Have TVA Bond Payments Violated the TVA Act?

TVA’s pension costs were $539,000,000 in 2013. The pension costs of TVA employees are part of the costs to operate, maintain and administer TVA’s power properties. TVA collected $539,000,000 from ratepayers to cover those costs in 2013, but made no payment to cover its pension costs for 2013. However, TVA paid $2.4 billion for redemptions and maturities of TVA bonds in 2013. TVA also incurred a $1.4 billion interest expense in 2013, most of which must have been paid to TVA bondholders. These actions by TVA have contributed to the underfunded status of TVARS.

It appears that TVA's failure to pay its pension costs is in conflict with the TVA Act and TVA’s 10-k report filed with the Securities and Exchange Commission (SEC). The TVA Act mandates that principal and interest be paid from revenues “after deducting all costs to operate, maintain and administer its power properties.” TVA’s 2013 10-k states that “costs of operating, maintaining, and administering TVA's power properties have priority over TVA’s payments on the Bonds.”

Specifications for Creating Government Corporations issued by the President’s Office of Management and Budget (OMB) appear to be suggestions, not regulations or laws. However, they do indicate that it is reasonable to believe that the federal government intends pension costs to be included in the costs covered by the revenues of government corporations, and that revenues collected to cover the pension should be directed to the pension. OMB specifications state that the revenues of government corporations “should be sufficient to cover all costs, including the full cost of employees' pensions and other benefits.”

Sec. 15d (a) of the TVA Act states:

The principal of and interest on said bonds shall be payable solely from the Corporation’s net power proceeds as hereinafter defined. Net power proceeds are defined for purposes of this section as the remainder of the Corporation’s gross power revenues after deducting the costs of operating, maintaining, and administering its power properties (including costs applicable to that portion of its multiple-purpose properties allocated to power) and payments to States and counties in lieu of taxes but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds of the sale or other disposition of any power facility or interest therein, and shall include reserve or other funds created from such sources.

Click here to see entire TVA Act.

Page 103 of TVA’s 2013 10-k states:

Power bonds and discount notes rank on parity and have first priority of payment out of net power proceeds, which are defined as the remainder of TVA’s gross power revenues after deducting the costs of operating, maintaining, and administering its power properties, and tax equivalent payments, but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein.

TVA considers its scheduled rent payments under its leaseback transactions, as well as its scheduled payments under its lease financing arrangements involving John Sevier CCF and Southaven CCF, as costs of operating, maintaining, and administering its power properties; however, such treatment is not free from doubt. Costs of operating, maintaining, and administering TVA's power properties have priority over TVA’s payments on the Bonds. Once net power proceeds have been applied to payments on power bonds and discount notes as well as any other Bonds that TVA may issue in the future that rank on parity with or subordinate to power bonds and discount notes, Section 2.3 of the Basic Resolution provides that the remaining net power proceeds shall be used only for minimum payments into the U.S. Treasury required by the TVA Act in repayment of, and as a return on, the Power Program Appropriation Investment, investment in power assets, additional reductions of TVA’s capital obligations, and other lawful purposes related to TVA’s power program.

Page 55 of TVA’s 2013 10-k states:

Power bonds and discount notes are both issued pursuant to section 15d of the TVA Act and pursuant to the Basic Tennessee Valley Authority Power Bond Resolution adopted by the TVA Board on October 6, 1960, as amended on September 28, 1976, October 17, 1989, and March 25, 1992 (the "Basic Resolution").  The TVA Act and the Basic Resolution each contain two bond tests: the rate test and the bondholder protection test.

Under the rate test, TVA must charge rates for power which will produce gross revenues sufficient to provide funds for:

• Operation, maintenance, and administration of its power system;
• Payments to states and counties in lieu of taxes;
• Debt service on outstanding Bonds;
• Payments to the U.S. Treasury in repayment of and as a return on the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment"); and
• Such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA’s power business, having due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible. See Note 16 — Appropriation Investment

Click here to see entire TVA 2013 10-k.

Page 11 of OMB Specifications for Creating Government Corporations issued in December 1995 states:

D.         Financing: Permanent authority to use collections instead of requesting annual appropriations.

1.         This is generally appropriate for businesslike activities, and hence government corporations.

2.         Revenues should be sufficient to cover all costs, including the full cost of employees' pensions and other benefits, interest and depreciation on capital utilized by the corporation, repayment of debt, etc.

Click here to see entire OMB Specifications.