TVA looks for way to replenish underfunded pension plan

June 29--When President Franklin Roosevelt created the Tennessee Valley Authority in 1933, he wanted TVA to be "a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise."

TVA's unique status as an independent federally owned corporation helped it capture the power of the Tennessee River and keep power rates relatively low for most of its 81-year history. But some TVA retirees fear that TVA's independence also now threatens the security of the utility's retirement program for nearly 36,000 current and retired TVA employees and their families.

TVA's employee retirement fund is more than $4 billion short of what actuaries estimate it should have to pay all the promised future retirement benefits. Although the fund remains one of the biggest in the Southeast and has more than enough money to pay current retiree benefits, the plan at the start of fiscal 2014 had only 63 percent of what experts project it needs to fully fund all of the future promised benefits.

That was the lowest funding level of any major U.S. electric utility last year. And unlike most pension plans, TVA's program is not insured or backed by the government. Private pension plans are guaranteed by the U.S. Pension Benefit Guaranty Corp., and most government retirement plans are backed directly by taxpayers.

"It's like driving your truck around with the gas tank on empty and without any insurance," said Dan Pitts, a 67-year-old TVA retiree who now works as an independent financial services broker in Knoxville. "There may not be any immediate problem, but it's a risk."

Pitts worked at TVA both as a rates and contracts administrator and as an auditor in the Office of Inspector General before retiring from the federal utility in 1999. He became concerned about TVA's retirement system a couple of years ago when he noticed that the utility was budgeting to collect employee pension benefits but not allocating the money to the retirement system. Pitts, who specialized in rate setting while at TVA, obtained budget information from TVA that showed that TVA budgeted $1.6 billion for its pension plans in fiscal years 2012 through the current fiscal year but is putting only $250 million of that into the retirement system.

"There's no expectation that a plan will be 100 percent funded every year," said Pitts, who authored an article on TVA's underfunded pension program for the trade publication, Pension and Investments. "But the trend is very disturbing and it's unclear why TVA continues to withhold adequate funding from its employees' pension plan."

TVA President Bill Johnson said he is committed to paying promised benefits and is working with the TVA Retirement System board about ways to improve the pension account.

"We have a significant underfunding situation," Johnson said during a conference call with industry analysts last month. "We make contributions into the retirement plan every year and we pay the benefit and stick to what is required -- there is no problem with that. There is a concern by me and by our board about the long-term costs of that plan. So we are actively engaged with the TVARs board in trying to discuss whether there are things that we can do over time to make it easier to fund that plan."

The utility put $1 billion in the fund in 2009 when it also cut some of the promised cost-of-living benefits for TVA retirees to help shore up the fund. In 2011, TVA also contributed an additional $270 million and is planning on pumping in another $250 million this year.

Those changes, combined with investment earnings on the fund, should help improve its financial status over time, TVA Chief Financial Officer John Thomas said.

"TVA is going to stand behind its obligations to employees and retirees," Thomas reassured retirees in 2012, noting that investment returns were helping to replenish the fund.

In an interview Friday, Thomas said TVA "is still working through the overall long-term solution" to shore up the pension plan.

With its top triple-AAA bond rating, ability to set its own rates and lack of a bankruptcy option, TVA is better positioned than investor-owned utilities to continue operations and meet its long-term retirement obligations, Thomas said.

"We're a governmental, ongoing identity that is providing a benefit over the long term," Thomas said. "We believe that we're going to pay for the benefits that the employees have earned. We're just working through with the TVARS (TVA Retirement System) board to determine what is the best way to ensure the long-term viability of the plan that is in everybody's interest."

But TVA is being sued by some of its retirees for the changes it made to the pension program and figures show that TVA's rebound from the market losses during the Great Recession have not been as great as most U.S. pension plans. A recent analysis of 418 defined benefit retirement plans by the Fortune 1000 corporations from the consulting firm Towers Watson found the average pension fund was 93 percent funded, well above TVA's 63 percent funding level in the most recent reporting period.

A $1 million financial analysis of TVA prepared this year for White House budget planners by Lazard Freres & Co. said the underfunding of TVA's pension fund accounted for $4.25 billion of a total $5.3 billion of outstanding liabilities for the federal utility. But Lazard said TVA's financial plans call for $2.9 billion in cash contributions through 2023 to help pay down such liabilities. Investment returns on TVA's pension and nuclear decommissioning funds could further reduce the unfunded liability.

Overall, Lazard said TVA's financial condition is improving and TVA still maintains the ability to raise electric rates to cover its costs with a simple majority vote of the TVA board.

Market meltdown

TVA's pension fund was overfunded through 2002 because of strong investment earnings in the 1990s. At one point, TVA's retirement system had more than 40 percent above what actuaries said was needed to pay all of the promised benefits so TVA suspended any contributions to the plan for five years.

But when the stock market collapsed during the Great Recession, TVA lost more than $3 billion in the value of its investments. As TVA cut the size of its staff, and retirees who comprised a bigger share of the pension program continued to live longer, the pension fund quickly became underfunded.

By 2009 with its pension fund more than one-third below what actuaries said was needed, TVA agreed to a one-time $1 billion contribution to the pension account and voted to suspend any cost-of-living increases in 2010 and 2012 and raise the age of retirement for future retirees to receive cost-of-living increases from 55 to 60.

Such changes were approved by the boards of both TVA and the TVA Retirement System, but a group of TVA employees and retirees organized as Save Our Retirement, sued TVA and TVARS in 2010, claiming that the changes violated TVA's pact with its employees. The initial lawsuit filed by eight TVA workers and retirees was dismissed, but In July 2013, the court granted the plaintiffs' motion to reopen the lawsuit. TVA filed a motion or summary judgment last November, which is still pending.

TVA benchmarks its pay and benefits with other comparable utilities and government agencies, but it insists that it is not obligated to provide cost of living increases to its retirees.

New employees at TVA, starting Tuesday, will not participate any longer in TVA pension program. Instead, TVA will provide contributions to individual 401(k) plans controlled by the individual employee. TVA will provide an automatic contribution equal to 4.5 percent of a worker's base compensation, plus match 75 cents for every dollar contributed by the employee to the 401(k) plan up to another 6 percent of base compensation.

If an employee contributes at least 6 percent of their base pay, then they will receive a total contribution of TVA equal to 9 percent of their base pay, for a total savings and deferral rate of 15 percent.

TVA employees and retirees in the TVA retirement system will not be affected by the changes, except if they are rehired by TVA.

In a summary of the new benefits, TVA said the 401(k) only plant "provides greater participant control and supports the long-term sustainability of the current system."

Contact Dave Flessner at dflessner@tiemsfreepress.com or at 757-6340.

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