Was it coined by New York State Governor (and the proud graduate of the "Fulton Fish Market") Al Smith?
(Historical Dictionary of American Slang, Vol. II H-S)
[punning on lieu] a. N.Y. State Pol. a fixed allowance paid to a legislator in lieu of reimbursement for actual expenses.
1945 Amer. N & Q (Jan.) 149: Lu-Lu payments: "payments in lieu of something or nothing" (N.Y. Herald Tribune, December 9, 1944).
1957 N.Y. Times in DAS: A "lulu" is an expense allowance that does not have to be accounted for.
1965 N.Y. Times (Jan. 17) I 46: Mr. McKeon had offered a bribe at the public expense" [punctuation
1968 Safire New Language 242: Lulu. Payment made to legislators "in lieu of" expenses....New York State sets a fixed fee to be paid them in lieu of expenses; if they can skimp on the outlay, they can keep the extra money.
1969 N.Y. Times (Apr. 22): "Lulu"...[was] coined by the late Gov. Al Smith
1995 N.Y.Times (Nov. 26)("City") 12: Mr. Vallone awards himself a $35,000 lulu for serving as Speaker.
15 November 1945, New York Times, "Hill's Prevailing Opinion Clearing Steingut," pg. 12:
"Lu-lu" Credited to Gov. Smith
The rule of morality for elected public officials credited to Governor Franklin D. Roosevelt is cited as legal authority for many of the questions asked in this proceeding. The abbreviation "lu-lu" is generally credited to another Governor of the State, Hon. Alfred E. Smith, who substituted that euphonious term for "in lieu of" appropriation made to several legislative officials.
28 September 1946, New York Times, pg. 2:
State Asks Court to End Fight on "Lulus"
FOr $81,000 "Expenses" to Legislators
ALBANY, Sept. 27 - Supreme Court Justice Roscoe Ellsworth was asked today to prohibit the State Controller from paying $81,000 annually in so-called "Lulus" to fourteen leaders and chairmen of legislative committees.