Administration August 6, 2001

Habit Forming? – CalPERS Delays Decision on Tobacco

June 20, 2000 (PLANSPONSOR.com) - The nation's largest public pension system took another step toward divestiture of its tobacco holdings - but opted to stay put for now. After more than a decade of resistance to a divestiture of tobacco stocks, the 13-member board of the California Public Employee Retirement System (CalPERS) directed its investment staff to draw up policy guidelines on divestiture that could be used for tobacco - or any other industry - for its September meeting.
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The move comes less than two weeks after the $114 billion California State Teacher’s Retirement System became the largest public pension system to sell off its tobacco holdings (see SMOKE OUT – Teacher Fund To Sell Tobacco Holdings ).

Sliding

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The $170 billion system currently holds nearly $400 million in tobacco company stocks, as part of an index fund designed to mirror the entire US stock market.  Still, that’s less than 1% of the total holdings.

CalPERS investment staff said that disposing of the stocks would incur millions in transaction fees, and represent a lost opportunity for higher returns in the future, though the fund’s holdings have slid 40% over the past two years.  The staff’s report also noted that the largest tobacco firms have evolved into diversified businesses.

The divestiture policy is expected to resemble guidelines used by CalSTRS in making its decision.  That policy permits divestiture if three of these four conditions are met:

  • Bankruptcy of tobacco company
  • Aggressive legal action against the companies
  • Heightened government regulation
  • Flight of large institutional investors from tobacco stocks

CIM Group deal delayed

State Treasurer Phil Angelides, who pushed for tobacco divestiture as a member of both the STRS and CalPERS boards, noted “You either believe the wave of litigation and regulation will go away or will be with us.”  He believes the latter is true.

The CalPERS board also put off till August a decision on a $250 million investment in a real estate fund (the CIM Group) that had hired two former directors of the retirement system and a retired state senator to help lobby the deal (see NewsDash 06/16).  The investment staff recommended a more modest $50 million investment, based on CIM’s relative inexperience, as well as stronger CalPERS oversight in the investment.

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