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Magnitude of the Under-Funded Status of TVA's Pension

It is important to keep the following in mind when evaluating the magnitude of the under-funded status of TVA's pension:
  • Using funded ratios from TVA’s 10-K statements is appropriate when comparing TVA’s pension to those of other utilities.  See TVA’s 2013 10-K here.  TVA’s 10-K statements show that TVA’s pension appears to be the worst funded of any corporate utility in the U.S., and the 4th worst funded of any U.S. corporation.  They show that TVA’s pension had a funded ratio of 59% at the end of fiscal year 2012, and 63% at the end of 2013.  TVA’s pension was $5.0 billion underfunded at the end of fiscal year 2012.  TVA’s pension was still $4.3 billion underfunded at the end of fiscal year 2013, even after a year of very good investment returns.  TVA’s OIG understands that numbers from the 10-K reports are the proper numbers to use in comparisons, and did so in their 2010 report on TVA’s pension risk.  See the OIG report here. 
  • Using funded ratios from TVARS annual reports to compare to other utilities is not appropriate.  The TVARS annual report shows a much higher funded ratio than TVA’s 10-K report.   TVARS reported a funded ratio of 79% in its 2012 annual report, and an underfunded amount of $1.9 billion.  See the 2012 TVARS annual report here.  (As of this writing, the 2013 TVARS annual report had not yet been released.)   TVARS uses an accounting standard which corporate utilities are not permitted to use in their 10-K statements.  This standard allows the future pension payments to be discounted to today’s dollars at the expected long-term rate of return of plan assets.  This produces a much lower present value of future pension payments.  This could make sense if TVARS was assured of a long future in which to earn its expected long-term rate of return, and was assured that TVA would make up any difference.  However, this is not how the benefits would be valued in today’s market.  In fact, if TVARS were terminated and the TVARS board searched for an insurance company to pay to take over benefit payments, that insurance company would price in a much lower expected return on assets.  It is likely that TVARS would have to pay even more than the underfunded amount produced using TVA’s 10-K data.  This was $4.3 billion at the end of fiscal year 2013.
Bottom line:  If someone tells you not to worry about the funding because it all depends on how you measure it, or to just use the numbers in the TVARS annual report which don’t show as high an underfunding, hold on to your wallet!

The graph below was developed using funded ratios from 10-K statements.  See the entire document I presented to the TVARS board here.

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