Pension Fund Conflict Resolved, but at What Cost?

Workers at Los Angeles City Hall are worried that a city retirement board member’s refusal to resign her seat over a conflict of interest could wind up hurting their pension fund and costing taxpayers.

Board Vice President Shelley Smith was warned this month by the city attorney’s office that she would either have to resign her seat or her husband would have to quit his job with Dimensional Fund Advisors, which handles $318 million in city pension funds.

The high-performing Santa Monica investment firm has the best annual return among the 12 financial advisors that invest the city’s pension funds, achieving a 50% return last year. The second-best performer had a 32.5% return.

With the contract up for renewal Oct. 14, either Smith or her husband, Grady Smith, had to go, the city attorney said.

So, many at City Hall were dismayed when neither Smith stepped down. Instead, the investment firm bowed out.

John Siciliano of Dimensional Fund Advisors would not say why it decided to withdraw.

The decision alarmed some city workers.

“It bothers me because it means we are losing the top-performing firm,” said Bert Moklebust, a city engineer who ran unsuccessfully against Shelley Smith in June for the pension board seat, which pays a $50 stipend per meeting.

Moklebust and other city employees said Shelley Smith should quit for the good of the fund. A mass e-mail sent to city employees this week urged workers to attend Tuesday’s pension board meeting to call on her to give up her seat, warning that the pension fund could lose up to $9 million if the DFA investments had to be liquidated.

Board member Richard Rogers said he believed the loss would be less than $1 million but said he still was troubled. Rogers said that if he had faced the conflict, he would have resigned.

“I’ve got concerns as a board member,” he said. “For her to face a situation where her remaining on the board will cost the fund its top-performing manager, that’s a hard situation.”

The firm’s decision to withdraw means it will have to sell the investments over the next 120 days so the money can be turned over to another firm.

“That’s going to cost the fund quite a bit of money in divestment of funds,” said board member Ken Spiker. “It’s going to be like a fire sale.”

Spiker, however, said retirement checks would not be reduced, even though the L.A. City Employees Retirement System could lose money. If it were to lose so much that it could not meet its obligations to retirees, the city would have to make up the difference.

Robert Aguallo Jr., general manager of the retirement system, said he hoped there would be no loss.

Shelly Smith, who did not return calls for comment, is a deputy city attorney first elected to the retirement board in 1994. She was reelected by a vote of city employees in June.

She is also president of the L.A. City Attorneys Assn., an affiliate of the Service Employees International Union, Local 347. The union said Friday it intended to pack Tuesday’s meeting to show support for Smith.