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City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Administrative Services
Meeting Date: June 17, 2025
Report #:2504-4587
TITLE
Approval of Professional Services Contract Number C26193797 with Chandler Asset Management, Inc. in an Amount Not to Exceed $750,000 for Investment Management Services for a Period of Three Years; CEQA Status - Not A Project
RECOMMENDATION
Staff recommends that Council approve and authorize the City Manager or designee to execute Contract No. C26193797 (Attachment A), with Chandler Asset Management, Inc. to provide investment management services for a period of Three Years and a total amount not-to-exceed of $750,000.
EXECUTIVE SUMMARY
Staff recommends transitioning investment management services to a specialized asset portfolio management firm. It is best practice to periodically evaluate and update our City policies and procedures and this action is in alignment with findings from an audit completed by Baker Tilly on Investment Management services citing risk in redundancies in service delivery. 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.
Staff recommend a blend of leveraging local knowledge with a professional specialized firm to further optimize performance, results and adapt to increasing market complexity while supporting a service delivery model that ensures continuity of the City’s investment program, regardless of changes or fluctuations in City staff resources.
This report includes an overview of the City’s investment management function, the benefits of partnering with a specialized investment management firm, and discussion of the competitive solicitation process in selecting Chandler Asset Management, Inc. as the City’s investment
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management firm. Additionally, on June 3, 20251, the Finance Committee reviewed and recommended that the City Council amend the City Investment Policy to reflect best practices in broker/dealer due diligence, timeliness of reporting and including consultants within the listing of authorized investment personnel. Should the City Council approve this contract, Chandler Asset Management, Inc. will onboard with Staff and the City Council/Finance Committee through an initial discussion of roles, responsibilities, objectives and onboard workplan. Then upon implementation, Chandler will have a follow-up discussions on observations, recommendations, workplan for related improvements and clarify periodic discussions and reporting of portfolio performance and compliance. The plan is to have an onboard study session with the Finance Committee.
BACKGROUND
City funds needed for immediate disbursement are maintained in a liquid checking account and funds that are temporarily idle or not needed for disbursement are held in the City’s pooled investment portfolio. Currently, City staff manages the investments of the City’s pooled portfolio in accordance with the City’s Investment Policy. The City’s Pension Trust Fund (Section 115), Deferred Compensation Plan (Section 457), the City’s pension plan with CalPERS, Other Post-Employment Benefits (OPEB) Trust, debt issuance proceeds, and investments of the City’s risk pool (ACCEL) are all currently managed by specialized firms.
The City Council first adopted the Investment Policy2, the policy that governs the investment of City funds, on October 22, 1984. Key philosophies of the City’s Investment Policy are:
1. Safety, the most important objective, ensuring safety of principal, undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio;
2. Liquidity, the second most important objective, meeting all operating requirement that may be reasonably anticipated; and
3. Yield, the last priority, ensuring that the portfolio is designed to obtain a market rate of return that reflects the authorized investments, risk constraints, and liquidity needs outlined in the Investment Policy.
The City Council reviews and adopts the Investment Policy annually, before the start of the new fiscal year to ensure its consistency with the overall objectives of preservation of principal, liquidity, and return, and its relevance to current law and financial and economic trends. In addition, the Investment Policy follows the Government Code and includes additional restrictions on some investments, such as a lower allowable percentage per investment type or issuer than State law.
1 Finance Committee, June 3, 2025, Item #3:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16128 2 Adopted by Council on June 17, 2024: https://www.paloalto.gov/files/assets/public/v/1/administrative- services/investment-policies/adopted-investment-policy-1-39-asd.pdf 7 1
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California Government Code Section 53600 et seq., strictly governs which investments public agencies can hold. In some cases, State law also governs what percentage of the portfolio can be invested in certain security types, maximum maturities, and minimum credit ratings by the major rating agencies (Standard & Poor’s and Moody’s Investors Service). Public agencies can only invest in fixed income securities. The purchase of stock is prohibited. Therefore, the City primarily invests in highly rated securities such as U.S. Treasury, Federal agencies, and government sponsored enterprise debt.
The City’s investment strategy has been focused on making short-term investments in anticipation of rising interest rates and holding investments until maturity dates to avoid the incurrence of losses that result from disposition of investments at market value lower than cost. For the past three years, the City’s investment portfolio statistics are as follows:
Table 1: Investment Balance, Yield, and Years-to-Maturity Fiscal Year
(Ending 6/30) Investment Balance Yield Years-to-Maturity 2024 $640.9M 2.6% 2.6
2023 $623.2M 2.3% 2.3
2022 $584.7M 1.6% 1.6
Investment advisory and portfolio management firms have specialized expertise, technology skills, and research tools necessary to reasonably achieve a higher rate of return and they can design and manage an investment portfolio that meet individual needs and preferences of public agencies and comply with applicable federal laws and California Government Codes.
The recent Investment Management Audit conducted by the City Auditor, Baker Tilly, and adopted by the City Council on January 16, 20243, identified segregation of duties and oversight of investment activities as a finding. This finding recommends that staff implement a formal process for review and approval of investment activities and that ASD should continue efforts to adjust the staffing of the investment function. Staff has made progress on these improvements and this recommended hybrid approach with a specialized firm will further segregate the duties, with appropriate oversight and internal controls.
ANALYSIS
It is best practice to periodically evaluate and update City policies and procedures. The Administrative Services Department (ASD) reviewed other agency practices and current trends.
Staff found that two-thirds of the cities within Santa Clara County utilize a specialized firm to professionally manage their investment portfolios. These services are either fully or partially 3 City Council, January 16, 2024: https://portal.laserfiche.com/Portal/DocView.aspx?id=70175&repo=r- 704298fc&searchid=8612bc60-125a-4964-9c0f-b6de5a04f68d; Office of the City Auditor Investment Management Audit: https://cityofpaloalto.primegov.com/Portal/viewer?id=0&type=7&uid=45e60ff6-0073-4805-bd0f- d06b82d471ac
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supported and include services such as cash flow forecasting, investment advisory and strategy services, and investment policy updates.
Moving forward with a specialized firm is consistent with investment portfolio management trends. Most recent investment activity reports for cities of Mountain View, Santa Clara, and Sunnyvale reported yield to maturity that ranged between 3.3% to 4.2%. These agencies have a blended approach utilizing a specialized firm and it is important to also note that the composition of their portfolios, policies, and practices may differ from the City. The selected professional firm will serve as a key partner of the City to provide comprehensive portfolio oversight, including diversification and performance optimization, risk management, regulatory compliance, reporting, and periodic investment policy updates. Quarterly investment reports will be completed in partnership between Staff and the firm to ensure compliance with City investment policy and transparency to the City Council and Finance Committee.
Solicitation Process
On February 7, 2025, ASD staff released a Request for Proposals (RFP), seeking to receive proposals from qualified firms with investment management services experience, with a focus on public agencies, to provide in-depth perspective on supporting the City in this area.
Table 2: Summary of Request for Proposals
Proposal Description/Number Investment Management Services RFP #193797
Proposed Length of Project July 1, 2025 to June 30, 2028 (Three Years) Number of Vendors Notified 3,471
Number of Proposal Packages Downloaded 36
Total Days to Respond to RFP 28
Pre-Proposal Meeting and Date N/A
Number of Proposals Received 10
Proposal Price Range $540,000 to $1,440,000
(Proposed Three Year Cost)
Public Link to Solicitation https://procurement.opengov.com/portal/palo-alto- ca/projects/145131
The RFP was sent to 3,471 firms and received 10 proposals. Proposals were reviewed by an evaluation team consisting of staff from Administrative Services Department (ASD). The proposals were evaluated on quality of proposal, proposed solution, experience, financial condition and stability, timely performance, prior record of performance for government agencies, and ability to provide ongoing services, and compliance with applicable laws and regulations. Following the proposal evaluation process, three firms were invited for interviews on April 14, 2025.
Throughout the evaluation process, Chandler demonstrated a high level of expertise, public sector experience, and research resources available to customize the City’s portfolio in accordance with the City’s investment objectives and goals. As of December 31, 2024, Chandler 7 1
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managed $27.3 billion for over 165 public agency clients in California, including over 80 California cities. For over 35 years, Chandler has assisted public agencies with fiduciary duties related to investment solutions and investment framework. Total asset under management (AUM) is $41.6 billion including $36.5 billion for over 200 local government clients, as of December 31, 2024.
Chandler’s investment philosophy for the portfolio will be to maintain a balanced portfolio that is focused on safety, liquidity, and yield. This philosophy helps manage the portfolio in both increasing and decreasing interest rate environments. Other benefits of that partnering with Chandler include:
•Proprietary software to ensure all transactions meet Government Code and the City’s Investment Policy guidelines
•Analysis of the City’s cash flow needs,
•Active management of the City’s investments,
•Access to market resources such as Bloomberg, Trade Web and proprietary optimizing models,
•Volume pricing optimization on transactions and other services, •Monthly online reporting and monitoring tools for all transactions and current balances, Assurance of portfolio compliance with all federal and State of California laws as well as ordinances, resolutions and policies of the City relating to the investment of public funds,
•Annually perform due diligence reviews of the broker/dealer, custodian bank and financial institutions utilized by the City and provide supporting documentation to the City,
•Keep the City informed of changing economic conditions through flash communications and formal periodic reports including discussions of key economic indicators relevant to the regional, State, national and global economies, and •Continuity of the investment program regardless of changes or fluctuations in staff levels or City personnel.
Chandler dedicated team members include the primary portfolio strategist with 30 years of industry tenure located in northern California, and four other investment managers and client services team members throughout the Bay Area and southern California. Chandler will provide monthly and quarterly reporting to the City Council, hold quarterly meetings with staff to discuss quarterly results, and be available to present to the Finance Committee or Council as needed. In addition, Chandler will be assisting ASD staff with the annual update of the Investment Policy, which ultimately is submitted for Council approval.
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FISCAL/RESOURCE IMPACT
Fees for investment management services are included in the FY 2026 Proposed Budget and are structured into the tier format below:
Table 3: Chandler Asset Management Fee Structure
Assets Under Management
(Market Value) Investment Management Fee Estimated Fee
First $150 million 0.06 of 1% (6 basis points) $90,000
Next $100 million 0.04 of 1% (4 basis points) $40,000
Assets in Excess of $250 million 0.03 of 1% (3 basis points) $96,000 For example, if the City has $600 million of assets under management with Chandler, the total annual fees would be approximately $235,000 or approximately 0.04 of 1% (4 basis points). The firm’s expertise is anticipated to garner higher investment earnings to offset the contract costs.
The total contract spans three years at an estimated $243,000 per year. Staff is requesting a total not-to-exceed of $750,000 to account for continued potential growth in the City’s investment pool (asset under management value).
STAKEHOLDER ENGAGEMENT
This contract was reviewed and coordinated with ASD staff, the City Attorney's Office, and Purchasing to ensure alignment with city policies and procedures.
ENVIRONMENTAL REVIEW
Council action on this item is not a project as defined by the California Environmental Quality Act (CEQA) because a contract for investment management services is an administrative activity which does not involve any commitment to any specific project which will not result in direct or indirect physical changes in the environment. CEQA Guidelines, section 15378(b)(5).
ATTACHMENTS
Attachment A: Contract C26193797 with Chandler Asset Management, Inc.
APPROVED BY:
Lauren Lai, Administrative Services Director