SACRAMENTO, Calif. -- California legislators have introduced a bill that would force CalPERS and CalSTRS to divest more than $900 million in tobacco stocks, but the real battleground might be at the board level.
Anti-tobacco advocates are armed with a new argument this year that might carry more weight at the two huge state funds as well as at local California public pension funds: U.S. tobacco stocks returned -51.5% last year, and continued litigation and regulatory pressures threaten the outlook for tobacco stocks.
"The tobacco industry has become everyone's favorite industry to sue," said Doug Cogan, director of the Investor Responsibility Research Center's tobacco information service in Washington.
Recent actions pushing divestment include:
* California legislators Tom Hayden and Wally Knox last week introduced a bill that would require the $171 billion California Public Employees' Retirement System and the $111 billion California State Teachers' Retirement System to divest themselves of more than $900 million in tobacco stocks over an 18-month period.
* California State Treasurer Philip Angelides has urged CalSTRS to sell its tobacco holdings. Two key studies on tobacco investing are slated for review at the board's April 5 investment committee meeting.
* Divestment proposals also are being considered at county retirement systems in the San Francisco Bay area, including San Mateo, Alameda and Contra Costa.
California is at the forefront of a movement to press public pension funds and university endowments to sell their tobacco stocks on moral and financial grounds.
To date, the San Francisco City & County Employees' Retirement System is the only local California fund to have adopted tobacco divestment, in June 1998.
On Feb. 28, State Sen. Hayden and Assemblyman Knox jointly introduced a measure to force CalPERS and CalSTRS to shed their tobacco stocks over an 18-month period. It's the third time the two Los Angeles Democrats have sponsored a tobacco divestment bill.
"Tobacco industry stock values are plummeting. If our state pension funds need an economic justification to get out of tobacco, they have it now," Mr. Knox said in a release.
Backed by the United Teachers-Los Angeles and the American Lung Association of California in Sacramento, the bill -- AB 107 -- will be considered first in the State Senate.
As of Dec. 31, CalPERS had $589 million in tobacco stocks, while CalSTRS had $319 million in such stocks.
However, efforts to impose a legislative solution on pension funds remain controversial.
"I am personally, and have been, opposed to divestment policies of any sort. I believe that investments should be made based on investment standards, and social or other kinds of considerations follow" if at all, said Chuck Valdes, chairman of CalPERS' investment committee.
While saying he's opposed to legislative mandates, William Crist, president of the CalPERS Board of Administration, said the board will address the tobacco issue at its annual asset allocation workshop March 13-14.
"We don't mess around with our passively managed index portfolio because once you do that, you have an actively managed portfolio," said Mr. Crist. About 85% of CalPERS' $77.5 billion in domestic equities are passively managed.
"But there are times to readjust the index, and to do it openly and with full disclosure of what you're doing and why," he said. "I think we should consider anything that may affect the markets in a way so profound that it would not be in our best interest to replicate the market. That's what our investment professionals should tell us."
Mr. Angelides, the state treasurer, believes the financial issues facing the tobacco industry are "unique in terms of litigation and regulatory pressure" and are "unlikely to lessen any time soon or in the foreseeable future. That creates substantial risk to investors" and to tobacco companies, he said in an interview.
On top of recent state/tobacco industry settlements totaling $246 billion, there is recent litigation by the U.S. Justice Department as well as various class-action lawsuits, including the prominent Engle case in Florida, which could cost tobacco companies hundreds of billions of dollars.
Mr. Angelides also noted tobacco industry stocks had lost more than half of their value in 1999.
But opponents of divestment -- including Kathleen Connell, the state controller and fellow CalPERS and CalSTRS board member -- warn that forcing pension funds to divest would lead them down a "slippery slope."
In response, Mr. Angelides said: "If you show me another sector that's already settled for $240 billion and faces litigation risk on the same magnitude, then I'd be looking at that sector."
Key studies due
Just before Christmas, Mr. Angelides urged the CalSTRS board to divest its tobacco stocks, arguing that it no longer would be prudent to invest in tobacco securities.
At the same time, Mr. Angelides placed a moratorium on the state's $33 billion short-term investment account buying tobacco company debt, but that fund hasn't held tobacco securities since 1995.
On April 5, the CalSTRS investment committee will review an updated study by BARRA RogersCasey Inc., Darien, Conn., on tobacco stocks' historic performance, as well as a second study by Pension Consulting Alliance, Encino, Calif., that will look at trends going forward for the industry.
The BARRA RogersCasey study will examine the performance of the fund's tobacco holdings from Jan. 1, 1993, through year-end 1999 -- a period in which tobacco stocks generally have fared poorly since a price-cutting war broke out in April 1993.
The BARRA RogersCasey study also will review how the Standard & Poor's 500 stock index and the S&P tobacco-free index fared from January 1987 through the end of last year.
A recent study by the IRRC, using BARRA RogersCasey data, shows the six stocks in the BARRA tobacco composite returned a cumulative 169.9% for the 10 years ended Dec. 31 -- just more than half of the S&P 500 index's performance.
The IRRC study also observed that the shrinking proportion of tobacco stocks in the S&P -- now at 0.5% of the index, compared with more than 3% in the early 1990s -- means shedding the stocks would have only a negligible effect on portfolio risk.
`Plight of the gray whale'
At the county level, pension officials remain wary of calls for divestment.
Despite a unanimous vote last November calling for divestment by the San Mateo Board of Supervisors, Sid McCausland, chief executive officer of the $1.3 billion San Mateo County Employees' Retirement Association, Redwood City, warned against taking such a step.
"The lid on Pandora's box will not be closed once the seal is broken. Already the plight of the gray whale is before you. Soon it will be land mines, handguns, morning-after pills and every other moral imperative that responsible citizens should consider in a pluralistic society," he wrote in a Nov. 23 memo to the fund's board.
The system is conducting due diligence on the proposal, Mr. McCausland said.
The $3.5 billion Alameda County Employees' Retirement Association, Oakland, on Feb. 9 decided to put off consideration of a tobacco divestment proposal.
In a memo to the investment committee, Investment Officer Betty Tse wrote that, "Staff believes the subject of socially responsible investment is a very complex one and could be time-consuming, and any decision relating to any particular social issue should be evaluated thoroughly."
A separate memo to the association's board from consultant Dorn, Helliesen & Cottle Inc., San Francisco, pointed out that while the effect of divestment on the fund's equity holdings would be minimal, banning tobacco stocks "would have a significant impact" on one of the fund's managers, Pacific Financial Research, Beverly Hills, Calif., which has a deep value approach and invests in a relatively small number of stocks.
As of Dec. 31, the portfolio had a tobacco weighting of 15.3%, with 10.5% in Philip Morris Cos. Inc. and 4.8% in UST Inc.
Dorn, Helliesen since has resigned the account for unstated reasons and officials there did not return phone calls.
In contrast, the Contra Costa Employees' Retirement System, Concord, is spearheading pro-divestment efforts at the county level.
Led by an anti-tobacco activist on its board, Peter Camejo, chairman and chief executive officer of Progressive Asset Management Inc., Walnut Creek, Calif., the $3 billion system is expected to approve on March 7 a proposal to sell its $5.4 million in domestic tobacco stocks.
The pension fund will not sell its international tobacco stocks -- now held in commingled accounts run by Deutsche Asset Management and Capital Guardian Trust Co. -- because it would be too expensive to set up separate accounts, said Patricia Wiegert, retirement administrator.
