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If Cincinnati voters approve Issue 22 to sell the city railroad, who’s in charge of the money and will safeguard against wasteful spending?
Sixteen financial institutions – including Cincinnati’s own Fifth Third – have applied for that job, city officials revealed to The Enquirer. Two other firms are also based locally: FEG Investment Advisors in Downtown and Sycamore Township’s Ascension Wealth Management.
The other 13 firms are: Callan; Clearstead; Cook Street Consulting, Inc.; 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.; and Wilshire Advisors LLC.
The latest disclosure by the city gives anxious voters additional details as they head to the polls for the Nov. 7 election.
For $1.6 billion, Norfolk Southern offered to buy the city-owned 337-mile stretch of track to Chattanooga in a deal that requires approval from Cincinnati voters.
But months of secret negotiations last year and other missteps by officials have sown doubts about the high-profile, high-stakes transaction that some say has lacked sufficient transparency.
So, how will this all work if it goes through?
Here’s what we know – and some critical things missing – about what may be next:
Is is unusual to cash out or privatize a public asset?
City officials have laid out a 10-year, $250 million spending plan that describes the sale as an “opportunity” that allows them to be more “flexible.”
While it’s unusual for a city to own a railroad and the sale is a large transaction, a municipality deciding whether to cash out of some public asset is not a new concept.
“This is a typical privatization of assets that we have observed in the United States and internationally,” Oliver Giesecke, a research fellow at conservative think tank the Hoover Institution, told The Enquirer.
What happens to the money if this is approved?
The ballot initiative directs the sale of the railroad proceeds to be deposited into a trust fund. The return on investments from the fund will be earmarked to pay for Cincinnati infrastructure projects, which the ballot language details as “streets, bridges, municipal buildings, parks” and “other public facilities.”
This past summer, Norfolk Southern executives told Wall Street analysts they expect to close the deal in the first quarter of 2024 if voters approve.
Who will mind the money?
That’s where the current bidding for investment advisor comes in.
The railroad’s governing body, the Cincinnati Southern Railway Board of Trustees, this fall solicited bids for an investment advisor for the trust fund that can “provide independent, objective, creative and proactive” counsel to the board.
The panel is considering applicants’ investing qualifications, philosophy and fees as part of the selection process. The advisor will be hired for an initial term of three years.
Railroad board officials are scheduled to interview advisor applicants in November and expect to negotiate a contract with the preferred candidate in December if the measure passes.
How will this infrastructure fund work?
While the railroad’s governing body would no longer have a railroad to supervise, it would have a trust fund that would distribute payments to the city for public works projects.
The board wants the financial advisor to help develop its investment policies, including where and how much to invest portions of the portfolio, as well as help hire investment managers for various parts of its portfolio.
The panel is seeking a financial manager to invest the sale proceeds to garner “at least 5.5%” average annual return.
By law, the board must transfer at least $26.5 million each year to the city for its infrastructure needs, but the panel said in its request for proposals it intends to aim higher: 3.5% of the fund to the city (which indicates an initial distribution of $56 million).
Are officials’ financial goals realistic?
Several experts told The Enquirer that a 5.5% annual return was a conservative investment goal long-term – although, in the short-term, interest rates and inflation have jumped higher, which makes that target easier to hit.
“(The targeted return) doesn’t seem outlandish,” Justin Marlowe, a research professor in the University of Chicago’s Harris School of Public Policy, told The Enquirer. He added the target is in line with other local and state government funds invested in various assets. “We’re now in an era of higher long-run interest rates (so the target) could be a bit more manageable, assuming the fund invests primarily in safe, fixed-income instruments like bonds.”
John Hund, a finance professor at the University of Georgia, told The Enquirer the panel will likely hire a wealth management firm (many affiliated or owned by major banks) that typically oversees cash for other major institutions, like pension plans, university endowments, charitable foundations.
“There is a ‘wealth’ of firms all lined up to manage large amounts of institutional money,” Hund said. “The key piece will be how much the institutional asset manager is charging in fees … so it’s important that the city carefully go over this piece.”
Are local officials not telling Cincinnati voters something?
The measure, if passed, will provide a dedicated stream of cash for Cincinnati’s roads, sidewalks and other capital projects – which under state law can’t be diverted to other uses.
However, that doesn’t mean local officials can’t raid the city’s existing $60 million capital budget for other purposes – which is funded by $25 million in lease payments for the railroad (that would go away with the sale) and about $35 million from the general fund – that is determined by the city council. City officials have already signaled they will continue to use the general fund for capital improvements, but haven’t specified how much.
For the latest on Cincinnati business, P&G, Kroger and Fifth Third Bank, follow @alexcoolidge onTwitter.
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