Written by The Business Journal Staff
(AP) — The nation’s largest public pension system is giving up tobacco.
The California Public Employees’ Retirement System decided Monday to sell its last $550 million worth of tobacco-related investments nearly two decades after trading away the bulk of them.
In a 9-3 vote, the CalPERS investment committee disregarded the advice from its own financial advisers who recommended reversing a sell-off of tobacco stock that was approved in 2000, which has cost the system more than $3 billion in lost earnings.
At that time, CalPERS divested tobacco holdings managed by its in-house advisers, but it allowed outside managers to retain the investments they controlled.
Public health organizations overwhelmingly opposed a re-investment, saying it would send the message that California supports a product that causes cancer and raises health care costs.
“We’ve made a lot of progress in de-normalizing tobacco, to get people to think that tobacco is not OK,” said Jim Knox, vice president of the American Cancer Society’s advocacy arm. “To have the largest pension program in the world to suddenly get back into tobacco in a big way sends the wrong message.”
The review of the divestment decision comes as CalPERS struggles to strengthen its finances in the face of lackluster investment earnings and a growing number of retirees drawing pensions.
CalPERS now spends more money each month than it takes in from taxpayer contributions and the earnings on its $304 billion worth of investments. The pension fund has enough assets to cover only 68 percent of promised benefits. The system’s investments earned just 0.61 percent in the last fiscal year and 2.4 percent the year before, far short of the 7.5 percent earnings target.
“I am not aware of anyone who smokes or doesn’t smoke based on whether CalPERS invests or doesn’t invest,” said JJ Jelincic, a member of the CalPERS investment committee who favored re-investing in tobacco. “And if we’re not changing behavior, then what are we getting for the money we’re giving up?”
CalPERS has long taken a dim view of divestment as a strategy to influence public policy, preferring to use its clout as a large investor to pressure companies in which it owns stock. The agency says it is obligated to maximize investment earnings to protect the long-term availability of retirement benefits and minimize costs to taxpayers.
Nonetheless, CalPERS decided in 2000 that mounting pressure from lawsuits and declining rates of smoking justified selling off tobacco-related investments.
Financially, it was a bad bet. In the 15 years since, tobacco was the second-highest performing industry and significantly outperformed the market, CalPERS experts wrote, and investors who didn’t sell off reaped 900 percent cumulative returns.
Investment advisers said a fully diversified portfolio that includes tobacco stocks is the lowest-cost, lowest- risk way to manage the portfolio. But they cautioned that re-investing carries its own risks.
The industry faces growing restrictions around the world on its core tobacco products and on emerging electronic cigarettes, including in California, which is raising taxes and raising the legal smoking age from 18 to 21. Tobacco stocks are also trading at all-time highs and may become less attractive as interest rates come down and investors move money out of high-dividend stocks.
Terry Brennand, from the Service Employees International Union, which represents government employees, said the pension system’s beneficiaries don’t favor re-investing. “They don’t want to have to rely on disease and death of other individuals in order to retire in dignity,” Brennand said.
The California State Teachers’ Retirement System, the nation’s second-largest public pension system, sold off most tobacco investments in 2000 and completely divested in 2009. CalSTRS has not reconsidered the decision since 2009, spokesman Ricardo Duran said.