NEW YORK -- The $38 billion New York City Employees' Retirement System spent four years and as much as $150,000 of plan assets on four tobacco investing studies that reached the same conclusion:
The investment outlook for tobacco stocks was bleak, and some action short of divestiture was merited.
Trustees finally decided two weeks ago to freeze the tobacco holdings in their passive portfolios, but to permit active managers to continue to act at their discretion.
But as they mulled over their options, NYCERS' tobacco holdings lost an estimated $50 million in value, according to information provided by Mark Green, a trustee who also is the city's public advocate and favored total divestment.
As fiduciaries, trustees are supposed to act in the best interest of plan participants. Yet trustees were given a general information packet that included a memo detailing how cigarettes contribute to New York's tax and employment base.
An examination of tobacco committee meeting minutes found no discussions on tobacco's effect on New York City's economy.
Still, a Sept. 23, 1996, memo on economic issues -- from NYCERS Chief Investment Officer Donna Anderson to then-Deputy Comptroller Jon Lukomnik -- was included in a packet to trustees.
Ms. Anderson gave a broad description of the issues confronting the tobacco industry. Under general comments, she said:
* Tobacco (Philip Morris) is one of the city's largest taxpayers.
* Philip Morris Cos. Inc. also pays significant real estate taxes to the city.
* General taxes on cigarettes contribute to the city coffers.
* Tobacco creates jobs, not only at the company level, but also through advertising, distribution and other ancillary businesses.
Ms. Anderson referred questions to Deputy Comptroller Richard Halverson, who replaced Mr. Lukomnik in May as City Comptroller Alan Hevesi's representative on the board.
Mr. Lukomnik, now a vice president with New York-based CDC Investment Management Inc., declined to comment.
Study time defended
Mr. Halverson and Michael Musuraca, a labor trustee and chairman of NYCERS' tobacco committee, said Philip Morris' economic importance to the city played no role in the trustees' decision.
"The trustees are limited to their fiduciary responsibility," Mr. Halverson said.
"I don't recall at any time this being an issue," said Mr. Musuraca.
Mr. Musuraca also defended the long study time, saying the board needed to be cautious about such a politically charged issue.
"I didn't get the feeling that anyone was trying to stall, so that we didn't take action.
"I believe that people had differences about whether one should divest or if one should take a more defensive position . . .I moved it along as quickly as possible, while trying to get consensus."
The studies cost between $100,000 and $150,000 and were paid for by the pension plan, several trustees said.
NYCERS' consultant Callan Associates presented the first study in early 1997, as part of its contractual duties. A second, which explored the legal ramifications, was performed by the law firm of Robinson Silverman Pearce Aronsohn & Berman LLP in late 1997.
The third one -- done in early 1998 by Avner Wolf, chairman of the finance department with Baruch College in New York and an expert on risk management -- cost $50,000. Trustees took turns at an April tobacco committee meeting describing it as disappointing and unsatisfying.
At the meeting, Laurel Eisner, Mr. Green's representative, said: "There comes a point where you look at what's out there and you just say, 'We know enough from reading.'
"And we believe we have been at that point for quite a while."
Nevertheless, trustees voted at that meeting to have another study performed -- this one by First Albany Corp., a fixed-income firm that underwrites the city's bonds, at a cost of between $40,000 and $50,000. Mr. Hevesi recommended First Albany, according to committee minutes.
Others act quickly
But other pension funds -- larger and smaller -- managed to come to a decision more quickly, even though NYCERS took up the issue two years before the others. And those earlier decisions should have provided a framework to help NYCERS' trustees.
For example, NYCERS trustees received a tobacco analysis in 1996 from State Comptroller H. Carl McCall, sole trustee of the $104 billion New York State Common Retirement Fund. (In 1996, Mr. McCall asked the state fund's active domestic equity managers not to buy tobacco company stock, but New York Common continues to add them in the passive portfolio -- the opposite of NYCERS' decision.)
Public pension funds in Maryland, San Francisco and Florida began studying the issue later than NYCERS, yet made faster decisions and, in some instances, booked gains from their divestment. All three passed along copies of their tobacco-related resolutions to New York City.
Maryland took about six months to study and act on the issue in 1996. The $26 billion Maryland State Retirement Systems, Baltimore, realized a gain of about $35 million on its sale of $75 million worth of tobacco stocks, said Peter Vaughan, executive director.
Trustees of the $10 billion San Francisco City & County Retirement System took nine months to study the issue and decide to sell $30 million worth of tobacco holdings, said Clare Murphy, chief executive officer
Lan Janecek, chief of domestic equities with the $70 billion Florida State Board of Administration, Tallahassee, said it took his three-member board -- with input from the Legislature -- no more than nine months to decide to sell its $830 million in tobacco holdings.
Within a month after the decision, Florida had sold 90% of its tobacco stocks. "We sold into a strong market," Mr. Janecek said. "It was a very successful move."