TVA falls through cracks as plan funding deteriorates

With widespread improvements in pension plan funded levels reported for U.S. corporations, it was alarming to learn the Tennessee Valley Authority's pension plan was only 63% funded at the end of its fiscal year Sept. 30. This funded level puts TVA's pension plan among the worst funded pension plans of major electric utilities in the U.S. The pension plan's current funded status, TVA's reluctance to properly fund it, and the fact that the pension benefits are not guaranteed raise serious questions about the long-term well-being of the pension promise to participants.

Upon realizing the critically deficient standing of TVA's pension plan, I reviewed the 10-K financial statements, filed with the Securities and Exchange Commission, of six utilities that compete with TVA: Exelon Corp., Entergy Corp., Duke Energy Corp., American Electric Power Co., Southern Co. and Dominion Resources Inc. The review focused on changes in the funded status of their pension plans from 2008 to through 2013.

The results of those comparisons are shown in the accompanying chart. All the comparative utilities' pension funds showed significant improvement in their funded status since 2008. In stark contrast, TVA's 2013 funded status is much worse than the 77% it was in 2008. TVA's 10-Ks show TVA made contributions in some years during this period, but the amounts were not sufficient to prevent the funded level from declining.

TVA is a self-supporting corporation owned by the U.S. government that provides electricity to 9 million people in parts of seven Southeastern states. TVA is governed by a nine-member board appointed by Congress. All funds for TVA's operations, including the pension plan contributions, come from the sale of electricity — none from congressional appropriations.

TVA's pension plan covers more than 12,000 current employees and 24,000 retirees. At the end of its latest fiscal year, the plan was 63% funded with assets of $7.2 billion and liabilities of $11.5 billion.

Investment management of the pension plan assets doesn't appear to be an issue in the deteriorating funded level. The TVA plan has a diversified asset allocation, including global equities and alternatives, such as real estate private equity and commodities. Its annualized returns over the three, five and 10 years ended Sept. 30 were 9.9%, 8.3% and 7.1% respectively, ranking in the 30th, 24th and 33rd percentile among institutional funds in the Wilshire Associates Inc. total fund universe, according to a TVA Retirement System investment committee report.

TVA continues to withhold pension funding even as it collects funds specifically to cover pension costs from its ratepayers. Based on information I received from TVA through a Freedom of Information Act request, TVA expects to collect $528 million from its ratepayers in the current fiscal year, ending Sept. 30, 2014, to cover pension costs but plans to contribute only $250 million to the pension plan. In addition, TVA collected $539 million in the fiscal year ended Sept. 30, 2013, and $530 million the previous fiscal year to cover pension costs, but contributed none of these funds to the employees' pension plan.

It is unclear why TVA continues to withhold adequate funding from its employees' pension plan.

Fortunately for pension plan participants of the comparative utilities, their pension plans have a much higher funded status, with some well in excess of 100%. In addition, their pensions are protected by the Employee Retirement Income Security Act, the Pension Protection Act and Internal Revenue Code requirements. These laws and regulations set minimum pension funding standards. They also insure the payment of pension benefits to retirees and require plan sponsors to pay annual insurance premiums to the Pension Benefit Guaranty Corp. based on the funded status of their plans.

In contrast, TVA's pension plan is considered a “government plan” and, as such, is not protected by ERISA, IRC requirements and the PPA.

Perhaps even more important, TVA's employee pension plan is not guaranteed or insured by any entity. The absence of protective regulations and controls has permitted TVA to freely reduce pension funding to dangerously low levels. Regrettably, there is no federal or state entity, except for Congress, with the authority to effectively challenge TVA's actions.

When Congress created TVA, it created an agency with broad powers to conduct its business. In fact, President Franklin D. Roosevelt referred to TVA as “a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise.” However, I seriously doubt that President Roosevelt or Congress intended for TVA to use its “power and flexibility” to restrict contributions to its pension plan, especially when critically underfunded.

Some analysts are not concerned by the poor condition of the pension plan and even suggest that if TVA were to default on its obligations, Congress would take action to save the pension plan. I believe it would be foolhardy to test this hypothesis. Further, it would be irresponsible for Congress to allow TVA to proceed unchallenged with its current pension funding policy.

TVA's pension plan has fallen through the legislative cracks. It is incomprehensible that federal pension laws, which were specifically designed to ensure adequate funding of corporate pension plans, are not applicable to a corporation owned by the federal government. Accordingly, it is clear that the best long-term solution is for Congress to enact legislation that would include TVA's pension plan under the protective scope of ERISA, PPA and the PBGC. This action would accelerate restoration of pension funding to safe levels, and provide a guarantee for payment of pension benefits.

Daniel M. Pitts works as an independent financial services representative in Knoxville, Tenn. He has never done business with TVA. Mr. Pitts is a TVA retiree, having worked for the TVA for 27 years as a power contracts and rate administrator and in its office of inspector general as an auditor.