The Tennessee Valley Authority's executive management and board of directors have not been up to the task of overseeing the company's defined benefit plan and its pension promises.
The plan's funding has deteriorated to levels that force the TVA to propose drastic changes to the plan. Those changes include benefit reductions and freezing its cash balance plan. But the proposal falls short of a disciplined program for shoring up funding.
The reductions have been proposed even though the TVA had a net income of $1.1 billion on revenue of $11 billion in fiscal 2015, and invested almost $2.9 billion in new plant and environmental improvements, making it seem as if employees and retirees are footing at least part of the bill for these investments.
The TVA must at least be brought under the supervision of the Department of Labor and the IRS through the Employee Retirement Income Security Act so the pension funding deficiencies can be corrected.
The situation is the result of the TVA not falling under ERISA or the Pension Protection Act of 2006, even though it is owned by the federal government. The TVA doesn't have rigorous oversight of its financial controls or the market discipline of shareholder oversight and activist investors.
A group of TVA retirees and active employees is seeking to raise federal and state attention to the worsening funded status of the electric utility's $6.98 billion defined benefit plan. The group is circulating a petition that as of early January has gathered 2,400 signatures, asking congressional leaders and governors in the states served by the TVA to hold the entity accountable for securing pension promises.
The TVA defined benefit plan's funding ratio fell to 53% as of Sept. 30, down from 61.2% a year earlier.
By contrast, corporate plans were funded at an aggregate 81.3% level, while state retirement systems were funded at an 80% level, according to two separate 2015 reports from Wilshire Associates Inc.
In creating ERISA in 1974, Congress did not include the TVA in its funding rules, even though the TVA is a federal entity. That was a mistake. But Congress cannot now make up for that mistake. For it to add the TVA now to the PBGC would unfairly place a tremendous financial risk on the federal insurance entity as well as participating corporate sponsors, which depend on the support and have been paying the premiums for their coverage.
Pension funding has been a challenge for the TVA, which has made three changes to its defined benefit program since the beginning of 1996 to reduce obligations.
William D. Johnson, president and CEO of the Knoxville, Tenn.-based authority — who received $4.6 million in total compensation in 2015, according to the TVA's 10-K filing, making him the highest paid federal employee — in a December memorandum to the TVA Retirement System's board, proposed a plan to improve the long-term financial health of the defined benefit plan.
Those proposed steps include amendments that would result in some future benefit reductions. “I believe these are reasonable and relatively modest for retirees and the participants in the original system,” Mr. Johnson wrote. The original system refers to the TVA's traditional defined benefit plan, which was closed to new participants as of Jan. 1, 1996.
In addition, under Mr. Johnson's proposal, the TVA would freeze its cash balance plan — created for new participants as of 1996 — and move those active participants to the TVA 401(k) plan. The cash balance pension plan was closed to new hires as of July 1, 2014.
Also, under Mr. Johnson's proposal, the TVA would commit to a minimum annual contribution of $275 million for 20 years for a total of $5.5 billion. That contribution level would result in a fully funded pension plan in 2035 with assets of $6 billion and obligations of $5.8 billion, according to the TVA's projections.
As a minimum first step, the TVA should revise its proposed framework and pledge to at least follow funding regulations under ERISA and the PPA. The PPA funding rules require sponsors to fully fund pension shortfalls over seven years, not 20. The PPA also restricts lump-sum payments upon retirement when plans are less than 80% funded.
Congress must address the funding situation and place the TVA under ERISA and the PPA, although leaving it outside the PBGC would appear to be a necessity to avoid putting the agency at risk for underfunding that it never covered. Placing the TVA under ERISA would help strengthen funding and better secure pension benefits for participants. n
This article originally appeared in the January 11, 2016 print issue as, "TVA fund needs ERISA help".