By Daniel M. Pitts | May 26, 2014
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.
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