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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.

Many states 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.

"The board 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."

Before Pennsylvania 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.

This amount 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.


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