SACRAMENTO, Calif. -- The California Public Employees' Retirement System board voted to have its staff review the politically charged tobacco divestment issue within 60 days, placing the issue squarely on the fund's agenda.
In the meantime, the board put off consideration of a bill that would mandate a selloff of tobacco stocks at both the $168 billion CalPERS fund and the $109 billion California State Teachers' Retirement System.
Other legislation also is under consideration that would affect both CalPERS fund and CalSTRS:
* S.B. 2122, which would create a joint advisory board to CalPERS and CalSTRS on asset allocation and active vs. passive decisions, was approved unanimously April 24 by the Senate Public Employment and Retirement Committee. State Controller Kathleen Connell, who sits on both pension fund boards and who wrote the bill, said the 13-person board would be modeled on the New York State Common Retirement Fund's advisory board and would include six outside investment professionals. But a staff analysis and CalPERS board members said an advisory body would be unnecessary and duplicative.
* A.B. 2745 would require CalPERS and CalSTRS and their internal and external money managers to study whether investments in foreign companies pose a threat to national security. CalPERS board members and staff said they do not have the resources to make a judgment on national security issues, and that role should be addressed by the federal government.
The tobacco divestment bill, A.B. 107, would require CalPERS and CalSTRS to divest their tobacco holdings by July 1, 2002, and would bar new or additional tobacco-related investments starting Jan. 1, 2001.
Divesting its $589 million in tobacco holdings would cost CalPERS $22.5 million, with a worst-case scenario of $56 million, according to an analysis by the fund.
State Treasurer Phil Angelides, a supporter of tobacco divestment, challenged the figures, noting a BARRA RogersCasey Inc. study said it would cost CalSTRS only $4.3 million to sell off its $339 million in tobacco stock.
CalPERS staff responded their figures were based on selling the stock in a relatively short period of time, which increases the cost.
The staff not only opposed the bill, saying it would limit CalPERS' authority in making prudent investment decisions, but also recommended an amendment to indemnify board members, money managers and others connected with the fund from potential liabilities incurred from implementing the bill if it were adopted.
The board directed the staff to study the tobacco issue within the context of overall divestment issues by its June meeting. CalSTRS separately will address a broader divestment policy at its May 3 meeting, and then will consider tobacco divestment in June.
In regard to the bill that would create a joint advisory board, a staff analysis said Nobel laureate William F. Sharpe found that CalPERS' asset allocation policy from April 1994 through September 1999 added $7 billion in value to the fund, while implementation added $5 billion. Those two sources of added value accounted for 15% of CalPERS' $78 billion increase in value over that period.
"Given this performance, it is not clear what perceived problem this bill is intended to address or what information, expertise or advice the proposed joint advisory board would be qualified to provide that is not already available to the CalPERS board from its investment professionals, consultants, managers and advisers," the analysis stated.
In addition, the analysis noted that nearly half of the members of the proposed advisory board -- which would comprise the governor, treasurer, controller, two members each from the CalPERS and CalSTRS boards, and six outside investment professionals -- already sit on the boards.
And the staff warned the outside investment professionals would not be able to do business with CalPERS or CalSTRS because of potential conflicts of interests.
But the board barely discussed the merits of the proposal. Mike Foulkes, deputy controller of legislation for Ms. Connell, said he hoped to get guidance from CalPERS' board on the bill's shape. Board members blasted the sponsors for not having a completed bill ready for consideration.
The bill will be taken up by the Senate Appropriations Committee.
