AAC F A M I L Y & F R I E N D S NACo news briefs
shrinking labor force participation rate has driven the unemploy- ment rate down to near 5 percent — a level considered close to full employment by many economists. Meanwhile, economic growth has also been quite tepid compared to other post-WWII recoveries, hovering close to 2 percent annually; yet, this too has been of a prolonged, steady nature. With dramatically lower en- ergy prices potentially bottoming, any increases in other produc- tion inputs may quickly ripple throughout the broader economy. Indeed, the recent uptick in real wage growth (2.7 percent over past 12 months) suggests this period of steady growth, cheap money and ultra-low inflation could be coming to an end. As such, the Federal Reserve needs to get in front of any inflationary pressures before it gets out of control.
Local Governments Benefit Tis policy change will impact local government budgets for
numerous reasons. Perhaps most importantly, state and local gov- ernments have taken advantage of these low rates. Total liabilities (excluding employee retirement funds) nearly doubled from $1.6 trillion in late 2003 to more than $3 trillion in 2010 before lev- eling off. Interest payments on this debt could dramatically in- crease as debt is refinanced — particularly if the initial debt were financed with short-term loans. Prudence suggests officials lock in this debt at the current low long-term rates before the increase.
Interest Rates Likely to Rise For many local governments, the powerful bull market has
replen ished defined-benefit pension funds. Tis market has also inflated price-to-earning ratios in many sectors. As earnings cool and debt becomes more attractive as an investment, equities markets will possibly gener ate far more tame returns. In fact, the broad U.S. equities market is on track for a negative return in
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2015. If this plays out, expect increased calls to shore up pension portfolios and to adjust expected long-term returns downward. Te expected increase in interest rates will also likely dent con- sumer spending as debt servicing swallows a larger proportion of family budgets. And the higher financing costs will deter larger purchases. Financial officers should anticipate marginally lower sales tax revenues as a result.
Some Help for ‘Savers’
In addition, the increase in rates could also cool the brisk hous- ing mar ket recovery. As rates rise, housing demand slows as in- creasing mortgage rates diminish affordability. Te housing re- covery has been uneven across the country; but since the depth of the housing collapse, prices have rebounded by nearly 30 percent in real terms. Although not quite rivaling the peak of the bubble, these prices are still significantly above long-term trend lines. Property tax revenue forecasts should take these factors into ac- count. Fortunately, it’s not all negative news. Although the initial impacts from these rate increases may not be welcomed, longer- term a return to normalcy will spur growth by al lowing capital to more freely flow to those most adept at creating wealth. As economist David Malpass ex plains, “Persistent near-zero inter- est rates punish savers and hurt income growth for average U.S. households. Meanwhile, income inequality wors ens as credit flows up the pyramid from middle-class savers earning paltry re- turns to the upper crust leveraging itself with cheap credit and stock gains.” As the changes sort out, maintain ing a “rainy day fund” with excess cash or short-term fixed investments may be the wisest course of action. Tis liquidity mitigates the need for painful tax hikes or draconian spend ing cuts should economic conditions rapidly change as interest rates rise.
Advertiser Resource Index
AAC Risk Management ...................................................................... 38 AAC Workers’ Compensation Trust .......................................................... 45 DataScout .................................................................. . Inside Front Cover Apprentice Information Systems, Inc. .......................................................... 48 Crews and Associates ........................................................................ 3 Guardian RFID ............................................................................. 22 Ergon Asphalt & Paving ....................................................................... 4 Financial Intelligence ........................................................................ 35 Nationwide Insurance ....................................................................... 23 Rainwater Holt & Sexton, PA ......................................................... Back Cover Southern Tire Mart ......................................................................... 51 Tax Pro ................................................................................... 10 Time Striping, Inc. ........................................................................... 8
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COUNTY LINES, FALL 2015
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