SR-602-002
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Council Meeting: February 13, 1990
FES i 3 1990
Santa Monica, California
To:
Mayor and City council
From:
City staff
subject:
Recommendation to Adopt Resolution in opposition of
Proposed FDIC Regulations [ 12 c. F . R. 330.12 (e)]
Limi ting FDIC Insurance on Deferred Compensation
Plans
INTRODUCTION
This report recommends that City Council adopt the attached
resolution in opposition of proposed FDIC regulations [12 C.F.R.
330.12 (e)] that would apply the $100,000 insurance limit to the
City's total deferred compensation plan and all other deposits of
the City. The proposed change would eliminate the $100,000 in-
surance coverage currently given to each participant in the
City's deferred compensation plan.
BACKGROUND
Congress enacted Section 457 of the United states Internal
Revenue service Code to provide public sector employees with a
tax-deferred investment option to create a source of future in-
come to supplement the benefits that they will receive through
their employers' retirement systems. Under Section 457 of the
IRS Code, a public sector employer can establish a deferred com-
pensation plan (commonly known as a 457 plan) that will allow its
employees to defer up to 25% of their current annual income, not
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to exceed $7,500 per year, and legally avoid paying Federal in-
come taxes on the amounts deferred and the earning on those accu-
mulated contributions until withdrawn, usually at retirement.
under California tax laws, income contributed to a 457 plan,
along with the earnings on those accumulated contributions, is
also tax-deferred until withdrawn.
The City of Santa Monica's deferred compensation plan was created
in accordance with the provisions of section 457 of the United
States Internal Revenue Service Code and ordinance statutes adop-
ted by the City Council. In 1975, this plan was made available
as an employee benefit to all eligible City employees. The
popularity of the deferred compensation plan is reflected in the
significant participation rates and contribution growth since its
inception.
Presently, the FDIC $100,000 insurance limit applies to the ac-
count of each individual plan participant, not to the total
amount of the City's deferred compensation plan. In the event
that a banking institution should become insolvent, each indi-
vidual plan participant I S account is insured up to $100,000 by
the Federal Deposit Insurance Corporation (FDIC).
The recent insolvency of a large number of savings and loan bank-
ing institutions resulted in a large financial deficit that the
FDIC could not cover. As a result, in order to cover this FDIC
financial deficit, Congress passed the Financial Institution Re-
form, Recovery and Enforcement Act.
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To enhance the solvency of its insurance funds, the FDIC has now
proposed new regulations [12 C.F.R. 330.12 (e)] that would apply
the $100,000 insurance limit to the employer's total deferred
compensation plan and all other deposits of the employer. Indi-
vidual participants would not be separately insured.
DISCUSSION
Currently, 622 City employees participate in the City's deferred
compensation plan. The total investments in this plan amount to
approximately $6,000,000. These deferred compensation monies are
administered by Great Western Bank, a federal savings bank,
through a deferred compensation agreement between the City of
Santa Monica and Great Western Bank. These funds have been
placed in either a savings indexed account or mutual funds. The
individual participant elects whether his/her deferred compensa-
tion contribution is to go into the savings indexed account, the
mutual fund or both.
Under the proposed FDIC regulations, if a banking institution,
such as Great Western Bank, should become financially insolvent,
the $100,000 insurance limit would only apply to the City's total
deferred compensation plan. Thus, in the event Great Western
should become financially insolvent, the City would only be
guaranteed a $100,000 reimbursement from the FDIC with the
remaining funds, or approximately $5,900,000, being totally at
risk.
Technically, all deferred compensation monies belong to the city
of Santa Monica, not to the individual participant as long as
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that participant is a City employee. Thus, the employee cannot
access his/her deferred compensation funds unless certain condi-
tions are met. Under the regulations governing a 457 plan, a
plan participant can only withdraw some or all of his/her de-
ferred compensation funds under two situations: 1) the employee
terminates his/her employment with the city; or 2) the employee
incurs an unforeseen financial hardship that cannot be covered by
any other means (e.g., personal loan, selling assets, obtaining
an equity loan on a home, car, etc.). Thus, employees would not
have the option, in light of the the proposed FDIC regulations,
to withdraw their funds in order to reinvest those funds in an
account that would have the $100,000 FDIC or FSLIC insurance
coverage.
The city of Santa Monica entered into its current deferred com-
pensation plan agreement with Great Western Bank on December 31,
1987. This agreement is to remain in effect for a period of
three years. Under the terms of this agreement, the City cannot
withdraw its deferred compensation funds and reinvest those funds
with another deferred compensation plan administrator.
In the notification that the City received from Great Western
Bank regarding the proposed FDIC regulations, Great Western Bank
encouraged the City to write letters opposing the proposed reg-
ulations, with said letters to be sent to the Federal Deposit
Insurance Corporation (FDIC) and to House or Senate Banking Com-
mittee members who represent our area. The attached resolution
opposes enactment of proposed FDIC regulations [12 C.F.R. 330.12
(e)) limiting FDIC insurance on deferred compensation plans.
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This resolution, if adopted by City Council, would be sent to the
FDIC and to the House and Senate Banking Committee members who
represent our area.
BUDGET/FISCAL IMPACT
This proposed new regulation by the FDIC would only pose a finan-
cial impact for the City if the financial institution which man-
ages the City's deferred compensation plan became insolvent. In
the event of financial insolvency by Great Western Bank or some
other banking institution which administers our deferred compen-
sation plan, the City would lose virtually all of the deferred
compensation deposits which it holds on behalf of city employees.
RECOMMENDATION
Staff recommends that the City council approved the attached
resolution opposing proposed FDIC regulations [12 C.F.R. 330.12
(e)] limiting FDIC insurance on deferred compensation plans.
Prepared by: Karen Bancroft, Director of Personnel
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BEFORE, DISTRIBUTION~ECK CONTENT OF
DISTRIBUTION OF RESOLUTION #: -r; 76
Councll Meetlng Date q'~ 3 /7'2:
Agenda Item;! b - (/
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ALL
FOR CI. CLERK'S
ORDINANCE #
ACTION
Introduced:
Was lt amended?
Adopted:
ALWAYS PUBLISH ADOPTED ORDINANCES
Cross out Attorney's approval
VOTE:
AfflrPlatlve:
Negatlve:
Abstaln:
Absent: ~
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PROOF VOTES WITH ANOTHER PERSON BEFORE ANYTHING
DISTRIBUTION: ORIGINAL to he slgned, sealed and flled ln Vault.
NEWSPAPER PUBLICATION (Date:
Department orlglnatlng staff report ( Laurle Lleberman)
Ordlnances only for Attorney ( C1audla Thompson) 2
Xanagement Servlces Lynne Barrette ORDINANCES ONLY 1
Agency mentloned ln document or staff report
(certlfled?)
SubJect flle (agenda packet)
1
Counter flle
1
Others: (ReVIew for departments who need to know).
Alrport Parklng Auth.
Audlt01:'lUm
Personnel
Plannlng
Pollee
Purchaslng
Recr/Parks
Transportatlon
Treasurer
I
BUlldlng Dept.
C/ED
Flnance
General Servo
L1brary
Manager
Flre
SE~D FOUR COPIES OF ALL ORDINANCES TO:
CODED SYSTEMS
l20 Ma1n Street
Avon, New Jersey 07717
4
SEND FOUR COPIES OF ALL ORDINANCES TO: 4
Debra Myrlck
Santa Monlca Munlclpal Court
1725 Maln Street, Room lIS
Santa Monlca, CA 90401 Total Copies
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RESOLUTION NO. 7978(CCS)
(CITY COUNCIL SERIES)
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SANTA MONICA
IN OPPOSITION OF PROPOSED FDIC REGULATIONS [12 C.F.R. 330.12 (e)J
WHEREAS, Section 457 of the Internal Revenue Ser-
vice Code was enacted to enable public sector employees to tax-
defer current income to provide a source of revenue to supplement
the benefits that they will receive from employer-provided re-
tirement systems; and
WHEREAS, the City of Santa Monica established a
deferred compensation plan under Section 457 of the Internal
Revenue Service Code to provide this benefit to its employees;
and
WHEREAS, City of Santa Monica employees voted to
have their deferred compensation funds invested with Great West-
ern Bank in order to obtain a $100,000 FDIC insurance guarantee
on each individual participant's deferred compensation account;
and
WHEREAS, the Federal Deposit Insurance corporation
(FDIC) has now proposed regulations [12 C.F.R. 330.12 (e)J that
would eliminate the $100,000 FDIC insurance guarantee limit for
each individual participant in the City's deferred compensation
plan,
NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF
SANTA MONICA DOES RESOLVE AS FOLLOWS:
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SECTION 1. The City of Santa Monica strongly op-
poses the proposed FDIC regulations [12 C.F.R. 330.12 (e)J that
would apply the $100,000 insurance limit guarantee to the City of
Santa Monica's total deferred compensation plan and all other
deposits of the City of Santa Monica, thereby eliminating the
$100,000 insurance limit for each individual participant's
account.
SECTION 2.
The Ci ty of Santa Monica urges the
Federal Deposit Insurance Corporation (FDIC) to not implement
these proposed regulations [12 C.F.R. 330.12 (e)].
SECTION 3. The City Clerk shall mail a copy of
this Resolution to the Federal Deposit Insurance corporation and
to the House and Senate Banking Committee members that represent
our area.
SECTION 4. The City Clerk shall certify to the
adoption of this Resolution, and thenceforth and thereafter the
same shall be in full force and effect.
APPROVED AS TO FORM:
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ROBERT M. MYERS
City Attorney
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Adopted and approved this 13th day of February, 1990.
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I hereby certify that the foregoing Resolution No. 7978(CCS)
was duly adopted by the city council of the City of Santa Monica
at a meeting thereof held on February 13, 1990 by the following
Council vote:
Ayes: councilmembers: Abdo, Finkel, Genser, Jennings,
Katz, Mayor Zane
Noes: Councilmembers: None
Abstain: Councilmembers: None
Absent: Councilmembers: Reed
ATTEST:
'A~~T. (Ji ty Clerk
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