If Cincinnati sells its railroad, where will the money go?

If Cincinnati voters approve Issue 22 to sell the commuter rail, who is in charge of the money and will prevent wasteful spending?

Sixteen financial institutions — including Cincinnati’s own Fifth Third — applied for the job, city officials revealed to The Enquirer. Two other firms are also based locally: FEG Investment Advisors downtown and Sycamore Township’s Ascension Wealth Management.

The other 13 companies 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 revelation from the city gives additional details to anxious voters as they head to the polls for the Nov. 7 election.

For $1.6 billion, Norfolk Southern has offered to buy the city-owned 337-mile stretch of track to Chattanooga in a deal that requires the approval of Cincinnati voters.

But months of secret negotiations last year and other missteps by officials have cast doubt on the high-profile, high-stakes transaction, which some say is not transparent enough.

So how will this all work if it passes?

Here’s what we know—and some important things are missing—about what could be next:

Is it unusual to monetize or privatize a public asset?

City officials laid out a 10-year, $250 million spending plan that described the sale as an “opportunity” to allow them to be more “flexible.”

While it’s unusual for a city to own a railroad and the sale is a big deal, a municipality’s decision whether to cash in on a public asset is not a new concept.

“This is typical asset privatization that we’re seeing in the United States and internationally,” Oliver Gieseke, a research fellow at the conservative Hoover Institution think tank, told The Enquirer.

What will happen to the money if this is approved?

The ballot initiative directs the proceeds from the sale of the railroad to be deposited into a trust fund. Investment returns from the fund will be used to pay for infrastructure projects in Cincinnati, which the ballot language describes as “streets, bridges, municipal buildings, parks” and “other public facilities.”

Norfolk Southern executives told Wall Street analysts last summer that they expected to close the deal in the first quarter of 2024 if voters approve.

Who would mind money?

This is where the current bid for an investment advisor comes in.

The railroad’s governing body, the Cincinnati Southern Railroad Board of Trustees, this fall solicited bids for an investment adviser for the trust fund that could “provide independent, objective, creative and proactive” advice to the board.

The panel considers applicants’ investment qualifications, philosophy and fees as part of the selection process. The advisor will be appointed for an initial term of three years.

Railroad board officials are scheduled to interview councilor candidates in November and expect to negotiate a contract with the preferred candidate in December if the measure passes.

How will this infrastructure fund work?

Although the railroad governing body would no longer have a railroad to oversee, it would have a trust fund that would distribute payments to the city for public works projects.

The board wants the financial adviser to help develop its investment policies, including where and how much to invest portions of the portfolio, and to help hire investment managers for various portions of the portfolio.

The panel is looking for a financial manager to invest the sale proceeds to collect “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 that it intends to aim for a higher goal: 3.5 percent of the fund’s city ​​(which shows an initial allocation of $56 million).

Are the officials’ financial goals realistic?

Several experts told The Enquirer that a 5.5% annual return is a conservative long-term investment goal — although in the short term, interest rates and inflation have soared higher, making that goal easier to achieve.

“(The targeted return) doesn’t seem unusual,” Justin Marlow, a research professor at the University of Chicago’s Harris School of Public Policy, told The Enquirer. He added that 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-term interest rates (so the target) may be a bit more manageable if we assume the fund invests primarily in safe fixed-income instruments like bonds.”

John Hund, a finance professor at the University of Georgia, told The Enquirer that the group would likely hire a wealth management firm (many affiliated with or owned by major banks) that typically oversees cash for other large institutions, such as pension funds. 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 part is going to be how much the institutional asset manager charges … so it’s important that the city carefully review that part.”

Are local officials not telling Cincinnati voters something?

The measure, if passed, would provide a special stream of money for Cincinnati’s roads, sidewalks and other capital projects — which state law says cannot be diverted for other purposes.

That doesn’t mean, however, that local governments can’t dip into the city’s existing $60 million capital budget for other purposes — which is funded by $25 million in lease payments for the rail line (that would disappear with the sale) and about $35 million from the general fund – which is determined by the municipal council. City officials have already signaled they will continue to use the general fund for capital improvements, but have not specified how much.

For the latest on Cincinnati business, follow P&G, Kroger and Fifth Third Bank @alexcoolidge on Twitter.

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