City Council
Staff Report
From: City Manager
Report Type: INFORMATION REPORTS
Lead Department: Administrative Services
Meeting Date: February 23, 2026
Report #:2512-5667
TITLE
Investment Activity Report for the Second Quarter (October - December), 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 December 31, 2025, the consolidated portfolio totaled $658.9 million (par value), including $537.5 million in investments and $121.4 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.
In coordination with the Finance Committee and Chandler, staff completed a comprehensive review of the City’s Investment Policy, focusing on alignment with California Government Code requirements and current best practices. Amendments to the Investment Policy were approved by the City Council in February 20261, and this report is presented in accordance with the policy in effect prior to those changes. Future quarterly investment reports will reflect the updated policy.
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 December 31, 2025 is included in Attachment B. A complete list of current and historical holdings, as well as the City’s Investment Policy, are available on the City’s website: www.paloalto.gov/investmentreporting.
ANALYSIS
Portfolio Overview
As of December 31, 2025, the City’s consolidated portfolio totaled $658.9 million (par value), including $537.5 million in investments and $121.4 million in liquid accounts. The investment portfolio had an average duration of 2.56 years and an average credit quality of AA+. The duration is closely aligned to 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.
1 City Council, February 09, 2026: Agenda Item #3: SR #2512-5767 https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=85314&dbid=0&repo=PaloAlto 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 December 31, 2025, the City’s portfolio average market yield was 3.87% compared to 3.55% for the ICE BofA 1-5 Year U.S. Treasury & Agency Index benchmark. The portfolio's total return for the quarter was 1.56%, exceeding the benchmark return of 1.35%.
These results reflect the shorter performance period beginning in August 2025, when portfolio management transitioned to Chandler. Future reports will include longer-term performance measures as the investment strategy continues to be implemented.
During the quarter, $52.5 million in securities were purchased, $5.5 million were called or redeemed, and $33.4 million matured.
Table 2 summarizes key portfolio characteristics including maturity, duration, yield, and credit quality. As of December 31st, the yield for LAIF and the two-year US Treasury were 3.98% and
3.48%, respectively. While 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.
Table 2: Portfolio Characteristics
Benchmark*
Portfolio as of
Dec 31
Portfolio as of
Sept 30
Average Maturity (yrs) 2.64 2.97 3.07
Average Modified Duration 2.47 2.56 2.64
Average Purchase Yield 2.76% 2.61%
Average Market Yield 3.55% 3.87% 4.01%
Average Credit Quality** AA+ AA+ AA+
*Benchmark: ICE BofA 105 Unsubordinated US Treasury & Agency Index **The credit quality is a weighted average calculation of the highest S&P, Moody’s and Finch Compliance and Credit Standards
The City’s Investment Policy establishes minimum credit rating requirements at the time of purchase and requires that any securities whose credit ratings fall below the minimum thresholds be reported to the City Council.
During the quarter, two securities experienced a credit rating downgrade. The Orchard School District and Oxnard Union High School District municipal securities were downgraded from Aa2 to Aa3. These securities continue to maintain a strong investment-grade rating, and staff and the City’s investment advisor recommend continuing to hold these securities. The downgrade falls below the minimum credit rating for new purchases under the Investment Policy in effect at the time of this report; however, under the Investment Policy updates approved in February, which allow securities rated ”A“ or its equivalent or greater, these securities would continue to meet minimum rating requirements.
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, 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 status relative to these limits.
At quarter end, the portfolio’s market value was 98.6% of book value, exceeding the 95% minimum threshold, and remained in full compliance with all policy limits.
Economic Outlook
The near-term economic outlook remains somewhat unclear due to delays in federal economic data following the government shutdown. Recently released data indicate inflation remains moderately above the Federal Reserve’s target, while labor market conditions continue to soften.
The Federal Reserve made the third rate cut in 2025, lowering the federal funds rate by 0.25% to a target range of 3.5% to 3.75%. Policymakers expressed differing views on a path forward, with some expecting further easing and others anticipating rate hikes.
U.S. Treasury yields continued to steepen during December. The two-year Treasury yield declined to 3.48%, while the 10-year yield increased to 4.17%, widening the spread between short- and long-term rates. Broader trade and fiscal uncertainties continued to cloud forecasts, though market conditions continue to support 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 due to 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 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 but 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 December 31, 2025) APPROVED BY:
Lauren Lai, Administrative Services Director