News: Quick Takes

Folwell: Switching to internal control of passive funds will save money, enhance control

UPDATE: The treasurer’s office reported Nov. 8 eliminating external management fees should save about $2.4 million annually.

State Treasurer Dale Folwell announced an investment switch Tuesday that would move billions from the state retirement system to internal control.

Before Nov. 1, North Carolina was one of the nation’s last states in the nation that used external rather than in-house managers to oversee passive index funds, Folwell said during his monthly Ask Me Anything teleconference with reporters.

The treasurer’s staff now controls $100 million in passive investments after using a trial shadow system for several months.

Passive management links an investment portfolio to a market index, unlike the riskier active management, in which managers constantly make buying and selling decisions in hopes of beating the market.

Folwell said he expects all $12.5 billion of U.S. passive index funds will be managed in-house by November 2018 — about 12 percent of the state investment portfolio. He also said his office will study converting its $7.5 billion of international passive index funds to in-house management.

In-house oversight gives the state more control over where the money is invested, increases transparency, and saves the fees paid to external managers, Folwell said.

Managing investments in-house should eliminate tracking errors by external managers who decide how the portfolio has performed compared with a market index. Cash flow and dividend payments sometimes were off, and those dividends were not being reinvested, Folwell said.

Other questions

When asked about the prospect that a tax reform bill being debated in Congress could boost federal deficits by $1.5 trillion, Folwell said he never has favored budget deficits.

But as chairman of the state Local Government Commission, he praised the provision in the bill retaining tax-exempt status for municipal bonds. Local governments often use that debt to pay for roads, bridges, schools, and other infrastructure. He said they help the state preserve its AAA bond rating, which confers lower interest rates on borrowing.

Yields on municipal bonds have gone down as the price and value of bonds have gone up since the tax reform package was announced, Folwell said, meaning the market reacted favorably to the news they will remain tax exempt.

Folwell said he would continue to push for a policy change that’s not in the tax reform bill: an extension of the freeze on an Obamacare tax. The freeze would save North Carolinians more than $400 million annually.

He sent a letter Oct. 17 asking President Donald Trump to extend the moratorium on the health insurance premium tax. The tax helps offset the cost of the tax credits for Affordable Care Act exchange enrollees.  

In his letter to Trump, Folwell cited actuarial data from the national consulting firm Oliver Wyman that showed reinstating the tax would cost North Carolinians $366 million in additional premiums next year.

Extending the moratorium for 2018 would save state taxpayers approximately $45 million in premiums for Medicare-eligible retirees. The state currently provides coverage through Medicare Advantage plans to 150,000 state retirees under the State Health Plan.