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).