Why is Cincinnati selling its railroad to Norfolk Southern?

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Cincinnati Mayor Aftab Pureval announced Monday the city intends to sell the railroad it owns for $1.6 billion.

It’s a big problem. The negotiations have been going on for more than a year, but the public has just learned of it through the mayor’s announcement. If you have questions about this, you are not alone.

Here’s what we know.

Wait, Cincinnati has a railroad?

Yes. Cincinnati is the only city in the country to have its own railroad. Completed in 1880, the Cincinnati Southern Railway travels 337 miles from Cincinnati to Chattanooga, Tennessee.

The railroad was built for $18 million after Cincinnati voters approved several bond issues to fund the project. In today’s dollars, that $18 million is about $618 million.

The Cincinnati merchants wanted the city to build the railroad because the only other rail link south at the time was through Louisville, and the Louisville merchants were unwilling to help their competitors in Cincinnati.

The Cincinnati Southern Railway Board of Directors has overseen the railroad since its inception. The five council members are appointed by the mayor and approved by the city council.

Who runs the railroad in Cincinnati now?

Although the railway board oversees the railway, it is not responsible for the punctuality of trains. The council is essentially a guardian of the railroad that is responsible for negotiating leases and looking after the interests of the city.

Currently, the city leases the railroad from Atlanta-based Norfolk Southern Railway for about $25 million a year. The company operates 19,300 miles of railroad in 22 states, serving all major ports on the nation’s east coast.

Why is there a case for sale?

The lease with Norfolk Southern will expire in 2026. Board members say they began negotiating a new lease last year when Norfolk Southern officials told them they wanted to buy the railway.

Chairman of the board, Paul Muething, said the company and the board had gone back and forth for a year before agreeing on the sale price of $ 1.6 billion. . He said the council consulted with appraisers to assess the offers and help determine whether a sale would benefit the city more than renewing the lease.

“We came to the conclusion that a sale at this price was a better deal,” Muething said.

Neither board members nor Norfolk Southern officials would discuss the range of value estimates they received from their appraisers. But Muething said $1.6 billion was above the “midpoint” of valuations.

Why were these discussions not made in public?

Ohio law allows public boards, including the railroad board, to meet in secret when discussing the sale of property by competitive bidding if releasing the information would give a competitive advantage to the other party.

Critics of the deal say the standard was not met in this case because there were no competing offers. Instead, sales negotiations took place only with Norfolk Southern, as the company held the right to continue leasing the railway for another quarter of a century.

A city lawyer representing the board said the executive session was warranted because a bidding process may one day be necessary if negotiations with Norfolk Southern fail or the deal is later rejected by the voters.

What happens to the money if the sale is made?

The agreement provides for the creation of a $1.6 billion trust fund called Building Our Future. The railway board will oversee the fund and hire a chief financial officer to manage the investments.

Pureval and board members, including former mayors Charlie Luken and Mark Mallory, said the city would come out on top by selling now instead of renewing the lease, which currently earns the city around $25 million a year. .

The goal is to avoid touching the original $1.6 billion, using only money earned from interest and investments. If investments on that $1.6 billion return 3.5%, for example, the return would be around $56 million. If they earn 5%, the return would be $80 million.

If the investments lose money over the course of a year, the city could draw from the base, or principal, amount of the trust fund.

All decisions regarding the disbursement of funds from the trust fund to the city would be made by the railroad board, in consultation with the board’s financial advisors.

Board members said Monday they expect the lowest annual payments to the city under the new trust fund will be no less than current lease payments of 25 millions of dollars. They said they would save money in good years to cover payments to the city in bad years.

Most years, Luken said, the city will likely receive significantly more than it does now.

“There’s going to be a lot more money,” he said.

How will Cincinnati spend the money?

Board members and city officials say money from the trust fund will only be spent on infrastructure projects, such as roads and bridges, this is how payments current leases are spent.

“Cincinnatians can now rest assured that through this trust fund, our most pressing infrastructure needs will be funded in perpetuity,” Pureval said.

While the source of the money will change, the city’s process for deciding which projects to build will not change: The mayor and the development department will still recommend projects for city council approval.

What happens next?

Railway management approved the deal on Monday, but it’s only a first step.

Current state law requires that proceeds from any sale of the railroad be used to pay off the city’s debt. Council and city officials are seeking a change that would allow the city to use proceeds from the sale for infrastructure instead.

This means the city and council need the Ohio General Assembly to change the law. It’s unclear how long that may take or if most state officials will be supportive.

If the law is changed, then the deal would go to Cincinnati voters. Pureval said this would happen next fall at the earliest.

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