CalPERS Panel to Study Fund’s Tobacco Holdings

Faced with legislation and pressure from one of its own members to dump its tobacco stocks, the investment committee of a massive state employee pension fund joined the state teachers pension fund Monday in a review of its holdings.

The decision by the California Public Employees Retirement System investment committee to study portfolio and fiduciary issues relating to divestment--and tobacco divestment in particular--signals a change in approach by the panel. It opposed previous legislative attempts to force it to sell its tobacco holdings.

The legislation by Assemblyman Wally Knox (D-Los Angeles) would require the $171-billion public employees pension fund and the $110-billion California State Teachers Retirement System to divest their funds of tobacco holdings. The bill would also bar the funds from investing in tobacco companies in the future.

State Treasurer Phil Angelides, who sits on the boards of both CalPERS and the teachers fund, has also called on the pension systems to unload their tobacco stock on grounds that it is simply bad business, noting the wave of litigation that has engulfed the tobacco industry and its recent poor stock performance.

The teachers fund’s tobacco holdings are estimated at $319 million and CalPERS’ at $589 million.

The investment committee held off on taking a position on Knox’s latest attempt to legislate tobacco divestment, agreeing only to support the amending of his bill to indemnify board members and other fund-related employees from claims, damages, suits, losses and liabilities that could result if it is enacted.

Investment committee staff has recommended that panel members oppose the legislation on grounds that it “would strip the board of its policy-setting and decision-making authority with regard to investments in tobacco companies.”

In addition to making a financial argument against tobacco investments, the bill notes that the state spends about $630 million annually on medical care for people with tobacco-related illnesses and $50 million each year on anti-smoking education programs.

Investment committee member William Crist voiced his opposition to the legislation during Monday’s hearing. San Francisco Mayor Willie Brown, who also sits on the committee, suggested that a more prudent approach may be to ask the Legislature to give the CalPERS board a chance to deal with the issue.

“I would caution this board on being very careful on challenging the position of the Legislature,” said Brown, a former Assembly speaker. “They don’t take it lightly.”

State Controller Kathleen Connell, another committee member, asked that CalPERS’ examination of divestment-related issues be broadened to include topics other than tobacco, noting that she has been approached by numerous groups with concerns about alcohol, tobacco and environmental-related investments.

CalPERS investment committee staff is scheduled to come back within 60 days with its finding regarding tobacco divestment. The more general look at divestment requested by Connell is expected to take longer.

Under pressure by teachers groups and Angelides, the teachers retirement system has also taken up the tobacco divestment issue. The teachers fund’s investment committee earlier this month directed its chief investment officers to prepare a draft divestment policy.

That committee is expected to vote on the policy in May and decide the following month whether to use the policy to remove tobacco stocks from the fund’s portfolio.