City Council
Staff Report
From: City Manager
Report Type: INFORMATION REPORTS
Lead Department: Administrative Services
Meeting Date: August 17, 2026
Report #:2512-5702
TITLE
Investment Activity Report for the Fourth Quarter (April – June), 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 June 30, 2026, the consolidated portfolio totaled $671.2 million (market value), including $528.5 million in investments and $142.6 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 and links 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 return.
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.
An overview of all City cash and investment holdings, including trust and debt-related funds, is included in Attachment A. The Investment Quarterly Report is included in Attachment B. A complete list of all current and historical holdings, as well as the City’s Investment Policy, is available on the City’s website: www.paloalto.gov/investmentreporting.
ANALYSIS
As of June 30, 2026, the City’s consolidated portfolio totaled $671.2 million (market value), including $528.5 million in investments and $142.6 million in liquid accounts. The investment portfolio had an average duration of 2.54 years and an average credit quality of AA+. The duration is slightly above Chandler’s recommended positioning of 2.46 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
Table 1 summarizes the portfolio’s maturity structure, which supports the City’s liquidity objectives and duration strategy.
U.S. Treasury
11.7%
U.S. Agency Bonds
16.4%
U.S. Municipal/ State
Bonds
28.5%Certificates of Deposits
(CD)
U.S. Corporate Bonds
9.0%
Supranational
Organizations Bonds
5.9%
Money Market Fund
0.3%
Asset-Backed
Securities (ABS/MBS)
4.5%
Liquid Accounts
21.2%
Investment by Type - $671.2 Million (Market Value)
Investment Performance and Activity
For the quarter ended June 30, 2026, the City’s portfolio average market yield was 4.32% compared to 4.16% for the ICE BofA 1-5 Year U.S. Treasury & Agency Index benchmark. The portfolio's total return for the quarter was 0.41%, exceeding the benchmark return of 0.24%.
During the quarter, approximately $43.5 million in securities were purchased, $3.5 million were called or redeemed, and $34.0 million matured.
Table 2 summarizes key portfolio characteristics including maturity, duration, yield, and credit quality. As of June 30th, the yield for LAIF and the two-year US Treasury were 3.82% and 4.15%, 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
June 30
Portfolio as of
March 31
Average Maturity (yrs) 2.64 2.95 2.99
Average Modified Duration 2.46 2.54 2.63
Average Purchase Yield 3.17% 3.04%
Average Market Yield 4.16% 4.32% 4.06%
Average Credit Quality** AA+ AA+ AA+
*Benchmark: ICE BofA 1-5 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 defines general portfolio limits and controls, including a maximum stated maturity of 10 years, no more than 30% of the market value of the total portfolio in maturities beyond five years, and maintaining a market value above 95% of book value. All FY 2026 Q4 Maturities - Market Value (millions)
Up to 1
Year
1 to 2
Years
2 to 3
Years
3 to 5
Years
Over
5 Years
Portfolio
Total *
% of
Portfolio
Par
Value
U.S. Treasury 24.0 $ - $ 30.0 $ 14.9 $ 9.7 $ 78.7 $ 11.7% 79.0 $ U.S. Agency Bonds 15.9 14.2 4.5 8.2 67.4 110.3 16.4% 119.9 U.S. Municipal/ State Bonds 47.4 45.9 30.6 21.6 45.5 191.0 28.5% 196.8 Certificates of Deposits (CD) 5.5 0.5 5.2 1.4 3.4 15.9 2.4% 16.2 U.S. Corporate Bonds 9.1 - 8.4 4.2 38.5 60.2 9.0% 60.7
Supranational Organizations Bonds 5.9 - 6.0 8.6 19.1 39.7 5.9% 39.4 Money Market Fund 2.3 - - - - 2.3 0.3% 2.3
Asset-Backed Securities (ABS/MBS) - - - 14.3 16.2 30.4 4.5% 30.5 Liquid Accounts 142.6 - - - - 142.6 21.2% 142.6
(US Bank, Wells Fargo, Fidelity, LAIF)
Grand Total 252.7 $ 60.6 $ 84.7 $ 73.3 $ 199.8 $ 671.2 $ 100% 687.4 $ % of Portfolio 37.6% 9.0% 12.6% 10.9% 29.8% 100.0%
Investment Type
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. Downgrades below minimum credit rating thresholds are reported to the City Council in accordance with the policy. No securities experienced such downgrades during the quarter.
At quarter end, the investment portfolio’s market value was 98.3% of book value, exceeding the 95% minimum threshold, and remained in full compliance with all policy limits.
Economic Outlook
Inflation remained above the Federal Reserve’s target during the quarter, although underlying inflation showed signs of stabilizing. Higher energy prices associated with Middle East tensions contributed to elevated headline inflation earlier in the quarter. However, oil prices declined by quarter-end as concerns over supply disruptions eased.
The Federal Reserve maintained the federal funds target range at 3.50% to 3.75% while signaling a more cautious approach as inflation remained above its target. U.S. Treasury yields reflected this outlook, with short-term yields increasing modestly while longer-term yields remained relatively stable, resulting in a flatter yield curve and continued uncertainty regarding the path of future interest rates.
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 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) and Retiree Medical Funds (Other Post-Employment Benefits Trust or OPEB), 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 June 30, 2026) APPROVED BY:
Lauren Lai, Administrative Services Director