City Council
Staff Report
From: City Manager
Report Type: INFORMATION REPORTS
Lead Department: Administrative Services
Meeting Date: November 17, 2025
Report #: 2501-4033
TITLE
Investment Activity Report for the First Quarter, Fiscal Year 2026. CEQA Status – Not a Project.
RECOMMENDATION
This is an informational report and no City Council action is required.
EXECUTIVE SUMMARY
This report is presented in accordance with California Government Code Section 53646 and the City’s Investment Policy.
As of September 30, 2025, the consolidated portfolio totaled $606.2 million (par value), including $534.6 million in investments and $71.6 million in liquid accounts. The investment portfolio was in full compliance with the City’s Investment Policy, and staff projects adequate liquidity to meet expenditure requirements for the next six months.
Attachments in this report provide detailed cash and investment information, including portfolio holdings, performance metrics, and related financial summaries.
BACKGROUND
The City’s Investment Policy is reviewed and approved annually by Council and establishes the framework for managing public funds in accordance with the Prudent Investor Standard under state law. The policy outlines authorized investment types, maturity and credit quality limits, diversification requirements, and reporting standards to ensure the objectives of safety, liquidity, and yield.
The policy also requires the Administrative Services Department to provide the City Council with monthly and quarterly investment reports, consistent with California Government Code 53646. Monthly reports provide details on investment activity during the period, such as purchases, calls, redemptions, and maturities. This quarterly report summarizes the City’s investment holdings, portfolio performance, and compliance with the City’s Investment Policy and California Government Code.
Beginning in FY 2026, the City transitioned from managing its investment portfolio in-house to partnering with Chandler Asset Management (Chandler) for professional investment management services, including cash flow forecasting, investment advisory and strategy, policy review, and active portfolio management.
A comprehensive view of all City cash and investment holdings, including trust and debt-related funds is included in Attachment A. The Investment Quarterly Report as of September 30, 2025 is included in Attachment B.
Previously issued investment reports are available on the City’s website:
www.paloalto.gov/Departments/Administrative-Services/Financial-Reporting
ANALYSIS
Portfolio Overview: As of September 30, 2025, the City’s consolidated portfolio totaled $606.2 million (par value), including $534.6 million in investments and $71.6 million in liquid accounts.
The investment portfolio had an average duration of 2.3 years and an average credit quality of AA+. The duration is slightly below Chandler’s recommended positioning of 2.5 years within a one-to-five-year maturity range.
Graph 1 below illustrates the City’s portfolio by security type, reflecting how funds are allocated across permitted investment categories.
Investments by Type - $606.2 Million (Par Value)
Table 1 summarizes the portfolio’s maturity structure, which supports the City’s liquidity objectives and duration strategy.
Investment Performance and Activity: For the quarter ended September 30, 2025, the City’s portfolio average market yield was 4.01% compared to 3.66% for the ICE BofA 1-5 Year U.S.
Treasury & Agency Index benchmark. The portfolio earned a total return of 0.40% for the quarter, exceeding the benchmark return of 0.24%. Because Chandler began managing the City’s portfolio mid-quarter, results reflect a shorter timeframe and early portfolio positioning.
Future reports will show performance over longer periods as the strategy takes shape.
During the quarter, approximately $12.5 million in securities were purchased, $10.8 million were called or redeemed, and $44.9 million matured.
Table 2 outlines the portfolio’s average maturity, modified duration, purchase yield, market yield and average credit rating quality. As of September 30th, yield for LAIF and the two-year U.S. Treasury were 4.20% and 3.57%, respectively.
Table 2: Portfolio Characteristics
Benchmark*
Portfolio as of
Sept 30
Average Maturity (yrs) 2.65 3.07
Average Modified Duration 2.48 2.64
Average Purchase Yield 2.61%
Average Market Yield 3.66% 4.01%
Average Credit Quality ** AA+ AA+
*Benchmark: ICE BofA 1-5 Unsubordinated US Treasury & Agency Indez **The credit quality is a weighted average calculation of the highest S&P, Moody’s and Fitch
Although these are not direct performance benchmarks, they provide useful context for evaluating the portfolio’s positioning relative to short-term liquidity returns and broader market conditions.
Compliance and Credit Standards: All new purchases met or exceeded the policy’s minimum credit rating of AA or Aa2. No corporate note securities experienced downgrades requiring review1, and the portfolio remained in full compliance with policy credit standards.
The Investment Policy establishes several structural limits and controls. General requirements include a maximum stated maturity of 10 years, no more than 30% of the portfolio in maturities beyond five years, at least $50 million maturing within two years, and maintaining a market value above 95% of book value. All marketable securities are held by a third-party custodian, and valuations are independently verified.
Specific limits also apply to each authorized investment type, covering maximum allocations, issuer exposure, credit quality, and maturity restrictions. The Investment Quarterly Report provides detailed compliance information and the portfolio’s current status relative to these limits.
At quarter end, the portfolio’s market value was 97.9% of book value, exceeding the 95% minimum threshold, and remained in full compliance with all policy limits.
Economic Outlook: Economic growth slowed in the third quarter of 2025, with easing inflation and continued uncertainty from tariffs and fiscal policy. Signs of a softer labor market emerged, and the Federal Reserve lowered the federal funds rate by 0.25% to a range of 4.00 to 4.25%, signaling the possibility of additional cuts later in the year.
U.S. Treasury yields declined modestly, with the 2-year yield at 3.57% and the 10-year at 4.12%, resulting in a slightly flatter yield curve. Broader trade and fiscal uncertainties continued to cloud forecasts, though market conditions supported stable fixed-income performance consistent with the City’s conservative investment approach.
Cash Flow Outlook: Cash flow needs fluctuate over the course of the fiscal year as a result of cyclical revenue patterns, with larger inflows from major revenue sources such as property tax receipts occurring in the second half of the year. One-time activities, such as the annual prepayment of pension obligations and large capital expenditures, also influence these 1 The Investment Policy (https://www.paloalto.gov/files/assets/public/v/2/administrative-services/investment- policies/investment-policy-fy-2025-2026.pdf) requires that if a medium term corporate note is downgraded to a level below AA or Aa2, that staff review the credit situation of the issuer and determine whether to sell or retain the investment.
patterns. The City’s investment strategy aligns with these cycles by timing maturities and maintaining sufficient liquidity to meet ongoing needs as they occur.
The portfolio is expected to meet all expenditure needs for the next six months.
Funds Held by Fiscal Agents and Trustees: The City holds bond proceeds, reserves, and debt service funds with fiscal agents, which are invested in accordance with the respective bond indentures. The City also maintains a Section 115 Pension Trust with Public Agency Retirement Services (PARS), governed by the City’s Retiree Benefit Funding Policy.
These funds are outside of the scope of the Chandler investment portfolio and therefore excluded from Attachment B, however are included in Attachment A of this report to provide a comprehensive view of City funds.
FISCAL/RESOURCE IMPACT
This report is for informational purposes only and has no direct fiscal impact.
STAKEHOLDER ENGAGEMENT
Staff collaborated with internal teams and external financial partners to gather the information included in this report.
ENVIRONMENTAL REVIEW
This informational report is not a project under the California Environmental Quality Act (CEQA) as defined in CEQA Guidelines Section 15378, as it is presented for informational purposes only and requires no Council action.
ATTACHMENTS
Attachment A: Consolidated Report of Cash Management
Attachment B: Investment Quarterly Report (as of September 30, 2025) APPROVED BY:
Lauren Lai, Administrative Services Director