Deputy Treasury Secretary Robert Kimmitt recently spelled out a few policy principles for sovereign wealth funds (SWFs), the most important of which was this: "Invest commercially, not politically." Mr. Kimmitt's concern is that "governments could conceivably employ large pools of capital in noncommercially driven ways that are politically sensitive."
Anyone interested in evidence of such behavior needn't look beyond America's borders. If California were a national economy, it would be the eighth largest in the world. And its Public Employees' Retirement System, Calpers, with $259 billion in assets, would rank fifth among the world's SWFs. Combine it with the $169 billion California State Teachers' Retirement System (Calstrs), and California runs the second largest SWF in the world, just behind the United Arab Emirates.
Calpers is a political entity in every sense of the word. Its board is comprised of four members of the state political hierarchy, two appointees of the governor, one appointee of the legislature and six elected members -- all six of whom have long ties to organized labor, including the board president, Rob Feckner, who is also executive vice president of the California Labor Federation. Calpers's investment policies are politically driven, often dictated by the legislature, and even involve foreign policy goals.
Gov. Arnold Schwarzenegger tried to tame the behemoth in 2005 by forcing public employees to join a defined-contribution pension plan.