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February 7 Letter

February 7 Letter

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Published by COAST

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Published by: COAST on May 06, 2012
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05/06/2012

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1February 7, 2012Mark Mallory, Mayor City of Cincinnati801 Plum St.Cincinnati, Oh 45202Dear Sir:This is my
third request 
for annual cash flows and additional information relatedto the Cincinnati Street Car project.
Please provide a written response to thisletter, and my 1/15 and 1/22 letter by Monday, February 13.
Since you have notyet provided annual cash flows, I have reviewed some of the assumptionspresented in the HDR Streetcar Feasibility Study.Some additional information:
The streetcar projected Net Present Value does not breakeven for at least20 years (...
certain cash outflow of $100 million
initial cash investment,and
$5 million annual outlay ($2.5 million annual operating cost plusinterest on debt of $60 million at 4%
); and
uncertain tax revenue
based on$1.5 billion of private capital investment.
Will taxpayers bear the cost of the investment shortfall during this period?
The feasibility study uses a base of $84 million in 2007 dollars, adjustedfor inflation to 2010 dollars would total $102 million. Using the sameweighting assumptions, 2012 costs would increase by $13 million.
1
Howwill this cost overrun be funded?
Cincinnati is a conservative city – e.g. culturally closer to Buffalo (a failedrail system) than Portland.
 Are private capital investments of $1.5 billionin 15 years too aggressive for this unproven $140 million+ investment?
The city has a history of projects not meeting expectations – subwaysystem, Cincinnati Transit Hub, Freedom Center.
Please comment.
 
The feasibility study references Technical Appendix G: Economic Assessment, which appears to be an integral part of the report.
Please provide a copy of the Technical Appendix G: Economic Assessment.
The city now has a shortage of parking. The projected $1.5 billion willeliminate existing street level parking.
Does the streetcar proposal includefunding for building additional parking facilities?
 
1
 http://www.cincinnati-oh.gov/city/downloads/city_pdf17754.pdf (Page 24)
 
 
2
Private capital investment of $1.5 billion
2
is a critical assumption in thestreetcar proposal. Using the commercial tax template
3
example on thecity website, NPV breakeven occurs in 20+ years. Current city taxpayerswill pay $16 million in the first 6 years, assuming investment objectives aremet. Delays in investment will require additional taxpayer investment –e.g. for each year of delayed $100 million investment by private investors,taxpayers will pay an additional $.7 million of cost
 
Please comment.
 
The useful life of a streetcar is 25-30 years, which will require streetcar replacement before 2040. This incremental spending of more than $20million (current dollar cost) has not been considered in any of my financialanalysis.
Please comment.
 
Future expansion of the streetcar across the Fort Washington Way will beconsiderably more expensive. “The other three FWW bridges (Vine St.,Race St., and Elm St.) are not designed for future rail and would requirefull deck replacements to accommodate the streetcar tracks.”
4
 
Pleasecomment on the overall streetcar strategy.
 
Please send your written response to these questions by Monday, February 13.
Background information
1. Tax RevenueThe streetcar projected Net Present Value
does not reach breakeven for at least 20 years.
This includes certain cash outflow of $100 million (initial investment),and $5 million annual outlay (operating cost plus interest on debt of $60 million at4%); and uncertain tax revenue based on $1.5 billion of private capitalinvestment. Tax revenue is calculated using the template on the city’s website,which provides for tax abatements of 75% of the value of commercial property for up to 12 years.
5
Similar abatements exist for residential investments.
2
 http://www.cincinnati-oh.gov/city/downloads/city_pdf17754.pdf (page 18)
3
http://www.cincinnati-oh.gov/cdap/pages/-3481-/
4
 http://www.cincinnati-oh.gov/city/downloads/city_pdf17754.pdf (page 15)
5
http://www.cincinnati-oh.gov/cdap/pages/-3481-/
 
 
3The initial negative cash flow is based on $100 million of capital cost, 4% annualinterest on $60 million of bonds for the project, and the projected annualoperating loss of about $2.5 million. Initial tax revenue is minimal due to the taxabatement.If private capital investment is delayed, breakeven would be later in the project,and conceivably the project could never break even.Using the most current information, project cost would total nearly $143 million,and consist of:
Inflation adjusted incremental spending of $13 million cost due to the 2-year delayed start to 2012. This is based on the inflation assumptionsused in the original feasibility study.
Approximately $30 million of utility cost additions outlined in the January25 letter, Exhibit 1. These cost estimates are not yet final and mayincrease.Using these additional costs, the NPV breakeven occurs in 2040, againassuming $1.5 billion of private capital investment starting in 2015. Investmentdelays would result with an NPV loss.
What are the annual cash flows used to substantiate the more than $140 million project?
 2. Cultural Assessment
(200.0)(100.0)-100.0
Millions$
NetPresentValue
CincinnatiStreetCar(2014-2040)

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