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Ohio Cultural Facilities Commission Stan Hywet Hall and Gardens3rd Quarter 2010 Meeting Page 1 of 10

Project Analysis and Staff RecommendationNational Underground Railroad Freedom CenterCommission Assessment Team: Tony Capaci, chief analyst and Amy Rice, chief project manager

National Underground Railroad Freedom Center 50 E. Freedom WayCincinnati, Hamilton County

Facility and Project Sponsor Information

ExecutiveSummary: The National Underground Railroad Freedom Center (Freedom Center,

NURFC, or the Sponsor) is a museum which is designed to act as a lens toexplore a range of freedom issues. The center offers lessons and reflections onthe struggle for freedom and features three pavilions celebrating courage,cooperation, and perseverance. . The facility opened in August of 2004 . Thestate has appropriated $ 15.5M , and the Commission has previously approved$14.65M for the facility. $14.65M has also been reimbursed to the FreedomCenter. Under NURFCs current operating structure, sustainability is an issue.The Commission is holding $ 462K in escrow in the event that the Sponsor isunable to continue to operate the facility. In May 2009, the Commissionauthorized a Memorandum of Understanding, spelling out the conditions underwhich full approval could be granted to the Freedom Center for the most recentappropriation of $ 850,000 . The MOU contemplates that the Freedom Center willobtain Congressional approval to federalize the facility and federal funding will beprovided for a portion of the operating costs. NURFC s vision is that the federalgovernment will establish a federal museum and oversight commission tocommemorate the ending of chattel slavery in the United States. A discussiondraft of this legislation was completed in October 2009. Preliminary terms includethe gifting of the facility to the United States government and the United States

government, via an appointed board of trustees, operating the facility incooperation with the Secretary of the Interior and other federal agencies. Thefederal legislation has not yet been approved, but the Freedom Centeranticipates that will be approved in 2011. Commission staff recommends XXX

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Deleted: Under NURFCs current operatinstructure, sustainability is an issue.

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Facility Overview: The Center consists of a 160,000-square-foot facility located on the Cincinnatiriverfront , which opened in 2004 . Features of the facility include a museum,interactive story theaters, computer networking to other Underground Railroadsites, arts and education facilities, and a public forum space.

The Center is owned and operated by the Sponsor, an Ohio nonprofit corporationsince 1995.

Culture Presented: The preservation and presentation of features of historical interest or significance.

SponsorBackground: The Sponsor states, The mission of the National Underground Railroad

Freedom Center is to reveal stories about freedom's heroes, from the era of theUnderground Railroad to contemporary times, challenging and inspiring everyone

to take courageous steps for freedom today.

Project Information

Scope: The current appropriation will reimburse the Sponsor for construction expensespreviously incurred but not yet reimbursed (the Project). The project consists ofreimbursing $850,000 on an appropriation awarded in H,B. 562 and release of a portionof the approximately $462,000 of escrow monies held under prior agreements with theCommission. . As described further in the financial section of this report, the value of thefacility has recently been written down to $32M (from $ 78M) at FYE09.

Regional Support

Matching ResourcesThe Sponsor demonstrated a minimum of non-state matching resources equal to at least 50 percent ofthe total state funding of $15,500,000 (a minimum of $7,750,000) . Matching resources weresubstantiated in November 2008. On October 9, 2001, Substantial Regional Support was confirmed bythe Commission in resolution R-01-26. The following table is provided for informational purposes.

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Amount

$0$0

$0

$0

$0

$34,000,000

$0

$4,500,000

$12,000,000

$0

$0

$50,500,000

$7,750,000

City Government

Source

Cash-on-HandFunds Already Expended on Project

Federal Government

Site Valuation

Other

Total Matching Resources

Minimum Match

Irrevocable Written Pledges

In-Kind Contributions (up to 50%)

Operating Endowment

Private Contributions

County Government

Funding Model

Amount Substantiation$15,500,000

$0

$63,000,000

$0

$6,000,000

$22,200,000

$11,650,000 $7,750,000 not substantiated

$106,700,000

$117,744,000

SourceState Funding

Total Funding Sources

Total Project Budget

Cash-On-Hand

Private Contributions

County Government

City Government

Federal Government

Other (future investmentincome)

The Project is complete and was previously funded as is indicated by the table above. However, twosignificant events have since transpired affecting the value of the project. The first is that theconsortium of banks settled $47M bond debt (which the facility was held as collateral) in exchange for$24M held in investments. The second event is that appurtenant to GAAP when an assets value isimpaired management wrote down the carrying value of the facility from $78M to $32M at FYE09.

Comment [kf3]: Will need to add some notexplain how they arrived at full funding and referthe recent changes noted later in our analysis.

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Therefore, when analyzing the funding for the project staff reviewed a completed project valued at$32M with no debt and concluded the project is fully funded.

Project Need

Financial Assessment

Commission staff analyzed the Sponsors financial statements, including

Internally generated financial statements for year-to-date September 30, 2010 ("YTD10") Audited financial statements for fiscal-years-ending December 31, 2009 and 2008 (FYE09

and "FYE08") Five-year pro forma

Statement of Financial Position Summary

YTD10 % Change FYE09 % Change FYE08

ASSETS:

Current AssetsUnrestricted 3,248,185$ 9.21% 2,974,206$ -61.47% 7,718,885$Restricted -$ NC -$ NC -$

Long-Term Assets 32,639,131$ -16.09% 38,897,769$ -62.27% 103,096,322$TOTAL ASSETS 35,887,316$ -14.29% 41,871,975$ -62.21% 110,815,207$

LIABILITIES:

Total Current Liabilities 618,721$ 0.58% 615,126$ -42.85% 1,076,256$Total Long-Term Liabilities -$ -100.00% 27,000,000$ -41.30% 46,000,000$

TOTAL LIABILITIES 618,721$ -97.76% 27,615,126$ -41.34% 47,076,256$

NET ASSETS:

Unrestricted 33,357,286$ 147.29% 13,489,393$ -78.44% 62,563,238$Temporarily Restricted 954,643$ 27.72% 747,456$ -35.33% 1,155,713$Permanently Restricted 956,666$ 4683.33% 20,000$ 0.00% 20,000$

TOTAL NET ASSETS 35,268,595$ 147.38% 14,256,849$ -77.63% 63,738,951$

TOTAL LIABILITIES AND NET ASSETS 35,887,316$ -14.29% 41,871,975$ -62.21% 110,815,207$

Solvency:An organization is solvent when assets are greater than liabilities. The Sponsor is solvent because net assetsare positive (YTD10 total assets are $35.9M; total liabilities are $0.6M).

YTD10, the Sponsor had no debt; therefore, a viability ratio was not calculated.

Liquidity:Liquidity relates to availability of, access to or convertibility to cash. A test of liquidity is current ratio (currentassets divided by current liabilities), which indicates how many times over the entity can pay its currentliabilities with its current assets . (Note: Restricted current assets were not used to calculate the current ratio because they generally are not available to service current liabilities. Including restricted current assets in the

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calculation could have the effect of artificially inflating the current ratio.) A current ratio of greater than 1:1 isconsidered acceptable.

YTD10 % Change FYE09 % Change FYE08Current Ratio 5.25 8.58% 4.84 -32.58% 7.17

The Sponsors YTD10 working capital is $2.7M). Days of cash-on-hand (an indication of how many days anorganization can pay expenses if its revenue stream ceases) at 22 is lower than the 30-day norm.

Leverage :Leverage is the degree to which a sponsor is borrowing money. A measure of leverage is debt ratio (debtdivided by total assets).

YTD10, the Sponsor has no debt; therefore, a debt ratio is not calculated.

Change in Net Assets: Change in net assets examines changes over several years to see where an entity is headed.

Operating Change in Net Assets Summary

YTD10 % Change FYE09 % Change FYE08

Total Revenues (net of capital income raised) $ 5,000,030 17.17% $ 4,267,276 -45.19% $ 7,785,726Total Expenses (net of capital expenses) $ 5,670,869 -30.48% $ 8,157,132 -22.94% $ 10,584,822OPERATING CHANGE IN NET ASSETS (pre-depreciation and pre-realized/unrealizedgain/(loss) on investments) $ (670,839) -82.75% $ (3,889,856) 38.97% $ (2,799,096)

Impairment loss (FAS-144 adjustment) $ - -100.00% $ (42,200,000) NC $ -Extraordinary income (debt settlement) $ 24,150,000 NC $ - NC $ -

Realized/Unrealized Gain/(Loss) onInvestments $ 26,517 -94.22% $ 458,825 P $ (2,447,546)

Depreciation $ (2,494,182) -35.23% $ (3,851,071) -11.24% $ (4,338,937)OPERATING CHANGE IN NET ASSETS(post-depreciation and post-realized/unrealized gain/(loss) on $ 21,011,496 P $ (49,482,102) 416.21% $ (9,585,579)

Pro Forma Review: A pro forma review is a projection showing anticipated expenses and revenues for the period.

Operating Pro Forma Summary

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Revised - Private Support Escalating

FYE11 FYE12 FYE13 FYE14 FYE15

Total Revenues (net of capital income raised) $ 3,816,900 $ 3,870,000 $ 4,523,000 $ 4,627,000 $ 4,731,000Federalization Revenue $ 750,000 $ 3,000,000 $ 3,000,000 $ 3,000,000 $ 3,000,000Total Expenses (net of capital expenses) $ 5,665,400 $ 5,722,000 $ 5,779,000 $ 5,837,000 $ 5,896,000Pre-Depreciation Surplus/(Deficit) $ (1,098,500) $ 1,148,000 $ 1,744,000 $ 1,790,000 $ 1,835,000

Depreciation $ (3,325,576) $ (3,325,576) $ (3,325,576) $ (3,325,576) $ (3,325,576)Post-Depreciation Surplus/(Deficit) $ (4,424,076) $ (2,177,576) $ (1,581,576) $ (1,535,576) $ (1,490,576)

Revised - Private Support FlatFYE11 FYE12 FYE13 FYE14 FYE15

Total Revenues (net of capital income raised) $ 3,613,900 $ 3,364,000 $ 3,964,000 $ 4,015,000 $ 4,066,000Federalization Revenue $ 750,000 $ 3,000,000 $ 3,000,000 $ 3,000,000 $ 3,000,000Total Expenses (net of capital expenses) $ 5,665,400 $ 5,722,000 $ 5,779,000 $ 5,837,000 $ 5,896,000

Pre-Depreciation Surplus/(Deficit) $ (1,301,500) $ 642,000 $ 1,185,000 $ 1,178,000 $ 1,170,000Depreciation $ (3,325,576) $ (3,325,576) $ (3,325,576) $ (3,325,576) $ (3,325,576)

Post-Depreciation Surplus/(Deficit) $ (4,627,076) $ (2,683,576) $ (2,140,576) $ (2,147,576) $ (2,155,576)

Footnote: According to the sponsor, if federalization is passed prior to September 30, 2011 $3M will be remitted by the federal government to theFreedom Center immediately. For purposes of the pro forma staff reported the federalization income on the accrual basis and recognized onlythree/twelfths in FYE11 of the projected remittance.

The Commission staff believes the Freedom Center is in danger of not continuing as a going concern.Accordingly, the consortium of banks that previously held the debt for the Freedom Center have exchanged$47M in local bond debt for approximately $24M the Freedom Center was holding in investments. The netresult of the bond settlement is an ex traordinary gain of approximately $24M in YTD10.

Also material to the Freedom Centers financial position is the adjustment of the carrying value of thebuilding on the FYE09 financial statement. The previous building balance of $78M in FYE08 was writtendown to $32M in FYE 09 as a result of FAS 144, the GAAP pronouncement applicable to Accounting for the

Impairment or Disposal of Long-Lived Assets . Additionally, the Freedom Center continues to operate at a deficit, as is evidenced by a pre-depreciation,pre-extraordinary gain, operating deficit of ($670K) at YTD10, a pre-depreciation loss of ($3.9M) at FYE09,operating deficits in previous years, and the Sponsor-prepared pro forma indicating pre-Federalizationlosses exceeding ($1.8M) for the out years.

Federalization is the prospect that the Facility will be gifted to the Federal Government (free and clear of anyliens), and the U.S. Government will use the Freedom Center to operate a museum commemorating theending of chattel slavery in the United States.

According to the sponsor, if federalization takes place, the Freedom Center expects to receiveapproximately $3M/year in operating revenues on a permanent basis , enabling the Freedom Center togenerate operating surpluses starting at $1.15M for each twelve month period beginning with October 1,2011, the start of the next Federal fiscal year. Therefore, when reviewing the Freedom Centers

sustainability staff heavily weighed the probability for successful federalization of the Freedom Center.According to the Sponsor, the most updated information currently available indicates that Senator SherrodBrown is backing the legislation that was discussed in draft form in October of 2009, and the FreedomCenter management is optimistic that the legislation will be passed. The Sponsor anticipates that the fundswould be received in the [fourth] quarter of 2011, if [it is] successful in getting the language signed and

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Comment [kf4]: Did the Auditors make thstatement or is it our staff opinion? Identify whoopinion this is.

Comment [t5R4]: It is our opinion howeveraise a good point.. if NURFC were to have a12/31/10 audit there is a good chance (in myopinion) they would not get an unqualified cleanopinion. They may get a qualified opinion based

going concern issues. I think it would beunreasonable to require a 12/31/10 audit before tFebruary meeting but we may want to considerrequiring the freedom center get from their auditia a special management report attesting the goingconcern issue prior to the February meeting.???leme know your thoughts.

Comment [kf6]: Need TC & CB assistanceunderstand this

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passed prior to [September 30, 2011]. Even if federalization is successful, there remains a pending issueregarding cash flow needs being met until the Federal funds are received. A review of the liquidity positioncalls into question the ability of the Freedom Center to meet its obligations in the first quarter of 2011 andbeyond. Curr ently, Commission staff is waiting for a cash flow schedule from fourth quarter 2010 throughthe period when Federal funds would be received. Correspondence from the Sponsor indicates their cashmay be depleted in the first quarter of 2011. Part of the solution to the sponsors anticipated cash flowproblem may lie with the Freedom Centers renewed ability to raise funds. Although the Freedom Centermust contend with a challenging environment for fundraising, including an uncertain economy, possibledonor fatigue, and the e ffect the write down of the building may have on potential donor enthusiasm , thefundraising outlook may be influenced positively by certain factors including th e e ffect the bond settlementhas on donor perspective as well as the prospect of federalization. A recent spike in fundraising has enabledthe Freedom Center to close the gap on its operating losses, so much so that the sponsor believes theymay break even by year end.

In formulating the recommendation to the Commission, the staff observes that one approach appears to bemost likely to enable fulfillment of the overall goal : to have the Freedom Center Facility provide culture to the

public for at least the next fifteen years. Because operating costs, which have been cut drastically in yearspast, cannot realistically be cut too much further and because operating revenues have historically beeninsufficient to cover costs, it appears that the most promising option is successful federalization ascontemplated by the Sponsor . Staff calculated the portion of unpaid total bonds which is allocated to theFreedom Center to be $7.4M as of October 2010 out of $14.7 originally appropriated and issued. Theunpaid bonds will be paid by the state in a time frame ranging from now until 2020. These calculations donot include the appropriation of $850K currently being considered by the Commission. Therefore, staffevaluates the risk to the state as high if the sponsor were to stop providing culture in 2011. Therefore, t healternative of not approving the Commission funds and thereby exacerbating a dire financial position maylead to the demise of the Freedom Center before federalization can be approved. . Approval for the$850,000 (The Project) and a portion of the $462,000 escrow release appears to be necessary to movingthe Freedom Center closer to federalization.

However, staff recommends such approval only conditionally, to mitigate the risk. Accordingly, staff isrecommending the Commission approve the Project and release of the escrow funds contingent on

execution of a guarantee in an amount equal to both the appropriation of $850,000 and the partial escrowrelease of approximately XXXXXXXXXXXThis guarantee would need to be acceptable to the executivedirector in her sole discretion Such a guarantee would ensure the Commission is placing the yet-to-be-approved state funds at no greater risk than they are currently andin factlessens the states riskassociated with $14.5M of appropriations previously approved as the Freedom Center moves closer tofederalization. Also, staff recommends the Commission require a board-approved business plan addressingcash flow concerns from fourth quarter 2010 through federalization and until a projected positive cash andworking capital position can be re-established. Finally, noteworthy for the Commissions deliberationsregarding the Freedom Center, is the Federal requirement that the Facility be free of all liens in order forFederalization to take place. This criterion would require the Commission to release its first lien position onthe facility at the point in time when the federal government commits to providing operating funds . As statedpreviously, it appears that the lower risk alternative at this point in time is to release the state funds inexchange for a guaranty in an equal amount. T he future release of the states first lien position at the timeof federalization was approved by the Commission in May 2009.

A review of the Sponsors solvency, liquidity, leverage, change in net assets and pro forma indicates it ismarginally likely the Sponsor will be able to operate the Facility and present culture to the public over asustained period of time in accordance with Section 3383.07 of the ORC.

See Exhibit E for a summary of the Sponsors financial statements.

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Comment [kf7]: enthusiasm?

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Comment [kf8]: Is this both a positive andnegative factor?

Comment [t9R8]: I believe it can be vieweeboth a positive and negative factor however, givthe fact their fundraising has increased I am viewas a positive factor as viewed by their currentdonors.

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Comment [kf10]: Is this true even if they dreceive our funds by 12/31/10?

Deleted: staff ecommendation to the

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Deleted: and the unenviable position of thstate owning a singular-use building, the usebeing a museum in a city that already housesthe successful Cincinnati Museum Center

Comment [kf11]: Need to calculate how many of the escrow is advisable to release.

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Deleted: However, if the Commission were to approvthe funds and Federalization did not come tofruition, the Commission would be responsibfor placing those additional funds at risk.

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Comment [kf12]: See note above aboutcalculating the amount. It cannot be the full escr

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Comment [kf13]: need to discuss after TRreviews Q's from John Pepper's attorney

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Provision of General Building Services

Although experienced in the provision of general building services at the Facility, the Sponsor hasmarginal financial capacity to continue providing general building services at the Facility. Inanticipation of the Sponsor completing the proposed Facility transfer to the federal government,Commission staff conditionally confirms the Sponsor continue to provide these services as permittedby section 3383.07 of the ORC.

Approval of the Project and Authorization of the Expenditure of FundsAppropriation History:

AppropriationName

BillNumber

AppropriationDate

G.A. AppropriationAmount

Comments

NationalUnderground

Railroad FreedomCenter

Am. Sub.H.B. 562

6/24/2008 127 $850,000 Funding this project.

NationalUnderground


Am. Sub.H.B. 699

12/28/2006 126 $2,000,000 Funded construction of thefreedom center.

NURFC H.B. 16 5/4/2005 126 $4,150,000 Funded construction of thefreedom center.

NationalUnderground


H.B. 675 12/13/2002 124 $4,000,000 Funded construction of thefreedom center.

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National

UndergroundRailroad FreedomCenter

Am. Sub.

H.B. 640

6/15/2000 123 $3,500,000 Funded construction of the

freedom center.

NationalUnderground


Am. Sub.H.B. 850

3/18/1999 122 $500,000 Funded construction of thefreedom center.

Cincinnati RiverfrontDevelopment

Am. H.B.748

9/17/1996 121 $166,668 Architectural fees andcontinuing development

work on the freedomcenter.

Cincinnati RiverfrontDevelopment

Am. H.B.748

9/17/1996 121 $333,332 Funded construction of thefreedom center.

Total $15,500,000

Recommendation: The materials submitted by the Sponsor were reviewed and analyzed, and theCommission Chief Analyst, Chief P roject Manager, and Executive Director recommend approval ofResolution R-10-17 , the approval of the Project and authorization of the expenditure of funds , under thefollowing conditions:

Guarnatee be provided by John Pepper acceptable to the Executive Director at her solediscretion guaranteeing the $850,000 appropriation

A Guarantee be provided by John Pepper acceptable to the Executive Director at her solediscretion for the partial release of the escrow funds.

A cash flow plan approved by the Board of Directors of the Freedom Center demonstrating thecash plow form the fourth quarter 2010 through anticipated federalization and until a projectedpositive cash and working capital position is established

A business plan approved by the Freedom Center board of directors addressing the necessarysteps the Freedom Center will have to undertake in order to meet the needs projected by apossible negative first quarter cash flow.

Commission Actions This Meeting:In Resolution R-11-XX, the Commission is asked to do the following: determine need for Project; determinesubstantial regional support; determine the provision of general building services; approve the project andauthorize the expenditure of funds, pending certain requirements; and authorize the execution of legalagreements.

Chief Analyst Chief Project Manager

Executive Director

Exhibits

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Comment [kf14]: list conditions

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A Provision of Culture

B Detailed Project Budget

C Facility Project Info

D Project Team Resumes and qualifications

E Financial Statements

F Evidence of Local Match

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also includes positive influences,

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also includes positive influences,Page 7: [3] Deleted Kathy Fox 11/ 21/ 2010 7:18:00 PM

very realPage 7: [3] Deleted Kathy Fox 11/ 21/ 2010 7:18:00 PM



staffPage 7: [4] Deleted Kathy Fox 11/ 21/ 2010 8:04:00 PM







and the unenviable position of the state owning a singular-use building, the use being a museum in acity that already houses the successful Cincinnati Museum CenterPage 7: [5] Deleted Kathy Fox 11/ 21/ 2010 8:12:00 PM

and the unenviable position of the state owning a singular-use building, the use being a museum in acity that already houses the successful Cincinnati Museum CenterPage 7: [6] Deleted Kathy Fox 11/ 21/ 2010 8:13:00 PM

asPage 7: [6] Deleted Kathy Fox 11/ 21/ 2010 8:13:00 PM

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However, if the Commission were to approve the funds and Federalization did not come to fruition, theCommission would be responsible for placing those additional funds at risk.Page 7: [7] Deleted Kathy Fox 11/ 21/ 2010 8:18:00 PM

However, if the Commission were to approve the funds and Federalization did not come to fruition, theCommission would be responsible for placing those additional funds at risk.Page 7: [7] Deleted Kathy Fox 11/ 21/ 2010 8:18:00 PM

However, if the Commission were to approve the funds and Federalization did not come to fruition, theCommission would be responsible for placing those additional funds at risk.Page 7: [8] Formatted tonyc 11/ 23/ 2010 10:24:00 AM

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