December 19, 2016 1:24 PM
CalPERS opts to keep ban on tobacco stocks
By Dale Kasler - The Sacramento Bee
CalPERS said no again to tobacco Monday.
Amid a passionate debate on the wisdom and morality of investing in tobacco, the big California pension fund
rejected a recommendation by its staff to end its 16-year-old ban on tobacco.
CalPERSf investment committee, in a 9-3 vote, concluded that the tobacco
industry is heading toward long-term decline and presents too much of a risk
Because the investment committee consists of every member of the governing
board, the vote represents the final decision.
Not only will CalPERS not reinvest in tobacco, it chose to unload $547
million worth of tobacco investments that it has continued to hold indirectly,
through funds operated by outside investment managers.
Despite the California Public Employeesf Retirement Systemfs anxiety about
the pension fundfs current financial state, representatives of state workers
urged the board to stay away from tobacco.
gI donft want to go back to my retirees and tell them their retirement
depends on companies that invest in disease and death,h said Terry Brennand of
the Service Employees International Union, which represents tens of thousands of
state workers.
CalPERS also got an earful from the American Heart Association, American
Cancer Society and others, citing the social and public health costs and arguing
that CalPERS was in danger of sending potential smokers the wrong message.
Cynthia Hallett of Americans for Nonsmokersf Rights said CalPERS would risk its
global greputation for responsible investingh if it jumped back into tobacco
stocks.
Aside from those issues, several CalPERS board members said they were
concerned that tobacco companies, while riding high now, could be headed for a
fall amid studies showing declining smoking rates in the United States and
overseas.
gEconomically I just donft see how this is sustainable down the road,h said
board member and State Controller Betty Yee.
Yee also rejected the suggestion by staff members that reinvesting in tobacco
companies could give CalPERS more leverage to change the companiesf behavior.
gThe tobacco industry is going to continue to be the tobacco industry,h she
said.
J.J. Jelincic, one of three board members who voted to reinvest in tobacco,
said CalPERS had made ga political decision,h not a financial decision, by
continuing to abstain. He also questioned the idea that anyone would take up
smoking based on CalPERSf investments.
CalPERS never completely abandoned tobacco. It has continued to hold $547
million worth of tobacco stocks and bonds through investment funds managed by
outside firms. That policy ended Monday, and the board directed the investment
staff to move away from those investments, too. That will match the stance taken
by CalSTRS, the teachersf pension system, which has been completely out of
tobacco since 2009.
CalPERSf vote caps months of study and soul searching, following a consultantfs report
saying its decision to sell its tobacco stocks in 2000 cost the pension fund
about $3 billion.
The pension giant faces growing financial problems. Although therefs no
immediate cash crisis at the $303.6 billion fund, CalPERS has only about 68
percent of the assets needed to meet its long-term pension obligations. It
earned just 0.61 percent on its investments in the latest fiscal year, and 2.4
percent the year before that. Both results are well below CalPERSf official
forecast of 7.5 percent in annual gains, and consultants have said the pension
fund can look for returns of as low as 6.1 percent annually over the next decade as the
global investment climate cools.
CalPERSf board is taking a look at its long-term investment outlook and is
expected to reduce its official forecast in early 2017, which would likely
result in higher pension contributions from the state, local
governments and school districts.
Board members acknowledged the downside of keeping the tobacco ban when
CalPERS is struggling to find strong investment returns. gEvery time we pull
something off the table, it makes it harder to achieve those returns,h said
board member Richard Costigan.
When CalPERS unloaded its tobacco stocks, the decision was as much about
dollars as it was about social costs. The tobacco industry had agreed to pay
billions of dollars a year to 46 state governments as compensation for public
health costs, and many experts believed it was in steep decline. Instead,
tobacco companies have bounced back, in part because of smokingfs increasing
popularity overseas.
gThe industry did not collapse,h the CalPERS investment staff wrote last week
in urging the board to reinvest in tobacco. gThose investors who continued to
invest in tobacco have in fact seen over 900 percent in cumulative returns over
the past 15 years, making the tobacco industry the second highest performing
industry over that time period and significantly outperforming the broad
market.h
Stanton Glantz, a UC San Francisco cardiology professor and director of the
universityfs Center for Tobacco Control Research and Education, argued that
buying tobacco stocks would run counter to Proposition 56, the just-approved
ballot initiative that raised cigarette taxes by $2 a pack.
He also said considerable investment risks remain. Other countries have
joined the United States in cracking down on smoking, and gwefre seeing an
accelerating decline,h he told the board. gIf CalPERS is interested in the long
run, I would think this is not a good thing to invest in.h