The Metro Crash and Tax: WMATA Clarifies

In a just-posted article, the Wall Street Journal sheds some light on WMATA’s claim that the 1000-series cars could not be replaced because “tax advantage leases…require that WMATA keep the 1000 Series cars in service at least until the end of 2014″:

Carol Kissal, chief financial officer at Metro, said in an interview that the decision not to replace the cars until 2015, and ignore the NTSB recommendation, was primarily based on the expectation that the cars would be used until the end of their 40-year life, and not because of restrictions from the leasing deals.

She said the leasing agreements didn’t explicitly prohibit Metro from retiring older cars. But most other cars that Metro could have used to replace the 1000-series cars were themselves under leasing arrangements that couldn’t be terminated, Ms. Kissal said.

“We could have replaced the asset, under most of the tax contracts,” Ms. Kissal said. “But we did not have any free, clear, unencumbered assets to replace it with.”

She said Metro had no ability to terminate the leasing deals, unless the assets themselves were damaged.

So it appears that most of the leases did not themselves require that the cars remain in service.  Rather, the leases did permit the 1000-series cars to be retired, so long as they were replaced in the lease by other assets.  But the existence of the leases did in some sense require keeping the cars in service, because WMATA had entered into so many leasing agreements that it had no other assets to substitute for the old cars.

Additionally, Andrea Monroe points out Section 21 of the lease agreement in the KBC leaseback documents, entitled “Voluntary Termination.”  This section permits WMATA to terminate the lease with respect to any equipment that has become obsolete, subject to some limits (for example, it could not exercise this right until five years had passed from the date of the agreement).  WMATA would be required to attempt to sell the obsolete asset, and would also be required to pay a fraction of the termination fee (each asset is assigned a value).

(This is the fifth post in a series. One, two, three, four, five.)

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2 Responses

  1. Jake says:

    Two points.

    First, I’ve not seen anything in the media about the similar train wreck, also on the Red Line, that Metro experienced about 3-4 years ago. As in the present situation, one train crashed into another from behind, with the lead car on the back train (the laws of physics being what they are) climbing over the rear car on the front train. This occurred toward the other end of the Red Line, somewhere around the Grosvenor station.

    Am I the only person in DC who recalls this event? Has WMATA forced local media publishers to install Orwellian memory holes into which inconvenient history gets fed?

    Second, WMATA is notorious for its lack of candor about financial matters. WMATA’s entry into unlawful SILO tax shelters to monetize its physical plant and equipment at the expense of customer service, and now safety, is not the only instance of secretive and lawless behavior on WMATA’s part where money is concerned.

    Let me explain. Seven or eight years ago the Federal government, DC’s largest employer, decided to grant all Federal agency employees the tax-free commuter transit subsidy, commonly known as SmartBenefits. Federal agency employees could get up to around $100 per month tax-free in this manner, collectible by using a Metro SmartTrip card to purchase Metrorail fares and pay for parking at Metrorail stations. Supposedly this policy would help overworked and underpaid Federal employees, while encouraging more mass transit use in the DC area, with the evident aim of placating environmentalists.

    The problem is that Federal agency employees never saw a nickel of the alleged tax-free commuter transit subsidy, because WMATA soaked up all that money, and then some, like a bizarre taxpayer-fed black hole. Put simply, WMATA’s immediate reaction was to approximately double all Metrorail fares, and triple the parking fees at all Metrorail stations.

    The result was — and remains — a staggering taxpayer subsidy to WMATA under the guise of a commuter transit benefit program to Federal agency employees. When this tectonic shift occurred, many letters were written to the WMATA board seeking an explanation of why WMATA sought to steal commuter transit benefits that rightfully belonged to the Federal agency employees to whom such benefits were given. The WMATA board responded to these legitimate inquiries with silence.

    Now let’s turn to the magnitude of this theft. In rough but very conservative terms, the Metrorail fare and parking fee hikes amounted to an additional $5 per day for commuters who rely on Metrorail to get to work in DC five days a week.

    According to the December 20, 2001 core capacity study available on WMATA’s website, average DAILY Metrorail ridership was expected to reach 775,000 by 2010. Anyone who regularly rides Metrorail knows we are already there and then some.

    Again, playing it conservative, multiply 700,000 commuters per day by a $5 daily hike in Metrorail fares and parking fees. You get $3.5 million per day of incremental windfall revenue to WMATA as a result of its voracious appetite for commuter transit subsidies to Federal agency employees. It would make no sense for WMATA to allow a penny of these employee benefits to actually fall into any employee pockets, correct?

    Take $3.5 million of incremental, stolen, taxpayer-subsidized revenue per weekday to WMATA, multiply that by 250 working days each year (excluding Federal holidays), and you get $875 million of “newfound” money to WMATA each year. Where have these stolen taxpayer dollars gone? WMATA does not say.

    One can surmise the answer, at least in part, however. The value of WMATA’s trains, track, stations, and parking lots to a counterparty in an unlawful SILO tax shelter is measured by the capitalized revenue stream those assets will generate over their economic life spans.

    Accordingly, the scheme works something like this.

    Federal government –> “tax-free” commuter transit subsidies to Federal workers –> $875 million stolen by WMATA annually –> equivalent value over a term of many years transferred, allegedly on tax-favored terms, to the SILO tax shelter investors with whom WMATA does business.

    For this our ancestors fought the American Revolution?