In California, an About-Face on Tobacco
Steven Greenhut
by

Sacramento

The nation’s largest state-based pension fund, the California Public Employees’ Retirement System (CalPERS), has long been known for using its investment muscle to push for “socially responsible” investments — and for strong-arming private companies to follow its politically correct mandates on everything from climate change to board diversity.

But in recent days, the system has been zinged for considering an about-face, jettisoning “social responsibility” in favor of better investment returns. Following completion of an eight-month study of the subject, CalPERS may abandon its 16-year-old policy of eschewing tobacco investments, which consultants argue has cost the fund $3 billion. CalPERS’ investment staff has recommended the change, which will be voted on by a committee on Dec. 19.

An October presentation by a top CalPERS investment official points out that CalPERS’s fiduciary duty is to California’s state and local government workers. It’s one thing, the official noted, for private investment firms to put social goals above financial returns, but as a public entity, CalPERS’ first priority must be returns on investment. Hence, tobacco investments may be back on the table.

The reaction was swift and overheated. “Not only is this a predatory out-of-state industry whose child-baiting marketing tactics are disgraceful, but its product is responsible for more than $13 billion in annual health-care costs,” said Lt. Gov. Gavin Newsom. “Taxpayers will be forced to pick up part of that tab, including CalPERS’ own retiree health benefits. We cannot sell our soul for profit. Investing in death for a return is inexcusable.” Other officials, including the normally sensible Treasurer John Chiang, also zinged CalPERS. Health activists were aghast.

CalPERS is terribly underfunded, having only 68 percent of the funds needed to pay all the outsized pension promises made to retirees and current government employees. Local governments are facing yet another round of fee increases, meaning more pressure for service cuts and tax hikes.

But CalPERS’ bout of common sense might also signal a much-needed pushback against the state’s overly puritanical view of tobacco. No one is arguing that tobacco is a healthy product, but the hard line California officials long have taken is not just a detriment to the state’s fiscal health but a barrier to achieve the state’s public health goals.

Gov. Jerry Brown signed into law last year a package of anti-smoking bills, including one to raise the smoking age to 21, which also prohibited sales of e-cigarettes and other nicotine vapor devices to those under 21. The latest studies happen to show that teens already are turning away from drugs, alcohol, and tobacco at encouraging rates. They also are turning away from e-cigarettes. Vaping is much safer than cigarettes but is not entirely safe. If teens avoid starting the vaping habit, that’s a good thing. But e-cigarettes have proven an effective aid to help some smokers quit. To the extent that teens who are current smokers can’t legally access vaping products that would help them to quit, the overall public health consequences could be negative.

California voters also approved this year’s Proposition 56, which raises the tax on cigarettes by $2 a pack — and boosts taxes an equivalent amount on vaping liquids. The goal of the tax hike, like the age-21 law, is to discourage smoking. By applying the provisions to e-cigarettes, the policies also serve to discourage switching to vapor products that Public Health England find are 95 percent safer than cigarettes.

Of course, cynics would argue the real rationale for the tax hike is to help backfill California’s budget for Medi-Cal, a low-income healthcare program. As smoking declines, officials seek new funds to replace fading tobacco tax revenue.

Ironically, Lt. Gov. Newsom led an admirable blue-ribbon commission studying the effects of marijuana use. A core argument: “In the transition to a legal market, the purpose of public policy would be to reduce the harms associated with the prohibition of marijuana, including the criminalization of people, while minimizing the harms and capturing the benefits of a legalized system.” In other words, the commission embraced the concept of “harm reduction.”

Indeed, the commission’s report provided intellectual heft to the idea of legalizing marijuana for recreational purposes. Medical marijuana has been legal in California since passage of Proposition 215 in 1996 but has operated in a bizarre gray area ever since because the Legislature had until recently lacked the courage to put clear-cut rules in place. In the ensuing years, it’s been easy enough to pay a fee to a doctor by claiming “anxiety” and get a card that lets one shop at any number of marijuana dispensaries found in most cities.

In the November election, voters approved (with Newsom’s backing) Proposition 64, legalizing recreational weed. Supporters didn’t claim marijuana smoking is necessarily a wonderful thing but that it’s far less harmful to regulate (and tax) than the current approach. Harm reduction has long been state policy, on everything from teen pregnancy to HIV infections.

Yet when it comes to tobacco — or even nicotine-based non-tobacco products such as vaping — California’s politicians demand abstinence (or medically based cessation programs). A report by my colleagues has found that local governments — including many California cities — also frequently make it tough for people to use these products, which is counterproductive. The best evidence for the policies comes from a University of Southern California study suggesting that teens who try vaping are more likely to begin smoking. But that study really only measured the likelihood of certain teens to experiment with all sorts of substances and doesn’t show vaping to be a gateway to smoking.

The federal Food and Drug Administration has taken a similar and perhaps even worse strategy, as its new “deeming” rules could possibly put the entire vaping industry out of business. They would require the mostly small vaping manufacturers to undergo multimillion-dollar tests to get approval for each and every combination of device, flavor, and nicotine strength they sell. Fortunately, the incoming Trump administration has a chance to put the kibosh on those rules.

Obviously, CalPERS isn’t getting into the minutiae of harm reduction. The pension fund just wants to reconsider its tobacco divestment policy as a means to boost its fiscal health. But maybe now that this politically correct and powerful organization is publicly saying the unthinkable about tobacco investments, other policymakers might have the courage to take a more nuanced view about tobacco-related products in general. The state’s fiscal health is important but so is the public’s health. Jettisoning the war on vaping is the socially responsible thing to do.

Steven Greenhut
Steven Greenhut
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Steven Greenhut is a senior fellow and Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.
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