This story was updated Wednesday, July 31, 2019, at 8:35 p.m. with more information.
NASHVILLE — In a Republican-led state where many top officials, including Gov. Bill Lee, oppose legalizing even medical marijuana, Tennessee's massive $52 billion retirement plan holds a $720,000 investment in the nation's blazing-hot pot industry.
The Tennessee Consolidated Retirement System's passively invested small-company stock fund, based on Standard and Poor's S&P Smallcap 600 index, owns 7,009 shares in San Diego-based Innovative Industrial Properties Inc.
A real estate investment trust, IIP Inc. calls itself the "leading provider of real estate capital for the medical-use cannabis industry." The company buys existing or still under-development medical cannabis-growing facilities and greenhouses in states where marijuana is legal. It then leases the properties to companies with state licenses to grow medical cannabis.
Tennessee Treasurer David Lillard told the Times Free Press that after abruptly learning the state had an investment in a marijuana industry company, he's ordered pension fund managers to sell the IIP Inc. stock out of TCRS' small-cap portfolio as soon as possible.
"I didn't know we had this investment until the Chicago Sun-Times called up and we began digging around to find it," Lillard said in an interview this week. "There are policy implications to this."
The Sun-Times reported that a dozen states' general employee or teacher pension funds, including Tennessee's, stood to benefit when Illinois' new law allowing recreational marijuana goes into effect Jan. 1. IIP Inc. has a facility there.
The Tennessee Consolidated Retirement System is hardly alone among states invested in California-based Innovative Industrial Properties Inc., which owns and leases medical marijuana-growing facilities in 11 states. According to the Chicago Sun-Times, Tennessee and 10 other states' as well as Canada have state employee, teacher pension or municipal worker funds with IIP Inc. investments:
For years, Tennessee lawmakers have rebuffed efforts to legalize medical cannabis. During the 2019 legislative session, renewed efforts by two Republican physician lawmakers and other colleagues to push a medical marijuana bill through the GOP-dominated General Assembly went up in smoke yet again.
A spokesperson for Lee on Wednesday declined to discuss the governor's thoughts on the investment as well as Lillard's plan to sell it. During his successful 2018 campaign, Lee said he didn't think medical marijuana was the "right approach right now."
Rep. Jeremy Faison, R-Cosby, chuckled over news that medical marijuana-shy Tennessee government has an investment in a pot industry company. In 2018, Faison sponsored a medical marijuana bill that made it through the full Health Committee with the support of then-House Speaker Beth Harwell. It later stalled.
But he questioned why officials are selling the IIP Inc. stock, which has been rising, when the state probably has holdings in alcoholic beverage manufacturers.
"I want our state employees and the people invested in the TCRS to be able to get an excellent return on their investment," Faison said. "If we're getting in the game, why would we stop if there's a way our state employees can get a better return on investment?"
Faison also pointed out that President Donald Trump has told congressional Republicans he would sign legislation to ensure states can decide for themselves whether to legalize marijuana. While the issue is a "tough sell" in the state legislature, it's "overwhelmingly popular" with Tennesseans, "even if you poll on Republican voters," Faison said.
State Senate Finance Chairman Bo Watson, R-Hixson, a member of the state's Pension and Insurance Committee, said: "I don't think any of us knew we had that investment. You understand the mechanics of that. I think it's appropriate that the treasurer is selling the stock. Our policy position has been that we have not supported medical marijuana at this point.
"It's contradictory and confusing to the public for the state to be invested in a marijuana company when we haven't expounded a position that we currently support it," Watson said, adding there are also "financial complications" with medical marijuana sales when it comes to banking.
The TCRS is considered one of the country's best-funded pension plans, according to the Pew Charitable Trusts. It has money available to cover an estimated 93% of its promises to retired and current state workers, public K-12 teachers and high education workers, as well as employees of some 500 local governments.
Pew ranks Tennessee's pension among the top three nationally. It consistently ranks in the top five or six pensions by other measures. TCRS covers 350,000 active and retired members. In Fiscal Year 2018, the system paid more than $2.5 billion in benefits to 138,000 retirees, some 92% of whom continue to live in Tennessee.
So exactly how did Tennessee wind up owning stock in a marijuana company?
Michael Brakebill, TCRS's chief investment officer, explained the purchase of Innovative Industrial Properties stock stems from the state's use of a small-company stock index that replicates Standard and Poor's S&P Smallcap 600 index.
Both are "passively" managed funds and seek to measure the small-company segment of the U.S. stock market. Unlike an actively managed fund where a manager or team selects specific stocks or sectors, passively managed funds simply follow a market index. The manager or management team doesn't make individual stock investment decisions.
Brakebill believes the IIP Inc. stock purchase occurred in April or May "when it got added to the index. It was basically a passive strategy where we're replicating and bought this small piece of this stock."
Asked what steps the pension fund will take as a result of the flap over the Innovative Industrial Properties Inc. investment, Lillard, who serves as TCRS's chairman, said that in addition to selling it, "we're going to review our procedures."
"But," the treasurer noted, "it's going to be very difficult to look at every one of the stocks you're going to potentially buy to replicate in an index. Sometimes we buy a passive index like the MSCI Index. We've got to figure out a way to do that and deal with it, because it highlights the fact that you know what you've got in portfolio."
Lillard said "the bottom line is I have ordered [Brakebill] and his staff to sell this investment, and we won't have it after today or tomorrow, whenever the transaction goes down."
The state pension stands to benefit immediately from the sale. The IIP Inc. stock was selling on May 6 at $84.06 a share. Wednesday morning, the stock was selling for $109.35 — a 25.29% increase over the early May price.
The Motley Fool, a financial services company that provides advice for investors through various stock, investing advice and personal finance services, recently wrote that Innovative Industrial Properties is worth keeping. It "ranks as one of the best-performing cannabis stocks of 2019 so far. The company is the leader in providing real estate capital for the U.S. medical cannabis industry."
Contact Andy Sher at email@example.com or 615-255-0550. Follow him on Twitter @AndySher1.