MARTA kept part of lease-back deals off books

Until last year MARTA was keeping massive lease-back deals off its accounting books, including $18 million in net assets for the fiscal year ending June 2008, according to an independent audit just released by a state legislator.

MARTA says it did so on the guidance of its auditor at the time, KPMG, based on a misinterpretation when they set up the deals nine years ago.

A representative for KPMG said the company would not comment, citing client confidentiality.

MARTA officials said on Wednesday that the off-book figures were not cash and could not be spent, because the money was tied up in a trust for the program.

So while MARTA has corrected its statements, the audit said, the new entries do not affect the $120 million operations deficit the agency is facing. It is still on track to cut up to 30 percent of its service to fill that gap in the fiscal year to start in July.

Starting in 2001, MARTA entered into complex deals to essentially make money off the federal tax exemption it gets as a public transportation agency. Such deals were popular among transit agencies and encouraged by the Federal Transit Administration, though the Internal Revenue Service fumed.

In the deals, MARTA leased its train lines and rail cars to financial firms that had little or nothing to do with transportation. The financial firms took the tax benefits, and immediately leased back the assets to MARTA so it could continue running.

MARTA officials said the profit from those deals -- $119 million as of last fall, according to a state audit -- was a different matter from the $18 million in net assets. They said that the profit had always been booked on MARTA's financial statements.

The misinterpretation involved whether the trust was "irrevocable" -- in which case no one could touch the assets in it and they would not be booked on MARTA's balance sheets.  The audit says MARTA and its advisers originally believed the trust was irrevocable. That assumption went unchallenged in yearly audits until the deals fell apart in the financial crisis, and MARTA staff and their accountants realized they could be unwound.

"It was with the collapse of AIG that this was recognized as not an irrevocable trust, because if it was you couldn’t unwind it," said Ted Basta, MARTA's chief of business support services.  The insurance giant AIG was a partner in some of the deals.

The figures kept off of MARTA's books included $465 million in assets (securities like treasury bills set aside to make lease payments) and $446 million in liabilities (the value of the payments MARTA would have to make) -- or at least that was their value as of June 30, 2008.

That made for a net asset of $18 million on that date, but MARTA said that when allowed to run their full course the value of the assets and the liabilities would have exactly matched, for a net of zero.

State Rep. Jill Chambers, the chairwoman of the legislative committee that oversees MARTA, released the audit. She said it was disturbing whether or not the money represented liquid cash.  "It's value that wasn't stated."

The audit, performed by the firm Cherry Bekaert and Holland, called the mistake a "material misstatement."  MARTA pointed out that that firm has audited MARTA's books for several years, and the mistake was only caught when the financial crisis caused the lease-back deals to implode.  A message left with Cherry, Bekaert and Holland was not returned.