Future Customers to Pay $229 Million of TVA's 2015 Pension Cost

TVA paid only $282 million of its $511 million pension cost in 2015.(1)  TVA expects future customers to pay the remaining $229 million of its 2015 pension cost that it chose not to pay.  The total amount of pension cost that TVA has assigned future customers to pay is $5.4 billion.(2)  In order to defer this cost as a regulatory asset on its balance sheet, as TVA has done, accounting standards dictate that TVA must believe that it is probable that it will be recovered through higher rates charged to future customers.(3)  $5.4 billion is almost half of TVA’s total 2015 revenue.  This percentage of annual revenue is by far the highest of any of the large electric utilities surrounding TVA.(4) 

Is it reasonable for TVA to believe that $5.4 billion of past pension cost will be paid by future customers?  Accounting standards indicate that such deferred costs will be subject to prudence reviews as part of the ratemaking process, and if denied, the costs will be immediately charged to income.(3)

The $5.4 billion of pension cost that TVA chose not to pay has resulted in a 53% funded ratio for TVA's pension.(5)   This is the lowest funded ratio of any of the large electric utilities surrounding TVA.  The Pension Protection Act and Internal Revenue Code (IRC) 430 require plans funded below 100% to include a level installment contribution each year that would result in the plan reaching a funded level of 100% within seven years.(6)  With the exception of 2009, TVA has contributed substantially less than this amount in each year since 2008.  Per IRC 430, a pension plan may be considered “at-risk” if it is funded below 80%.(7) TVA’s pension has been funded below 80% for the last eight years. 

  

TVA chooses to charge its customers the full amount of the cost of its Supplemental Executive Retirement Plan (SERP) each year the cost is incurred.(8)  TVA does not transfer large portions of its SERP costs to future customers as it does for its employees' pension costs.

TVA claims that since its employees' pension is a government plan, it is not subject to the Pension Protection Act, IRC 430 and IRC 409A.  These laws were created in part to provide an incentive for executives to maintain adequate funding of their employees' pensions.  Per IRC 409A, executives at companies with an “at-risk” employee pension who receive tax-deferred compensation are required to immediately pay taxes, interest, and a 20% tax penalty on that compensation.(9)

TVA claims that the TVA Act gives it the authority to behave as a private company and pay its executives in excess of legal limits imposed on other government executives.  TVA claims that it should not be treated as other government agencies when it comes to executive salaries, bonuses and deferred compensation.  When it comes to TVA executives' tax payments on this excess compensation, however, TVA reverts to claiming that it should be treated as other government agencies.

Notes:

1. The employer contribution to the pension in 2015 was $282 million.  $511 million is the 2015 total net periodic pension benefit cost as actuarially determined.  See pages 124 and 126 of TVA’s 2015 annual financial statement filed with the Securities and Exchange Commission (TVA's 2015 10K) at http://www.snl.com/irweblinkx/docs.aspx?iid=4063363
2. $5.4 billion is the amount of TVA’s pension regulatory asset recognized on TVA’s 2015 Balance Sheet.  See page 125 of TVA’s 2015 10K.
3. FASB's SFAS 71 Accounting for the Effects of Certain Types of Regulation, provides GAAP guidance to those accounting standards that are unique to regulated utilities.  Specifically, these companies may be permitted to defer certain costs to their income statement under certain conditions.  Generally, regulated utilities may defer the recognition of certain costs if it is probable that through the ratemaking process there will be a corresponding increase to future rates.  In practice, companies will defer costs to a regulatory asset account if a written order is received from their regulators.  This order must either implicitly or explicitly allow for such treatment, and the company must believe there is a probability of recovery.  However, regulatory assets will be subject to prudence reviews as part of the ratemaking process and there is a possibility these costs will be denied.  If that occurs, the costs would be immediately charged to income. See http://www.money-zine.com/definitions/investing-dictionary/regulatory-assets/
4. TVA’s total operating revenue totaled $11.0 billion in 2015.  See page 81 of TVA’s 2015 10K.
5. TVA’s pension had benefit obligations of $12.8 billion and assets of $6.8 billion in 2015, resulting in an unfunded amount of $6.0 billion.  See page 124 of TVA’s 2015 10K.
6. See IRC 430(c)(2)(A) https://www.law.cornell.edu/uscode/text/26/430
7. See IRC 430(i)(4)(A)(i) https://www.law.cornell.edu/uscode/text/26/430
8. See paragraph beginning "Supplemental Executive Retirement Plan" on page 123 of TVA's 2015 10K where it states "TVA has historically funded the annual calculated expense."
9. See IRC 409A (a)(i)(A) and 409A(a)(i)(B) https://www.law.cornell.edu/uscode/text/26/409A