California’s giant pension fund kicked the tobacco habit. Now it’s reconsidering

CalPERS, based in downtown Sacramento, is considering reinvesting in tobacco after a 16-year ban.
CalPERS, based in downtown Sacramento, is considering reinvesting in tobacco after a 16-year ban. Sacramento Bee file

CalPERS kicked the cigarette habit 16 years ago. Now it appears ready to reverse course.

The staff of the California Public Employees’ Retirement System, after an eight-month study, is recommending that the nation’s largest public pension fund drop its ban on investing in tobacco stocks. CalPERS’ investment committee is expected to vote on the recommendation next Monday.

Simply put, CalPERS needs the money. Its decision to dump its tobacco stocks in 2000, at a time when the industry was struggling under the weight of numerous lawsuits, has been a financial blunder, according to a lengthy staff memo to the CalPERS board.

Wilshire Associates, one of CalPERS’ leading investment consultants, said in a report last spring that the decision has cost the pension fund about $3 billion. Seriously underfunded and struggling with declining investment profits, CalPERS has to jump back into tobacco to help improve its finances, the staff said.

The possibility of reinvesting in tobacco sparked immediate controversy Tuesday. State Treasurer John Chiang, a member of the 13-person CalPERS board, announced he will vote against the idea. “CalPERS should not put money into an industry that is so harmful to people’s health and so costly to the state,” he wrote in a letter to Henry Jones, chairman of the fund’s investment committee. Lt. Gov. Gavin Newsom, who isn’t on the CalPERS board, issued a statement that “we cannot sell our soul for profit.”

Chiang and Newsom, both Democrats, have both said they intend to run for governor in 2018.

The American Cancer Society, American Lung Association and other health-advocacy groups sent a joint letter to the pension fund saying the investments “would pit CalPERS’ portfolio against the financial and physical well-being of its members and the rest of California.” Stanton Glantz, a UC San Francisco cardiology professor and director of the university’s Center for Tobacco Control Research and Education, said CalPERS’ investments would undermine the state’s anti-smoking programs, “increasing the amount of disease and death in California.”

The CalPERS staff report acknowledged the considerable social costs of tobacco, and the fact that CalPERS also serves as health insurer for more than 1.4 million public employees, retirees and their families. Nonetheless, “our role as administrators of the health insurance program is distinct from our role as fiduciaries for the retirement portfolios,” the staff report said. Funding the pension system is CalPERS’ “primary mission,” the staff said.

The tobacco debate comes at a particularly sensitive time for the $301 billion pension fund. After two straight years of paltry investment gains, CalPERS is considering reducing its annual investment forecast. That would force the pension fund to impose higher contribution rates on the state and local government agencies.

As it stands, CalPERS is just 68 percent funded, meaning it has 68 cents on hand for every $1 in long-term pension obligations. It is cash-flow negative, which means it’s paying out more in pension benefits than it’s taking in.

“As a mature, cash-flow negative system, CalPERS is obligated to seek out and implement the portfolio construction methods that best serve our mission – the sustainable delivery of promised benefits,” the staff report said.

Back when CalPERS unloaded its tobacco stocks, the industry was getting pounded by product liability cases, and the pension fund’s decision “was firmly grounded in its concern over the ongoing financial risk,” the report said.

But the industry proved resilient.

“Those investors who continued to invest in tobacco have in face seen over 900% in cumulative returns over the past 15 years,” the report said.

CalPERS still holds $547 million worth of tobacco stocks, through funds managed by outside investment managers. Chiang, for one, said Tuesday he wants CalPERS to get rid of those stocks, too. CalSTRS, the state teachers’ pension fund, has been completely tobacco-free since 2009.

Dale Kasler: 916-321-1066, @dakasler