TVA racks up $6 billion shortfall in its employee pension fund

The Tennessee Valley Authority lost $762 million in its pension fund investments in fiscal 2015, leaving the federal agency with a record high $6 billion shortfall in its employee retirement system.

TVA's pension plan, which provides benefits to 23,700 retirees and also includes nearly 10,000 active TVA employees, reported assets of $6.8 billion as of Sept. 30, or only 53 percent of the $12.8 billion that actuaries estimate the plan needs to provide all of the future benefits promised to TVA workers and retirees.

"Employees and retirees at TVA are worried at the end of the day if they are going to get their promised benefits," said Leonard Muzyn Jr., an energy market analyst for TVA in Chattanooga who has served on the Tennessee Valley Authority Retirement System board for the past 12 years. "We only have slightly more than half the money we need to pay for the program, and TVA has deferred $5.4 billion to future customers to pay for these benefits. What if the competitive landscape for utilities worsens and TVA can't collect that money? It's a big concern for a lot of people."

Muzyn said TVA's pension fund has been "at risk" from a lack of adequate funding for the past eight years.

Other TVA retirees criticized TVA for not providing the contribution levels recommended in recent years by the seven-member TVARS board even though TVA has fully funded a separate executive retirement plan and provided record high compensation to its top executives.

"I am astonished to learn that TVA's pension is now funded at the lowest level in the history of TVA, and that TVA's CEO is the highest paid federal employee in the history of our nation," said Dan Pitts, a retired TVA auditor who has studied TVA's pension plan for years.

In fiscal 2015, TVA earned a record $1.1 billion and paid CEO Bill Johnson a total of $6.4 million - the highest amount ever paid a federal government employee.

TVA's primary pension plan is in significantly worse shape than any of the other electric utilities in the South, Muzyn said. Those utilities and other private businesses are governed by the Employment Retirement Income Security Act, which requires companies meet minimal funding standards and guarantees the benefit payments for beneficiaries. But as a government identity, TVA is not governed or protected by the ERISA rules.

Last week, even TVA Director Pete Mahurin acknowledged TVA needs to get its underfunded pension fund in better shape. While praising the financial improvements that led TVA to a record $1.1 billion of net income in fiscal 2015, Mahurin said TVA "needs to get our pension liabilities under better control. I think we've got a real problem with that," said Mahurin, the chairman of the TVA board committee on rates and finances.

TVA contributed $282 million to its pension plans in 2015, up from $256 million in 2014. But those contributions were more than offset by investment losses in the past year in the pension portfolio and were less than half the $690 million paid to retirees during the past year.

TVA Chief Financial Officer John Thomas on Monday sought to allay concerns about the funding status of its retirement program. Thomas said the pension fund lost 4.5 percent of its value in fiscal 2015, but he insisted that TVA is well positioned to meet its future pension obligations.

"You really have to think about the pension as a long-term investment," Thomas said. "In the three prior years, we saw earnings of about 13 percent, on average. Even with the decline this year, the investment returns, on average, were more than 8 percent."

The investment performance has stayed ahead of the 7 percent investment return target, Thomas said.

"We have a 20-year funding plan for this, and we did make contributions this year and will continue to monitor this going forward," he said. "Overall, we're going to stand behind our obligations to our retirees."

The utility put $1 billion in the fund in 2009 when it also cut some of the promised cost-of-living benefits for TVA retirees to help shore up the fund. Under its agreement with the retirement system, the $1 billion contribution was a four-year advance payment into the pension fund.

The cost-of-living cutbacks and higher eligibility age adopted in the 2009 pension plan changed by TVA were challenged the next year by a group of TVA employees and retirees who filed a lawsuit in federal court. A federal judge in Nashville dismissed the challenge in August, but the plaintiffs have appealed that decision to the 6th Circuit of Appeals.

In its annual financial report filed with the U.S. Securities and Exchange Commission, TVA estimates its pension benefit costs for fiscal 2015 - or the amount the utility should add to investment income to help ensure adequate reserves for promised benefits - was equal to $511 million. However, only $282 million was paid into the pension plan by TVA.

The rest of the benefit paid but not funded, or $289 million, was listed as a deferred asset for future ratepayers to pay, Muzyn said. That deferred asset expense has swelled in total to $5.4 billion, which could be considered as future financial obligation. If TVA counted its unfunded pension obligations as a debt obligations, it could push the federal utility above its $30 billion debt ceiling imposed by Congress on the agency.

But TVA does not identify its future pension obligations in is assessment of future financial obligations, which otherwise totaled $25.8 billion.

While TVA has not fully funded its main employee pension plan, the utility's SEC filing indicates the utility's retirement plan for senior executives is fully funded.

"TVA has established a Supplemental Executive Retirement Plan for certain executives in critical positions to provide supplemental pension benefits tied to compensation that exceeds limits imposed by IRS rules," TVA said in its filing with the SEC. "TVA has historically funded the annual calculated expense."

Contact Dave Flessner at 423-757-6340 or dflessner@timesfreepress.com.