The settlements states have begun to receive from the tobacco industry litigation are huge amounts of money, on the order of good-sized pension funds.
The assets must be invested prudently by specially established investment boards, so future generations can benefit.
In Florida, for example, the new state tobacco endowment fund has received $725 million so far this year, and it expects to receive another $375 million later this month or in January. That creates a $1 billion fund in a matter of a few months.
In all, the states, whether part of the so-called master tobacco settlement agreement or among those that achieved separate deals, are expected to receive close to $250 billion over 25 years.
This giant windfall puts a tremendous responsibility on the states for the proper investment of that money.
Each state, as a first step, has to decide how so much money should be invested, and by whom.
Kansas, which won't receive its first allocation from the settlement until next year, plans to have the Kansas Public Employees' Retirement System invest the money.
That's a bad idea.
In Kansas, or in any other state, the public employees' pension fund should devote its full attention to managing and monitoring retirement assets on behalf of the participants. Any new assignment will detract from its duty to pension fund participants.
Public pension funds are fraught with enough politics already. Often the boards overseeing such funds find themselves in a tug-of-war with politicians who are trying to use some of the pension assets to appease some voter constituency.
Witness the efforts by the previous administration in California, that of former Gov. Pete Wilson, to withdraw several billion dollars from the California Public Employees' Retirement System, Sacramento, to help finance the state budget. Fortunately, that move ultimately was invalidated by the top court in California, which ordered the state to repay CalPERS.
Focusing on how to invest the money under prudent-person mandates to secure the pensions of public employees is a big enough task for a pension board's members and the staff professionals. They don't need any distractions. The tobacco money has the potential of generating huge controversies, not only regarding how the money is spent (which is, of course, outside the purview of investment overseers) but how it is invested. So much money is involved that politicians and social activists will not be able to resist meddling.
There is one obvious point of controversy for the tobacco money: Who is its proper constituency? Who are, or should be, the "beneficiaries" for whom the assets should be invested? Unlike a pension fund, which has a clearly defined constituency, the tobacco settlement has no clear constituency. In that vacuum, everyone and anyone can try to persuade the legislatures of their right to a say in how the assets should be invested and spent.
This will generate a never-ending debate. Indeed, some of the money of the tobacco settlements, supposedly to advance health purposes, already is being assigned to unrelated political projects.
Public pension funds have enough trouble keeping the focus on their purpose, managing assets for their participants. To put tobacco-settlement money with public pension funds will only confuse efforts by the pension boards to keep harmful politics out of the management of their assets.
States should establish separate authorities to oversee the investment assets of the tobacco settlements. These authorities should call on the best investment advice available to develop long-term investment policies appropriate for the purposes to which the assets will be set. They also should hire separate investment teams to manage the money.
The model for such authorities already exists: The Alaska Permanent Fund, which oversees the investment of the assets arising from taxes on Alaska's oil wealth.
Public pension fund board members and staff professionals might serve as sounding platforms and informal advisers in establishing these distinct investment oversight authorities. But they should resist deeper involvement
Satetes may try to save money by giving the tobacco-settlement assignment to public pension funds. It is a false saving that will be costly in the long run for the problems it will create.
