Fact Checking Councilman Rennie

Dear Members of the Town Council:

This letter is to provide a response to Council Member Rennie’s comments at the March 5, 2019, 115 Trust Oversight Committee meeting. We have attached a video clip from that meeting which captures Mr. Rennie’s comments whereby he claimed that comments from the public were not correct and he wished to “set the record straight”.  As Mr. Rennie is a member of the Oversight Committee, we feel it is of utmost importance that the Oversight Committee makes correct statements.

At the 3-11-19 Finance Committee meeting, Mayor Leonardis, also on the Oversight Committee, was also under the impression that funds in a 115 Trust could be used to cover any budget deficit.  In fact, the 115 trust can only be used to paydown pension debt and/or reimburse the town for pension payments it’s made.  It’s critical that the Oversight Committee know what they are over-seeing.

We think it is important to the other members of the Council and the public to understand Mr. Rennie’s “facts”.  The town’s rules limit public comment to only 3 minutes and Mr. Rennie made his comments AFTER all members of the public had spoken.  Mr. Rennie, nor other Council members questioned any of the speakers while they were speaking, leaving a last-minute comment by the Council to sound as if it was the correct answer.  The only avenue for the public to respond is through an open letter to the public, Next Door and the newspapers.

We might add that there is something terribly wrong when members of the Oversight Committee don’t ask questions of speakers at the time they are speaking, especially if they believe there are inaccuracies in the speaker’s comments. However, that seems to be the norm and it has a chilling effect on any resident who takes the time to actually come to a meeting to voice their concern or share their ideas.

Let us now address Mr. Rennie’s comments such that the Council and the public may better understand the real facts about the 115 Trust.  Mr. Rennie is encouraged to counter our observations publicly.

Mr. Rennie’s Comment #1 — The purpose of putting money into the 115 Trust was not to play “roulette” or get a “better return”. The Finance Committee would expect the same returns given the same asset allocations.

Mr. Rennie was on the Finance Committee when they decided to pick the high-risk investment.   It  wasn’t even close to the asset allocation that is used by CalPERS. In fact the Finance Committee selected an investment portfolio offered by PARS that had the highest “expected rate of return”.   There were 4 other portfolios that had lower “expected rates of return” and a lower “risk”.  In fact, the PARS representative mentioned that of those cities who chose to implement a 115 trust, only 10% chose the high-risk portfolio that Los Gatos has chosen.

The Finance Committee purposely selected the PARS Capital Appreciation portfolio which at the time was invested with an asset allocation of 75% in equities, 20% in fixed income and 5 % in cash. On the other hand, CalPERS is invested in 50% equities, 28% fixed income, 13% real assets, 8% Private equities and 1% liquidity. 

The portfolio claimed to have an inception to date (99 months) annualized total return (gross of investment fees) of 10.46%, with annual returns over the 99 month period ranging from negative (1.35%) to a positive 23.77%. This was a high risk, potentially high reward portfolio, with lots of volatility. This is the epitome of playing “stock market roulette” with the Town’s pension money.

CalPERS reports a 10 year net return (net of all fees) of 7.9%. PARS offered portfolios that were very similar to the CalPERS asset allocation, but the Finance Committee rejected investing in these less “risky” assets. The reason why the Finance Committee chose the Capital Appreciation portfolio was because they chose to “chase returns”. The entire discussion was around trying to find an investment portfolio that would “outperform” CalPERS in the long run.  

Is Mr. Rennie now suggesting that he really didn’t expect the PARS portfolio to outperform CALPERS and still purposely selected a higher “risk” portfolio in which to invest the Towns pension funds? How is that prudent?

Mr. Rennies Comment #2 – The reason to put money into the 115 Trust is that it is a form of diversification.

We believe Mr. Rennie was implying that by investing the Town’s pension funds in a 115 Trust and having those funds invested in someone other than CalPERS, the Town would be diversifying its investment risk.

When building a diversified portfolio, you should look for investments—stocks, bonds, cash, or others—whose returns haven’t historically moved in the same direction and to the same degree. This way, even if a portion of your portfolio is declining, the rest of your portfolio is more likely to be growing, or at least not declining as much.

But that isn’t what the Finance Committee did. Instead they invested the 115 Trust pension funds in an investment portfolio that is highly correlated with the asset allocation made by CalPERS. That means when CalPERS performance is up, the PARS portfolio will also be up. Conversely, when the CalPERS portfolio is down, so will the PARS portfolio. The returns will move in the same direction, but perhaps not at the same rate.

We saw this happen this past year. The actual return for the PARS Capital Appreciation portfolio for 2018 was a negative (5.82%) gross of fees. CalPERS also reported a negative return of (3.9%) net of fees which was less than PARS. If PARS was truly diversified from CalPERS, you would have expected PARS to have either a LOWER negative rate of return or even a positive rate of return. This isn’t what happened which proves PARS Capital Appreciation portfolio is not diversified from the CalPERS portfolio.

Mr. Rennie’s Comment #3 – Your funds are more flexible in a 115 Trust. If you put money into CalPERS you can’t get it back and CALPERS will require you to continue to pay whatever is required (i.e. the Town’s required minimum mandatory payments).

What many of us have been advocating for some time is for the Town to make an “additional discretionary payment” (ADP) to CALPERS to pay down the Town’s growing unfunded pension liability. Let’s be very clear on this point – the Town must pay off this debt to CalPERS – there is no option here. Currently, CalPERS requires the Town to make annual minimum mandatory unfunded liability debt payments according to a 30 year amortization schedule. CalPERS charges the Town 7% interest on this debt but gives the Town the option to make additional payments if the Town wishes to do so. Nothing is preventing the Town from making prepayment against the unfunded liabilities.

The only questions that have to be answered are when to pay and how much to pay? We can do nothing and pay off the UAL (unfunded liabilities) over a 30 year period or we can pay more sooner. Many of us have been advocating to make a large ADP to CalPERS as soon as possible. The benefit if this is very obvious.  1) the Town saves the interest cost associated with a 30 year amortization payment plan, 2) the Town gets immediate relief in that the portion of the UAL that has been paid off (called an amortization base) will no longer be included in the go-forward minimum mandatory payment required by CALPERS and 3) the amount of the reduction in the minimum mandatory payment is immediate and known which makes budgeting easier.

Making an ADP to CalPERS is like making a prepayment on your home mortgage. Once you make that prepayment you 1) get the benefit of reducing your mortgage debt earlier thereby saving interest charges, 2) the amount of debt reduction is absolutely known. No one expects to be able to have your bank refund your mortgage payment.  The objective is to pay down the principal and reduce the costs of interest.

Unlike a home mortgage, CalPERS also will decrease your go-forward minimum required payments by giving you credit for the debt you have paid off.  This is a very valuable benefit since it immediately gives the Town budget relief. These reductions can be very sizeable based on which debt amortization base the Town pays off. Mr. Rennie seemingly does not grasp this benefit in that he seems to think that CalPERS will not reduce the minimum mandatory payment after an ADP is made. The way he makes it sound is that the required payments won’t go down.  The other implication is that he’s ok with foregoing the benefit of paying less interest as a result of paying down the unfunded liabilities. 

Mr. Rennie’s Comment #4 – Putting money into a 115 Trust gives the Council the ability to decide at any time to pull the money out (like in a really bad recession) which will in turn give relief to our budget. This is a HUGE advantage to having the Town’s pension funds in a 115 Trust.

There is a lot to unpack in this comment and again demonstrates a superficial understanding of the 115 Trust and PARS investment.

Let us start with what Mr. Rennie got right – the ability to withdraw funds from the 115 Trust at any time.  That is true, but the funds cannot be used for anything that the Town wishes.  Mayor Leonardis, also on the Oversight Committee with Mr. Rennie, had this same misconception at the 3-11-19 Finance Committee meeting.  Do the other members of the Oversight Committee know the rules?

One of the ironies of this method is that the CalPERS payments have increased because the town hasn’t paid down the debt in the first place.  The way Mr. Rennie appears to view the 115 trust is that it becomes the “knight in shining armor” to save the day.  However, it was the town who allowed the debt to increase to unsustainable levels. 

The 115 Trust is a legal entity that must comply with strict IRS codes. There are restrictions on the use of funds that are withdrawn from the Trust. Specifically, any money withdrawn from the 115 Trust can only be used to reimburse the Town for pension payments made to CalPERS. The implied notion that there can be broad budget relief for money withdrawn from a 115 Trust is absolutely incorrect.

Furthermore, the thought that these funds will be fully available during a really bad recession totally ignores the market risk associate with the Capital Appreciation portfolio. Given the extremely high allocation in equities, it is highly likely that in a “really bad” recession this investment will decline exactly at the time the Town will need the funds.

The scenario Mr. Rennie outlined, namely a really bad recession when the Town owes CalPERS $8m (I know this is hyperbole) would be a disaster for the Town. To “pull the money out of the 115 Trust”, the Town would have to liquidate its position in the Capital Appreciation portfolio and then withdraw the net proceeds from the Trust. In Q4 2018, this portfolio declined 9.41%! If the Town had to liquidate its portfolio at that time, it would have been a material loss for the Town. Given this reality, it is very difficult for anyone to come to the same conclusion that Mr. Rennie has that this flexibility is a HUGE benefit compared to the certainty associated with the benefits of paying down the UAL with an ADP.

Mr Rennie’s Comment #5 – We can’t compare the 10 month period we have invested with PARS to CALPERS to determine which one has superior returns.

While it is true that the Town has only been invested in the PARS Capital Appreciation portfolio for 10 months, the portfolio’s inception date was January, 2009. The portfolio has a published track record that the Finance Committee reviewed when the decision was made to invest in the portfolio. As of Q4 2018, the 5 year published annualized total return of the portfolio was 4.81% and a one year return of negative (5.82%) gross of management fees.

Let’s compare that to CalPERS which has over a 30 year investment history that includes the largest percentage downturns and includes the longest downturn periods. Over the past 5 years CalPERS has experience a 5.1% annualized total return with a one year return of negative (-3.5%) net of all fees. I don’t think there is any confusion here as to which fund published superior returns over the past 5 years and the past year. Given this, why would the Town make a bet on an investment portfolio which hasn’t been around all that long relative to CalPERS AND has inferior returns for the past 5 years and the last year?


Our objective has been to respond to Mr. Rennie’s statement that he wants to “set the record straight”.  He has not.  We have tried on a number of occasions to meet with Mr. Rennie to engage in a discussion on these very points. He has refused to meet and does not reply to our emails. It is unfortunate that we have to resort to this open forum to correct his misstatements, but when he makes such blatant comments that are obviously incorrect, the record must be corrected.

Again, we encourage Mr. Rennie to respond in writing or “reply to all” to the Council, the Staff, FC and the public.  This is an open discussion for all citizens interested in the town’s serious pension debt issue.

In the end, CalPERS will be paid.

Other Pertinent Documents Regarding the above:

November 7, 2018 Finance Committee Report

PARS Sample Investment Policy

December 4, 2017 Finance Committee Meeting

CalPERS 12-31-18 Financial Report


Phil Koen

Jak VanNada

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