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Tuesday, July 28, 2009

Muni Tax Shelter Deal Could Lead to More S.F. Rail Carnage

Posted By on Tue, Jul 28, 2009 at 10:30 AM

Jim Herd
Did promised millions froma shady tax shelter deal blur Muni's judgment?

A month before investigators began to sift through train wreckage to determine the cause of last week's Muni light rail crash, officials examining the aftermath of a deadly transit accident in Washington D.C. discovered a phenomemon that could eventually lead to problems with San Francisco trains.

According to Bloomberg, The Wall Street Journal, and other outlets, Washington transit officials had decided not to to replace dangerously worn-out rail equipment because a bizarre set of tax-shelter deals -- similar to ones in place in San Francisco -- actually prevented such upgrades.

While San Francisco's tax shelter deal hasn't been mentioned in reports about investigations of last week's crash, these types of deals are suspected to contribute to safety concerns nationwide.

According to the Journal:

"Washington transit authorities failed to upgrade aging rail cars in part because of tax-shelter deals, triggering charges days after a fatal train crash that financial concerns were outweighing passenger safety."

"The transit authority's failure to upgrade the old cars was thrust into the spotlight Monday, when nine people died after a Metro train plowed into a stationary train in northeast Washington, D.C. The victims may have had a better chance of surviving had they been riding in newer cars with better safety features. The cause of the crash hasn't been determined, but investigators on Thursday found flaws with the agency's automatic train-control system that may have contributed."

Brace yourselves Muni passengers, because San Francisco's transit system is party to a tax-shelter transaction of a type critics such as U.S. Senator Charles Grassley now say threaten the safety of rail commuters. And it just so happens SF Weekly was a lone dissenter to that deal citing -- guess what -- safety concerns.

In 2002, SF Muni raised $30 million by leasing its light rail cars
to tax-shelter investors, then signing a 30-year deal to lease the
vehicles back, while allowing the investors to claim to be the "owners" of the cars for tax purposes. This way, the investors got to write off the
cars' wear-and-tear on their taxes. This tax-write-off privilege was
worthless to Muni, because city agencies don't pay federal income
taxes. So the $30 million fee seemed like a good deal to government bureaucrats.

SF Weekly called the deal a disaster in the making, not least
because it required us to keep the same cars running for nearly 30 years, no
matter how worn out -- and dangerous -- they became.

"First, there's the matter of the length of the lease. Muni must promise to lease the Breda cars back from investors for 27 years.
Even Muni's own, highly optimistic analysis says that if the "proposed
transaction terminates early, the cost to the City would be enormous."
If the cars were to wear out before the lease was up, Muni could end up
owing huge sums of money -- perhaps more than $100 million," I wrote at the time. It hadn't occured to me at the time that transit agencies such as Washington D.C.'s might simply avoid the expense by simply deferring safety upgrades.

"There hasn't been enough time to know if the cars would wear out
before the 30-year life span the Muni-Breda lease assumes they would
have," I wrote in 2002. "When I asked why Muni thought the Breda cars would
last 30 years, spokeswoman Maggie Lynch faxed me two words: "Industry

The "industry practice" Lynch was referring to was pioneered by
cities such as Washington D.C., which entered into a tax shelter deal
that's now apparently contributing to multiple passenger deaths by
discouraging replacement of worn-out equipment.

Michael Burns, the former San Francisco Muni manager who led the deal,
left in 2005 to run the Santa Clara Valley Transportation Authority.

May God have mercy on Silicon Valley transit users' souls.

Photo   |   Jim Herd

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