Monday, September 19, 2022

Spiraling admin costs + strong toll revenue recovery at HCTRA

(This week we have part 1 of 2 always-excellent blog posts by guest author Oscar Slotboom)
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The Harris County Toll Road Authority recently posted its annual report for the 2022 fiscal year, which ended February 28. Of course, fiscal year 2021 (plotted as year 2020 in the charts) was heavily impacted by Covid, with revenue down 35.5%.
Anyone who drives the toll roads (including me) knows that the traffic recovery has been strong. Toll revenue rebounded to $808.9 million, 5.4% below the $855 million peak in 2019 and 13.7% below the peak using inflation-adjusted dollars.
The Katy Managed Lanes had a very strong revenue recovery from 2020's $8.9 million, posting $18.6 million in revenue, which is 17% below the 2018 peak in actual dollars and 26% below 2018 using inflation-adjusted dollars.
However, if you look at Schedule 1 on page 53 and schedule 5 on page 57, you'll see that 10 of 14 toll system segments showed a higher traffic count and higher revenue in 2022 (2021 in the charts) compared to 2020 (2019 in the charts), including a new record high for any segment in a year, $129 million on the Sam Houston Tollway North (US 290 to IH-45 North). The four segments with lower revenue were only slightly down. So why is overall toll revenue 5.4% below 2020?
The answer: A massive increase in administration cost.
Administration costs sustained a $109.9 million dollar swing from 2019 to 2021, going from a positive (i.e. revenue-increasing) $42.3 million in 2019, to -$33.2 million (revenue-decreasing) in 2020 and then to -$67.2 million in 2021. (reference schedule 5 on page 57).
If administration costs are removed from toll revenue, we can see that 2021 had record revenue of $876.1 million, 7.8% above 2019's $812.5 million, although still 2.7% below the 2018 peak using inflation-adjusted dollars.
So what is the cause of this massive increase in administration cost? There is no explanation in the 2022 annual report. The only clues we can gather are from the notes attached to the administration line item. In the 2020 annual report page 62 (corresponding to year 2019 in the chart), when administration was still a substantial positive on the bottom line, the note is
Consist of EZ tag sales fees, toll violation (VEC) revenue (excluding tolls), net of an allowance for uncollectible accounts, reimbursements to patrons for overpaid toll(s), collector/vault adjustments, and other miscellaneous revenues.
The note for 2020 and 2021 says
During the COVID-19 emergency declaration, administrative fees associated to violations were waived and no related revenue was generated. This line consists of allowance for uncollectible accounts on toll violation (VEC) revenue administrative fees (excluding tolls), EZ tag sales fees, and other miscellaneous revenues.
This prompts the following questions in my mind:
Why are we seeing a $34 million increase in administration cost in 2021 compared to 2020?
Covid-related financial impacts should have been recognized in 2020, since that's when the covid "emergency" occurred. Does 2021 include deferred recognition of losses incurred in 2020?
Should we expect administration to return to revenue-increasing status with the current fiscal year, since Covid is no longer a factor?
Is HCTRA no longer attempting to collect unpaid tolls?
Does lower operational efficiency for traditional billing tasks have any influence on this high administration cost?
Total headcount at HCTRA decreased from a peak of 1181 in Feb. 2000 to 890 in Feb. 2022, as we would expect with the end of manual toll collection. It seems like the end of manual toll collection should lower administrative cost.
In part 2, which may not be the next blog post, we'll take a closer look at toll diversions and the cost of converting the HCTRA system to be 100% electronic tolling.

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