City Council
Staff Report
From: City Manager
Report Type: INFORMATION REPORTS
Lead Department: Administrative Services
Meeting Date: August 18, 2025
Report #:2501-4027
TITLE
Investment Activity Report for the Fourth Quarter, Fiscal Year 2025. CEQA Status – Not a Project.
RECOMMENDATION
This is an informational report and no City Council action is required.
EXECUTIVE SUMMARY
The City’s Investment Policy1 requires that staff report to Council quarterly on the City’s portfolio composition and performance, discuss overall compliance with the City’s Investment Policy, and provide recommendations, if any, for Policy changes. In addition, staff provides a detailed list of all securities and reports on the City’s ability to meet expenditure requirements over the next six months. This report is to inform Council of the City’s investment portfolio performance as of the fourth quarter ending June 30, 2025 and to disclose staff’s cash flow projections for the next six months. Staff expect that the City will have sufficient funds or liquidity to meet expenditure requirements for the next six months. The portfolio details, activities, and performance are discussed below, and additional information is provided in the attachments. During the fourth quarter staff complied with all aspects of the Investment Policy and no significantly notable activity or changes in value occurred in this reporting period. As reported in the second and third quarters of Fiscal Year 2025, three municipalities’ bond ratings have been downgraded below the City’s minimum Investment Policy guidelines, however, the likelihood of a loss of their investments is low so these investments are planned to be retained. 1 City of Palo Alto website, Administrative Services Department, Money Management & Treasury:
https://www.cityofpaloalto.org/files/assets/public/v/1/administrative-services/investment-policies/adopted- investment-policy-1-39-asd.pdf
ANALYSIS
The City’s investment portfolio is summarized in Graph 1 and detailed in the Investments by Fund Report (Attachment B). The Investments by Fund Report groups the portfolio’s securities by investment type and include details of the investment issuer, date of maturity, current market value, the book and face (par) value, and the weighted average maturity of each type of investment and of the entire portfolio.
Due to rounding, the above graph's percentage total is less than 100 percent.
The par value of the City’s portfolio is $661.8 million; in comparison, last quarter it was $656.6 million and last year it was $640.9 million. The $5.2 million portfolio growth since the last quarter results from timing of cash flows, major revenue receipts due to seasonal timing, and one fewer pay period in the fourth quarter compared to the third quarter. Property taxes and related receipts begin the second, third, and fourth quarters and major revenues such tax as sales, transient occupancy and utility user’s taxes are historically higher in the fourth quarter. In the fourth quarter, higher capital project expenditures, mainly attributed to the Regional Wastewater Quality Control Plant, offset the historically higher tax receipts in the fourth quarter.
The portfolio consists of $84.7 million in liquid accounts and $577.1 million in various investment types as detailed in the following Table 1. The Investment Policy requires that at least $50 million be maintained in securities maturing in less than two years. The portfolio includes $259.3 million in investments maturing in less than two years, comprising 39.2% of the City’s investment portfolio. In addition, the Investment Policy allows up to 30% of the portfolio to be invested in securities with maturities beyond five years; actual at the end of the fourth quarter it is 24.9% of the portfolio.
U.S. Treasury
0.6%
U.S. Agency
26.1%
U.S.
Municipal/State
38.8%
Negotiable CD
11.7%
U.S. Corporate
3.6%
Supranational
8.1%
Liquid Accts.
11.0%
Graph 1: Investments by Type - $661.8 Million
(Par Value)
The current market value of the portfolio is 97.0% of the book value. The market value of securities fluctuates, depending on how interest rates perform.
As interest rates decrease, the market value of the City’s portfolio will likely increase, and vice versa. There are inherent principal risks when actively buying and selling securities; providing information on market values is a reporting requirement that informs staff of the portfolio’s overall position. The market valuation is provided by U.S. Bank, the City’s safekeeping agent.
The average life-to-maturity of the investment portfolio is 2.81 years, compared to 2.87 years last quarter and 3.11 years in the fourth quarter of the prior year.
To minimize investment principal risk of loss due to lower market values, the City’s investment practice is to buy and hold investments to maturity. In instances where there is a need to sell securities for contingency cash flow planning, the City’s practice is to sell securities that are at or above the market value.
Investments Activity During the Fourth Quarter
During the fourth quarter, $21.4 million securities with an average yield of 3.1% matured. During the same period, per the following Table 2, securities totaling $21.0 million with an average yield of 4.6% were purchased. Investments purchased in the fourth quarter were made in securities with longer duration to take advantage of the higher interest rate environment. As a result, the interest rates rose on new investments; the City’s portfolio’s average yield also rose. The City’s short-term money market and pool account increased by $5.6 million compared to the same quarter of the prior fiscal year. Staff continually monitors the City’s short-term cash flow needs and adjust liquid funds to meet them.
Per California Government Code Section 53607, the Administrative Services Department provides a monthly report of transactions (investments, reinvestment, sold, and exchanged securities) to Council via a separate report. Though not required by this code, included in this Table 1: Up to 1 Year 1 to 2 Years 2 to 3 Years 3 to 5 Years Over 5 Years Portfolio Total * % of Portfolio U.S. Treasury 3.5$ 0.3$ -$ -$ -$ 3.8$ 0.6%U.S. Agency Bonds 55.211.8 1.7 17.9 86.0172.626.1%U.S. Municipal/ State Bonds 53.254.122.8 53.4 74.1257.638.9%Negotiable Certificates of Deposits (NCD) 25.016.114.0 17.2 5.0 77.311.7%U.S. Corporate Bonds 3.8 7.0 8.5 4.7 - 24.0 3.6%Supranational Organizations Bonds26.0 4.3 2.0 21.4 - 53.7 8.1%Liquid Accounts (LAIF & Fidelity)72.8 - - - - 72.811.0% Grand Total 239.5$ 93.6$ 49.0$ 114.6$ 165.1$ 661.8$ 100%% of Portfolio 36.2%14.1%7.4%17.3%24.9%100.0%* $126.0 million or 19.1% are in investments that support Environmental, Social, and Governace (ESG) Activities(aka "Green", local banks, and Supranational Bonds) Investment Type
FY 2025 Q4 Maturities - Par Value (millions)
report are security maturities and cash movement activity in the City’s two liquid operating cash pool accounts (Local Agency Investment Fund and Fidelity accounts). Monthly and quarterly investment reports, along with the City’s Investment Policy, can be found on the City’s website3.
Availability of Funds for the Next Six Months
Staff expect that the City will have sufficient funds or liquidity to meet expenditure requirements for the next six months.
Over the next six months, an overall decline in the portfolio in the range of $10 to $15 million is expected due to routine business activities. This reflects expected receipts of in the range of $400 million and expenditures in the range of $400 to $425 million.
The expected decline in the portfolio is attributable to pre-paying a portion of the Fiscal Year 2026 Public Employers’ Retirement System’s (PERS) employer contribution of $49.7 million, representing the City’s unfunded accrued liability (UAL) lump-sum prepayment for FY 2026. By prepaying PERS instead of making payments with each payroll period, the City is expected to save $1.7 million in pension expense; the savings will be offset by the loss of approximately $0.9 million in interest income in the City’s investment portfolio. This results in net citywide savings of $0.8 million due to PERS’ ability to earn interest earlier and at a higher rate than the City’s portfolio.
As of June 30, 2025, the City had $84.7 million deposited in the Local Agency Investment Fund (LAIF) and a money market account. In addition, investments totaling $89.5 million will mature between July 1, 2025 and December 31, 2025.
3 City of Palo Alto, Administrative Services, Financial Reporting, City Investment Reports and Policy:
www.cityofpaloalto.org/investmentreporting
Table 2:
Up to 1 Year 1 to 2 Years 2 to 3 Years 3 to 5 Years Over 5 Years Portfolio Total * % of Purchase U.S. Agency Bonds -$ -$ -$ $ 1.7 5.5$ 7.2$ 34.3%U.S. Municipal/ State Bonds - - - - 3.8 3.8 18.1%Negotiable Certificates of Deposits (NCD) - - 0.3 0.5 - 0.8 3.8%U.S. Corporate Bonds - 0.5 - - - 0.5 2.4%Supranational Organizations Bonds- - 1.7 7.0 - 8.7 41.4% Grand Total -$ 0.5$ 2.0$ 9.2$ 9.3$ 21.0$ 100%% of Purchase 0.0%2.4%9.5%43.8%44.3%100.0%* $11.5 million or 54.7% are in investments that support Environmental, Social, and Governace (ESG) Activities(aka "Green", local banks, and Supranational Bonds) Investment Type
FY 2025 Q4 Security Purchases - Par Value (millions)
Compliance with City Investment Policy
During the fourth quarter, staff complied with all aspects of the Investment Policy. Attachment C lists the major restrictions in the City’s Investment Policy compared with the portfolio’s actual performance.
The City’s Investment Policy requires new such security purchases to be rated AA or better and “If securities owned by the City are downgraded by Moody’s, Fitch, or Standard & Poor’s to a level below AA or Aa2, it shall be the City’s policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio.” The Southern California wildfires (Palisades and Eaton fires) have resulted in rating downgrades of the Los Angeles Department of Water & Power (LADWP) to “A” by Standard and Poor’s and Fitch to AA-. Moody’s still maintains its “Aa2” with a negative credit watch by all three rating firms meaning further rating downgrade(s) could occur. The City’s investment portfolio has $1.9 million in LADWP bonds with a remaining maturity duration of two years. LADWP potential issues revolve around lack of water supply and working hydrants and possibility of fires starting by downed power lines. Based on staff’s analysis, the likelihood of a loss of these investments is low so these investments should be retained.
In April 2025, the City of Los Angeles rating was downgraded by S&P to AA- and is on a negative credit watch by the three rating agencies. The City’s portfolio contains $5.4 million of their General Obligation (GO) Bonds, six of their bonds in the City’s portfolio are only rated by S&P and one is rated only by Moody’s which has a rating of Aa2 with durations ranging from 0.2 years to
7.2 years. GO bonds debt service on these bonds are funded by restricted annual property tax assessment(s); risk of loss is low and these securities will be retained to maturity. The City’s portfolio does own other municipalities securities in the area whose ratings have not been impacted by this, but staff will actively monitor all these entities’ ratings and potential liability developments with the assistance of the City’s brokers and by the use of EMMA’s website which is designated by the U.S. Securities and Exchange Commissions as the official sources for municipal securities data and disclosure documents.
In April 2025, the City of Oakland’s S&P rating was downgraded to AA- with a negative credit watch. The City’s portfolio has $6.9 million in City of Oakland GO Bonds with durations ranging from 3.5 years to 8 years and $0.2 million in revenue bonds with duration of 0.5 years. The main reason for the revised ratings is the large current and projected deficit due to expenditure growth, outpacing revenue growth. S&P acknowledges that Oakland’s management has implemented a plan to reduce operation expenditures, but they have concerns whether such actions are sufficient to address their structural imbalance. Based on staff’s analysis, the likelihood of a loss of these investments is low so these investments should be retained.
Investment Yields
Fourth quarter Interest income, on an accrual basis, was $4.4 million. Compared to the prior year’s same quarter of $4.1 million, it is $0.3 million higher due to prudent long-term investments made in the last several years during the higher interest rate environment. As of June 30, 2025, the yield to maturity of the City’s portfolio was 2.70%; in the prior quarter it was 2.65%. In the fourth quarter, LAIF’s average yield was 4.27% while the average yield on the two-year and five- year Treasury bonds was approximately 3.86% and 3.97%, respectively. In comparison, in the prior quarter LAIF had higher 4.34% yield, and the two-year and five-year Treasury bonds yields were 4.15% and 4.25%, respectively.
The City’s portfolio yield is lower than the two-year and five-year Treasury bond due to the fluctuating but still high interest rates environment. It is expected that as the City’s investments mature in the next few years, funds will continue to be reinvested and will follow the economic patterns. Graph 2 shows the City’s yields and interest earnings for the past 23 years.
City’s portfolio duration is 2.81 years.
Yield Trends
The Federal Open Market Committee (FOMC), since March 2020, has raised the federal funds rate 11 times totaling 5.25% with the first occurring on March 16, 2022. Beginning July 31, 2024, FOMC decreased the rate four times totaling 1.25%. Since December 2024, the Federal Reserve kept interest rates unchanged. The primary goals of the Federal Reserve's monetary policy are to promote maximum employment, stable prices, and moderate long-term interest rates.
Following three consecutive rate reductions that began in September 2024, in March 2025 the FOMC held interest rate in the range of 4.25% to 4.50% for a six straight meeting. The Federal Reserve’s “wait-and-see” posture allows for time to assess impacts to inflation and growth from recent policy shifts under the new administration. Unemployment remains low and inflation remains elevated, though the risk of both has risen. Economic uncertainty has diminished but
5.88%
5.00%
4.17%
4.54%
City of Palo Alto
2.71%
1.80% 1.93% 1.66% 2.70%
3.65%
1.41%
0.81% 0.25%
2 Yr. Treasury
4.39%
3.86%
4.43%4.39%
4.98%
1.10%
5-Yr. Treasury
2.88%
2.47%
0.27%
3.23%
4.00%
3.97%
4.47%
1.44%
5.25%
0.23%
LAIF
1.29%
2.63%
4.27%
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
$5.0
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
Int. Earnings (Millions)Yields
Fiscal Year Quarters
Graph 2: Yields and Interest Earnings
remains elevated. In a press conference filled with comments around uncertainty, Federal Reserve Chair Jerome Powell articulated the complexities surrounding the current economic landscape, which is heavily influenced by policies from the Trump administration.
Funds Held by the City or Managed Under Contract
Attachment A is a consolidated report of all City investment funds, including those not held directly in the investment portfolio. These include cash in the City’s regular bank account with US Bank and Wells Fargo. A description of the City’s banking relationships can be found in City Council Staff Report ID #2404-2845 5. The bond proceeds, reserves, and debt service payments being held by the City’s fiscal agents are subject to the requirements of the underlying debt indenture. The trustees for the bond funds are U.S. Bank and California Asset Management Program (CAMP). Bond funds with U.S. Bank are invested in federal agency and money market mutual funds that consist exclusively of U.S. Treasury securities. Bond funds in CAMP are invested in banker’s acceptance notes, certificates of deposit, commercial paper, federal agency securities, and repurchase agreements. The most recent data on funds held by the fiscal agent is as of June 30, 2025.
In January 2017, the City established a Public Agencies Post-Employment Benefits Trust Section 115 Irrevocable Trust (“Pension Trust”) administered by Public Agency Retirement Services (PARS). This fund is governed by the City’s Retiree Benefit Funding Policy 6 as opposed to the Investment Policy; however, it is discussed in this report to present the full picture of the City’s investments. It is the City’s intent to prefund pension costs and to address the Net Pension Liabilities (NPL) as calculated by Governmental Accounting Standards Board Pronouncement No. 68 (GASB 68). PARS offers five portfolio types, each with different asset allocation models that carry different levels of risk. In February 2023, the City Council revised the City’s portfolio selection from “Moderately Conservative” to “Balanced”, shifting from the second most conservative to a balanced portfolio that places more emphasis on growth of principal. Additional information on the establishment of this trust can be found in City Council Staff Report ID # 75537.
Through June 30, 2025, principal investment contributions of $87.4 million made over time since May 2017, have increased to $106.9 million and the net return for one and five years has been
12.6% and 6.1% respectively. Since inception, $23.5 million net earnings have been realized with $1 million in administrative expenses.
FISCAL/RESOURCE IMPACT
This is an information report.
5 City Council, June 17, 2024, https://portal.laserfiche.com/Portal/DocView.aspx?id=73964&repo=r-704298fc 6 Retiree Benefit Funding Policy, https://portal.laserfiche.com/Portal/DocView.aspx?id=61647&repo=r- 704298fc&searchid=01094afe-6411-4c18-937a-9d13dd8f4659
7 City Council, January 23, 2017 Item #5, CMR 7553:
https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports- cmrs/year-archive/2017/7553.pdf
STAKEHOLDER ENGAGEMENT
Staff works internally and with external parties (U.S. Bank’s custodial, U.S. Bank’s bonds, Wells Fargo and U.S. Bank’s banking, California Asset Management Program (CAMP), and Public Agency Retirement Services (PARS)) statements to prepare this report.
ENVIRONMENTAL REVIEW
This Council informational report is not a project under California Environmental Quality Act (CEQA) as defined in CEQA Guidelines, section 15378, because the report is presented for informational purposes only with no action requested of the Council.
ATTACHMENTS
Attachment A: Consolidated Report of Cash Management
Attachment B: Investment Portfolio
Attachment C: Investment Portfolio Compliance
APPROVED BY:
Lauren Lai, Administrative Services Director