Voters agreed to sell the Cincinnati Southern Railway. What happens now?
Voters narrowly approved the sale of the Cincinnati Southern Railway last week, accepting a $1.6 billion deal from Norfolk Southern.
The Board of Trustees that manages the railway will transition to managing a trust fund with the sale revenue; the board will decide annually how much of investment returns to forward on to the city, which is only to be spent on maintaining or replacing existing infrastructure. The board is currently considering which private company will make actual investment decisions, with their choice expected by the end of January 2024.
The sale passed with 51.56% support, a difference of just 2,614 votes. That means more than 40,000 Cincinnatians opposed it.
"We are still dealing with the fallout from the very recent corruption scandals that engulf this building," said Mayor Aftab Pureval, referring to City Hall. "It was a close election, but given how complex and how important this decision was, I am optimistic that we're slowly but surely earning that trust back."
Cincinnati NAACP President Joe Mallory was opposed to the sale based on concerns about how the money will be spent. He attended Tuesday's Board of Trustees meeting and says he still has concerns.
"When it comes to the wealth management piece, are they going to be minorities?" Mallory told WVXU. "And I'm not talking about females, I'm talking about Black people who are going to be able to make some money. Because we're talking about millions of dollars that's going to be awarded to the people who are gonna be managing all this money, and it's gonna be for years to come."
City officials are now shifting to make good on pre-election promises that the revenue will be spent equitably throughout the city.
Here's what we know now about the historic sale and what happens next.
When will the city get the $1.6 billion?
Official closing of the sale will take place no later than March 15, 2024. The payment is expected to be officially sent to the city on that date.
Norfolk Southern is responsible for paying all closing costs.
The first investment returns are not expected for at least a year. Mayor Aftab Pureval says the new revenue will first be available in calendar year 2025, for use in the fiscal year 2026 budget (July 1, 2025 to June 30, 2026).
Pureval says the results should be evident.
"People will see fewer potholes, improved road conditions; people will see a commitment to building new fire stations and updating police stations and parks and rec centers," Pureval told WVXU.
How much money will the city get between now and 2025?
The board will receive a few separate payments separate from the $1.6 billion sale.
Extended transaction fee: Norfolk Southern has agreed to pay a transaction extension fee in December, January, February and March. The amount of each payment could vary; it starts at 1/12th of the full payment price ($1.62 billion) and is multiplied by either 4%, or the current yield for U.S. Treasury bills (more specifically, the coupon equivalent rate for 13-week bills).
One-twelfth of $1.62 billion is $135,000,000; multiplied by 4%, the payment would be $5.4 million.
The yield for U.S. Treasury bills has been above 4% for all of 2023 so far. The coupon equivalent from Nov. 7 is 5.44%, which would equal a payment for the city of $7,344,000.
Tax credit revenue: The city will also get revenue from tax credit agreements, one federal and one with the state of Kentucky. The board has gotten those annual payments since about 2009; the final one, for calendar year 2023, will be worth about $1.8 million.
Final lease payment: The city will get a partial lease payment through mid-March of about $5.4 million.
Who will manage the new infrastructure trust fund?
The existing Board of Trustees, which currently manages the Cincinnati Southern Railway, will remain intact to manage the new infrastructure trust fund.
For now, the board will continue under the existing structure: five members, each appointed by the mayor of Cincinnati and approved by a majority vote of City Council. Terms are five years and there are no term limits. There is no compensation for serving on the board. No more than three members may be of the same political party at any time.
One new requirement, per the state law change enacted over the summer, is that new board members must reside in the city of Cincinnati.
Two of the five current board members are at the end of their current term but say they intend to remain on the board for the time being.
"I'd like to at least continue serving while this closing takes place and the trust gets set up," said Board President Paul Muething. "I don't know about four or five years."
Who will decide how the money is invested?
The Board of Trustees plans to hire an investment advisor, and a request for proposals was open earlier this year. The deadline was mistakenly extended from Oct. 13 to Oct. 27 due to miscommunication with city administration, according to Assistant City Manager Billy Webber.
Webber says an extension is typical for city RFPs, but this process should have been managed by the board instead. The extension was rescinded and two entities with plans to apply ended up missing the deadline.
The board decided to re-open the application period for only those two entities to apply; the 16 who submitted in time have the option to update or amend their applications.
The new deadline will be Nov. 30. Board President Muething says the Davenport Group will prepare a report on the applications and identify recommended top candidates. The board plans to hold a public meeting in early January to consider the report and possibly interview top candidates. Muething hopes the board will make a final decision by the end of January.
"We are on track — the money will come in on March 15, and the money will be invested on March 15 or 16," he said.
The board will meet in a special meeting Jan. 8 to review the applications, then interview top candidates in another special meeting on Jan. 16 and 17. A final special meeting is scheduled for Jan. 22 for the board to deliberate and vote on a final decision. Muething says if the board will decide Jan. 17, if possible.
The 16 companies who have already submitted applications are:
- Ascension Wealth Management
- Cook Street Consulting, Inc.
- FEG Investment Advisors
- Fifth Third Bank
- John W. Bristol & Co., Inc.
- Marquette Associates, Inc.
- Meketa Investment Group
- NEPC, LLC
- Northern Trust
- PFM Asset Management
- Segal Advisors
- UBS Financial Services, Inc.
- Verus Advisory, Inc.
- Wilshire Advisors LLC
Two volunteer experts will advise the board as they decide who will hold the first investment manager contract: Karl Scheer (chief investment officer at the University of Cincinnati), and Robert Seidel (a corporate finance attorney). Board Member Amy Murray says the two were chosen to advise the board in this particular decision, and will sign statements affirming they have no financial involvement with any of the applicants.
The first contract will be for three years, with an option for the board to extend it another seven years.
Prior to the election, WVXU asked the mayor and a few council members if council would have any oversight over what the infrastructure fund is invested in.
"It's council's prerogative to set the guidelines and the principles upon which the Cincinnati railroad board will act from an investment perspective," Mayor Pureval said. "We will make every effort to get community input to identify our priorities, values and principles, and communicate that effectively and clearly to the railroad board."
Councilmember Meeka Owens, chair of the Climate, Environment, and Infrastructure Committee, said investments should follow council's priorities.
"It will be our prerogative to make sure we are aligning ourselves with those priorities in how we invest these dollars," Owens said.
Several years ago, Cincinnati City Council asked the pension fund's Board of Trustees to divest from private prisons. The board refused, saying it would be bad for the financial health of the fund.
What will the city spend the new revenue on?
State law mandates how the money can be spent. Any changes to that would require a change in state law (passage in both the Ohio House and Senate, with final approval from the governor).
The CSR Board established rules for how investment income can be spent. The negotiated sale agreement made the sale contingent on passage of a state law that would allow the creation of a trust fund with certain requirements: Proceeds from the fund could only be spent on "rehabilitation, modernization, or replacement of existing infrastructure improvements" and could not be used to construct new infrastructure improvements.
When state lawmakers took up the issue earlier this year, they expanded on that requirement to make it even more specific: “…for the purpose of the rehabilitation, modernization, or replacement of existing streets, bridges, municipal buildings, parks and green spaces, site improvements, recreation facilities, improvements for parking purposes, and any other public facilities owned by the City of Cincinnati, and to pay for the costs of administering the trust fund.”
That includes street paving and pothole repair, recreation centers, public parks, etc.
In response to a request from City Council, the City Manager’s Office put together a plan for how the money could be spent. The report estimates investment revenue over the next ten years would be at $250 million more than if the city continued the lease; that amount is broken down into specific departments and projects:
- Parks - $40.7 million
- Recreation - $27.6 million
- Streets and sidewalks (transportation infrastructure) - $101 million
- Public services (including police and fire) - $49.6 million
- Health - $31.1 million
See a full list of specific projects in the report below:
As with all city spending, City Council has the final say; in this case, that means which infrastructure projects to fund with the money restricted to that purpose. Council will make those decisions one year at a time rather than voting on the above plan all at once.
The budget process each year starts with the city manager’s office (typically in close collaboration with the mayor’s office), and City Council can make changes before voting on final approval.