Interest Rates, Tax Reform, and the Impact on Local Governments - - PowerPoint PPT Presentation

5502 N Nebraska Ave Tampa, FL 33604 WaterWalkerInvestments.com

February 2, 2018

Presented by:

David Jang, Partner Client Advisory Services (407) 618-4269 david@waterwalkerinvestments.com

Interest Rates, Tax Reform, and the Impact on Local Governments

This presentation is for Institutional Investors Only – Not for Public Distribution

Objectives

Analyze Tax Cut & Jobs Act (TCJA) Interest Rate Expectations Impact on Local Governments

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Tax Cut & Jobs Act (TCJA)

• The current U.S. statutory corporate tax rate is 35 percent. However, due to

various deductions, credits and income deferral strategies, most corporations pay a lower rate, known as the effective tax rate (ETR), which averages about 23 percent under current law across all industries over the next decade. However, this value varies considerably across industries, with mining paying 18 percent and agriculture paying 33 percent.

• The TCJA reduces the statutory corporate tax rate from 35 to 21 and the average

ETR falls from 21 to 9 percent in 2018. However, by 2027, the ETR doubles in value to 18 percent, mostly due to expiring provisions.

• In the short run, the biggest winners of the TCJA are capital-intensive industries

like utilities, real estate and transportation, which benefit the most from temporary expensing of equipment. However, over time, several industry ETR’s will actually rise above the new statutory rate of 21 percent in future years.

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TCJA Impact on Growth

• By 2027, under our standard economics assumptions, we project that GDP is

between 0.6 percent and 1.1 percent larger, relative to no tax changes. Debt increases between $1.9 trillion and $2.2 trillion, inclusive of economic growth.

• By 2040, we project that GDP is between 0.7 percent and 1.6 percent larger under
• ur baseline assumptions, and debt increases by $2.2 to $3.5 trillion.

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Supply Side Economics

Provide tax cuts to corporations Use funds to expand workforce and increase capital expenditures Workers will consume more

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Stock Market Continue Upward Climb

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Stocks Are More Expensive

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U.S. Dollar Has Weakened

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Tax Cut & Jobs Act 2017

Allow companies to reinvest the tax savings Lessen tax burden on corporations, pass-through companies and individuals

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Corporate Cash Uses

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Corporations Sitting On Cash

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2017 Budget Deficit Higher

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Gross Domestic Product (GDP)

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Historical Tax Revenue

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State GDP Growth

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Factors Affecting Consumers in 2018

Higher Gasoline Prices Student Loan Debt Medical Care

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Consumers Lead GDP

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State Income Growth

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Oil Prices Have Risen

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Components of Consumer Debt

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Accounts By Loan Type

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Accounts 90+ Days Delinquent

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Statistics By Student Loan Program

The Federal Family Education Loan (FFEL) Program was the second largest of the U.S. higher education loan programs (Direct Loans being the first). The FFEL was initiated by the Higher Education Act of 1965 and was funded through a public/private partnership administered at the state and local level. A Federal Perkins Loan is a low-interest loan for both undergraduate and graduate students with exceptional financial need. A Federal Perkins Loan is made through a school's financial aid office. Your school is your lender, and it is made with government funds. The William D. Ford Federal Direct Loan Program (also called FDLP, FDSLP, and Direct Loan Program) provides low-interest loans for students and parents to help pay for the cost of a student's education after high

• school. The lender is the U.S. Department of Education

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Repayment Status of Direct Loans ( 3Q 2016)

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Medical CPI Outpaces Overall CPI

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Interest Rate Outlook

Rising Rate Environment

• 2017: March, June & December

Markets Expect 3 rate hikes in 2018

• Inflation Expectations

Longer Term Rates

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Yield Curve

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U.S. Yields Highest in Developed World

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Market Expectations More Accurate

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Fed Balance Sheet

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Municipal Debt

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State Revenue Growth Slowing

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Florida Sales Tax Revenue

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Large Component of Overall Revenue

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Detailed Participation Rate

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Rental Housing Costs

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Pinellas County Employment

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Pinellas County Average Annual Wage

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Pinellas County Education

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Impact on Local Governments

• Service Costs Rising
• Interest Income Higher
• Reallocate from longer term portfolio to preserve principal

Budget

• Police & Fire
• Deferred Compensation Programs

Wages

• Willing to Pay More?
• Tax Cut Offset by Higher Expenses

Taxpayers

• Balance Sheet

Ability to Borrow

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Summary

• Money multiplier effect

Tax Cuts = More Economic Activity

• Yield curve is also flattening

Interest Rates Rising

• Revenues & Expenses

Challenges for Local Government

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Speaker Bio

David Jang is a partner, Client Advisory Services for Water Walker Investments and has over 28 years of treasury and investment advisory experience with emphasis in the Florida government sector the past 14 years. Mr. Jang has served

• n various Florida Government Finance Officers Association (“FGFOA”) School
• f Governmental Finance subcommittees since 2003 and has given presentations
• n treasury, investment and economic topics at the FGFOA School of

Governmental Finance, FGFOA Annual Conference, Florida School Finance Officers Association (FSFOA), Florida Association of School Business Officers (FASBO), Council of Business Affairs (COBA), and various FGFOA Local Chapter meetings. Mr. Jang has advised his clients on bringing more efficiencies to their banking/custodial relationships and consulted and managed on their

• perating surplus investment and bond proceeds portfolios to ensure adherence to

state investment statutes and bond indentures.

• Mr. Jang earned his bachelor’s degree in economics from the Wharton School,

University of Pennsylvania. Mr. Jang earned the Association of Financial Professionals (AFP) designation of Certified Treasury Professional (CTP).

• Mr. Jang also has FINRA Series 7, 24, 63 and 65 licenses and is a Registered

Investment Advisor with the Florida Department of Professional Regulation. Direct Line: (407) 618-4269 email: david@waterwalkerinvestments.com

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This presentation is only intended for institutional and/or sophisticated professional investors. This material is intended for informational purposes only and should not be relied upon to make an investment decision, as it was prepared without regard to any specific objectives, or financial circumstances. It should not be construed as an offer

• r to purchase/sell any investment. Any investment or strategy referenced may involve significant risks, including, but

not limited to: risk of loss, illiquidity, unavailability within all jurisdictions, and may not be suitable for all investors. To the extent permitted by applicable law, no member of the Wertz York Capital and/or Florida Fixed Income Trust or any officer, employee or associate accepts any liability whatsoever for any direct or consequential loss arising from any use of this presentation or its contents, including for negligence. This material is not intended for distribution to, or use by, any person in a jurisdiction where delivery would be contrary to applicable law or regulation, or it is subject to any contractual restriction. No further distribution is permissible without prior written consent. The views expressed within this material constitute the perspective and judgment of Wertz York Capital Management and/or Florida Fixed Income Trust at the time of distribution and are subject to change. Any forecast, projection, or prediction of the market, the economy, economic trends, and equity or fixed-income markets are based upon current

• pinion as of the date of issue, and are also subject to change. Opinions and data presented are not necessarily

indicative of future events or expected performance. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. No representation is made as to its accuracy or completeness. Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted.

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Disclosures

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