Public pension system to sell all tobacco stocks

The nation’s largest public pension system is giving up tobacco.

The California Public Employees’ Retirement System decided Monday to sell its last $550 million worth of tobacco-related investments nearly two decades after trading away the bulk of them.

In a 9-3 vote, the CalPERS investment committee disregarded the advice from its own financial advisers who recommended reversing a sell-off of tobacco stock that was approved in 2000, which has cost the system more than $3 billion in lost earnings.

At that time, CalPERS divested tobacco holdings managed by its in-house advisers, but it allowed outside managers to retain the investments they controlled.

Public health organizations opposed a reinvestment, saying it would send the message that California supports a product that causes cancer and raises health care costs.

The review of the divestment decision comes as CalPERS struggles to strengthen its finances and as a growing number of retirees draw pensions.

CalPERS now spends more money each month than it takes in from taxpayer contributions and the earnings on its $304 billion worth of investments. The pension fund has enough assets to cover only 68 percent of promised benefits. The system’s investments earned just 0.61 percent in the last fiscal year and 2.4 percent the year before, far short of the 7.5 percent earnings target.

“I am not aware of anyone who smokes or doesn’t smoke based on whether CalPERS invests or doesn’t invest,” said JJ Jelincic, a member of the CalPERS investment committee who favored reinvesting in tobacco. “And if we’re not changing behavior, then what are we getting for the money we’re giving up?”

CalPERS has long taken a dim view of divestment as a strategy to influence public policy, preferring to use its clout as a large investor to pressure companies in which it owns stock. The agency says it is obligated to maximize investment earnings to protect the long-term availability of retirement benefits and minimize costs to taxpayers.

Nonetheless, CalPERS decided in 2000 that mounting pressure from lawsuits and declining rates of smoking justified selling off tobacco-related investments.

Financially, it was a bad bet. In the 15 years since, tobacco was the second-highest performing industry and significantly outperformed the market, CalPERS experts wrote, and investors who didn’t sell off reaped 900 percent cumulative returns.