Alternative TVARS Proposal from Hovious and Muzyn

February 1, 2016

Mr. Kerry D. Hale
President
Trades and Labor Council for
     Annual Employees of TVA
5726 Marlin Road, Suite 500
Chattanooga, Tennessee  37411


Dear President Hale:

Thank you for copying us on your January 26, 2016 letter to Mr. Bill Johnson, President and Chief Executive Officer of the Tennessee Valley Authority.  We are honored to serve on the TVARS Board with the strong support of TVA’s Trades and Labor employees.  Each of us received a majority of the Trades and Labor votes cast in our last elections.  We are the only TVARS Board members who can make this claim.  We are working very hard to ensure that all TVARS members and beneficiaries are treated fairly, including TVA’s Trades and Labor employees and retirees.   We would like to take this opportunity to provide you with some additional information and request your support for our alternative proposal which will not reduce the benefits of rank-and-file workers.

The alternative to President Johnson’s proposal is not significant rate increases passed on to our customers resulting in reduced electric sales and a reduced workforce.  The estimated savings from President Johnson’s proposal for TVARS is about equal to the pension costs over the last few years that TVA did not contribute to the fund.  Even if you agree with TVA that this amount needs to be collected again from ratepayers in the future, spreading this amount over twenty years would result in a very small increase in electric rates.  The math demonstrates the needed increase in electric rates would be about one half of one percent.  This is very unlikely to result in reduced electric sales and a reduced workforce.

Several governance changes in TVA’s proposal would increase TVA management control of TVARS and could hinder the ability of TVARS to operate in the best interest of its members.  The requirement to obtain TVA’s approval of TVARS asset allocation could interfere with TVARS’ plan to de-risk its assets to better protect its members from swings in the financial markets.  Term limits on TVARS Board directors could remove elected TVARS Board directors who have demonstrated strong support of employees’ interests.  The strong support of TVA managements’ interest by TVA-appointed TVARS Board directors is already assured by TVA managements’ ability to remove them at will.

The TVARS Board has determined that the COLAs are vested benefits under the authority granted the TVARS Board under TVARS’ rules and regulations.  As the lawsuit progresses through the Sixth Circuit Court of Appeals, we suppose it is possible that the court will decide that the rules and regulations do not govern TVARS, but we believe this is highly unlikely.  In fact, TVA has already argued in court documents that the rules and regulations govern TVARS.

Based on this additional information, we ask for your support for our alternative proposal:

• Amendment of the minimum contribution formula in the rules to bring it more in-line with ERISA minimum funding requirements.  We do not propose to change the formula to amortize the unfunded liability as quickly as required by ERISA because we realize that TVARS has been inadequately funded for decades and that it will take time to fully restore TVARS’ financial health.  We believe that an amortization period which produces a minimum annual TVA contribution in the $350 to $400 million dollar range is a reasonable compromise.

• Voluntary TVA compliance with provisions of the tax code which provide for tax penalties on deferred executive compensation when a company’s employee pension is inadequately funded.  Executives of non-government utilities must comply with these provisions, and their pensions are generally funded at much higher levels than TVA’s.

• Elimination of TVARS benefits based on pay in excess of executive level federal pay caps.  All TVARS rules made prior to 2005 were based on benefits being capped at federal levels.  Removal of the Federal Executive Level IV pay cap has resulted in an increased drain on TVARS that benefits only highly compensated TVA executives.

• Improvement of TVARS’ governance structure so that the TVARS Board shall be comprised of seven directors consisting of:

1. Two retiree directors, both chosen in open and transparent elections in which all retirees are allowed to vote;
2. Two active employee directors, both elected by active employees (employees lose one director);
3. Two TVA-appointed members (TVA management loses one director); and
4. One seventh member elected by the other six board members (remains as is).

• Approval of a recall election process for any of the four elected members.  A mandatory recall election to be held within 45 days after receipt of petitions with a minimum of 250 valid signatures of TVARS members who are eligible to vote for the director being recalled (in order to bring the TVARS Board’s responsiveness to the interests of employees and retirees more in-line with its responsiveness to TVA management).

• Amendment of the rules so that the seventh member shall not be engaged in any business relationship with TVA, including, but not limited to, consulting, contracting, or representing any business or entity that does, or seeks to do, business with TVA.

We would be happy to meet with you to discuss this proposal and answer any questions you have. We would also be happy to share with you the hundreds of comments we received from TVA employees and retirees expressing their opinions on TVA’s proposed changes to TVARS.

Sincerely,

James Hovious and Leonard Muzyn
Elected TVARS Board Directors

Please see the signed copy of this letter sent to Mr. Hale here.