California Cities Modernize Investment Policies for 2025 Fiscal Year, Albany Leads with ESG Integration

California municipalities are tightening investment rules for fiscal year 2025–2026, adopting policies designed to reinforce compliance with state law, reduce risk, and align with evolving market conditions. The updates reflect a statewide effort to balance safety, liquidity, and yield in public funds, while integrating new legislative and sustainability considerations.

Common Policy Themes
City councils across the state are reaffirming annual reviews of their investment policies, with treasurers or CFOs delegated management authority, subject to council oversight. Officials are bound by the “prudent investor standard,” requiring care and diligence in safeguarding principal while ensuring adequate liquidity.

Risk mitigation remains central: maximum maturities are generally capped at five years, portfolios must be diversified across issuers and security types, and credit-rating floors guide investment eligibility. Oversight is enhanced through quarterly reporting on compliance, liquidity, and market value; some jurisdictions also require monthly transaction disclosures.

Albany’s ESG Pivot
Albany has emerged as a first mover among California cities, adopting a formal Environmental, Social, and Governance (ESG) Implementation Policy effective September 1, 2025. Managed by PFM Asset Management, the strategy excludes investments in oil and gas, energy services, and defense, while requiring issuers to hold a Sustainalytics ESG Risk Rating of “medium” or lower. Issuers must also rank in the top 50th percentile of their subindustry peers.

The framework applies to a range of short- and medium-term securities, including commercial paper and asset-backed instruments. Albany acknowledged the approach carries a modest fee increase of one basis point but expects to maintain returns while aligning with community values.

Other City-Specific Moves

• Pomona adopted its FY 2025–26 policy in August, highlighting compliance with SB 1439, which expands conflict-of-interest rules. The city initiated a $1 million allocation to the California Asset Management Program pool earlier this year.

• Burbank revised its 2024 policy to boost liquidity requirements to $124 million, clarify treatment of non-negotiable certificates of deposit, and confirm that ETFs remain impermissible. The city also encourages ESG-aligned investments, though without a formal ESG mandate.

• Calabasas limited money market fund exposure to 20% of its portfolio and capped average maturity at three years in its FY 2024–25 policy.

• Menlo Park reaffirmed its ESG-sensitive approach, barring investments in fossil fuel, firearms, and tobacco issuers.

• Orange retained its conservative stance, with adjustments to asset-backed security provisions to reflect Senate Bill 882.

• Manteca reported a mid-2025 portfolio balance of $467 million under PFM Asset Management, with compliance across all guidelines.

Legislative Drivers
Recent state laws are shaping these policies. AB 2618 extends until 2031 a 50% portfolio concentration cap for certain depository placements, up from 30% for some agencies. SB 1439 broadens conflict-of-interest rules, while SB 882 clarifies limits on privately-backed securities, requiring top credit ratings and five-year maturity caps.

Trends
The changes reflect cities’ efforts to adapt to a shifting economic and regulatory environment while reinforcing transparency and fiscal discipline. Albany’s ESG adoption may mark a turning point, providing a potential template for municipalities looking to integrate sustainability into public fund management without undermining performance.