City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Administrative Services
Meeting Date: June 16, 2025
Report #:2505-4709
TITLE
Recommend the City Council Adopt the Fiscal Year 2026 Investment Policy as Recommended by the Finance Committee: CEQA Status – Not a Project
RECOMMENDATION
The Finance Committee and staff recommend the City Council approve the City’s Investment Policy (Policy) (Attachment A).
ANALYSIS
The Investment Policy (Policy) requires that the Policy be reviewed annually, and that any changes be approved by the City Council during the annual budget process. The Policy (and any changes) was reviewed by the Finance Committee on June 3, 20251.
Proposed Changes Resulting from the Investment Management Audit The City Auditor issued the Investment Management Audit on December 12, 20232, which contained recommendations for the City to improve its oversight over the City’s investment portfolio, including the following recommendations:
1. Segregation of duties and oversight of investment activities a. Staff should implement a formal process for review and approval of investment activities (complete)
b. Continue efforts to adjust staffing levels of the investment function. Additional staffing resources have been hired and is currently being trained. (in process)
2. Supporting documents for investment activities
1 Finance Committee, June 3, 2025, Item #3:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16128 2 City Council, January 16, 2024: https://portal.laserfiche.com/Portal/DocView.aspx?id=70175&repo=r- 704298fc&searchid=1841ef17-7090-4241-9d91-bd787b78be3c
a. Maintain adequate supporting documentation such as cash flow and evaluation of quotations for each investment decision (complete)
b. Update Investment Policy to require broker/dealers provide documentation showing their financial condition and relevant registration (complete) As staff performed this review and further researched industry’s best practices related to #2b above, two benchmarks were used to assess brokers and dealers.
Broker and Dealer Record Free of Disclosure Events
The Financial Industry Regulatory Authority (FINRA), an independent regulator for all securities firms doing business in the United States and regulated by the Federal government, publishes the Broker Check report. The report contains the individual’s experience; current registrations and licenses; and any disclosure events, including customer disputes, disciplinary events, and/or criminal events. The proposed Policy recommends adding criteria that brokers and dealers maintain a record free of disclosure events, evidenced by the individual’s BrokerCheck report.
Net Capital Requirement
The Securities and Exchange Commission (SEC) amended financial responsibility rules for broker/dealers in 20133 where amendments to net capital, customer protection, and recordkeeping were designed to better protect broker/dealer customers and enhance the SEC’s ability to monitor and prevent unsound business practices. As a result, Rule 15c3-1 was added and requires brokers/dealers to maintain enough liquid assets for each dollar of liabilities, based on specific ratios, to ensure that there are sufficient liquid assets to pay all liabilities to customers. Firm net capital status is a required financial statement disclosure by the SEC. The Proposed policy recommends that net capital requirements, as outlined by SEC Rule 15c3-1, must be met for broker/dealers.
Other Proposed Changes
In addition to the proposed changes to further refine the Policy to address Investment Management Audit, staff propose these additional improvements to the Policy:
1. Authorized Investments
a. Clarify that the Policy is more restrictive than the Government Code and that the more restrictive parameters will take precedence; holding limits and minimum credit quality requirements apply at the time the security is purchased b. Any investments currently held at the time the policy is adopted, which does not meet new policy guidelines, can be held to maturity and will be exempt from the 3 SEC Adopts Amendments to Financial responsibility Rules for Brokers-Dealers, July 31, 2013:
https://www.sec.gov/newsroom/press-releases/2013-140
current policy. At the time of the investment’s maturity or liquidation, such funds will be reinvested only as provided in the current policy.
2. Policy Review and Reporting on Investments
a. Outlined requirements in California Government Code Section 53646, which include a requirement that the quarterly report be reported to Council within 45 days after the end of the quarter and listing the reporting requirements per the Code.
3. Authorized Investment Personnel
This change was discussed at the June 3, 2025 Finance Committee meeting and was included in the Committee’s motion. Staff proposes updating the Authorized Investment Personnel section of the policy to include the blended approach of a specialized firm and leveraging staff. This would align with best practice of updating city policy and practices, findings in staff’s research of how other agencies manage the investment function, with city auditor observations, and anticipated higher investment earnings by partnering with an investment management firm.
In addition, on the June 17, 2025 Council Consent Agenda4, staff will be recommending that Council approve an agreement for investment management services with a specialized asset portfolio management firm, enabling a blended approach to this function. The City’s current investment management structure is supported by Administrative Services staff and in a recent survey, it was determined that two-thirds of cities within Santa Clara County enlist the expertise of professional investment portfolios managers from specialized firms.
FISCAL/RESOURCE IMPACT
Approval of the recommendation will not have a financial impact. The additional reporting can be accommodated with existing staff resources.
STAKEHOLDER ENGAGEMENT
Staff work internally and with external parties (broker/dealers and municipal advisor) to review the Policy and consider new and upcoming industry best practices.
ENVIRONMENTAL REVIEW
This activity is not a project under the California Environmental Quality Act (CEQA) as defined in CEQA Guidelines, section 15378, because adoption of the investment policy is a government funding mechanisms or fiscal activity which does not involve any commitment to any specific 4 City Council, June 17, 2025, Report #2504-4587
project which may result in a potentially significant physical impact on the environment. CEQA Guidelines section 15378(b)(4).
ATTACHMENTS
Attachment A: Proposed FY 2026 Investment Policy
APPROVED BY:
Lauren Lai, Administrative Services Director