PART 9 (out of 10)
SST Talks to LAUSD’s Chief Financial Officer
In a desperate attempt to get things moving, our lead consultant talked to the CFO. She told her to respond to the committee motions. The consultant might have scared the bejesus out of her by threatening that as the fiduciary she could be personally liable. Finally the CFO approved the IPS. We had more motions. We went to work replacing the funds which we had talked for two years. Once again they were on “hold.” This time George talked to the her. Ghastly isn’t it? But it’s how major decisions are often handled in the lofty towers of power.
First it was Mercer, then the Chair, and now it was the CFO who was the obstacle. Like a dysfunctional family, one member takes on the role of the “identified patient.” It’s so typical. It seems most behemoth bureaucracies have weak links which take turns screwing things up. They seem unresponsive, blame employee turnover, or wish problematic issues will resolve themselves. Our committee membership was stable but affected by bureaucratic disregard.
In the morass of our committee business, there was supposed to be this order: the committee passes a motion which sent to the CFO for either approval, rejection or a request for more information. Here are dates to show how slowly this system was working. The Investment Policy Statement (IPS) was sent in the fall of 2007 and it sat on her desk for a year before she signed it. SST recommended the following fund changes, passed by the committee and sent to the CFO in December 2008 and then sent again in the fall of 2009 and were not approved by the CFO until the spring of 2010. Noticed that the dreaded Turner Mid-Cap Growth was finally removed.
Table 4
Removed Replaced by
- Turner Mid-Cap Grth TMGFX (1.35%)* 1a. Am. Cen. Heritage TWHIX (1.16%)*
- Vanguard Grth & Income VQNPX (.52%)* 2a. Am. Funds R4 RGAEX (.81%)*
- Dreyfus S&P 500 PEOPX (.65%)* 3a. Fid. Spart. 500 Inx FUSEX (.25%)*
*Total costs including the .15% TPA fee.
The above problems with our district-bloated-bureaucracy paled in comparison to the next incidents which shocked all.
Our Former Mercer Lead Consultant works for AIG-VALIC
Business Wire Press Release June 6, 2007 (Link to AIG-VALIC Press Release) reported that our former Mercer lead consultant now works for AIG-VALIC! During those heated revenue sharing debates, another member and I accused the Mercer lead consultant to her face of “taking care of AIG-VALIC interests over the participants” Of course, she denied it vehemently. But doesn’t it make sense now? I think our instincts were right. It didn’t matter that there might be implications of impropriety involving both AIG-VALIC and Mercer as hired contractors by LAUSD. Of course, I am not talking about anything illegal—these companies have legends of attorneys. In my opinion this is a blatant “in-our-face” ethical and conflict of interest issues.
If the Mercer lead consultant had considered our recommendations, worked with the committee by accepting one or two of our recommendations (out of the three), we would have no problem who ever she worked with. But she didn’t. She ignored our recommendations and offered other funds which were just as expensive. She wanted no part of reducing revenue sharing by considering our fund recommendations, in spite of both her and our Chair telling the Board of Education the committee selects the investments. In my opinion she did not act on the behalf of our employees when she defended the AIG-VALIC Vice President misleading statements to the Board of Education with his flat-out lie about costs.
My opinion was not imagined. Read what the teacher’s union financial consultant said in an email about Mercer’s selection process:
“I think we all agree that the fund selection process was tainted and I think everyone will feel better once SST has done their analysis, and taken the “stench” of Mercer off the funds. If the funds offer any revenue sharing benefit, so be it; as long as that factor is not taken into account in the selection process, and it is disclosed to the participants, it will only reduce the overall cost of the plan for each participant. I think at this point, everyone feels that Mercer (in concert with AIG, probably) selected many of the funds based on their willingness to share revenue, and not whether or not the funds themselves were best in class. This doesn’t pass the smell test, as rightly pointed out by the committee.”
Please explain this clause which was also in the AIG-VALIC/LAUSD contract? “Contractor will also take all necessary steps to avoid the appearance of conflict of interest….”[emphasis is mine]. Did AIG-VALIC’s decision to hire our former consultant have no impact on our employees when she defended high fee revenue sharing which would benefit AIG-VALIC?
In my opinion, the committee and visitors witnessed first hand how she stood up for AIG-VALIC’s interests. Mercer’s contract with LAUSD expired in December 31, 2006. We were told by her Mercer colleagues four months later that “she had moved on.” Wouldn’t make perfect business sense for AIG-VALIC to offer her a position after the LAUSD/Mercer contract expired? Her performance with our committee did not hurt her changes, heck, in my opinion, it practically guaranteed employment.
Russell Olsen, author of the Handbook for Investment Committee Members, wrote about the responsive relationship of consultants/advisors with committee members:
“The adviser and his people must be the source of expertise and the ones who do the work, but they should always remember that the investment committee is the one deciding on the objectives and policies, making the actual investment decisions, and shouldering the final responsibility. The adviser cannot be moving in one direction and the committee in another.”(Bold is mine)
I doubt if this transfer of employment heralded the national mischief AIG found itself in soon after.
To be continued, one more part….AIG’s 2008 bankruptcy and what the committee did about it, end of the five year contract with VALIC in 2011 and time to select another TPA. Lessons learned.