Project Analysis and Staff Recommendation

National Underground Railroad Freedom Center

Project Manager: Tony Capaci

National Underground Railroad Freedom Center Cincinnati, Hamilton County

General Information
Local Project National Underground Railroad Freedom Center (NURFC)
Sponsor

Local Project NURFC’s mission is to reveal stories about freedom’s heroes, from
Sponsor the era of the Underground Railroad to contemporary times,
Background challenging and inspiring everyone to take courageous steps for
freedom today.

Project Location 50 East Freedom Way, Cincinnati, Ohio 45202

Property Owner National Underground Railroad Freedom Center

Current
$2,000,000 from Am. Sub. H.B. 699, 126th G.A.
Appropriation
Facility The Freedom Center consists of a 160,000 square foot facility
Description located on the Cincinnati Riverfront. Features of the facility include
a museum, interactive story theaters, computer networking to other
Underground Railroad sites, arts and education facilities and a
public forum space.

Project The Freedom Center is a $117.7 million project, opened in August

Description 2004 and features three pavilions celebrating courage,
cooperation, and perseverance. The current appropriation will go
to pay for expenses previously incurred but not yet reimbursed by
the Commission.

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Project Costs $62,633,000 Construction and Soft Costs
$17,660,000 Exhibits
$2,790,000 Fixtures/Furnishings/Equipment
$32,761,000 Pre-Opening Expenses (Other)
$115,844,000 Project Cost Approved by Commission
$1,900,000 2004/2005 Operating Deficit (Other)
$117,744,000 Total Project Cost

Percent for Art The current appropriation is less than $4 million and therefore not
subject to Percent for Art. Previous appropriations of $4,000,000
and $4,150,000 were exempt per the Office of Budget and
Management, in consultations with the Ohio Arts Council.

Project Status The project was completed and opened to the public in 2004.

Determination of Need
Executive Summary: Given the Freedom Center’s current financial state,
Commission staff has reservations regarding NURFC’s sustainability and is
recommending that the additional State bond funds be approved on the condition that
the Commission’s leasehold interest in the project is extended to be coterminous with
the term of the new bonds. This is a more stringent property interest than the new
bonds require, due to NURFC’s financial condition; typically the Commission would
utilize only a Cooperative Use Agreement for the Treasurer of State bonds.

Analysis: This financial analysis was conducted using the audited financial
statements for Fiscal Year (FY) 2005 and 2006, and unaudited consolidated financial
statements for the periods ending March 31, 2007 and June 30, 2007. Additionally,
year to date (YTD) 2007 actuals and forecasted 2007 year end numbers were used for
this analysis. This analysis has addressed the financial condition of NURFC with
particular consideration given to the areas of full funding, sustainability and the risks
that relate to NURFC for providing culture for the duration of the bond term. Exhibits A,
B and C (attached) support this analysis.

Fiscal Years 2005, 2006, and 2007 Statement of Financial Position Review: In
reviewing the Statement of Financial Position, National Underground Railroad
Freedom Center (NURFC) continues to hold a sizeable asset position with total assets
of $128.8 million as of December 31, 2006. Total assets have shown a relatively
neutral net growth, decreasing by 1% in FY06 from FY05, and increasing by 1% for the
first six months of FY07. NURFC has maintained a consistent asset mix with
increasing holdings in cash and investments as well as government receivables.
Accordingly, government receivables increased 3,281% to $2.1 million in FY06, while
cash grew by 9% and investments by 7% for the same period. Museum facilities are
depreciating $4 million annually and net pledges receivable decreased by 2% from
FY05 to FY06.

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Fiscal Years 2005, 2006, and 2007 Statement of Financial Activities Review: In
reviewing the Statement of Financial Activities, NURFC has achieved a 3% increase in
total support and revenue from FY05 to FY06. This increase was comprised primarily
of a $2.8 million gain in net contributions coupled with decreases of $1.8 million in
government grants and $791,174 in earned revenue. Total support and revenue for
FY06 was $15.6 million, which is up $482,416 from FY05. Management has raised $10
million since June 2005 to successfully complete the “Bridge To The Future” operating
costs fundraising campaign. The Freedom Center is engaging consultants to develop
an operating endowment campaign to begin in the spring of 2008. Once an operating
endowment is established, income from it will be used to cover a percentage of
NURFC’s operating expenses. Based on past performance, these fundraising efforts
appear to be achievable.

Management has forecasted total earned revenue for FY07 as $1.81 million as
compared to FY06 earned revenue of approximately $1.83 million. Earned revenue as
of August 31, 2007 is $1.2 million or 67% achieved with four months remaining. Based
on past performance, revenue projections appear to be reasonable.

Total expenses for FY06 were $16.4 million as compared $17.9 million for FY05. The
decrease in total expenses were primarily due to decreases in fundraising and
development expenses by 31%, general and administrative expenses by 18%, and
museum programs by 9%. NURFC reduced its post depreciation losses from $2.5
million in FY05 to $777,000 in FY06. Total expenses as of August 31, 2007 were
$5.81 million or 74% of total forecast while 75% of the year has expired.
Consequently, these projections also appear reasonable based on past performance.

Total government grants decreased by 36% from FY05 to FY06 due to a reduction in
Federal Department of Education (FDOE) grants. Management has forecasted a 174%
increase in total government grants for FY07. These grants include $1.4 million of
authorized funds from the (FDOE), which the Freedom Center has the eligible
operating expenses to match; $800,000 from a city grant and $1 million from the State
of Ohio Department of Education for the 5th and 8th grade free admissions program.
Therefore, government grants for FY07 are forecasted fairly.

The Freedom Center has been steadily improving their program ratio which has
increased each year from a low of 25% in FY04 to 42% as of June 30, 2007. The
significance of the program ratio is that it generally tells a prospective donor how much
of their $1 contribution can be expected to be used for program activities, which is the
essential mission of the organization. In this case, NURFC has been able to directly
impact its programming activities from the success of the aforementioned “Bridge To
The Future” fundraising campaign. Management strives to improve its program ratio to
a more generally acceptable level of 75% to 80%. Though management has made
gains in improving its programming efficiency, it has the tremendous challenge of
overcoming the huge burden of bond interest expense.

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NURFC has experienced a reduction in the value of their investments reflecting an
unrealized loss at June 30, 2007 of $716,576. The Investment Committee continues to
monitor the fund and has recommended to the Board that no changes be made to
investments at this time. Management will reduce capital debt and interest expense,
as a result of being reimbursed for previous expenditures, with the $2 million state
appropriation.

Conclusion: NURFC management has demonstrated the ability to effectively raise

funds while proactively reducing expenses during declining revenues. However, the
decision not to address replacement of depreciating assets may be a detrimental one
because those assets will one day need to be replaced. Additionally, management
has acknowledged the need to establish an operating endowment. Revenues and
expenses are deemed to be reasonably forecasted by management in the submitted
Pro forma Analysis (please refer to Exhibit C for a thorough analysis of the Freedom
Center’s Pro forma).

While the financial sustainability of the Freedom Center is a continued concern to

Commission staff, the risk of culture not being provided during the remaining years of
the original bond term and of the bond term for this new appropriation would be
mitigated by the Commission entering into a lease extension with NURFC, to be
coterminous with the term of the new bonds. In other words, entering into an extended
lease now with NURFC covers the remaining years of the previous appropriation bond
term and the entirety of the bond term for the additional $2 million. Therefore, the
Commission staff recommends that the Commission confirm its determination of Need
for the project and approve the additional $2 million in funding for the National
Underground Railroad Freedom Center, subject to the condition described herein.

Determination of Substantial Regional Support

Executive Summary: NURFC management has represented that earnings from
future investment income are an integral component of its funding model, and has
requested that the Commission permit such future earnings as an acceptable funding
source for the purpose of establishing full funding for the project. Future earnings of
this nature are typically not permissible as a source for full funding; however,
considering the complex funding model for this project, and that construction is
complete and the facility is operational, it is the recommendation of staff that future
investment income be accepted as a funding source to meet the full funding
requirement if the State’s leasehold interest in the facility is extended as described
above.

Full funding and local match analysis below reflects the funding sources for the project
as a whole, including past appropriations.

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 Funding Sources Confirmed Anticipated Total
State Funding $14,650,000 $14,650,000
Private Contributions $63,000,000 $63,000,000
City Government $6,000,000 $6,000,000
Federal Government $22,200,000 $22,200,000
Other State $244,000 $244,000
Programming Revenue $3,900,000 $3,900,000
Future Investment
$7,750,000 $7,750,000
Income*
Total $109,994,000 $7,750,000 $117,744,000
*Future investment income earnings were projected by management using a model based on historical
performance assuming 50 basis points (.5%) as the spread between the variable borrowing cost on a tax
th
exempt borrowings and a variable rate of return on taxable investments. As of October 15 the net spread was
51 basis points. Assuming 50 basis points, $7.75 million in future earnings is achieved prior to the end of the
new bond term.

Local Match Amount Sources/Notes

Past Appropriations $12,650,000
Current Appropriation $2,000,000 Am. Sub. H.B. 699, 126th G.A.
Total $14,650,000
Match 50%
Match Required $7,325,000
Confirmed $4,500,000 City of Cincinnati
Confirmed $34,000,000 Private Contributions
Confirmed $12,000,000 Federal Grant
Total Confirmed $50,500,000

Determination of the Construction Administrator

Previously determined in R-01-26 adopted on October 9, 2001.

Determination of the Provision of General Building Services

Executive Summary: The Commission staff recommends The National Underground
Railroad Freedom Center continue to provide general building services for the facility.
The Freedom Center has been providing building services since their opening in
August 2004.

Commission Action
Prior Resolu- Resolution State Expenditure
Appropriation Reference Balance
Actions tion Date Interest To Date
GRF $333,332 Am H.B.748 R-97-23 10/01/1997 None $333,332 $0
st
121 G.A.
GRF $166,668 Am.H.B.748 R-98-10 11/12/1998 None $166,668 $0
st
121 G.A.
Bond $500,000 Am Sub H.B.850 R-03-01 1/14/2003 Lease $500,000 $0
nd
122 G.A.

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 Bond $3,500,000 Am Sub H.B.640 R-03-01 1/14/2003 Lease $3,500,000 $0
rd
123 G.A.

Bond $4,000,000 H.B. 675 R-03-01 1/14/2003 Lease $4,000,000 $0

th
124 G.A.
Bond $4,150,000 H.B. 16 R-05-07 5/26/2005 Lease $4,150,000 $0
th
126 G.A.

Total $12,650,000 $12,650,000 $0

In Resolution R-07-44 the Commission will be asked to:

• Confirm previous findings;
Current • Authorize the expenditure of additional funds up to $2 million, pending
Action certain requirements; and
• Authorize execution of a Cooperative Use Agreement, an amendment to
the Lease and a Construction Administration and Funding Agreement.

Recommendation and Concurrence

Recommendation I have reviewed and analyzed the materials submitted by the
project sponsor and recommend approval of Resolution R-07-44:

Tony Capaci Date

Project Manager

Concurrence I concur with the analysis and staff recommendation to approve

Resolution R-07-44

Barbara Witt
Manager of Project Services Date

Concurrence I concur with the analysis and staff recommendation to approve

Resolution R-07-44:

David Wartel Date

Assistant Director/COO

Concurrence I concur with the analysis and staff recommendation to approve

Resolution R-07-44:

Kathleen M. Fox, FASLA Date

Executive Director

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