KNOXVILLE - TVA's 33,000 retirees and employees will get smaller cost-of-living increases in their pensions and different Medicare supplement plans for their health care next year as TVA revamps its key retirement programs to save money and offer more choices.
The TVA board Thursday approved amendments to the TVA Retirement System to help shore up the underfunded retirement plan over the next two decades.
The federal utility will boost the annual contribution to its employee pension plan to $300 million next year, up from $275 million this year, and will pay another $80 million to employees in 401(k) plans that are replacing the pension plan for younger workers.
But in exchange for TVA boosting such contributions, TVA retirees had to agree to cut their future inflation-adjusted increases by 0.25 percent below the consumer price index and cut back some other supplemental retirement benefits.
The changes, which were previously approved by the TVA Retirement System board by a 4-3 vote, will reduce TVA's long-term funding liability by $700 million, TVA Chief Financial Officer John Thomas said. But in exchange for those savings, TVA pledged to provide at least $300 million a year to the pension fund even as it shifts more workers to 401(k) plans.
TVA's new 401(k) option provides up to 12 percent of employer matching funds for employees who contribute 6 percent of their income into their individual 401(k) plans. Over time, TVA will likely have to pay more in such payments and pension contributions, but the changes will help the utility make up a $6 billion funding shortfall in the TVA retirement plan.
TVA's pension fund, which 15 years ago had a $1.8 billion surplus, now barely has over half the $12.8 billion that actuaries say is needed to meet all of its future funding liabilities. TVA cut back on its contributions to the plan when the plan was over funded. The pension suffered $2 billion of investment losses in the Great Recession and future funding liabilities have increased as interest rates have dropped and future investment earning forecasts had to be cut.
At the end of the last fiscal year, TVA's pension had assets of $6.8 billion, or only 53 percent of the $12.8 billion of liabilities in the plan. TVA has the worst funded pension of any major electric utility in the country, although TVA President Bill Johnson said TVA is now under the same pension rules as investor -owned utilities.
Johnson said TVA has continued to pay all of its promised retirement benefits but he said some changes and sacrifices are needed by retirees, employees and ratepayers to resolve the funding shortfall over the next two decades.
When TVA decided to cut cost-of-living increases in the pension plan nearly a decade ago, a group of retirees formed a group known as Save Our Retirement, and eight retirees and employees sued TVA, claiming that TVA didn't have the right to deny payments promised to its current and former employees..
That lawsuit was recently dismissed by a federal appeals court that ruled the cost-of-living adjustments are not vested benefits TVA is legally obligated to pay.
"We wanted to move this direction, regardless of the outcome of the litigation, because we believe it removed uncertainty on this topic for employees and retirees," said Rebecca Tolene, deputy general counsel for TVA. "The changes address the current demographic, economic, business and funding realities, and are designed to lessen the impact on retirees while giving employees more flexibility with their retirement plan options."
TVA Director Pete Mahurin urged the TVA board to provide another $30 million into the pension fund, raising the annual contribution up to $330 million, at least for one year.
"We did better than we had projected with our operating results and in paying down our debt, so this seems to be appropriate to pay this part of our debt to our retirees as well," he said.
But the board voted 5-4 against the proposal, urging TVA instead to use that money to pay down its own statutory debt.
Suzan Bowman, chairman of the Tennessee Valley Authority Retirees Association, said retirees were divided over the pension changes. But she said she was pleased the board was taking steps to ensure the solvency of the plan.
She was less sanguine about the health care changes planned for the 15,000 TVA retirees who are getting TVA's Medicare supplement, now provided by BlueCross BlueShield of Tennessee. TVA is proposing to allow retirees to go on the private exchange and buy the type of Medicare supplement plan they want.
"This gives retirees many more options," Johnson said.
But Bowman said many retirees have been calling her office and are worried, especially when they heard this week about premium increases planned for next year of up to 62 percent by BlueCross in Tennessee for the public health exchange programs provided for individual coverage under the Affordable Care Act.
"We won't see the rates for our exchange programs until about Oct. 15, but if (the rate increases) are anywhere near those amounts, then we have a serious situation for our retirees who are going to have to get coverage on the private marketplace," she said.
Johnson said based upon the experience of other employers who have switched to such individual Medicare supplement plans, he expects any premium increase to be far lower that what insurers are planning under the public marketplace exchange for the Affordable Care Act.
Contact Dave Flessner at dflessner@timesfreepress.com or at 423-757-6340.