Addicted to Owning Tobacco

Like smoking, investing in tobacco companies is a hard habit to kick. Or so it seems for California’s public pension systems.

The shocking truth is that the state’s two public pension funds are the largest government agency investors in tobacco industry stocks in the country. The California Public Employees Retirement System (CALPERS) and the State Teachers Retirement System (STRS) together hold $1.8 billion in stocks and bonds issued by cigarette companies.

California is as addicted to owning tobacco stock as I was to smoking tobacco 30 years ago. In the end, both will kill you.

With the lawsuits raging and a bailout settlement collapsing, tobacco stock will eventually collapse too and take with it the pension funds of thousands of California workers.

Philip Morris’s stock lost almost 5% of its value in one day recently on a rumor that tobacco’s bailout was in trouble. The latest news that the tobacco companies have walked away from the negotiating table could be the end of the settlement deal. If so, instability in the industry due to litigation and regulation will drive stock prices down even further. Yet the state’s pension system managers refuse to heed the warning signs that investing in tobacco may be hazardous to their funds’ health.

Even as the costly litigation settlement between 40 state attorneys general and the top tobacco companies is pending in Congress, officials of California’s retirement systems continue to defend their massive tobacco investments.

Their determination to hang on to the stocks comes despite disclosure by Philip Morris to the Securities Exchange Commission that the proposed settlement would “materially adversely affect its financial position in future years.” R.J. Reynolds made a similar admission. And these gloomy forecasts were based upon the original form of the settlement, which by most predictions will be made much worse for the tobacco industry by Congress.

As recently as last week, CALPERS opposed state legislation that would require a phaseout of tobacco investments over three years. CALPERS testified to a legislative committee that Wall Street financial analysts were still calling tobacco a “buy.” That same week, The Times reported a conversation between Sen. John McCain (R-Ariz.) and Wall Street analysts who told him that the new, tougher tobacco settlement deal in Congress could “put the industry out of business.”

Someone is not getting the straight scoop. Either the tough deal will ruin tobacco companies, in which case CALPERS should unload the stocks as quickly as possible, or the deal won’t ruin tobacco interests, and the U.S. Senate is being fed false information.

There is one possible explanation for why CALPERS cites a rosy outlook for the tobacco industry. Wilshire Investments Inc. manages much of the CALPERS investment portfolio. CALPERS disclosed in fall 1997 that Wilshire Investments was commissioned by Philip Morris to conduct a study of tobacco stock values and the advisability of keeping these stocks in the portfolio. If ever there was a built-in conflict of interest, this is it. Perhaps CALPERS is confusing the data paid for by Philip Morris with impartial analysis.

Most of the state pension funds are invested through a passive indexing method. Rather than actively buy and sell on Wall Street every day, the pension systems make a fixed selection each year of 2,500 top-rated stocks and simply ride out the ups and downs of the market.

CALPERS has resisted removing tobacco stocks from the index because it would be unusual to single out the industry. But to ignore the real possibility of a tobacco industry meltdown is like putting the Titanic on automatic pilot as it careens toward the iceberg.

The primary excuse given by California pension fund officials is that they are required by law to base investment decisions on financial criteria alone and are precluded from factoring in social concerns. The fatal flaw in this argument is that now there are compelling economic reasons to dump tobacco, regardless of any moral or ethical considerations. In fact, by CALPERS’s own admission, tobacco stocks underperformed the Standard & Poor’s 500-stock list by at least 15% over the past five years.

Other states, such as New York and Florida, have stopped investing in tobacco. Yet California pensions will not consider even modest reductions in tobacco holdings or a freeze on purchases.

In fall of 1997, I conducted an investigatory hearing on tobacco investments by the state pension systems. There Rep. Henry A. Waxman (D-Los Angeles) and I called on the pension fund to reduce their exposure on tobacco funds. Although the fund managers paid lip service to our concerns, they did little to protect retirees’ dollars once the spotlight dimmed.

Because the state pension funds have not put forward a responsible tobacco divestment plan, I have introduced legislation to require them to do so. My aim is to protect pensioners’ funds above all else and end risky investing in the tobacco industry.

I just hope my bill is in time.