Critics Question Alaska’s Approach to Tobacco

On one hand, Alaska is fighting a lawsuit by Philip Morris Inc. and other tobacco companies and debating a big increase in cigarette taxes to reduce smoking.

On the other, the state’s $20-billion oil nest egg, the Alaska Permanent Fund, has made millions investing in Philip Morris stock. And tobacco industry critics are questioning the Philip Morris investment, the Permanent Fund’s biggest stock holding.

Rick Steiner, who heads the Coastal Coalition, has asked the fund to sell its $153 million worth of Philip Morris shares. The Coastal Coalition, an environmental group formed after the Exxon Valdez oil spill in 1989, also wants the Permanent Fund to divest of its $51 million in Exxon stock.

Steiner said that allowing Permanent Fund investments in Philip Morris contradicts the state’s efforts to fight smoking.

Gov. Tony Knowles and four legislators have introduced bills that would raise cigarette taxes by a dollar or more a pack. Knowles and other leaders also said they were outraged by a lawsuit filed Jan. 8 by Philip Morris and three other cigarette companies to prevent the state from suing over smoking-related medical expenses.

At his annual budget address to the Legislature Jan. 17, Knowles crushed a pack of Camel cigarettes and said he hoped the higher tax would be the “straw that breaks Joe Camel’s back.”

Steiner said, “The governor and legislators feign this self-righteous indignation over smoking, then the state gives the tobacco companies millions of dollars to play with.”

“This notion of breaking Joe Camel’s back with one hand and feeding Joe Camel with the other just doesn’t wash.”

Permanent Fund managers say they cannot bind their outside investment firms to any social litmus test when picking stocks. Outside firms manage all the fund’s $10.3 billion in stocks.

Byron Mallott, Permanent Fund director, said managers faced a similar issue a few years ago when critics asked the fund to divest in stock of companies doing business in South Africa as pressure for the government there to end racial discrimination.

“If it’s tobacco today and it was South Africa then and Exxon at the time of the Valdez incident, what will it be tomorrow?” Mallott said. “Those are not decisions covered in our investment policy. We have one clearly articulated goal, to maintain the safety of the principal while maximizing total return.”

In stock value alone, the fund’s investments in Philip Morris over the years have grown about $66 million over the cost of the stock. The Permanent Fund also has taken in millions of dollars in Philip Morris shareholder dividends.

Besides its 1.3 million Philip Morris shares, the Permanent Fund owns about $44 million of stock in five other tobacco companies. Tobacco shares account for nearly 1% of the fund’s total assets and 1.9% of its stock holdings.

“It does seem inconsistent that we’re trying to fight the tobacco epidemic in Alaska but then investing in tobacco companies that use that money to addict more kids to their product,” said Anne Marie Holen of the group Citizens to Protect Kids from Tobacco.

A Philip Morris spokeswoman did not return a telephone call for comment.

Terry Brown, the fund’s chief investment officer, said restrictions on the fund’s stocks might reduce earnings, which could affect annual dividends the fund pays to most Alaskans. Last year’s Permanent Fund dividend was $1,130 a person.

Brown said it would be up to Knowles and the Legislature to establish a policy defining socially objectionable stocks.

Knowles spokesman Bob King said the governor does not want to meddle in investments by the Permanent Fund, established 20 years ago with excess oil revenue as a rainy-day account.

“We feel the best way to send a message to the tobacco industry is to raise the tax on cigarettes and educate kids about the dangers and addictiveness of tobacco,” King said.

House Speaker Gail Phillips said Permanent Fund managers have done a good job racking up profits and that they would be hindered by any sort of socially responsible investment policy.

“They’re the professionals. I certainly wouldn’t presume to tell them how to invest the money,” Phillips said. “If you start limiting investments, you might find there are no investments to be made in the whole world because somebody might object to it.”

Other investments can be substituted for objectionable stocks without hurting a fund’s performance, said Steve Schueth, president of the Social Investment Forum, which discourages investment in firms linked to health or environmental problems.

“It sounds like Alaska is not too clear in its viewpoint on tobacco,” said Schueth, vice president of Bethesda, Md.-based Calvert Group, which manages mutual funds that avoid tobacco stocks. “They’re raising taxes and trying to dissuade people from using the stuff, but they’re profiting off tobacco, as well.”