Presented by: David Jang, Partner Client Advisory Services 5502 N Nebraska Ave (407) 618-4269 Tampa, FL 33604 david@waterwalkerinvestments.com WaterWalkerInvestments.com Interest Rates, Tax Reform, and the Impact on Local Governments February 2, 2018
Objectives Analyze Tax Cut & Jobs Act (TCJA) Interest Rate Expectations Impact on Local Governments 2 This presentation is for Institutional Investors Only – Not for Public Distribution
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. 3 This presentation is for Institutional Investors Only – Not for Public Distribution
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 • our baseline assumptions, and debt increases by $2.2 to $3.5 trillion. 4 This presentation is for Institutional Investors Only – Not for Public Distribution
Supply Side Economics Provide tax cuts to corporations Use funds to expand workforce and increase capital expenditures Workers will consume more 5 This presentation is for Institutional Investors Only – Not for Public Distribution
Stock Market Continue Upward Climb 6 This presentation is for Institutional Investors Only – Not for Public Distribution
Stocks Are More Expensive 7 This presentation is for Institutional Investors Only – Not for Public Distribution
U.S. Dollar Has Weakened 8 This presentation is for Institutional Investors Only – Not for Public Distribution
Tax Cut & Jobs Act 2017 Allow companies to reinvest the tax savings Lessen tax burden on corporations, pass-through companies and individuals 9 This presentation is for Institutional Investors Only – Not for Public Distribution
Corporate Cash Uses 10 This presentation is for Institutional Investors Only – Not for Public Distribution
Corporations Sitting On Cash 11 This presentation is for Institutional Investors Only – Not for Public Distribution
2017 Budget Deficit Higher 12 This presentation is for Institutional Investors Only – Not for Public Distribution
Gross Domestic Product (GDP) 13 This presentation is for Institutional Investors Only – Not for Public Distribution
Historical Tax Revenue 14 This presentation is for Institutional Investors Only – Not for Public Distribution
State GDP Growth 15 This presentation is for Institutional Investors Only – Not for Public Distribution
Factors Affecting Consumers in 2018 Higher Gasoline Prices Student Loan Debt Medical Care 16 This presentation is for Institutional Investors Only – Not for Public Distribution
Consumers Lead GDP 17 This presentation is for Institutional Investors Only – Not for Public Distribution
State Income Growth 18 This presentation is for Institutional Investors Only – Not for Public Distribution
Oil Prices Have Risen 19 This presentation is for Institutional Investors Only – Not for Public Distribution
Components of Consumer Debt 20 This presentation is for Institutional Investors Only – Not for Public Distribution
Accounts By Loan Type 21 This presentation is for Institutional Investors Only – Not for Public Distribution
Accounts 90+ Days Delinquent 22 This presentation is for Institutional Investors Only – Not for Public Distribution
Statistics By Student Loan Program 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 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. 23 This presentation is for Institutional Investors Only – Not for Public Distribution
Repayment Status of Direct Loans ( 3Q 2016) 24 This presentation is for Institutional Investors Only – Not for Public Distribution
Medical CPI Outpaces Overall CPI 25 This presentation is for Institutional Investors Only – Not for Public Distribution
Interest Rate Outlook Rising Rate Environment Markets Expect 3 rate hikes in 2018 • 2017: March, June & December Longer Term Rates • Inflation Expectations 26 This presentation is for Institutional Investors Only – Not for Public Distribution
Yield Curve 27 This presentation is for Institutional Investors Only – Not for Public Distribution
U.S. Yields Highest in Developed World 28 This presentation is for Institutional Investors Only – Not for Public Distribution
Market Expectations More Accurate 29 This presentation is for Institutional Investors Only – Not for Public Distribution
Fed Balance Sheet 30 This presentation is for Institutional Investors Only – Not for Public Distribution
Municipal Debt 31 This presentation is for Institutional Investors Only – Not for Public Distribution
State Revenue Growth Slowing 32 This presentation is for Institutional Investors Only – Not for Public Distribution
Florida Sales Tax Revenue 33 This presentation is for Institutional Investors Only – Not for Public Distribution
Large Component of Overall Revenue 34 This presentation is for Institutional Investors Only – Not for Public Distribution
Detailed Participation Rate 35 This presentation is for Institutional Investors Only – Not for Public Distribution
Rental Housing Costs 36 This presentation is for Institutional Investors Only – Not for Public Distribution
Pinellas County Employment 37 This presentation is for Institutional Investors Only – Not for Public Distribution
Pinellas County Average Annual Wage 38 This presentation is for Institutional Investors Only – Not for Public Distribution
Pinellas County Education 39 This presentation is for Institutional Investors Only – Not for Public Distribution
Impact on Local Governments Budget • Service Costs Rising • Interest Income Higher • Reallocate from longer term portfolio to preserve principal Wages • Police & Fire • Deferred Compensation Programs Taxpayers • Willing to Pay More? • Tax Cut Offset by Higher Expenses Ability to Borrow • Balance Sheet 40 This presentation is for Institutional Investors Only – Not for Public Distribution
Summary Tax Cuts = More Economic Activity • Money multiplier effect Interest Rates Rising • Yield curve is also flattening Challenges for Local Government • Revenues & Expenses 41 This presentation is for Institutional Investors Only – Not for Public Distribution
42 This presentation is for Institutional Investors Only – Not for Public Distribution
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