Cincinnati sale of ‘historic’ railroad asset would fund infrastructure

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Cincinnati voters in November will decide whether to greenlight a plan pitched by city leaders to sell a 338-mile freight railway line and use the money to create a permanent investment fund to support infrastructure needs.

If approved, the deal would mark one of the few instances of true asset recycling in the U.S.

The Cincinnati Southern Railway, a freight line that runs to Chattanooga, Tennessee, is the only city-owned interstate railway in the country. The city has owned it for more than 150 years – it floated $10 million of bonds in 1869 to finance construction – and has leased it to Norfolk Southern or its subsidiaries and predecessors since 1881.

Cincinnati would use $1.62 billion from the sale of its 338-mile railway to fund infrastructure projects under a plan voters will consider in November.

Bloomberg News

As the current lease nears expiration in 2026, city leaders have said a sale would generate nearly twice as much as current lease payments, which also go to pay for infrastructure. The deal calls for the $1.6 billion to go into an investment fund, where the principal would remain untouched and the interest — estimated at up to $70 million annually — would be used to chip away at an infrastructure backlog that’s pegged at $400 million.

The Ohio Legislature passed a state law paving the way for the deal, and the Cincinnati City Council on Aug. 2 approved a motion sending the question to the Nov. 7 ballot.

The Cincinnati Southern Railway board of trustees, a state entity that oversees the railway and supports the sale, approved terms at a July 13 board meeting. The U.S. Surface Transportation Board is reviewing the proposal and expected to release a decision next month.

Mayor Aftab Pureval and other city leaders have launched a campaign urging citizens to vote yes despite wariness about Norfolk Southern, which landed on front pages in February after one of its trains derailed causing a fiery explosion in East Palestine, Ohio. The Cincinnati Southern line is one of Norfolk Southern’s busiest and a key link in its national system.

The new state law restricts the use of proceeds to “modernizing, repairing and replacing existing infrastructure” and requires the Cincinnati Southern Railway Board of Trustees to send at least $26.5 million to the city’s coffers each year to ensure that Cincinnati doesn’t get less than it does under a lease, which now provides about $25 million annually.

If approved, the deal would mark one of the few examples of asset recycling in the country, according to Robert Poole, director of transportation policy at Reason Foundation.

“It stands out as an example and may attract more attention to the idea of asset recycling,” Poole said.

A relatively untapped market in the U.S. that’s closely watched by infrastructure investors, asset recycling is when a state or local government sells off an existing asset and plows the proceeds back into infrastructure.

Australia is a leading practitioner, Poole said, with the government requiring locals that enter into either long-term leases or sales of their assets to use the proceeds for infrastructure.

“I have not seen that emerge as a standard here,” Poole asset. “We’ve tried to put that into the transportation vocabulary but it’s not widely used.”  

The concept was included in the 2021 Bipartisan Infrastructure Law, which requires the Secretary of Transportation to submit an asset recycling report to Congress by 2024. The law marks the first time where U.S. federal legislation has called out the practice.

Though the provision only encompasses a report, supporters hope it could lead to federal incentives for the practice.

The best U.S. example so far of asset recycling was the 75-year lease of the Indiana Toll Road in 2006 for $3.8 billion under former Indiana Gov. Mitch Daniels.

As part of the concession, the state retired $225 million of debt and used the rest of the money to pay for infrastructure projects for 10 years. At the time, the lease was politically controversial and only narrowly passed the Indiana Legislature, recalled Poole, who testified in favor of the proposal.

“Everyone thought [Daniels would] never get re-elected, but the increased highway investments from the proceeds were a slam-dunk for him to be re-elected,” Poole said.

Cincinnati Mayor Aftab Pureval
Cincinnati Mayor Aftab Pureval is pushing for a sale of the city’s 338-mile railway, saying proceeds would generate twice as much for the city’s infrastructure than current lease payments.

Cincinnati Mayor’s Office

Norfolk Southern has been trying to buy the railway from Cincinnati for years. In 2009, it offered $500 million, noted Robert Dovenberg of BMO Capital Markets, the railway board’s advisor, during the July 13 meeting. In 2021, the freight operator offered around $900 million. After negotiations, the offer grew to a $1.6 billion lump sum payment.

Depositing the money into an investment fund would create a “perpetual cash flow” of $57.1 million in 2024 dollars, taking into account inflation and other factors, Dovenberg said. “The cash flow from this is more than double what the city could expect to receive in its current lease” and “more than 60% higher than Norfolk Southern’s proposed revised lease payment,” he said.

In a press release, the railway board noted that in 2024, lease proceeds are projected to be $26.5 million, while the potential trust fund earnings of 5.5% on a $1.6 billion portfolio would total $88 million. If the city reinvested $32 million of that into the fund, the remaining $56 million would be available for existing infrastructure and CSR operations. “We and our advisors find this scenario reasonable, prudent and responsible,” said Paul Muething, president of the CS board, in the release.

The deal also calls for Norfolk Southern to pay $25 million in transaction fees.

With traffic of around 30 to 40 trains a day, the CSR is “one of the highest capacity lines on the Norfolk Southern system,” said Jim Bertrand, partner at Stinson LLP, the rail board’s counsel, at the meeting. “Which means this is incredibly important to them as they operate their entire rail system and as a result it makes this line very valuable.”

According to the city-owned railway’s website, Cincinnati was motivated to build the line to ensure its relevance to the nation’s transportation network as railroads supplanted the riverboats that first drove the Ohio River city’s growth.

Cost overruns ultimately led the city to obtain $8 million in additional bond authorizations from voters beyond the original $10 million referendum in 1869.

The most recent lease, which expires in 2026, was modified with an agreement that gives Norfolk Southern the right to extend it through 2051. The lease also gives the freight operator the right of first refusal if the city decides to sell the asset and appoints an arbitrator to help set lease payments, a move that favors Norfolk Southern over the city, Mayor Pureval said in an interview with CityBeat.

The parties are “very, very far apart” on the new lease terms and the infrastructure backlog is “growing every year,” he said.

“I am staring down a fiscal situation that is dire, with the city not being able to provide basic services that citizens desire. We’re facing a rail industry that puts the city at risk for owning a railroad that the federal government has the exclusive power to manage and regulate, and we’re looking at a sale that could solve both issues.”

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