NCPA - National Center for Policy Analysis


March 11, 2008

The fear that many have with sovereign wealth funds (SWFs) is a concern that governments could conceivably employ large pools of capital in non-commercially driven ways that are politically sensitive.  Anyone interested in evidence of such behavior needn't look beyond America's borders, says Benn Steil, director of international economics at the Council on Foreign Relations.

For instance:

  • If California were a national economy, it would be the eighth largest in the world.
  • 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, says Steil:

  • 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.  But he was driven into retreat by strong union opposition, and last October he joined the effort to politicize investments by signing legislation to force Calpers and Calstrs to divest about $3.4 billion in stock of companies that do business in Iran.

Source: Benn Steil, "California's Sovereign Wealth Fund," Wall Street Journal, March 7, 2008.

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