COUNTY TOLL ROAD AUTHORITY

September 15, 2020

Commissioners Court
Administration Building
Houston, Texas 77002

SUBJECT: Recommendation that Harris County (County) authorize the creation
of a Local Government Corporation (LGC) pursuant to Chapter 431,
Subchapter D, of the Texas Transportation Code, that would contract
with the County for the continued Operation and administration of the
County?s toll road system and the Harris County Toll Road Authority
(HCTRA)

Dear Court Members:

It is recommended that Harris County (County) authorize the creation of a Local
Government Corporation (LGC) pursuant to Chapter 431, Subchapter D, of the Texas
Transportation Code, that would contract with the County for the continued operation
and administration of the County's toll road system and the Harris County Toll Road
Authority (HCTRA). This letter is written in support of and is complementary to the
Budget Management Department?s recommendation to create the LGC and proceed
with the LGC re?nancing of outstanding debt.

HCTRA is a department of Harris County government that operates as a county toll
authority under Chapter 284 of the Texas Transportation Code. HCTRA was created by
Harris County in 1983 following voter approval of a countywide bond referendum (held
September 13, 1983) that authorized the issuance of up to $900 million of tax supported
bonds for the initial development of a Harris County tolled highway system, which is
legally referred to as the ?Project.? The ?rst two component segments of the project -
the Hardy Toll Road and the Sam Houston Tollway-West - were completed in 1988 and
1990, respectively. Subsequently, over the past 30 years, HCTRA has acquired,
constructed, and/or completed the remaining component segments of the Sam Houston
Tollway, the Westpark Tollway, the Fort Bend Parkway Extension, the Katy Managed
Lanes, and the Tomball Tollway, all without having to incur irresponsible debt for the
County and/or require onerous toll rate policies for the region?s users of the system.
Concurrent with the advancement of the HCTRA system, the County enjoyed
tremendous population and job growth (partly attributable to the prudent ?nancial
management and selective project development of HCTRA), and has been able to fund
in excess of $2 billion of non-tolled transportation infrastructure in the County from
HCTRA surplus revenues, while simultaneously being acknowledged as the most
?nancially successful urban tolled highway system in the United States. However, with
acknowledgment of this success, it can be argued that HCTRA has a structural
problem.

7701 Wilshire Place Drive, Houston. TX 77040-5326 
phone 713-587-7800 fax 713-462-4572

Since post-WWII, highway construction has allowed and subsidized tremendous growth
and prosperity in metro areas across the United States, and Houston is no exception.
That same growth, however, often places these metropolitan regions in a condition to
chronically cope with the costs, pollution, ?ooding, and other problems that can develop
during and after a highway?s development. The mechanics of Chapter 284 allow
HCTRA to "construct?, ?acquire", ?improve", ?operate", and ?maintain" a system of tolled
highways in Harris County. But, the same Chapter 284 that provides broad powers to
HCTRA to expand the system of tolled highways also restricts the County in regards to
HCTRA's longevity. Speci?cally, Chapter 284 states that the HCTRA system becomes
a part of the State Highway System, to be maintained by the Texas Transportation
Commission without tolls, when all of the bonds and interest on the bonds that are
payable from and secured by revenues of the project have been paid by the issuer of
the bonds or another person with the consent or approval of the issuer or (2) a suf?cient
amount for the payment of all of the bonds and interest on the bonds to maturity has
been set aside by the issuer of the bonds or another person with the consent or
approval of the issuer in a trust fund held for the bene?t of the bondholders." In the
previous statement's simplest form: without revenue bond debt, HCTRA ceases to exist.
And the restrictions continue. HCTRA's current bond indentures (the contracts between
Harris County and the bondholders of HCTRA's bonds), only provide for the issuance of
revenue bonds for tolled infrastructure. Thus, despite the County's non-toll
transportation infrastructure challenges, HCTRA's long-term existence under its current
legal, ?nancial, and governance structure, is predicated only on the continued
construction, acquisition, and/or improvement of debt-?nanced tolled highways in our
region.

Furthermore, the County is currently confronting the pandemic and the
resulting economic downturn in our region. This is an unprecedented situation that
presents unique ?nancial challenges for the County and may require additional levels of
?nancial support for the County to effectively respond to these challenges for the
foreseeable future.

There is a mechanism available under current State law that allows the County and
HCTRA to address these challenges in order to provide for (1) long-term operation,
maintenance, and improvement of the existing HCTRA system, (2) expansion of the
HCTRA system where Commissioners Court deems prudent, (3) continued transfer of
surplus revenues for non-tolled transportation projects in Harris County, (4)
establishment of annual payments from the toll road system to the County that are not
restricted to transportation purposes and could be used for other County purposes and
needs (such as ?ood control, response), and (5) the expansion of the
County's ?pay-as-you-go" non-toll transportation program with a new HCTRA bond
?nancing option for County mobility projects. The County may exercise its Chapter 284
powers through a local government corporation (LGC) and would authorize the creation
behalf? of the County pursuant to Chapter 431, Subchapter
D, Transportation Code. The County has authorized a similar corporation to operate
NRG Park, and Fort Bend, Brazoria and Montgomery Counties currently operate their
toll systems through an LGC. The LGC would be under the control of Commissioners
Court, and it would have the same powers as a county acting under Chapter 284 (with

2

one exception relating to Chapter 362, Transportation Code, which is not relevant to this
potential transaction).

It is recommended that the LGC would enter into a contract with Harris County for a
minimum of thirty (30) years. As part of that contract, the LGC will refund all of
outstanding debt (approximately $2 billion), and with current interest rates, the
financing would generate net present value savings to the County of approximately $60
million. The refunding of all existing County toll system debt will allow the LGC financing
to be done under a new bond indenture, with new terms that will permit the LGC to pay
an upfront franchise fee (currently estimated at $300 million) and an annual franchise
fee to the County (currently estimated at $90 million) that would be in addition to the
current pay-as-you-go mobility fund transfers that are made by to the County.
The annual franchise fee would be an operations and maintenance expense of
the toll system and would not be financed with bonds but would be sourced from
available toll system revenues, for the right of the LGC to collect and receive toll
revenues and use Harris County assets to operate the toll system, and would be in
consideration for Harris County?s historical tax support for GO debt, and the
prior and continuing commitment to pay, if needed, the expenses of the toll
system from ad valorem taxes. This tax commitment was approved by the County's
voters in 1983, but has never been needed, because toll revenues have always been
more than adequate to pay toll road debt service and expenses. The tax support
has, however, enabled the HCTRA system to be financed on much more favorable
terms, and it could be argued that it enabled the system to be built to begin with. Going
forward, tax revenues would still not be expected to be needed to pay 
expenses or service debt, but would continue to produce financing benefits to
the LGC and the toll system. By structuring the transaction in this way, the County?s
right to receive the franchise fee payments would be authorized by and consistent with
the terms of the new bond indenture as an expense of the toll system, and Harris
County bond counsel?s view is that the County's use of such payments would not be
limited to the transportation purpose restrictions in state law that apply to the use of
surplus revenue and may be used for a variety of County purposes, such as
flood control.

In addition to the upfront franchise fee, the annual franchise fee, and on-going mobility
fund transfers, the LGC would also be authorized to issue bonds and other obligations
(such as commercial paper) that would be paid from surplus revenues of the toll road
system in order to fund non-tolled streets, roads, and related facilities. Mobility fund
bonds, which could partially replace road bonds paid from taxes, would help protect the
flow of funds in the new indenture with the pledge of and lien on surplus revenue. It is
envisioned that the LGC will initially issue $100 million in mobility fund bonds in
connection with the restructuring transaction.

It is further envisioned that the contract between the County and the LGC will provide
that existing contracts, including contracts with other governmental authorities, will
remain in the name of the County, and that the LGC will contract with HCTRA to
continue operating the toll system. In other words, it is anticipated that there will be no

transfer or assignment of existing contracts, and HCTRA operations will effectively
continue, as is, with no anticipated change in staffing, salaries, or benefits.

Financial modeling of the proposed transaction has been performed using, FY2019-
2020 year-end financial information and estimated FY2020 - 2021 year-end financial
information of the County, updated toll system revenue projections from CDM Smith,
the County?s traffic and revenue consultant, and an analysis of potential financing
alternatives developed by Hilltop Securities and RSI Group, the County?s financial
advisory firms. The modeling assumes that the County will not reduce current toll rates
going forward and that the County?s toll rates will generally keep pace with inflation.

The recommendation to create the LGC and undertake the refinancing is both
fiscally and structurally responsible. The LGC and will be able to maintain high
levels of liquidity and responsible debt service coverage ratios, and because of the
current interest rate environment, the refinancing generates net present value savings,
thereby allowing for greater funding in the future for mobility projects and system
improvements. And lastly, the LGC structure provides Commissioners Court greater
discretion over the use of revenues generated through the County?s toll road system,
allowing the County to re-invest those revenues in the way that most benefits Harris
County. This letter has been reviewed by Harris County bond counsel and the Harris
County Attorney?s Office.

Sincerely,

731.?: u- 

Peter W. Key
Interim Executive Director


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