Without oversight, $1.6 billion railroad fund ripe for mismanagement, waste | Opinion

There is still a lot of interest and talk about Issue 22 and the sale of the Cincinnati Southern Railway to Norfolk Southern. There remains a great deal of cynicism too. Many who didn't support the sale still expect, whether fair or not, that the $1.6 billion gained from the sale is going to be wasted, stolen, or otherwise corrupted. Some are very discouraged and have just "thrown up their hands." And understandably so.

For example, not a single elected official in Cincinnati has expressed any criticism about Norfolk Southern’s shameful spending of $6 million to "win the vote." Ohio’s election laws need to be reformed to prevent such influence of corporate money in any future initiatives to sell a public asset. But that is an issue for another day.

According to its treasurer, "Build Cincinnati’s Future," the political action committee that spent Norfolk Southern’s $6 million was guided by a "steering committee." The members of the steering committee have not been publicly identified. But it’s only logical to conclude that the members of the steering committee, who wanted the city to get that $1.6 billion, will also want to influence how the $1.6 billion is invested and spent. The mayor knows who the steering committee members are because he pretty much said so when interviewed by a local TV station during the campaign.

So, who are they? How does the public counter such faceless and nameless influence operating "behind the scenes" with respect to the investment and use of our trust fund?

A convoluted system governs $1.6 billion trust fund

The fact is that instead of a simple, annual lease payment from Norfolk Southern, we now have a very convoluted system governing our $1.6 billion. This presents many problems from an oversight perspective. There are many different parties involved: the Cincinnati Southern Railway Board of Trustees, UBS, the mayor, Cincinnati City Council members, the city manager, the city’s fiscal officer, who has specific responsibilities under the law. This landscape creates a lot of opportunities for things to fall through the cracks, or worse.

A neighbor, who also voted "No" on Issue 22, even drafted a flow chart to help him understand this convoluted system.

Keep promise to increase spending on existing infrastructure

City Council should establish a permanent baseline for the Capital Improvement Program budget at the FY2024 funding level, which is $76.4 million. That would include the annual, guaranteed $26.5 million disbursement from the trust fund, which essentially replaces the annual Norfolk Southern lease payment. Only in that way would any additional disbursement from the trust fund represent an increase in capital improvement spending. Such an increase was promised and is necessary to address the "crisis" in deferred maintenance and needed infrastructure repairs pronounced by the mayor during the campaign. Remember, he said without the sale of the CSR, Cincinnati would die a slow death.

Protect trust fund by using discretion over disbursements

The railway board has a significant fiduciary duty to manage the trust fund in the best interest of their "client," i.e., the citizens of Cincinnati. That includes making sure that the process put in place by the railway board for making disbursements to the city does not result in the illegal use or waste of those proceeds. The law restricts the use of trust fund proceeds to "existing infrastructure." There are no other "safeguards" about how the money is spent, with perhaps one exception: the law gives the railway board discretion over the amount that will be disbursed to the city every year beyond the guaranteed $26.5 million.

Ohio Revised Code 746.05(B) provides: "The railway board of trustees shall determine the amount transferred pursuant to this section..." This is a disbursement authority given to the board by the statute apart from the guaranteed $26.5 million. This is where the railway board can establish conditions and/or criteria for any additional disbursement of trust fund proceeds to the city. This would be a very effective oversight mechanism to help ensure that the $1.6 billion trust fund proceeds are being properly invested and spent.

For example, if the city receives an additional $20 million disbursement from the trust fund but is unable to spend it during the year, what happens to the money? Does it just keep piling up because the city government does not have the capacity to spend it? Just this past year, the city had $7 million in the Infrastructure and Capital Projects Reserve account that was not used, a large portion of which ($2 million) was then diverted to purposes other than infrastructure. Would the same thing happen if trust fund proceeds were not spent by the end of the year? Would those funds remain with the city? Should not any unused funds be returned and reinvested in the trust fund?

Alternatively, the railway board could withhold an amount equivalent to unspent funds from its disbursement to the city in subsequent years. In other words, the city should be required to demonstrate its capacity to spend the trust fund proceeds, effectively, legally, and in a timely manner before it receives additional funds beyond the guaranteed amount.

In order for the trust fund to benefit future generations of Cincinnatians, the current generation of politicians and fiduciaries cannot be permitted to fritter away the fund and its earnings. The railway board must play a central role in safeguarding the trust fund.

While serving at the U.S. Department of Transportation in the early 1990s, the Inspector General would refer to the Federal Transit Administration as a "religious organization" because it granted billions of federal dollars to states and local governments and just "prayed" that it was properly spent. In other words, it performed practically no oversight of those federal funds. Thanks to Congress, the IG’s recommendations and FTA’s responsiveness, oversight of transit projects improved. A similar outcome is possible here.

Hire a compliance officer to oversee railway board

A strong argument can be made that the railway board has a similar duty to ensure compliance with the statute by all those parties referenced above. The statute does not prohibit such an oversight role for the board and provides that the board can hire whatever expertise it requires to fulfill its responsibilities. Key objectives of a compliance assurance function would be to help avoid controversial and costly litigation over the governance and operation of the trust fund and associated spending, and help to effectively manage the risks, including reputational risk, associated with incidents of non-compliance, not to mention outright fraud, waste, and abuse or even just the slightest perception of a conflict of interest in the eyes of the public.

The compliance function would go far beyond the testing for fraud and the assessment of internal controls normally conducted as part of an organization’s annual financial statement audit.

During its Jan. 17 meeting, I encouraged the railway board to provide the public with the opportunity to comment on its internal policies and procedures where such recommendations can be made on the record beyond a two-minute comment at a City Council or board meeting. It seems that the railway board’s fiduciary responsibilities require such an open and transparent process.

As stated, a fiduciary is supposed to act in the best interest of their client. In this situation, the citizens of Cincinnati are the railway board’s clients, not the mayor, City Council, the city manager nor the developers and special interests. It is in the best interest of the citizens of Cincinnati that the sale proceeds be invested prudently, for maximum return on investment, and spent wisely, legally and effectively. That excludes investing in funds based on political agendas or using the funds for City Council vanity projects, cutting deals with developers, and pandering for votes. Just fix our roads and bridges; repair our facilities; and keep the city’s vast health and safety infrastructure up to date, as promised. That is what the people are asking.

The convoluted system left by the sale of the railroad includes substantial risk of errors, mismanagement and fraud, waste and abuse. City Council, the city administration and the railway board must establish strong internal controls in their policies and procedures for governing the investment and the use of the sale proceeds. An independent compliance officer, situated at the railway board, and given sufficient authority to do their job, is probably the best oversight model to put in place at the current time.

The closing of the sale is only a month or so away. Nonetheless, we have not yet seen how the railway board and the city plan to carry out their responsibilities, including how they plan to safeguard our trust fund. It’s time for them to tell us what internal policies and procedures they propose and allow the public a reasonable amount of time to comment.

Todd Zinser lives in West Price Hill and founded Citizens for a Transparent Railroad Vote. He retired as the inspector general of the U.S. Department of Commerce after 31 years of conducting audits and investigations of federal officials, programs and operations and remains a certified fraud examiner.

This article originally appeared on Cincinnati Enquirer: Waste, abuse threaten $1.6 billion railroad fund without oversight