Houston Strategies

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In my previous post, "HCTRA: from model agency to delay, divert and do nearly nothing", I documented how HCTRA has hugely increased diversions of toll revenue and drastically curtailed construction. To summarize

• HCTRA had $935 million in revenue in 2023, and $410 million in profit.
• $369.3 million was diverted out of HCTRA in 2023. Diversions have averaged $345 million per year in the years 2020-2023. Harris County diverted $1.292 billion of toll funds out of HCTRA in the last 4 years, which is around $830 million above historical levels.
• For the period 2020 to 2023, diversions were 46.3% of toll revenue and 45.3% of total revenue. It appears this trend will continue for 2024 and 2025 based on budget documents (page 81), although the percentage may be in the mid-thirties since there were one-time transfers in the 2020-2023 period.
• HCTRA awarded approximately $1.648 billion in construction contracts in the six years prior to 2019, but only two projects for around $297 million in the six years after 2019. Long-planned projects like the Hardy downtown connector, toll barrier removal and the SH 225/Sam Houston interchange have been delayed for years.

The Loophole

Are these large diversions legal? Apparently yes, using a loophole in Section 284.0031 of the Texas Transportation Code which states "The commissioners court of a county or a local government corporation ... may authorize the use or pledge of surplus revenue to pay or finance the costs of a project for the study, design, construction, maintenance, repair, or operation of roads, streets, highways, or other related facilities." It appears the phrase "other related facilities" is used to justify diversions to anything remotely related to a road, and the term "maintenance" may allow toll revenue to go into maintenance budgets for marginally related facilities. Of course, money that would normally fund precincts, non-HCTRA engineering or general administration can be shifted to other "focused objectives" (starting on page 52), nearly all of which have nothing to do with infrastructure.

HCTRA's financial statement for fiscal year 2024 (ended September 30) will be available in April. The Harris County 2024 budget indicates at least $300.5 million in transfers. For the current fiscal year, the Harris County budget (excerpt below) indicates at least $305 million in transfers, but we won't know the official audited amount until April 2026.

$950 million in new debt in 2024, and another $2.15 billion on the way

With toll revenue being diverted out of the agency, there's no money to pay for planned projects. The result: a huge increase in debt is in progress.

The 2023 HCTRA financial statement shows $1.999 billion in debt principal and $111.9 million in commercial paper principal outstanding for a total of $2.1 billion. In the near future, we can expect debt to rise to around $5.2 billion, a 148% increase.

HCTRA issued $950 million debt in June 2024, the first of what is expected to be multiple debt issues.

This May 2024 credit opinion document from Moody's Ratings has more information about the HCTRA debt issuance program. Some key points are excerpted below.

HCTRA has expressed an intent to issue $3.1 billion in new debt. $950 million this year is only the start. This means that HCTRA's debt principal will skyrocket to around $5.2 billion within a few years.

If the huge toll revenue diversions were not occurring, HCTRA would have around $215 million per year available to dedicate to the capital program, which would greatly lower the debt needed to complete the investment program.

Say what?!?! $1.838 billion for removing toll barriers and toll system enhancements? Yes, it's true, if you look at this HCTRA document (page 5) you'll see "Barrier Free HCTRA" listed at $1.61 billion, which is more than the way-over-budget ship channel bridge ($1.45 billion).

Good grief, this is outrageous! At least half the toll road system is already barrier-free, and only sections built before 2000 have barriers. Since this work will mainly apply to the original three sections of the Sam Houston Tollway (Southwest Freeway to North Freeway) which have paid for themselves many times over, this certainly smells like paying tolls to pay for the collection of tolls.

HCTRA needs to provide a detailed listing of the costs in this program. Is this project a trojan horse to disguise bloated administrative costs? Who knows, but a detailed listing of estimated costs of all elements in the project would shed some light on this appalling cost. (Attention Houston Chronicle!)

Moody's expects that toll rate increases will be needed to maintain HCTRA's credit rating, and HCTRA appears to have a policy in place to start increasing tolls.

Yup, we know the transfers are siphoning off a large percentage of revenue. Actually, I'm surprised Moody's isn't more concerned about it, but there is some discussion on page 4.

It appears that HCTRA is governed solely by Commissioners Court, with no independent oversight. Of course, the political minority (Republican Jack Ramsey) has no influence in the matter, and the majority does what it wants, and it could be a case of one or two individuals steering these decisions. In sharp contrast, the North Texas Turnpike Authority has 9 directors, with 8 appointed by four different counties and one by the governor. This prevents one or two people from having too much power.

Overall, Moody's says HCTRA can most likely withstand the massive debt increase, mainly due to the strong financial position inherited when Democrats took control of Commissioners Court in 2019, and with expected toll increases.

We don't get much for $3.5 billion

So what do we get for $3.5 billion in capital spending, including $3.1 billion in new debt? Not nearly as much as I would think or hope. For example, this spreadsheet shows total construction payments of $1.45 billion from 2001 to 2022, including construction of the Westpark Tollway, Tomball Tollway, Sam Houston Northeast, Sam Houston tollway widenings, Fort Bend Parkway and extensive miscellaneous work. Now it costs $3.5 billion for a smaller number of long-planned projects that have been delayed for years and years. Sure, there's been inflation, but the new capital projects program seems like poor bang for the buck.

Using cost numbers here and here and an estimate, I come up with Ship Channel Bridge $726 million for remaining work, Hardy Downtown connector $226 million for remaining work, Hardy-Sam Houston connectors $310 million, Sam Houston-SH 225 connectors phases 1 and 2 estimated $350 million and the Lynchburg ferry $15 million. That adds up to $1.627 billion. This is just about the same as the barrier-free program at $1.61 billion. The total is $3.24 billion.

Commercial Paper Shenanigans?

Looking at HCTRA's 2023 financial report page 33, there is a discussion of the issuance of commercial paper, which is short-term financing as opposed to long-term bonds. Issue K authorized $200 million in May 2022, and issue K-2 authorized $150 million in May 2023.

HCTRA diverted $799 million out of HCTRA in 2020 and 2021. Then HCTRA issued $350 million in commercial paper in 2022 and 2023. It looks like so much money was diverted that HCTRA was short of money, so it had to tap credit markets to pay bills. In other words, the bank account was empty.

For both credit issues, HCTRA paid a 10% interest rate for 270 days, amounting to $25.89 million. Why did HCTRA need to pay 10% interest? Is this sound financial management - running the bank account dry and then taking out $350 million in loans with 10% interest for a period of time? The interest on the commercial paper after the 270 days is not stated, but the payment schedule shown on page 34, using estimated dates and the Excel XIRR function, suggests a rate of 5.88%.

The 2023 financial statement says remaining principal was $111.93 million, but the Harris County 2025 budget (page 90) shows huge adopted amounts for payments in 2024 and 2025 on Series K and K-2, including $320.3 million budgeted for 2025 (see budget excerpt below). Looking at the commercial paper reports, I can't make any sense of the numbers. Perhaps we'll get some clarity in the next HCTRA financial statement.

Wayne Dolcefino investigates HCTRA

HCTRA services contracts are another world which I haven't even attempted to dissect. Services and fees were $213.4 million in 2023.

Investigative reporter Wayne Dolcefino has investigated HCTRA's service contracts and recently posted a video with results of his investigation. Dolcefino reports that certain contracts have been transferred to firms with politically well-connected ownership, and the cost to HCTRA has gone up substantially after the work was transferred.

 

Tolls go on Forever, no matter how much HCTRA customers pay

The Chronicle recently reported that tolls will continue forever, regardless of how much customers have paid on particular sections, even on sections which have paid for themselves many times over, such as the original three sections of the Sam Houston tollway, completed in 1988 to 1990.

The 2023 HCTRA financial statement states, "When all of the debt service has been paid or provided for in a trust fund, the Toll Roads will become a part of the State of Texas Highway System." What will HCTRA do to continue charging tolls forever? Continue to divert toll revenue, and issue more bonds to ensure the agency is perpetually in debt.

HCTRA's Game, post 2019

So now we get a clearer picture of HCTRA's modus operandi since Democrats took control of Harris County Commissioners Court in 2019.

Sad but true, HCTRA has degenerated into a Chicago-style, debt-driven machine rife with inefficient project delivery, high costs, cronyism and increasing debt. Customers of the toll road system will pay for this, making the Houston area a more expensive place to travel and conduct business.

Can this be fixed?

Since HCTRA operates at the direction of Commissioners Court, and Commissioners Court has created this situation, the only potential remedy is state-level legislation, which has been done before in 2021 with SB 1727.

Some possible legislative remedies could include