State, city pension funds invest millions in tobacco companies

August 01, 1994|By Joel Obermayer and Marina Sarris | Joel Obermayer and Marina Sarris,Sun Staff Writers

While Maryland and Baltimore have been battling smoking -- with measures ranging from a state ban on smoking in workplaces to a city restriction on billboard ads -- their employee pension funds have been holding tens of millions of dollars in tobacco company investments.

The state fund has $112 million in stocks and bonds in tobacco companies such as Philip Morris Cos., the maker of Marlboro cigarettes, and RJR Nabisco Holdings Corp., which produces Camels. Baltimore's pension fund holds more than $23 million in similar investments.

And during the past five months, the State Pension and Retirement Systems bought $27 million in bonds from tobacco companies -- even as those companies were preparing to sue Maryland over its workplace smoking ban.

When told about the investments by a Sun reporter, Attorney General J. Joseph Curran Jr. said the state pension fund should consider selling them immediately. Such investments are "ill-advised and arguably hypocritical and just plain wrong," the state's top lawyer said.

Several other public officials, who also said they had been unaware of the investments, found the holdings troubling, too.

But city pension fund trustees warned that such a sell-off could weaken the funds and spark divestment proposals from everyone from environmentalists to opponents of defense contractors.

"It would open up a Pandora's box," said George F. Eckert, a Baltimore pension fund trustee. "It could reach a point where our money managers will have so many guidelines that they may have difficulty in getting returns."

Until recently, few government and institutional pension funds gave serious thought to selling off their tobacco stocks -- in the way they once did with investments related to South Africa.

Still, several universities, including Johns Hopkins and Harvard, already have divested.

The debate over tobacco divestment could intensify nationwide, states pass anti-smoking laws, the federal government considers regulating cigarettes and Congress debates raising taxes on them.

Many trustees of the state and city pension systems said their first priority -- and legal duty -- is to make the best investments possible. Historically, they have tried to focus on financial

returns, not politics or social issues.

"The trustees have an obligation to make sure the assets of the system are there to pay off current and future retirees," said state pension trustee Joseph Adler, chief of the Maryland personnel department. Currently, 63,000 retirees receive checks from the state; 12,000 draw benefits from the city.

Pensions funds spread their money over a broad range of investments to generate a steady flow of money for retiree benefits -- and guard against sudden swings in the stock or bond prices for a particular company or industry. The trustees set investment guidelines and hire professional money managers guide that diversification.

Not surprisingly, as a result of that diversification strategy, pension funds wind up investing in tobacco companies. The state's $16.3 billion fund, which covers state employees as well as many teachers and county and municipal workers, has close to 1 percent of its assets in tobacco investments. Baltimore's $2.2 billion fund holds about the same percentage in tobacco investments.

Aside from Philip Morris and RJR Nabisco, the state and city have holdings in UST Inc., maker of Skoal smokeless tobacco. The state also has stocks and bonds in American Brands Inc., maker of Lucky Strike cigarettes.

Trustees said several of the companies are large conglomerates that get some of their sales and profits from foods and other products. For example, Philip Morris owns Kraft foods and makes Oscar Mayer hot dogs, Jell-O and Miller beer. Last year, tobacco products generated 43 percent of revenues and 62 percent of operating profits at the company.

Tobacco stocks generally have been good long-term performers, trustees said. Philip Morris stock has generated a 14-fold return, including dividends, since 1980. That return came despite a 20 percent drop in the stock in the past two years.

William E. Dix, a 20-year trustee of the city pension fund, said politicians should not impose social concerns on the fund. "The city retirement system belongs to the employees and the retirees of the city. It is not the city's money," he said.

But social concerns have played a role in state and city investment policies in the past. In 1985, the state pension board decided not to invest in companies active in South Africa unless the firms agreed to follow the Sullivan Principles, a voluntary ethics code that guided racial practices under apartheid. The city voted to divest its pension funds completely from companies that did business in South Africa in 1986.

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