Los Gatos officials weigh using $3.1 million to cut CalPERS bill or keeping it in 115 trust

Mayor Hootis convened a joint study session of the Town Council and the finance commission to review options for the Town of Los Gatos’ investment buckets, including a staff recommendation and outside analysis on whether to transfer a $3.1 million balance to CalPERS or retain it in the town’s 115 trust.

The discussion centered on trade‑offs between using cash to reduce a growing CalPERS amortization charge (the Town’s actuarial amortization is reported at about a 6.8% effective rate) and retaining flexibility by keeping funds invested under a 115 trust or other strategies that could, with higher flexibility and lower fees, potentially earn more over time.

Mark Shuster, the outside fiduciary advising the Town, opened the presentation by stressing local fiduciary duties: “it says that you're the fiduciary of every dollar that you have in this city,” and said his team’s review of the Town’s 457(b) platform showed embedded fees that, compounded over 30 years, could cost participants roughly $22,000,000. He described how his office negotiates with recordkeepers and arranges separate managed accounts to reduce hidden fees, and said the example 457(b) account’s fee profile was cut from roughly 40 basis points to about 5 basis points in the analysis presented to the Town.

Town staff and the finance commissioners pressed for detail on the slides and arithmetic. A finance participant summarized current balances discussed in the meeting: about $30,000,000 in the OPEB trust, $3,000,000 in the pension/115 balance at issue, roughly $52,000,000 in other Town‑managed investments, about $12,000,000 in LAIF, and about $6.6 million in checking — roughly $103,000,000 in total across the Town’s buckets. Commissioners asked which of those pools are appropriate candidates for more active management or for transfers to CalPERS.

Michael Gonzalez, a portfolio manager on the presenter’s team, reviewed capital‑markets assumptions used to model portfolios (BlackRock’s Aladdin assumptions on long‑term returns and volatility) and explained how different equity/fixed‑income mixes and the use of certain alternatives would change expected returns and risk over 30‑year horizons. Gonzalez explained alpha and beta concepts and how the team constructs mixes intended to match discount‑rate targets such as a 6.8% hurdle.

Council members pushed on the central policy question: does the Town accelerate payments to CalPERS (a guaranteed reduction of the 6.8% amortization) or accept liquidity and market risk in pursuit of higher returns and lower fees? One commissioner noted that paying down CalPERS is a guaranteed 6.8% return by extinguishing liability, while others emphasized that properly managed portfolios and lower fees could close the gap but carry no guarantee. Shuster said he could not recommend without seeing full Town financials but suggested a blended approach — some discretionary paydown and some retained liquidity and investment — might be prudent depending on the Town’s cash‑flow needs and strategic priorities.

Town Manager (staff) told the group that staff is reviewing responses to RFPs for a fiscal condition/five‑year forecast and an asset‑liability management (ALM) plan; staff expects to bring a recommendation to Council on which consultant to hire. The manager asked whether the finance commission wanted to review RFP responses before Council; staff said it could be done but it would delay the selection by at least one meeting.

No formal decision or vote was taken during the study session. Participants agreed the next steps are to complete the planned studies (fiscal condition and ALM) and return to Council with more complete data so the body can weigh the guaranteed benefit of a CalPERS transfer against the potential upside and liquidity benefits of other strategies.

The meeting closed with the mayor thanking the presenters and staff; Council and the finance commission agreed to continue the discussion after the pending consultant work is completed.