NJ Transit could lose millions if AIG fails

January 26, 2009 9:42:02 PM PST
NJ Transit could lose $150 million if a troubled insurance firm collapses, prodding state officials to ask Washington to prevent the loss - so far without success. Transit officials said Monday that if American International Group, a New York-based insurer racked with financial problems, failed, it could upend more than a dozen complicated equipment leases and force the transit agency to pay $150 million to a host of banks.

Richard Sarles, NJ Transit's executive director, told a state Assembly committee that the agency would not raise fares to cover the loss, but would instead defer some capital projects.

The equipment leases date from 1994 to 2003. In the deals, NJ Transit would buy rail cars, locomotives and other equipment, and sell them to a bank. The equipment was then leased back to NJ Transit.

The agency would benefit by getting an infusion of cash, and the banks would get tax write-offs from the declining value of the assets.

Such transactions, carried out by roughly 30 transit agencies nationwide, have since been outlawed by the federal government, which labeled the deals an improper tax shelter.

NJ Transit completed 16 of the deals and earned roughly $110 million. Most of the money was used for the agency's operating budget, said H. Charles Wedel, chief financial officer of the transit agency.

Nevertheless, NJ Transit was not allowed to make its lease payments directly to the banks. Instead, it was required to deposit the money with a third party. The agency chose American International Group, a once powerful international insurer.

AIG, as the firm is known, lost billions from the soured real estate market this past year. As a result, its credit rating was downgraded, and it received tens of billions of dollars in federal bailout funds.

AIG has not missed any payments on behalf of the transit agency, state officials said. But now the banks are requiring NJ Transit to deposit its payments with a healthier company, a difficult task given the widespread financial turmoil.

If the payments aren't made, NJ Transit would owe the banks $150 million, transit officials said.

AIG spokesman James Norton said Monday night that he wasn't immediately familiar with the NJ Transit situation and so declined to comment.

Meanwhile, NJ Transit has asked the federal Treasury Department to guarantee the payments, but the federal agency has so far refused, Wedel said.