City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Administrative Services
Meeting Date: February 9, 2026
Report #:2512-5767
TITLE
Adoption of Revisions to the 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 (Attachment A).
BACKGROUND
The Investment Policy (Policy) requires that the Policy be reviewed annually, and that any changes be approved by the City Council. The Policy and revisions were reviewed by the Finance Committee on January 6, 20261. The Policy, and monthly and quarterly investment activity reports can be found on the City’s website2.
Earlier this year, the City’s investment management function transitioned from an in-house to a specialized asset portfolio management firm, Chandler Asset Management (Chandler). In addition to active investment management, this transition leverages the expertise of a professional firm in areas such as cash flow forecasting and investment advisory and strategy services.
On October 21, 2025, the Finance Committee received and discussed an overview of investment advisory services to be performed by Chander3. At this meeting, the Committee, staff, and Chandler discussed the City Auditor’s recommendations from the December 2023 Investment Management4; initial observations made by Chandler related to the City’s cash flow 1 Finance Committee, January 6, 2026, Item #1:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=18526 2 City Investment Reports and Policy: www.paloalto.gov/investmentreporting 3 Finance Committee, October 21, 2025, Item #2:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16276 4 Policy & Services Committee, December 12, 2023, Item #5:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=12186
analysis, banking and custodial arrangements, active asset management strategy, and the Policy; and staff and Chandler’s workplan to transition investment management from in-house to Chandler. The Details of these items are outlined in staff’s report to the Committee.
There are several key observations in the City’s Policy that allow more flexibility and higher potential investment returns, while staying within the California Government Code (Code) and prioritizing asset safety were discussed. Review and updates to the Policy were included as part of the second phase of transitioning investment advisory services (by Spring 2026).
The Committee reviewed the revised policy in its January 6th meeting and unanimously approved the following motion:
MOTION: Councilmember Reckdahl moved, seconded by Councilmember Lythcott-Haims, to recommend the City Council approve revisions to the City’s Investment Policy (Attachment B) with the following changes:
•In #3 of the General Investment Guidelines section, define “liquid investments” •Edit #4 of the General Investment Guidelines section to read: “Should the ratio of the market value of the portfolio to the book value of the portfolio fall below 95 percent, the Administrative Services Department will report this fact to the City Council quarterly within a reasonable time frame and evaluate whether there is any risk of holding any of the securities to maturity.”
Edit the final sentence of #5 of the General Investment Guidelines section to read:
“As soon as reasonably possible, percentage limitations will be restored as investments mature in each category.”
•In #8 of the Authorized Investment section, reference the California Government Code limits and collateralization requirements
The attached Policy (Attachment A and B) incorporated the Committee’s revisions (highlighted in yellow).
ANALYSIS
The primary recommended changes to the Policy are listed below:
The staff report from the Finance Committee’s January 6, 2025 meeting1 and Chandler’s memorandum9 provide a detailed discussion of these changes.
FISCAL/RESOURCE IMPACT
The transition to Chandler Asset Management is expected to increase the City’s return on investments. Revised forecasts assume average portfolio returns of 3.0 to 3.3% over the next several years as existing investments mature and are reinvested under the new investment strategy, compared to previous earnings of approximately 2.6% (as of August 2025 snapshot).
Additionally, the City implemented a new automated daily sweep into interest earning accounts, this streamlined process is also yielding additional interest income. Based on these improvements and assumptions, citywide investment returns are projected to be approximately $18.7 million in FY 2027, with the General Fund receiving approximately 20% of these receipts. Citywide, this reflects a $2.9 million or 18.4% increase over FY 2026 Adopted Budget levels. Changes in the Policy can be accommodated with existing staff and investment advisory resources.
STAKEHOLDER ENGAGEMENT
Staff worked internally, with its investment advisory, and the Finance Committee to review the Policy and consider the changes that align the policy with investment portfolio goals and objectives, industry best practices, and alignment with the California Government Code.
9 Finance Committee, January 6, 2026, Item #1:
https://cityofpaloalto.primegov.com/viewer/preview?id=0&type=8&uid=03d484c6-e481-427c-83ff-85e88651d701
POLICY PHILOSOPHY &
GOVERNANCE
•Removed “hold to maturity”
language to allow for tactical sales
before maturity
•Shift from transactional focus to
governance with management
directives; removed requirement
that each trade must be pre-
approved by ASD Director.
•Clarified general investment
guidelines to address minimum
liquidity and trade execution.
•Leverage use of external
investment advisors.
•Shift from reporting concentration
limits and other items from par
value to market value.
READABILITY
•Clarified and more strongly
defined descriptions of prohibited
investments.
•Updated language governing trade
activity with broker/dealers.
•Augmented governance language
to include dealings with authorized
financial institutions, and
depositories.
TECHNICAL UPATES
•Revised concentration limits and
credit quality limits to be more
inline with Code.
•Updated language to allow for use
for all major credit rating agencies.
•Added additional investment types
permitted under Code to enhance
diversification and return
potential.
•Revised issuer concentration limits
and added more robust sector
concentration limits.
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 fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. CEQA Guidelines section 15378(b)(4).
ATTACHMENTS
Attachment A: Proposed Investment Policy (Redline)
Attachment B: Proposed Investment Policy (Clean)
APPROVED BY:
Lauren Lai, Administrative Services Director