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June 22, 2001
Florida Can't Quit Tobacco Profits
by Mark Thomsen
Sunshine State will again invest pension funds in cigarette makers.
SocialFunds.com --
In a move that somehow seems reminiscent of the novel Catch 22, the three members of the board
overseeing Florida's $100 billion employee pension fund voted last week to reverse the ban on
investing state pension money in tobacco stocks. Just four years after publicly blaming the
industry for illness and death, state officials have decided that tobacco is a good investment
again.
 "The current trustees were uncomfortable with
the previous decision and didn't feel that social policy decisions should drive the investment
practices of the board. That's it in a nutshell," said Tom Herndon, Executive Director of the
State Board of Administration. The Executive Director is a non-voting administrative position that
reports to the three-member board.
Governor Jeb Bush, Comptroller Bob Milligan and
Insurance Commissioner Tom Gallagher, all Republicans, are the board members that made the decision
to reinvest. Only Milligan was present when the decision to divest was made; he was in his first
term as Comptroller. Milligan opposed divestment at that time as well, but was outnumbered by
then-Governor Lawton Chiles and Insurance Commissioner Bill Nelson, both Democrats.
Florida divested from tobacco stocks in 1997, while there were ongoing negotiations to settle
the state's lawsuit against the tobacco industry. Florida filed a lawsuit against tobacco
companies in order to collect millions in health care costs the state paid for poor and elderly
people with smoking-related illnesses.
Florida was able to reach an agreement with
cigarette makers in just three months. The settlement involves payments totaling approximately $13
billion over a period of 25 years. The settlement has been used to create the Lawton Chiles
Endowment Fund, a $1.3 billion health care fund. Its portfolio will remain tobacco-free.
The price of tobacco stocks sank after the huge lawsuit settlements and awards, and Florida's
decision to divest seemed to make financial sense at the time. But in the past year, technology
stocks have been in trouble and investors have flocked to more anti-cyclical industries such as
tobacco. R.J Reynolds (ticker: RJR) closed yesterday at $55.70 and Philip Morris (MO) at $47.66.
According to the Council for Responsible Public Investment (CRPI), a California-based
non-profit, Governor Bush has been pursuing securitization of the lawsuit settlement payments.
A likely way for Florida to do that would be establishing a non-profit corporation that would
sell the lawsuit payments as a security. The benefit for potential investors is the interest they
receive on their money.
Securitization is attractive to the state because getting more
money up front helps make budgetary planning easier. Over time, however, the state ends up
receiving less money than it would if it had just taken the settlement payment in increments.
Since there is a possibility of tobacco companies defaulting on future payments, securitization
shifts the risk of non-payment from Florida to the investors buying the securities.
"Governor Bush has been pursuing securitization of their tobacco settlement funds for the last
few years now," said Mary Wells, Director of CRPI. "It seems incongruent to say on one hand that
the settlement funds must be securitized because the industry has a questionable financial future,
yet at the same time say that Florida must jump back into tobacco stocks because their future is so
bright."
Florida and Maryland are the only two states that have decided to reinvest in
tobacco stocks after divesting while lawsuits against the industry were still active. Wells says
she knows of no other public institution that is considering a reinvestment in tobacco stocks.
Actual participants in Florida's state pension fund have no recourse to the board's
decision. But according to Herndon, starting June 1, 2002 the fund will offer an optional defined
contribution plan. Through this 401(a) plan, members will have the opportunity to direct their own
investments. Herndon said a decision has not yet been made on whether to include a social
investment option.
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