Why did CalPERS stick with tobacco ban?

By one estimate, CalPERS has missed out on $3 billion in financial returns by refusing to buy tobacco stocks. But the pension giant decided in 2016 to stick with the ban despite a recommendation from its staff that the ban be relaxed.
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By one estimate, CalPERS has missed out on $3 billion in financial returns by refusing to buy tobacco stocks. But the pension giant decided in 2016 to stick with the ban despite a recommendation from its staff that the ban be relaxed.
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Business & Real Estate

CalPERS opts to keep ban on tobacco stocks

By Dale Kasler

dkasler@sacbee.com

December 19, 2016 01:24 PM

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 the practice. CalPERS’ 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 Employees’ Retirement System’s anxiety about the pension fund’s current financial state, representatives of state workers urged the board to stay away from tobacco.

“I don’t want to go back to my retirees and tell them their retirement depends on companies that invest in disease and death,” said Terry Brennand of 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 Nonsmokers’ Rights said CalPERS would risk its global “reputation for responsible investing” 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.

“Economically I just don’t see how this is sustainable down the road,” said state Controller Betty Yee, a CalPERS board member.

Yee also rejected the suggestion by staff members that reinvesting in tobacco companies could give CalPERS more leverage to change the companies’ behavior. “The tobacco industry is going to continue to be the tobacco industry,” she said.

J.J. Jelincic, one of three board members who voted to reinvest in tobacco, said CalPERS had made “a political decision,” not a financial decision, by continuing to abstain. He also questioned the idea that anyone would take up smoking based on CalPERS’ 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 teachers’ pension system, which has been completely out of tobacco since 2009.

CalPERS’ vote caps months of study and soul searching, following a consultant’s 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 there’s 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 CalPERS’ 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.

CalPERS’ 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. “Every time we pull something off the table, it makes it harder to achieve those returns,” 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 smoking’s increasing popularity overseas.

“The industry did not collapse,” the CalPERS investment staff wrote last week in urging the board to reinvest in tobacco. “Those 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.”

Stanton Glantz, a UC San Francisco cardiology professor and director of the university’s 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 “we’re seeing an accelerating decline,” he told the board. “If CalPERS is interested in the long run, I would think this is not a good thing to invest in.”

Dale Kasler: 916-321-1066, @dakasler