We expect government transparency. Wall Street loves the backroom deal.

On ever-shifting ground between them you'll find public pension funds, unique government organs that pump hundreds of billions of taxpayer dollars into private investments.

That dual nature creates a tension graphically illustrated with Monday's news that the California teachers' retirement system's portfolio included a stake in Freedom Group. The global firearms manufacturer's subsidiaries include the company that made the rifle used to kill 20 children and six adults at a Newtown, Conn., school on Friday.

CalSTRS investment partner Cerberus Capital Management said Tuesday the company is up for sale.

"They're doing what we want them to do," a CalSTRS spokesman told The Bee's Dale Kasler.

Public pension funds must invest wisely, pay promised benefits and operate transparently. That often smacks squarely into how their business partners operate.

CalPERS, for example, has heard complaints about its interests in companies that do everything from manufacturing equipment to building settlements on Israel's West Bank to making and pricing AIDS drugs.

Sometimes pension funds become hostage to politics. After private contractors at Abu Ghraib prison abused Iraqi prisoners, CalSTRS considered a 2004 ban on investing in firms that sell "technologies or services designed for use in the torture of human beings."

Both CalPERS and CalSTRS divested themselves of apartheid South Africa holdings. More recently, they dumped Iranian business interests. Those decisions can be costly.

In 2001, the funds axed tobacco. Since then, the industry's shares have tripled or more, outpacing many other investments.

"We shot ourselves in the foot on that one," said Susan Sears, a former state Department of Forestry and Fire Protection worker and president of the 33,000-member California State Retirees. She thinks socially conscious investing hobbles pension funds and pressures their other investments to hit home runs.

When the Legislature told CalPERS and CalSTRS to dump their Iranian holdings, the funds took their time. Lawmakers fumed. Federal action eventually prodded them to divest.

"Socially responsible" investing is a slippery slope. Wal-Mart accounts for 13 percent of Freedom Group's sales. Are pension funds with a piece of the world's biggest retailer supporting the assault weapons business? What about fast-food purveyors? Alcohol companies? Casinos? Public pensions have interests in those industries, too.

Of course, nobody is ask- ing Goldman Sachs about its gun company holdings this week. Hedge funds like Cerberus still operate in a relatively opaque world.

Government pension funds confront a never-ending tension because of Wall Street's culture. They deal with it because, well, they need the money.

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