Gimme Shelters

Under the upcoming BART deal, investors will lease the commuter trains that BART owns from BART. The investors will then lease the trains right back to the transit agency, paying the agency what is almost certain to be a multimillion-dollar fee for the right to deduct the trains' wear and tear from their federal income taxes. The trains will never leave BART's control; it's a purely paper transaction, and both BART and the private investors will make out like bandits -- unless something goes wrong. And there are real and significant risks. Like the Legislature's July borrowing spree, the lease-leaseback legislation now in committee could come back to haunt the public.

Schroeder tells me the deal currently under negotiation assumes BART's rail cars will last another 30 years; if they become worthless before then, BART could be responsible for making investors whole. Such deals assume the IRS will not issue a ruling -- as it has following previous, related deals -- eliminating the tax break that makes the deal profitable. In such cases, investors can sue a government agency such as BART, claiming the flimsy tax shelter was the agency's fault. Another drawback: Deals such as the BART-sponsored federal income tax shelter now under negotiation typically involve massive attorney and financial consultant fees, often equaling as much as 3 percent of the deal's total value. As in the case of the attorney/ lobbyist cottage industry surrounding state bond borrowing, fee-hungry financial consultants lobby and make political contributions to legislators, creating a situation where the incentives all tend in the direction of creating more tax shelters. Tellingly, the financial counsel to Muni in last year's train-car deal was none other than Orrick, Herrington & Sutcliffe LLP, the politically connected law firm that seems to have a lock on California's bond counsel business.

By putting public agencies in the improper business of abetting sham federal tax shelters, our state Legislature invites and encourages greater impropriety across California.

In 2002, corporate accountants at companies such as Enron, WorldCom, and Tyco, among others, violated investor trust by creating pretend profits and hiding real expenses. In 2003, Republicans created the illusion that California's massive financial problems could be solved without tax increases by pushing the state into a position of massive, highly complex, expensive borrowing that will affect public finances for years into the future. Now, legislators from both parties are likely to pass a measure that encourages cash-strapped local governments to jump into the business of helping corporations craft federal tax dodges.

California's burgeoning tradition of shell-game finance has been spurred by a fact that's obvious, despite GOP attempts to dismiss it: Republican governors and Republican-controlled state legislatures across the nation whose states are facing budget shortfalls have turned to tax hikes to solve their problems. In California, Republicans wishing to enliven their effort to recall Gray Davis delayed approval of a budget for three weeks by refusing to accept any new taxes. When it came time to enter into the massive borrowing needed to make good on their no-tax-hike political sloganeering, Republicans were all too happy to go along. Like their compadres on the federal level, California Republicans are comfortable demolishing government finances in the name of tax relief.

If the state is ever going to quit spiraling from financial crisis to financial crisis, California budget voodoo has to stop. The Republican recall drive is not a step in that direction.