March 11, 2002
State Tobacco Settlement Money Being Reinvested in Tobacco Companies
by William Baue
States that do not place specific restrictions on investing tobacco settlement money may be
investing the funds back into tobacco.
Today, the Investor
Responsibility Research Center (IRRC) released a survey of state treasurers on how they are
allocating settlement money received from the tobacco industry. All 50 states are receiving
settlement money. The November 1998 Master Settlement Agreement requires tobacco companies to pay
46 states an estimated $206 billion over 25 years. The four remaining states reached earlier
settlements and will receive $40 billion over 25 years.
Amazingly, many states
are investing portions of their settlement money back into the tobacco industry. According to
IRRC, while twelve states have placed restrictions against investing tobacco settlement money back
into tobacco stocks, sixteen states have no restrictions. IRRC is an independent firm that
provides information and research to investors. Ten states failed to respond to IRRC's one-page
survey, despite persistent attempts to reach those state treasurers.
"This is money
coming from the tobacco companies to redress harm to the states caused by smoking-related
illnesses," said Doug Cogan, director of IRRC's Tobacco Information Service. "It's certainly
ironic that money coming into the left hand is going back in the pockets of the tobacco companies,
the very companies that were responsible for causing the harm, with the right hand."
Without specific restrictions, it is difficult for institutional investors to avoid tobacco
holdings. Most index funds, for example, track indexes with tobacco company representation. For
example, the S&P 500 includes Philip
Morris (ticker: MO), Loews
(LTR) and UST, while the S&P
MidCap 400 includes RJ Reynolds
Tobacco (RJR) and Universal Corp. However, several index fund providers, such as Barclays
Global Investors and State Street Global Advisers, offer tobacco-free funds.
recognize the duplicity of investing tobacco settlement money back into tobacco stocks. For
example, on January 17, Pennsylvania's Tobacco Settlement Board passed State Treasurer Barbara Hafer's motion to prohibit the
investment of its $248 million settlement endowment in tobacco companies.
made a moral and logical decision," said Ms. Hafer. "The investment of funds received from tobacco
companies in those companies would have been a hypocritical reward."
had even been awarded tobacco settlement money, Ms. Hafer appealed to the state to divest its
public pension funds from tobacco holdings. In 1997, as a member of the boards of trustees for
Pennsylvania's Public School Employees' Retirement System (PSERS) and the State Employees'
Retirement System (SERS), Ms. Hafer urged both boards to divest from tobacco companies.
Ms. Hafer failed to convince the SERS board, but she did reach a compromise with the PSERS
board, which set a cap on its tobacco holdings. At the time, PSERS held $264 million in tobacco
stocks, according to Robert Gentzel, a spokesperson for Ms. Hafer. Now, PSERS holds about $117
million in Loews, Philip Morris, RJ Reynolds, and UST combined, according to data provided to SRI
World Group by FactSet Research
Systems/LionShares. This example illustrates that divesting funds from tobacco holdings can
take some time.
Other states are not nearly as forward thinking as Pennsylvania.
Connecticut, which has recently positioned itself as progressive by sponsoring shareowner
resolutions on social issues such as diversity in the boardroom, has not restricted its tobacco
settlement money from investment in tobacco companies. Connecticut has invested approximately 0.44
percent of the $36 million it has received in tobacco settlement money to date back into tobacco
holdings. This percentage translates to about $160,000, according to IRRC.
may seem negligible. But for larger states, even less than one percent may mean significant money.
For instance, Texas has invested about 0.74 percent of its tobacco settlement money back into
tobacco stock. Since Texas has received $1.495 billion in settlement money to date, that 0.74
percent amounts to about $11 million of capital for tobacco companies.