In an effort to improve the health of its critically underfunded employees' defined benefit plan, the Tennessee Valley Authority board voted in August for a combination of pension benefit cuts and an increase in contributions.
The cuts affect active participants and current retirees, while the TVA committed to contribute at least $300 million a year until the pension plan is fully funded. Some mistakenly believe these changes solved TVA's pension funding crisis. The harsh reality is that these changes, approved by both the TVA board and the board of the Tennessee Valley Authority Retirement System, do little to improve the underfunded status of the pension plan. Even with these cuts and the promise of more funding, it might take 20 years or longer for the pension plan to be fully funded.
The approved pension benefit changes are multifaceted and affect employees and retirees differently, based on when individuals started participating in the pension plan, years of service and whether they were in the original benefit structure or in the cash balance plan. Changes included a reduction in the calculation of the cost-of-living adjustment, a more restrictive eligibility for COLA and reducing the interest credit for the cash balance plan.
According to data published by TVA, the net effect of the pension changes is a reduction of the present value of TVA's pension benefit obligation by about $960 million. On average each of the 35,000 employees and retirees gave up about $27,000 in benefits. Despite the reductions, the funded status of the pension plan improved to only 55% from 53% based on $7.2 billion in pension assets and $13.1 billion in pension liabilities as of Sept. 30, reported by the TVA in a 10-K filing with the Securities and Exchange Commission. At 55% funded, TVA's pension plan continues to be the worst-funded pension plan of any major U.S. electric utility.
More worrisome are TVA projections that show that even with the cuts, there is only a 50% chance the pension plan will reach 80% funding in 16 years, or fully funded in 20 years, leaving the pension plan in a very weak status for an unreasonably protracted period of time
TVA just like its competitors is exposed to a broad range of financial and operational risks that threaten to disrupt its cash flows and ability to fund the pension plan. However, unlike its competitors' pension plans, the TVA pension plan is critically underfunded and not protected by the Employee Retirement Income Security Act and not insured by the Pension Benefit Guaranty Corp. or guaranteed by the U.S. government or any other entity. For these reasons, it is vital for TVA's pension plan to be quickly brought back to a strong level, and maintained there.
TVA has dismissed an increase in electric rates as a way to strengthen the poor financial status of the pension plan because of the effect on low-income ratepayers. In TVA's response to an April 22 letter to U.S. Reps. Peter DeFazio, D-Ore., and Steve Cohen, D-Tenn., about TVA's proposed pension cuts, William D. Johnson, TVA president and CEO, stated that TVA's 9 million users of electricity are “among the poorest in the nation” and a rate increase would represent a “true hardship” for them. However, information about TVA's rates published by the Energy Information Administration does not support Mr. Johnson's statements. In fact, EIA data suggest that a modest rate increase would have a minimal impact on TVA ratepayers, including those who are considered low income.
EIA data for 2015 reveal that a 1% rate increase would raise the average TVA residential bill by $1.29 per month. It is estimated that low-income ratepayers use about 20% less energy than others, which means their bills would rise by an average of only about $1.02 per month — about 3.5 cents per day. In addition, TVA's industrial rates would increase an average of 0.06 of a cent per kilowatt hour, which would have little or no effect on TVA's relative standing with its competitors.
A simple 1% rate increase earmarked for the pension plan would produce an additional $110 million per year or $4.5 billion over 20 years, based on TVA's expected rate of return of 7% on pension assets.
TVA freely admits that its actuaries believe there is only a 50% chance that the pension will reach 80% funded by the year 2032. That admission alone is reason enough to consider a modest increase in rates to benefit the pension. Further, it is clear that a small rate earmarked for the pension plan would not be a true hardship for any of TVA's customers and would provide an important boost to the financial health of the pension plan. Reaching a stronger funding level sooner would not only benefit the pension plan and its participants, but TVA and its ratepayers would benefit as well. TVA should view a more rapid funding of the pension plan as an insurance policy that will soften the blow when the next operational disaster or economic upheaval occurs.
Considering the risks TVA faces, kicking the “pension can” down the road is clearly an unwise decision for both ratepayers and pension plan participants.
Mike Moseley is president of the Knoxville-based Tennessee Valley Authority Retirees Coalition, a chapter of the National Retirees Legislative Network, and is a TVA retiree, having worked for Knoxville-based TVA for 35 years. Mr. Moseley's positions with TVA included quality and business improvement manager and power plant manager.