June 25 (Bloomberg) -- Washington’s Metro transit system, said it will use any new federal and state funding to maintain and upgrade equipment after the deadliest crash in its history, rather than to pay so-called lease-back deals.

General Manager John Catoe gave the assurance today in response to comments by U.S. Senator Charles Grassley of Iowa, who is seeking to bar the Washington Metropolitan Area Transit Authority from funneling part of a proposed $3 billion funding package to lease-back obligations.

“I absolutely agree our first priority has to be safety,” Catoe said in an interview, three days after a Metro train crash that killed nine people. “We will not use those funds for anything else.”

The transit authority, known as WMATA, had been raising extra cash by selling its trains to financial companies such as SunTrust Banks Inc. and KBC Group NV and leasing them back. Terms of those agreements were cited by safety inspectors in 2006 as a reason why WMATA hadn’t replaced older cars that are more prone to crushing upon impact. That same model, the 1000 Series, was involved in the June 22 crash that killed eight passengers and a Metro operator.

“WMATA disregarded risks to passenger safety in order to fulfill a contract entered into as an accommodation party to a tax shelter,” Grassley, the top Republican on the Senate Finance Committee, wrote in a letter today to House Majority Leader Steny Hoyer of Maryland.

SunTrust, KBC

The transit authority has 15 lease-back obligations remaining after unwinding five others, a WMATA spokeswoman, Candace Smith, said today in an interview. Brussels-based KBC Group, Belgium’s third-biggest bank by assets, and Atlanta-based SunTrust, Georgia’s largest bank, are among the financial companies that held the deals that were unwound, she said.

Banks used the lease-back deals to gain tax breaks, while Metro was able to raise cash from the upfront payments on the sales. In addition to the annual leasing costs, WMATA in some cases would have to pay a penalty for terminating the contracts.

“We’re looking to get those closed up way before” the 2014 contract expiration date, Catoe said today. He said the WMATA gets “no tax benefit” from the deals.

Confidentiality agreements prevent WMATA from disclosing the banks that still hold the 15 lease-back contracts, Smith said.

$3 Billion Funding

A Metro train traveling on the system’s Red Line in Northeast Washington plowed into the back of another train on June 22, shearing off its front end, and landing on top of the other train. Nine people died and at least 80 were injured.

Hoyer, a Democrat whose congressional district includes areas served by the same Metro line where the crash occurred, called yesterday for Congress to complete a $3 billion funding package for Metro that had been pending since before the crash.

“I hope we can move quickly to pass this legislation critical to meeting Metro’s capital and maintenance needs,” Hoyer said on the floor of the House. “We don’t know that that was the cause, but certainly it is a consideration.”

The 1000 Series car on the train that ran into the other was an older model that U.S. safety investigators had called for replacing or overhauling 13 years ago.

The National Transportation Safety Board had advised Metro to improve its rail cars after a January 1996 collision that killed a train operator. In a 2006 report, the NTSB said it was dropping the matter because WMATA was citing funding concerns related to lease-back agreements in its decision to resist the recommendations to retire or overhaul the 1000 Series rail cars.

Getting New Trains

The transit agency told the federal safety board it was “constrained by tax advantage leases” that required it to keep in service the 1000 Series cars until at least the end of 2014, according to NTSB documents.

The lease-back deals let Metro swap out the leased cars, said Catoe, who joined WMATA in January 2007. He said the agency could divest a 1000 Series car and replace it with a new one without violating the terms of the agreements.

The 1000 Series cars are more than 30 years old. The Metro system has 290 of the cars among more than 1,100 cars in service, according to WMATA’s Web site. The cars were manufactured by Rohr Inc., a Chula Vista, California-based company that was acquired by Goodrich Corp. in 1997.

The cars in the train that was struck were newer models, from the 3000 and 5000 series. Metro has about 364 Series 2000 and 3000 cars, made by Ansaldo Breda, a unit of Finmeccanica SpA, Italy’s biggest defense company. The 190 5000 Series cars were made by Construcciones y Auxiliar de Ferrocarriles SA of Spain, also known as CAF. Metro’s newest cars, 184 from the 6000 Series that weren’t involved in the crash, were made by Alstom SA, the world’s largest trainmaker.

To contact the reporter on this story: Angela Greiling Keane in Washington at agreilingkea@bloomberg.net

Last Updated: June 25, 2009 15:08 EDT