The staff of the California Public Employees' Retirement System had recommended that the system's board approve ending restrictions on tobacco investments managed by its own staff. The ban began 16 years ago.
That restriction did not apply to CalPERS' investment funds managed by outside firms. As of June 30, CalPERS' retirement fund held $547 million of tobacco-related securities managed by outside investment firms, which are still authorized to invest in tobacco shares.
But in a 9-3 vote Monday, CalPERS' board rejected its staff's suggestion and extended the anti-tobacco restriction to its funds managed by outsiders.
"Economically I don't see how [tobacco] is sustainable as an industry down the road," said state Controller Betty Yee, a CalPERS board member who introduced the motion to expand the ban. "As fiduciaries we need to make a decision, with respect to the options laid out before us, on an economic basis."
It wasn't immediately clear how long it would take for CalPERS and its outside managers to unload the securities, but it's likely to take at least several months.
CalPERS does not want to suppress prices of the stocks by dumping them too quickly, and it needs to find replacement stocks for the tobacco shares in its portfolios.
The pension fund, with about $290 billion in total assets, already is struggling with poor returns on its overall holdings. In its fiscal year that ended June 30, CalPERS earned a return of less than 1%, its worst performance since 2009.
In 2000, CalPERS voted to divest tobacco shares from its internally managed investment portfolio because of the products' widespread health concerns, related healthcare costs for smokers and, at the time, massive litigation against the tobacco companies and the stocks' poor returns.
But tobacco stocks have surged in recent years, and CalPERS staff recommended that the restriction be lifted.
The staff's recommendation partly reflected "increasing demands on investment returns to fund benefits" for the system's 1.8 million members and CalPERS' "duties as fiduciaries," CalPERS said in notes for Monday's meeting.
But it also said that "while broader social implications of the tobacco industry may not be directly relevant" to its role as a fiduciary, "they can and should be factored into" its analysis of "the likely continued sustainability of this industry."
The outlook for the tobacco industry, and thus its stock prices, took up a sizable portion of the board's discussion Monday.
Stanton Glantz, director of the Center for Tobacco Control Research and Education at the University of California San Francisco, told the board that smoking worldwide was in decline because of such factors as heightened health-awareness campaigns and higher taxes, such as California's recently passed proposition to raise its cigarette tax by $2 a pack.
Tobacco firms have continued to prosper in part by raising prices for remaining smokers, but those price hikes eventually will reach levels that further cut demand for smokes, Glantz said.
Board member J.J. Jelinic, on the other hand, opposed the motion to expand CalPERS' anti-tobacco stance. "I am not aware of anyone who smokes or doesn't smoke based on whether CalPERS invests or doesn't invest, and if we're not changing behavior, then what are we getting for the money we're giving up?" Jelinic said.
"The current market price reflects all available public information, so it reflects all the risks," Jelinic said.
Board member Bill Slaton also opposed the expanded ban. While acknowledging that "the product is dangerous and expensive to society," Slaton said, lifting the ban would have provided "the best chance of meeting our goals and providing retirement security to members of CalPERS."
Before the vote, however, board member and California Treasurer John Chiang wrote in a letter to his fellow board members that "investing in tobacco-related securities is a bad economic decision for CalPERS beneficiaries, for the state in general and for the world as a whole, whether we invest directly or through others."
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3 p.m.: This article was updated throughout with CalPERS' board voting to expand the pension fund's ban against investments in tobacco-related securities and with comments from board members.