Fund to Debate Tobacco Holdings

The debate over whether the massive state teachers pension fund should divest itself of tobacco stocks is set to heat up today.

Members of the investment committee of the $110-billion State Teachers’ Retirement System are expected to take up the issue at their monthly meeting in the capital, where several studies on the topic will be presented.

The CalSTRS board decided against selling its tobacco holdings in 1998. But in recent months it has come under new pressure by teacher groups and one of the board’s own members to divest itself of tobacco stocks.

Rather than argue that investing public funds in tobacco companies is morally wrong, state Treasurer Phil Angelides, who sits on the CalSTRS board, contends that it is bad business.

Angelides said divestment is necessary because of the extraordinary and unprecedented barrage of litigation and regulatory action involving the tobacco industry, which he says has made bankruptcy of tobacco companies a real threat.

“When you have bankruptcy the price of stock goes to zero,” said Angelides. “With all the alternatives, why take the risks?”

Last year alone, he said, the CalSTRS portfolio absorbed a loss in value of about $200 million in tobacco stocks.

Both the Los Angeles teachers union and its statewide counterpart, the California Teachers Assn., are calling for the CalSTRS board to dump its $319 million in tobacco holdings, which represent 0.41% of the system’s equity holdings.

It is estimated that it would cost the pension fund $4.35 million to divest its tobacco holdings and reinvest the proceeds in non-tobacco stocks, according to a study prepared by BARRA Rogers Casey Inc., an investment consulting firm.

Unlike Angelides, the teachers unions have raised ethical issues as they seek to end the investment of their money in tobacco companies.

“How can we as teachers tell our kids not to smoke or to respect human rights, when millions of our own pension’s funds are invested in companies which addict kids like Philip Morris?” said Gary Krane, a Los Angeles teacher and executive director of the California Teachers Tobacco Divestment Campaign.

In a statement this week, Philip Morris said it continues to believe that its “financial performance, strong business fundamentals, and commitment to improving shareholder value make Philip Morris an attractive investment for the well-managed portfolio.”

Indeed, the tobacco industry’s recent losses could turn out to be a bump in the road.

A survey conducted by Pension Consulting Alliance Inc. found that Wall Street analysts continue to hold a generally positive opinion of the tobacco industry, partly because of the valuable franchises held by some tobacco companies and the expectation that they will continue to make money.

The BARRA study, meanwhile, found that tobacco divestiture generally increases risk, but not always significantly. Evidence also is mixed as to whether divestiture increases returns, the study adds.

From an investment standpoint, board members are likely to weigh the tobacco industry’s ability to overcome its legal and financial challenges and Angelides’ argument that tobacco has become a risky investment.

A broader issue is the “slippery slope” factor--a reference to the danger of setting a precedent for additional divestment actions. Divesting any tobacco stocks would require the board to change its overall investment strategy.

“The key issue is, are they opening up the door for a torrent of investment decisions to be made based on public policy concerns,” said one observer. “If so, a very significant percentage of the market could be precluded from investment.”

Angelides and the teachers unions could face opposition from state Controller Kathleen Connell, a CalSTRS board member who has stated her opposition to divesting for any reason other than sound fiscal policy.

Angelides has stated that he will not invest any of the more than $30 billion in state money that he manages in tobacco stocks, continuing a trend established in 1995. He also has asked the investment committee of the $171-billion California Public Employees’ Retirement System, of which he is a member, to consider adopting a tobacco-free investment policy.

A number of pension funds across the nation have adopted similar policies. A survey conducted by the Investor Responsibility Research Center Inc. of 80 public pension funds found that 13 funds had some form of a tobacco divestment policy and that tobacco divestment across the funds totaled $1.5 billion.