By the numbers
* $7.1 billion — Value of assets in the TVA retirement system plan as of Sept. 30, up 5.1 percent from the previous year* $13.1 billion - Funding liability of the TVA retirement system, up 2 percent from a year ago* $733 million - Investment earnings in the past year, compared with a $325 million loss the previous year* $281 million - TVA employer contributions to the plan, down $1 million from the previous year* $1.2 billion - Actuarial “paper” increase in funding liability from reducing the discount rate from 4.5 percent to 3.65 percent to reflect lower interest rate environment* 35,000 - Approximate number of TVA retirees and dependents and employees covered by the pension planSource: TVA 10K financial report for fiscal 2016
Pension changes
TVA and the TVA Retirement System board agreed to a number of changes that actuaries estimate will cut the long-term funding liability of the pension plan by $960 million. The changes include:• Funding commitment of $300 million a year from TVA for 20 years, up from $281 million paid this year* New employees are no longer covered by the pension plan and receive TVA payments into indivdual 401(k) plans instead• Limiting cost of living adjustments to 0.25 percent less than consumer price index growth
The TVA retirement system boosted its investment income and trimmed its promised retirement benefits over the past year to improve the fiscal health of the pension plan for more than 35,000 TVA employees and retirees.
But TVA's pension plan is still underfunded by more than $5.9 billion even after TVA reported record high net income in fiscal 2016.
In its year-end financial report this week, TVA said it ended its fiscal year on Sept. 30 with pension assets of $7.1 billion, or less than 55 percent of the $13.1 billion that actuaries project the fund should have to meet all of its future obligations.
TVA's retirement system beat the overall market and enjoyed a healthy 11.2 percent return on its $7 billion of investments in the past year. But those gains were offset by an accounting readjustment for the discount rate used to calculate future values of investments.
Despite the ongoing funding shortfall, TVA Chief Financial Officer John Thomas said the Tennessee Valley Authority has continued to pay out all of its promised retirement benefits, which totaled $692 million in the past year. After years of discussions with the TVA Retirement System board, TVA also gained approval this summer for some cutbacks in future cost of living increases and coverage for new employees. Those changes saved an estimated $960 million in liability expenses for TVA.
In exchange for the changes in the plan, TVA has committed to pumping at least $300 million a year into the pension program, starting in 2017, even as it shifts employees hired since July 2015 away from the defined benefit pension and pays such employees instead with matching 401(k) contributions to individual retirement plans.
In fiscal 2016, TVA contributed $281 million for its employer share of the pension plan, down from the $282 million contributed in the previous year.
"I think people can get distracted by the fair value accounting impact on a liability, but I think overall it's going to take a 20-year sustained commitment to this that we've made (to bring the pension to full funding)," Thomas told analysts and reporters during a conference call this week. "But it's a bit hard to look at this year-to-year and draw any conclusions. But I'm pretty pleased with what we saw in 2016."
The pension funding status improved from having only 53 percent of what actuaries said was needed a year ago to having 55 percent of the money needed today to meet all of the future funding obligations. The funding status would have been even higher had not TVA adjusted its projected discount rate to reflect today's lower interest rate environment, which lowered the estimated value of the fund by nearly $1.2 billion without any change in the cash flow requirements for the pension.
"There actually was very positive news for our pension fund (in fiscal 2016)," Thomas said. "The assets this year earned 11.2 percent, so $733 million of incremental value flowed into the plan. That's over the policy expectations and we're ahead of where we expected we would be just several months after reaching agreement about a long-term funding status."
But retirees remain concerned about the underfunding of the pension plan, especially since the government plan does not enjoy the insurance backing of the Pension Benefit Guarantee Corp., afforded to similar private pension plans.
Dan Pitts, a TVA retiree who has analyzed the funding shortfall, calculates that the average retiree gave up $27,000 in future benefits under the changes adopted last year and without such sacrifices the pension plan would have actually ended up in worse shape after TVA adjusted its assumed discount rate.
"Without help from retirees and employees, the pension plan funded status would have dropped to 51 percent," Pitts said. "I am encouraged that TVA put together a long-term funding plan for the pension. My main concern is that their promise to contribute $300 million per year is not enough to bring the pension back to a strong level in a reasonable length of time."
TVA spokesman Scott Fiedler said Friday the utility "takes its obligations to active and retired employees seriously" and will continue to work with TVARS to pay promised retirement benefits.
"Ultimately, our goal is 100 percent funding for the pension plan," Fiedler said.
But Pitts said he worries that TVA could be sidetracked from meeting that goal by other unexpected expenses.
"If TVA has another Kingston ash spill or nuclear incident, TVA's ability to fund the pension could be seriously impacted and could lead to more serious declines in the pension's funded status," Pitts said.
Contact Dave Flessner at dflessner@timesfreepress.com or at 423-757-6340.