Some big state pension funds continue to invest in tobacco manufacturers, even as their attorneys general are suing the same companies for reimbursements of state-paid medical bills from tobacco-related health problems.
What's more, some pension funds have ignored recommendations by the states' chief lawyers to sell their tobacco company shares, buy no additional shares, or use their shareholder power to urge tobacco companies to adopt federal guidelines on limiting their marketing and advertising to teen-agers.
The tobacco investment policies of pension funds are in the limelight again because of the April 17 annual meeting of RJR Nabisco Holdings Corp. and the April 25 annual meeting of Philip Morris Cos. Inc., the world's largest tobacco company.
At RJR, many of these large pension funds plan to support management in a proxy war by dissident shareholder Bennett LeBow to unseat the current board and replace it with a slate that would press for a spinoff of RJR's tobacco operation within six months.
A similar spinoff resolution is on the ballot at Philip Morris. Many large pension funds, which two years ago pressed the company for a spinoff, now say the issue is moot because the company's stock has performed considerably better since then.
Ironically, some state pension systems, such as the California Public Employees' Retirement System, also are responsible for paying medical bills incurred by their pensioners.
"These products are killing the plan participants. There's no obligation for pension managers to have these represented in their pension portfolio," commented Brad S. Krevor, executive director of the Tobacco Divestment Project, a program run by the Tobacco Control Resource Center Inc., Boston, a non-profit educational foundation that aims to influence public policy on tobacco.
In the seven states that have sued cigarette manufacturers for reimbursements of tobacco-related Medicaid claims, at least five state pension funds still invest in tobacco company stocks:
In Mississippi, Frank Ready, executive director of the $9 billion-plus Mississippi Employees' Retirement System, Jackson, said the pension fund views investments in tobacco companies purely from an investment perspective. "So have we sold stock because our attorney general has brought lawsuits against the tobacco companies? The answer is no."
Mr. Ready would not say how many tobacco shares the fund holds.
In Louisiana, James Wood, executive director of the $4.1 billion Louisiana State Employees' Retirement System, Baton Rouge, said the board has not questioned investments in tobacco companies, despite the attorney general's lawsuit. It has 213,000 shares of Philip Morris.
The $28 billion Minnesota State Board of Investment, St. Paul, three years ago abandoned its policy not to invest in "sin stocks," companies that earned more than half of their revenues from the sale of tobacco or alcohol. The pension fund now has "probably less than 1%" of its total assets in tobacco, according to Howard Bicker, executive director. Minutes from a board meeting last December show the fund has no intention of curtailing investments in tobacco companies, believing "the potential for adverse claims against tobacco companies (has) already been factored into the current market price of these stocks."
The two large Massachusetts state funds - the $7 billion Pension Reserves Investment Management Board and the $8.5 billion Massachusetts State Teachers' & Employees Retirement System - collectively own around $150 million in tobacco stocks.
The $52 billion Florida State Board of Administration has 3.9 million shares in Philip Morris, 1.2 million each in RJR and American Brands and 1.3 million in UST Inc. Lan Janecek, chief of equities, said, "If there's an edict politically (to divest from tobacco stocks) then I've got to follow it." But he admits it would be tough to follow such a mandate because some of them are very sound investments. Nonetheless, he couldn't quite explain why the fund owns RJR, a laggard stock. "I don't question my external managers' individual holdings, " he said.
In Maryland, where the state plans to file a similar lawsuit, Attorney General Joseph H. Curran Jr. almost two years ago urged Louis L. Goldstein, the state comptroller and chairman of the $20 billion-plus Maryland State Retirement Systems, to sell off its then-$112.4 million in tobacco stocks.
The state retirement system, however, responded with a "thank you, but no thanks," Michael Enright, a spokesman for Mr. Curran said. Mr. Goldstein's office did not return repeated calls seeking comment.
And in fact, so far only one large pension fund, the $50 billion New York State Teachers' Retirement System, may be cutting back its exposure to tobacco stocks because of their increased riskiness, George H. Philip, executive director, said.
"It won't be no tobacco, but we could short-weight the sector," Mr. Philip said. The fund's trustees will decide whether to adopt such a strategy at a meeting April 25. If a policy is approved, it will be based purely on economics - not the morality of investing in tobacco, he said.
The fund's existing tobacco policy discourages companies from marketing their products to teen-agers and encourages spinoffs, he said. The fund holds about 933,000 shares of RJR Nabisco and about 3 million shares of Philip Morris in indexed portfolios.
Ironically, its sister fund, the $75 billion New York State & Local Retirement Systems, virtually doubled its holdings in RJR over the same period to 840,000 shares by year-end 1995. Last month, New York State Comptroller H. Carl McCall said the system planned to halt buying additional shares in tobacco companies through outside managed active portfolios. The system has $160 million of its actively managed portfolio in tobacco stocks. The lion's share, however, is in indexed portfolios that are unaffected by Mr. McCall's announcement.
The fund owned 4.9 million shares in Philip Morris at year end, a tad less than the 5.1 million shares it held at the beginning of 1995, according to CDA Investment Technologies Inc., Rockville, Md.
Some funds that invest in tobacco companies are shareholder activists at those companies.
Minnesota, for example, voted for all socially motivated shareholder proposals presented last year to tobacco companies and supported a spinoff of RJR's and Philip Morris' tobacco operations. But this year, the fund's board has voted against the upcoming spinoff proposal at RJR and Philip Morris, Mr. Bicker said.
Minnesota also backed a shareholder resolution at Albertson's Inc. last fall, asking the grocery store chain to act to prevent teen-agers from buying cigarettes in its stores. The proposal never appeared on the ballot, however, because the company conceded to the request, Mr. Bicker said.
And the fund plans to co-sponsor more of these tobacco-related proposals in next year's annual meeting season.
In Massachusetts, Treasurer Joseph D. Malone is "looking very closely" at Attorney General Scott Harshbarger's proposal that the PRIM and MASTERS boards press tobacco companies in which they own shares to adopt the Food and Drug Administration's guidelines on promoting cigarettes to youth.
Said R. Scott Henderson, general counsel to both systems: "Our inclination is to cooperate" with the attorney general's recommendation.
Executives at the two funds are talking with outside money managers, consultants and other public pension funds on how to frame a tobacco policy that also would guide them on voting on socially motivated shareholder proposals, he said.
An identical proposal by Florida Attorney General Bob Butterworth has met with resistance from some cabinet members who also are trustees of the $52 billion state board.
A looser version, which may be discussed by the cabinet later this month, recommends the Florida fund support shareholder proposals asking cigarette producers to limit their marketing efforts as long as "no element of said proposal adversely affects the state's interest under the statutory investment criteria of yield, risk and diversification."
Meanwhile, several public pension fund executives say many of their tobacco company investments are unavoidable because they're an integral part of their indexed portfolios.
Philip Morris is in two key baskets - the Dow Jones industrial average and the Standard & Poor's 500 Stock Index. They have less of an excuse with RJR, which is generally in their actively managed portfolios. RJR, however, is in broader market benchmarks such as the Russell 1000.
Worse still, since Philip Morris and RJR also are the nation's two largest packaged food producers, rejiggering an indexed portfolio to comply with a mandate of divesting tobacco stocks would cause the funds to lose exposure to their higher-growth food operations, said Douglas G. Cogan, deputy director of the Investor Responsibility Research Center's social issues service, Washington.
Philip Morris "is a major growth stock. It was up 64.5% last year. If you had to take that out of the index fund," that would really hurt, said Florida's Mr. Janecek.
In California, a state that has not yet jumped into the tobacco litigation fray, the $98 billion California Public Employees' Retirement System strongly opposes a legislative effort to get the fund to unload its tobacco holdings. The system is among Philip Morris' top 25 shareholders with 4.9 million shares, and RJR's 26th largest holder with 1.5 million shares.
"Historically CalPERS has opposed any campaigns that would require the fund to divest itself of tobacco stocks," Brad Pacheo, a spokesman said.
