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TVARA Board Meeting

The recently released minutes of the TVARA August 8, 2014 board meeting contain many good questions about the retirement system. Reproduced below is the section of the meeting minutes that pertains to the retirement system. I added my comments in red. See the complete meeting minutes here.

TVA Retirement System Update - (This portion of the minutes have been edited by Pat Brackett, Director, TVA Retirement Management)

As of June 30 we had $7.7 billion in assets. The previous 9 months have been up 11.2 percent, but July was down 1 – 1-1/2 percent. By the Retirement System’s books we are 84-85 percent funded. TVA books are approximately 20 points lower. The economy is getting a little stronger. So far it has been a good fiscal year.

The TVARS Board met on July 14, and recommended $350 million to be contributed to Retirement in 2015. However, TVA has their own data and they will decide on the amount.
This does not explain why TVA has chosen to rely on its own data rather than the retirement board’s data. The retirement board is tasked with supplying TVA with data on the retirement system, and TVA has relied on it for many decades.

Questions:

The graphs and charts that we see make us feel uneasy because this is where we get our living from.
Some systems are 90-100 percent funded. The data is correct on the graphs and charts you’ve seen and the information is correct. TVARS is not as well funded as many of the investor owned utilities we’ve been compared to. But there a some fundamental differences between TVARS and these investor owned utilities we’ve been compared to. TVA is subject to different accounting standards than TVARS is and calculates their liability according to those standards which results in a higher liability and lower funded status. We would love to be fully funded and we would love to have $11.5 billion in assets so we could take risk out of the investment portfolio. TVA does not have to fund TVARS like these other investor owned utilities that are subject to ERISA. TVA is a federally-owned corporation. We look like other governmental plans with automatic colas, higher discount rates, and longer amortization periods. The investor owned utilities we are being compared to do not have an automatic COLA, use a lower discount rate, and a shorter amortization period. Some think that TVARS can force TVA to contribute more to the System and that’s not true. TVARS is required to tell TVA what the minimum contribution is according to the System’s Rules and Regulations. TVA has ultimate control of what they contribute.
This does not explain that FERS (Federal Employee Retirement System) is the governmental plan which covers the vast majority of federal employees. A small percentage of TVA employees are covered by FERS, including all of the TVA board members. TVA has historically been required to contribute more to FERS for these employees, as a percentage of pay, than it has contributed to TVARS. TVA is required to make contributions to FERS every year.

Could you get us comparable graphs so we can see better how we are? That might make us feel better.
Yes, I can provide comparisons to other governmental plans.
It is difficult for me to imagine any comparisons that would make me feel better. The vast majority of federal employees are covered by FERS. Non-federal government entities generally face little competition and have the power to impose taxes. TVA faces stiff competition and does not have the power to impose taxes.

Ours is not guaranteed by the PBGC and others are?
Non-forfeitable benefits of the System are guaranteed by TVA. The lawsuit filed in 2010 is over whether the cola benefit is a non-forfeitable benefit.
Ours is not guaranteed by the PBGC while those of the other electric utilities are guaranteed by the PBGC.

Are other plans like ours?
Most currently open plans to new employees at other utilities are like the cash balance plan that TVARS approved in 1996.
The cash balance plan is like current plans open to new employees at other utilities. However, the plan currently open to new TVA employees, the new 401K plan, is not like the plans of other utilities. The new 401K plan is a significantly lower cost plan, as discussed below.

30 Years is what you use for your calculations?
Yes. The System’s Rules amortize any deficit over 30 years. There is talk about governmental plans using something less than 30 years like 20 years, but there are no changes now.

Is the new 401K plan any benefit to our current system? There is no immediate large cost savings to the System but over time the service cost for employees will go away which is $75 million annually, so long term yes.

What are the consequences of TVA not funding the minimum?
Section 11 is a messy area of the Rules and might be interpreted differently by different people, but employees could stop accruing benefits and the TVARS Board would have to get with its actuary to set aside funds for non-forfeitable benefits – first the annuity, second the pension, and third the supplemental benefit. Cola benefits could only be paid if there were enough assets to do so or TVA contributed additional funds to pay colas.

We don’t anticipate that do we?
No.

• The 401K plan – what is the overall cost between old plan and this one?The legacy final average pay plan and the cash balance plan were both designed to cost on average around 9 percent of pay. The cost of the 401k only benefit is also around 9% of pay based on a 4.5% non-elective contribution from TVA and a 4.5% matching contribution if the employee contributes 6%. The benefits are competitive across the three benefit structures.
The legacy final average pay (original) and cash balance plans, with their eligible 401K matches, cost more than 9 percent. For example, cash balance plan members receive 6 percent pay credits each year and are eligible to receive a 4.5 percent 401k match. That is a total of 10.5 percent of pay. Original plan members’ benefits are generally considered to be better than those of the cash balance plan, however comparisons are not as straight-forward due to the non-linearity and multiple inputs of the pension formula of the original plan. In addition, employees covered by the new 401K plan are not eligible to receive the supplemental pension benefits. On the positive side, as far as new employees are concerned, TVA contributions to their new 401K accounts of up to 9 percent are actually deposited in those accounts. After a three year vesting period, these contributions cannot be taken back by TVA. There is no doubt however that the new 401K plan is a lower cost plan as the three plans are currently structured.

How does the 2000 employee reduction number affect our system?
There are roughly 1000 people and 1000 job vacancies. The 1000 retirees have been planned for along the way. Depending on their age, service and whether they are in the final average pay plan or the cash balance plan, there will be actuarial gains or losses associated with them leaving.
Incentivizing employees to retire earlier increases the cash drain on an already financially weak system.

Did TVA make a recommendation to settle the lawsuit?
Yes. They have made a proposal to TVARS. TVARS would like for it to be made public before they vote on it.
For several years, TVA, TVARS and the plaintiffs negotiated and engaged in mediation in an attempt to settle the lawsuit. These actions occurred subject to confidentiality agreements. A willingness by all three parties to negotiate and listen to the other two sides is what will lead to a fair negotiated settlement. The TVARS board has amply demonstrated its willingness to negotiate by conceding to TVA’s request for a lower cost new 401K plan for new employees.

So if the Board turns it down, it is at the mercy of the court?
If the TVARS Board does not agree to a settlement proposal the issue will be decided by the court. (Pat has to do a deposition on September 4).
The plaintiffs would also have to agree to a settlement proposal in order to avoid having the court decide.

What are the risks?
If the judge rules in favor of Plaintiffs that the COLA is a non-forfeitable benefit, then it will have to be financed and paid. If not, then as long as TVA contributes at least the minimum required amount to the System which provides for colas, colas would be paid. If TVA did not contribute at least the minimum required then as I stated previously the Rules provide a priority of benefits to be paid and the cola would only be paid if there were funds available to pay it or TVA contributed additional funds to pay a cola.

Suzan thanked Pat for all the time he spends answering our questions. Pat reinforced that he is closer to retirement than beginning a career. He has been at TVA for 32 years. His wife is a 20-year employee, and her father is a retiree. He wanted to reassure us that he is working for us.

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