance shouldn't imperil this financing.
The Treasury Dept. should step in & guarantee the deals.

CTA is a quasi-governmental agency, receives about 50% of revenue from fare-box with the rest from taxes. This allows CTA to play hiring games without having to answer to the Shakman act or anything else, which allows CTA to hire all the $100,000+ managers. CTA is like the public schools, quit crying about what you don't have and make better use with what you have. Like Tony Soprano used to say about his mother, she's crying poor with a ham under each arm.

I'm sure some people have read the Trib article about the Smart Cards. I think it sounds like a good idea for those who are OK with using the cards now. It could be a positive development and hopefully implement a better system than the one we have now since any bidders will have to replace the readers we have now.

http://www.chicagotribune.com/news/local/transportation/chi-cta-farecard_19nov19,0,967349.story

This lease-back sounds like a tax shelter (selling a public asset to a private entity, and simultaneously leasing it back, so that the private entity can take advantage of the depreciation deductions associated with the public asset). I'd be curious to know if that was, in fact, the purpose of this lease.

If so, how ironic that the CTA wants the federal government to bail it out from a transaction whose sole purpose was to screw the IRS. :)

I read the article too. I think this is a good idea. I'm especially interested in the possibility that these cards could be used at many different transit systems. This would be a nice thing for tourists, and very helpful to more-frequent travelers.

One of the first hassles of trying to use a system in a new city is buying the fare card. Where are the vending machines, how do they work, what card do I need, what button do I press, do they take cash or cards ... oh shit, there goes my train.

matth: It's a tax shelter that's been used for decades by railroads for their equipment. It's also currently used by the airlines for their planes.
It's also some similarities to what Chicago, Indiana & several other governments are doing with their toll roads.
It's not screwing the IRS, it's a long standing type of legal tax avoidance. In the case of the rails & airlines, it was often used to buy equipment they couldn't otherwise afford due to cashflow problems.
It always worked out, except now, there is a problem with insuring the deals & the equipment owners want their money paid up in full, now, because they lessees [CTA, NYC MTA, etc] no longer have insurance & I assume that the contracts call for payment in full if insurance is no longer in effect.
That's why all these public transit agencies want the feds to step in & guarantee the insurance.
The amount required would be a blip in the $700 billion+ that's going out of the US Treasury.

The trouble with bailouts of private industries that may appear on the surface to yield a net benefit, is that the benefits on one side are obvious but the costs on the other side are hidden. You may preserve some jobs, but due to the laws of economics (which you can't repeal any more than the laws of physics) it will come at the expense of other jobs--it's just that they are very diffuse and not easy to trace and count up. This is why central planning doesn't work.

But one thing that should be apparent--people in unprotected jobs are being asked to fork over their own hard-earned money to preserve the jobs of people who are paid more than they are, whether union or management, without getting anything in return, as compared with what they get by buying a car. This is unfair and will harm the economy far more in the long run than the necessary and long-overdue adjustments of reorganization.

Not to toot my own horn or anything, but note that I suggested the smart card proposal here only six days ago:

http://www.ctatattler.com/2008/11/cta-board-meeti.html#comment-138995970

Yay me.

Unfortunetely that Tribune article was written by Jon Hilkevitch. So it provides nothing in the way of good context or any connection with the way the CTA's fare system currently operates. Chicago Cards or passes are not even mentioned in the article. Perhaps someone can decipher whether or not the CTA plans to completely elimanate all its current media. The article gives a mixed impression. Or maybe someone could let us know when a competent reporter writes an article so we can find out more. Obviously you can't completely get rid of everything else because there are tourists and other occasional riders who it will not be feasable to distribute something permanant such as this.

Ordinarally it would seem that something like this would save a lot of money in processing costs. Obviously, it is not very efficiant to go from station to station and take cash out of and reload the machines. But that is not, from my observations, what occurs. The fare card machines seem to be processed by the "customer service personel" at the stations. And 90% of the time their job is to do nothing anyway. They just occasionaly open the gates for people with wheelchairs or bicycles or answer any questions that riders will, every once in a while, have(from my observations, usually pretty poorly such as when one the employee couldn't direct a customer to a street that was around fifteen feet away). So the CTA will not save money from this responsibility going away. The employees would just go to doing nothing during the time. There would be some money saved from the lack of need to maintain as many machines and the need to print fewer fare cards. But this would seem to be pretty minimal. Well, that might not neccessaraly be the case anymore since the fare change in January will cause a huge amount of people to go back to the transit cards, for which customers ditch and get new ones at a far higher rate. The Chicago Cards seemed to have done a good job at reducing the CTA's cost there. But Huberman has thrown that incentive away. And I am not very confident that Huberman knows what he is doing considering his bizarre decision of equalizing the transit card and Chicago Card fares.

And, of course, the other obvious question is will these cards be able to be read by the Chicago Card readers or will they need to spend a huge amount of money purchasing and installing new machines for every bus and rail station. One might have thought that the Tribune article would at least mention that, if not go into further detail about why Huberman would think the money would be worth it in the long run(and heck, perhaps even getting quotes from people who have knowledge in this area as to whether it is a good idea). But no. The article was written by Jon Hilkevitch. So it is always the absolute bare minimum. Perhaps Kevin can ask his sources at the CTA whether new machines will be needed. Maybe the Tribune may wake up if a blog is able to beat them in providing this information (of course, this blog and all its commentaters have been providing more substantive information and discission than the media for awhile).

Ooops. Meant "discussion", not "discission".

I sent Kevin an article about this about a month ago. The IRS has shut down these kind of deals now as was mentioned in the article.

Because of the AIG collapse, the CTA has to come up with 70+ million dollars and they are asking the court to let them out of that obligation.

KevinB

Would these "innovative" leaseback agreements even have been necessary if transit agencies in the U.S. had been able to depend on a reliable stream of capital funding with which they could develop realistic budgets and plan several years into the future? It seems that the current leaseback guarantee crisis, caused by AIG's collapse, would never have been necessary if transit had been adequately funded for the last two decades. Good thing the Senate told the Big Three CEOs to get back on their private planes and think of a better solution for their stupidity. Mitt Romney had an excellent Op-Ed in the NY Times today about how U.S. automakers should be forced into bankruptcy rather than be bailed out by the taxpayers. Wait, did I just say I agreed with Mitt Romney? Eeek!

That's one good thing that has come out of this economic situation. With both the original rescue package for banks and the discussion of this auto bailout there has been quite a few people agreeing with those on opposite ends of the political spectrum. Maxine Waters and Jesse Jackson Jr. were on opposite sides of the rescue bill. Ralph Nadar and Rush Limbaugh had the same position. There are millions of people for whom this issue has challenged their perceived notions of what is liberal and conservative. So if they normally reflexively form their opinion based on their ideology then this is neccessated a bit more complex thinking.

I could have swore that I read that they would have the new company pay for the new readers and that the cost to the CTA would be nothing and they would save money in the long run. I can't find where I read that now, unless they edited the article.

From the sidebar accompanying the Tribune article:

"The CTA also will continue for the indefinite future to accept the following forms of payment:

CTA Chicago Card, a value-added card that customers can replenish at CTA vending-card machines in CTA rail stations and selected other locations.

CTA Chicago Card Plus, which is similar to a Chicago Card except that value is automatically added to the card when the account runs low by tapping new funds from a customer's bank account or billing his or her credit card.

CTA magnetic strip transit cards, as well as seven-day, 30-day and visitors passes are available for purchase at currency exchanges, Jewel and Dominick's stores and other locations.

Cash, which is accepted only on CTA buses."

From the main article:

"The new smart card technology will open new lines of revenue to the cash-strapped CTA and allow it to eventually get out of the costly business of supplying fare cards. The CTA also will need far fewer transit card vending machines, which are expensive to buy and maintain, officials said.

'Moving away from producing our own fare media and maintaining transit card vending machines across the system will save the CTA at least $10 million a year over time,' Huberman said.

The CTA also could reap substantial royalties by offering a credit card company a half-billion transit-fare transactions a year, Huberman said. In addition to royalties, the companies would be expected to help pay for card-reading machines on buses and at rail stations, he said."

It also says that the banks that issue the cards, not the CTA, will take care of any payment disputes. Hm.

I'm wondering what will become of people who don't use banks. I'm a little leery about privacy concerns. I'm also wondering if the CTA will pick a bank with good customer service, or just go with the highest bidder. This should be interesting.

Meh---More ways to disenfranchise those who don't have a bank account/credit card.

I don't even think my bank offers a smartcard at this point, and Bank of America isn't a small bank...

Plus, I'll have to say that I have some of the same privacy concerns that some of the other folks have had...and somehow, every time I hear how the CTA is going to "save me money", the hair on the back of my neck stands on end...


KevinB

I saw a poster at Talking Points Memo put this serial bailout situation in an interesting way -- an "inverse Gresham's law", or in other words, good debt driving out bad. The catch is that the good debt is Treasury bonds, and that's all the market will buy. So the only institution that can lend is the federal government. Effectively, the market has spoken, and what it has called for is this -- socialization of the economy. Because the only institution the market trusts any more is the government.

I guess capitalism was good while it lasted . . .

CTA has the press release and we are all supposed to say how wonderful the savings will be and the implementation is years away. Last press release concerned a similar smart card program with Chicago Public Schools where CTA was going to save $500,000. Well the deal never happened and is dead, but there is never a retraction because we are just supposed to think the CTA will still save $500,000.

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