Teacher Pension System Dumps Tobacco Stock

Reacting to concerns that the tobacco industry could declare bankruptcy, the investment committee of the state’s huge teachers pension fund voted Wednesday to dump virtually all of its tobacco holdings.

The decision by the $110-billion State Teachers Retirement System paves the way for the fund to divest itself of roughly $238 million in tobacco stocks. That represents less than 0.35% of the system’s equity holdings.

State Treasurer Phil Angelides, who sits on the CalSTRS board, had pushed for the change because of the unprecedented barrage of litigation and regulatory action engulfing the tobacco industry.

“It was the right thing to do,” Angelides said after Wednesday’s vote. “These investments don’t make sense from an investment standpoint or given the ill effects the products are having on society.”

The change also had been sought by teachers groups, which raised concerns about the ethics of investing members’ money in tobacco companies. Both the Los Angeles teachers union and its statewide counterpart, the California Teachers Assn., had called for the system to sell its tobacco stocks.

“It just goes to show that a small group of dedicated concerned teachers can change the world,” said Gary Krane, co-director of Teachers for Socially Responsible Investment.

The decision to keep or sell an additional $11 million in tobacco stocks, which are actively managed, will be left to fund managers who are given the discretion to buy, sell or hold investments.

Members of the investment committee voted 9 to 0 Wednesday in favor of unloading the bulk of the system’s tobacco stocks, with a proxy representing the state’s director of finance abstaining from voting.

“We feel it’s the duty of CalSTRS to insure that investments are made in the best financial interest of California’s retirees,” finance department spokesman Sandy Harrison said. “We don’t want to support something which might weaken that requirement.”

The CalSTRS board adopted a divestment policy last month that requires that an industry meet at least three of four economic risk factors, such as the significant threat of industry-wide bankruptcy filings, in order to be considered for divestment. The policy does not apply to countries or companies.

State Controller Kathleen Connell, who sits on the investment committee, said she felt comfortable that the new policy would avoid setting a precedent for additional divestment actions.

“I don’t think we’re going to have a slippery slope here,” Connell said.

Connell emphasized that her vote in favor of selling the CalSTRS tobacco holdings was based solely on sound fiscal policy as opposed to the social issues raised by teachers.

Before the vote, CalSTRS chief investment officer Patrick Mitchell described the change as prudent given that the fund’s consultants had previously determined that CalSTRS’ portfolio would perform the same with or without tobacco stocks.

But more important, Mitchell said, was the threat of bankruptcy facing the tobacco industry. Lawyers representing the tobacco industry are currently trying to avert a potentially crushing punitive-damage award in a class-action lawsuit filed in Florida on behalf of 500,000 sick smokers.

“However remote you think that possibility is,” Mitchell told committee members, “there certainly is a dark cloud currently hanging overhead.”

Once the bankruptcy threat is past, Mitchell told committee members, they should consider restoring tobacco stocks to the fund’s portfolio.

A spokesman for Philip Morris declined to comment. CalSTRS tobacco holdings include nearly $144 million in Philip Morris stocks.

In a related matter, the committee voted to take no position on legislation by Assemblyman Wally Knox (D-Los Angeles) to prohibit new or additional investments in tobacco companies by CalSTRS or the $175-billion California Public Employees Retirement System.

CalPERS’ investment committee is also undergoing a review of its tobacco holdings and is scheduled to discuss the topic at a June 19 meeting. Proposals for CalPERS to unload its tobacco stocks are expected to face tough scrutiny by several board members.