Washington Won’t Kick $256 Million Tobacco Investment While The State Is Looking To Reap Settlement, Board Doesn’t Want To Lose Wall Street Muscle

Washington, one of the states pressuring the tobacco industry to pay billions in damages and to change its marketing practices, will keep its hefty stock portfolio in tobacco companies, a state panel decided Thursday.

The state Investment Board defied the wishes of Gov. Gary Locke and Attorney General Christine Gregoire and narrowly voted to hang on to the state’s $256 million portfolio of tobacco stocks.

Gregoire was one of the lead attorneys who recently negotiated a proposed $368 billion, out-of-court settlement with the industry. Aspects of the deal have encountered opposition in Congress and the White House and with public-health activists like Dr. C. Everett Koop.

Advocates of divesting the state’s holdings said Thursday that the stocks are risky, given the mounting assault on the industry and the uncertainty surrounding the proposed settlement. But defenders said the state doesn’t have clear evidence that the stocks are a bad investment at this time.

The motion by retired labor leader George Masten to divest the stock failed on a 4-4 tie, with one member absent. Officials on both sides of the issue said the situation will be monitored closely and that a new vote could be taken in the coming months.

“These kinds of issues are never settled,” Masten said in an interview after the vote. “I think we should be divesting. I think the heat will be on the tobacco industry continuously. I’m betting tobacco is going down … and I wouldn’t invest any of my personal money in tobacco stock.”

He said he doesn’t plan to “go out and aggressively round up” the fifth board vote necessary to sell the stock. He said his motion would have passed if Patrick McElligott, representing law enforcement and firefighters on the board, hadn’t had to miss the meeting.

The board’s public markets committee had voted unanimously last month to recommend selling the stock, which represents something less than 1 percent of the state’s total investments of $32 billion. Proceeds are used largely to pay public pensions. Earlier in the week, Florida sold most of its $825 million worth of tobacco stock. Maryland divested its $75 million portfolio last year.

Washington’s single largest tobacco holding is $144 million worth of Philip Morris stock.

The investment panel must consider only economics when deciding on stock holdings, although social policy may be weighed as a secondary consideration if it doesn’t cost the state anything, Assistant Attorney General Jeff Lane told the board this summer.

Proponents of divestiture were careful to mention only economic concerns during the debate.

Gary Moore, director of the state Department of Labor and Industries, said the motion was far different from previous suggestions to divest from companies during apartheid in South Africa or warfare in Northern Ireland.

“It is my belief that the tobacco industry is under major assault and it is not going to improve in the near future,” Masten said.

He noted the political difficulties the proposed settlement is having and nodded his agreement when investment adviser Charles Kaminski said, “Having an activist Food and Drug Administration that has the ear of the president is the biggest wildcard. … The cartoonists say Joe Camel is in the witness protection program and is now going by ‘Bob Camel.”’ Board Chairman C.T. Purdom, head of the Washington Education Association, and state Treasurer Michael Murphy both said they have big doubts about the long-term yield of the stock - and a gut instinct that it’s time to sell.

But foes of the selloff said it’s pure speculation whether tobacco stocks will decline.

“The bottom line is that there is nothing we know (about the economic risk) that the experts do not know,” said John Charles, Locke’s appointee as director of retirement systems. “I see … no compelling evidence to disinvest.”

House Appropriation Chairman Tom Huff, R-Gig Harbor, a voting member, said the board was confusing economic and political considerations.

Michael Palmer, vice president of the board’s investment adviser, Wilshire Associates, said the board should sell the stock only if it knows something that has escaped Wall Street and all of the financial experts. Other advisers who sit as nonvoting members also urged the status quo.

“Hong Kong has more volatility,” Palmer said, referring to the recent return of the economic powerhouse to China from its British crown colony status. “Why would we treat tobacco differently from Hong Kong?”

The state’s chief investment officer, Christopher Ailman, said the industry is being rocked with “significant volatility” and that the proposed settlement may raise as many questions as it answers. But he said it’s the board’s call: “Risk is in the eye of the beholder.”

Huff and other opponents of the sale also pointed to the estimated $9 million cost of getting into a tobacco-free portfolio and noted that the board just last month approved 100 percent passive management of the state funds. Intervening in one particular area sets a bad precedent, Huff said.

The selloff motion was backed by Moore, Murphy, Masten and Purdom and opposed by Huff, Charles, labor leader Gerald Morgen, and state Sen. George Sellar, R-East Wenatchee.