ERS adviser settles 'pay-to-play' allegations in San Diego

Callan Associates was accused of sending business to money managers it paid as consultants

The financial adviser that makes recommendations to Hawaii's largest pension fund has agreed to pay the city of San Diego $4.5 million to settle a lawsuit accusing Callan Associates of steering business to money managers that paid it for consulting.

Callan also makes financial recommendations to the board of the State of Hawaii Employees' Retirement System, which had $10.2 billion in assets as of Sept. 30.

ERS Administrator David Shimabukuro and ERS Chief Investment Officer Kimo Blaisdell did not return phone calls yesterday.

Under the settlement approved yesterday, San Diego said it had no proof that the pension fund consultant engaged in so-called "pay-to-play" or unfair business practices, said Nancy Malinowski, a spokeswoman for San Francisco-based Callan. By settling, Callan got the city to drop the allegations while avoiding the cost and time of going to trial.

"That was the most important point," Malinowski said. The allegations in the lawsuit, she said, "created a false impression about our business."

Callan had been an adviser to San Diego's pension fund for more than two decades.

City Attorney Michael Aguirre in August 2005 sued the pension fund consultant, accusing it of recommending money managers to the retirement system that had paid it for consulting work. The lawsuit said that Callan never disclosed receiving payments from the money managers, who the city said in some cases failed to live up to the performance measures set for the fund.

The lawsuit was one of several connected with the pension fund's $1.4 billion deficit, which resulted from the now-ended practice of failing to contribute enough money to the retirement system to meet all the benefits it has promised to municipal workers. Callan, which has worked for the pension since 1982, will continue to advise the retirement system on its investments, Malinowski said.

A spokeswoman for Aguirre didn't immediately return a phone call seeking comment.