Cincinnati’s $1.6 billion railway sale to Norfolk Southern is moving ‘fast’ despite derailment

Published: Feb. 21, 2023 at 6:28 PM EST|Updated: Feb. 21, 2023 at 7:16 PM EST
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CINCINNATI (WXIX) - An historic proposal to sell the Cincinnati Southern Railway is barreling forward in Columbus.

It could make for an awkward month as legislators face the double bind of advancing that sale to the same company, Norfolk Southern, they’re attempting to rein in with new safety regulations. And all of it would have to be included in the same bill.

It could make for an awkward fall in Cincinnati as well. Residents could be empowered to vote on a deal that was executed before the train derailment and cannot be changed—nor could any version of it exist that would impact Norfolk Southern’s safety measures. And even if the referendum fails, any impact on the freight giant’s rail operations in Cincinnati would likely be minimal.

The Cincinnati Southern Railway Board of Trustees called the Ohio train derailment “terrible and tragic” after its meeting Tuesday. U.S. Rep Bill Johnson (R-Ohio) has described the situation as an “unmitigated disaster.”

U.S. Sen. Sherrod Brown took a jab at Norfolk Southern (and roiled supporters) when last week he noted Norfolk Southern paid out more in stock buybacks and dividends to shareholders in 2022 than it spent investing in its own rail infrastructure.

Norfolk Southern’s case isn’t helped by reports that the train that derailed in East Palestine had multiple problems on the route allegedly due to its excessive length and weight. Norfolk Southern’s COO reportedly said in 2021 longer and heavier trains answer the “opportunity” of business returning post-pandemic.

Staffing cuts that began in 2019 have also decreased rail safety, labor representatives told the Associated Press. (Norfolk Southern said it would begin reversing those cuts last December.)

Now “accountability” is the watchword of the moment. Public officials across the political spectrum and at every level of government, including Transportation Secretary Pete Buttigieg, have vowed to hold Norfolk Southern accountable if a federal review determines it was at fault.

Cincinnati voters in November will find their ability to do the same extremely limited, according to several elected officials who spoke with FOX19.

The CSR board’s Tuesday statement poignantly concludes: “We are focusing on maximizing the value of the CSR for the citizens of Cincinnati, as we have been appointed to do.”

Where things stand

The Cincinnati Southern Railway Board of Trustees announced and executed the deal to sell the 337-mile rail line to Norfolk Southern for $1.6 billion at the end of last year.

Norfolk Southern would be significantly hamstrung without access to the CSR. The company’s president and CEO last year called the CSR “a core line” and “a critical artery” in its vast web of rail corridors spanning the East Coast, the South and the Midwest. An independent analysis commissioned by the CSR board found every alternative Norfolk Southern route from Chicago to Atlanta would be cost-prohibitive.

Cincinnati currently receives around $25 million annually from Norfolk Southern in lease payments. Mayor Aftab Pureval said last year the annual returns under the sale would amount to $60 million.

Crucial in the context of the Ohio train derailment: The sale agreement contains an indemnity clause insulating the City from liability and putting Norfolk Southern on the hook for all costs incurred for claims arising in connection with the ownership, use and operation of the line after closing.

The sale requires three things to go through: A change of state law; approval by a public referendum of Cincinnati voters; and sign-off by the federal transportation officials.

Ohio’s Ferguson Act of 1869 spells out the terms of any potential CSR sale. As currently written, if the CSR is sold, the proceeds could only be used to pay off public debt. A new amendment would allow the sale proceeds to be placed in a trust with the CSR board acting as the sole beneficiary.

The trust assets could then be invested under at least one independent financial advisor, though the board would be empowered to retain as many as are “appropriate and reasonable,” and they would be paid using investment proceeds from the trust. The board would be required to pay the City a lump yearly sum from the investment earnings with a minimum annual payment that will be included in the referendum language. The board could only dip into the principal amount to pay the city if the investment earnings don’t clear that minimum amount in a given year.

The City would only be able to spend the money on the “rehabilitation, modernization or replacement of existing infrastructure improvements,” but use on debt service payments or the construction of new infrastructure is prohibited.

That amendment is written into the Ohio Transportation Budget as introduced last week. Lawmakers must approve it and send it to Gov. Mike DeWine’s desk by March 31.

‘The only one against it’

The only state legislator to have voiced opposition to the sale says it’s likely to pass the Ohio General Assembly “fast.”

Sen. Louis Blessing (R-Colerain) doubts the sale proceeds will outperform what the City currently receives, forcing it to resort to new taxes or service cuts even as the state prospers.

“With Intel coming to Ohio, the Honda battery plant, there’s a lot of tech companies that are investing now, and certainly they’re going to need rail to ship their products throughout the country,” Blessing said last week. “I just think the value of the railroad is going to go up, and go up significantly, and you just want to hold onto it as a public asset.”

Blessing also says the legislation isn’t specific enough with regard to how the City can spend the money.

“They make it sound like it’s only going to be for aging roads and bridges, and I agree, you can use it on that. But why couldn’t this be used for the decks of Fort Washington Way? Why couldn’t it be used for a convention center rehab? I’m not opposed to any of those things being done, but I think they’re not talking about that, and they make it seem like it’s not a possibility.”

Lastly, Blessing takes issue with the CSR board’s five members who are appointed by Cincinnati’s mayor. According to the proposed amendment, all five members would have to live within the city limits.

“I think the world of the current board, and I’ve worked with [Mayor Aftab Pureval] on some things. But there’s no guarantee a future mayor wouldn’t attempt to put cronies on there that wouldn’t attempt to help his future campaign,” Blessing argued.

The sale language was originally put before the state legislature during the lame duck legislative session last December. Blessing blocked it. “Everyone was running around trying to accomplish everything at once, and it didn’t leave any opportunity for public input,” Blessing said. Ohio Senate President Matt Huffman (R-Lima) agreed, if only in deference to Blessing as a member of the local delegation most impacted by the sale. The same deference could work against him in March.

“Generally, members of the General Assembly will defer to local members,” Blessing said. “So, if the whole delegation but me is supportive of this, the rest of them will be like, ‘That’s just an anomaly.’”

And it looks like that’s just what will happen. “I’m still the only one against it,” Blessing said.

‘We’re locked in’

More than one Cincinnati City Council member has unanswered questions about Norfolk Southern, but the body’s ministerial role in the sale is confined to passing along the ballot language for the referendum.

“City Council has no say in this,” City Council member Liz Keating said. “There’s nothing we can do to stop it. The best thing a council member can do at this point is use their platform to continue to ask questions and gain clarity on everything so there’s full transparency for the voters when they go to the ballot box.”

Council member Seth Walsh last week described East Palestine as a “disaster” and said “it opens questions of a moral and environmental magnitude that must be weighted with the decision.”

Trenchant social media replies to Walsh’s statement (not all of them factually accurate) reveal at least a vein of public dissent.

The problem opponents will run into is twofold: Norfolk Southern has a significant monopoly on the line no matter what happens; and federal law preempts almost every state and local attempt to regulate rail lines in the U.S.

The City’s current lease of the CSR contains a 25-year extension clause if the parties don’t sign a new lease by a certain date. If the sale referendum fails, the CSR board and Norfolk Southern could go back and work on a new sale agreement. But without a new lease or sale agreement, Norfolk Southern would trigger the extension, giving it exclusive rights to the CSR until 2051 at a rate decided in arbitration.

“We are locked in with Norfolk Southern through 2051 no matter what,” Keating said, adding the arbitration terms are not favorable to the City and generally default to the previous lease rate plus interest.

Independent analyses commissioned by the CSR board found Norfolk Southern reaped huge rewards for leasing the CSR from 1992-2020 that the City did not see. The lease payments grew over that time by 68.2 percent, while Norfolk Southern’s enterprise value grew by more than 500 percent.

“So the amount of money we could potentially get off a lease over the next 25 years is very small compared to what we could get off a sale,” Keating said.

Keating doesn’t yet have a stance on the sale but argues it offers the City a chance to “diversify its investments” rather than rely on the lease payments alone.

Washington or bust

Every year, a representative from the City of Cincinnati is permitted to go out and kick the CSR’s tires—not to inspect its safety or assess its upkeep, but simply to make sure it still exists.

That, according to the 142-year-old lease agreement with Norfolk Southern, is the full extent of the City’s oversight of its most valuable asset.

Mark Mussman, director of education at the Greater Cincinnati Homeless Coalition, crystallized public opposition to the sale speaking before City Council’s Budget and Finance Committee during public comment last week. Mussman asked the City to take action to require Norfolk Southern to switch to electronic braking systems, record highly hazardous flammable materials consistently and “rescind their actions that result in precision-scheduling railroading[...]”

“While a catastrophe like [East Palestine] on the Cincinnati Southern Railroad would hold Norfolk Southern liable legally, we are morally responsible for any disaster that occurs when we as a city could use this opportunity to demand better, so we should consider regulating and not selling the railroad,” Mussman said. He added: “We have a chance to do here what federal and state governments have failed to do.”

But none of those suggested regulations fall within the purview of local or state governments thanks to federal preemption, a legal doctrine in effect since the end of the 19th century.

The Federal Railroad Safety Act of 1970′s preemption provision states “laws, regulations and orders related to railroad safety and law, regulations and orders related to railroad safety security shall be nationally uniform to the extent practicable.”

The 1995 federal law that created the Surface Transportation Board gives the federal government exclusive control over “rates, classifications, rules (including car service, interchange and other operating rules), practices, routes, services and facilities of such carriers; and the construction, acquisition, operation, abandonment or discontinuance of spur, industrial, team, switching or side tracks, or facilities, even if the tracks are located or intended to be located entirely in one state.”

The 9th Circuit Court affirmed the preemption doctrine in 1998 with its opinion in City of Auburn v. Surface Transportation Board.

The Ohio House Democratic Caucus is advocating for a set of state rail reforms, also included in Ohio’s transportation budget:

  • Require at least two-person railroad crews on trains;
  • Require the Public Utilities Commission of Ohio to ensure railway wayside defect detector systems are operational, effective and up-to-date;
  • Require rail yard lighting and walkway safety measure;
  • Create railway safety zones; increase annual funding for the Ohio Rail Commission from $10 million to $15 million; and
  • Require PUCO reporting when a train blocks a crossing.

The reforms could potentially pass muster if they’re enacted under the state’s power to police public health and safety, but their ultimate fate is unclear given the sweeping nature of federal preemption.

As for local governments, cities like Cincinnati can conduct environmental monitoring and apply building and zoning codes to the rail lines, but that’s it.

“The City [of Cincinnati] doesn’t have any oversight over Norfolk Southern. That’s all the federal government,” Keating said. “So nothing would change whether it’s leased or sold. The only factor is whether we’re putting all our eggs in one basket with a lease or taking that huge principal and investing it in a diverse set of funds.”

As for new safety regulations to ensure what happened in East Palestine doesn’t happen in Cincinnati, Keating says residents have only one recourse.

“We can continue to push our leaders in Washington for more regulations and more oversight,” she said. “And as a council member, I’ll continue to ask questions.”

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