Despite the success of cutting its overall debt to a 30-year low in fiscal 2019, TVA's unfunded liability for its employee retirement plan grew in the past year, leaving the utility more than $5.3 billion short of what TVA actuaries say the pension fund needs to ensure future retirement benefits are paid.
In its annual financial report filed with regulators last week, TVA disclosed that the TVA Retirement System (TVARS) has only 60% of what it needs to fully fund its future obligations to more than 23,000 TVA retirees and dependents. TVA's unfunded liability grew in fiscal 2019 by about $1.6 billion, which equaled the amount TVA paid down its other long-term obligations during the fiscal year that ended Sept. 30.
TVA's pension shortfall widened from a year earlier when actuaries estimated TVA's pension fund had 63% of what it needed.
As of Oct. 1, TVA's Retirement System had a fair market value of of $7.98 billion and liabilities of $13.3 billion, leaving a shortfall of $5.33 billion. That shortfall is not included in TVA's estimate of its debt and long-term financial obligations, which fell below $22.2 million this year for the first time since the 1980s,
TVA also has another $499 million shortfall in its unfunded liability for other post-retirement benefits, including the costs for health care benefits for TVA retirees not yet eligible for Medicare.
Losing interest at TVA
The drop in the funded status of TVA's retirement plan and other post-retirement benefits was due almost entirely by the recalculation of future pension earnings caused by the drop in the discount interest rate, not because of any worsening of the cash value of the retirement fund, TVA officials said.
TVA Chief Financial Officer John Thomas said the decline in the pension funding status reflects the accounting calculations required for public companies regulated by the U.S. Securities and Exchange Commission. But Thomas said that should not be a concern about TVA's ability to pay future retirement benefits.
"We had a really strong year in terms of the returns for the plan — about 5% — so we were able to hold the asset balance, earning just as much as what our payouts were," Thomas said. "But the discount rates were extremely low this year so when you calculate the liability (for paying future pension benefits based upon investment earnings) you are dividing these liabilities by a lower number."
The TVA Retirement System (TVARS), which is a separate legal entity from TVA and is governed by its own 7-member board of directors, insists that the pension fund is adequately protected.
TVA pension plan by the numbers
* $7.98 billion of assets
* $13.3 billion of liabilities
* $5.33 billion shortfall
* 60% funded
Source: TVA 10K report for fiscal 2019 on TVA Retirement Plan due to drop in discount rate from 4.35% to 3.2%
"TVARS has never missed a payment to its retirees and beneficiaries in the 80 years of its existence and all retirement benefits will be made to them in the future," said Mark Meigs, executive secretary for the TVA Retirement System. "I'm confident that TVARS is on solid ground as TVARS has $8 billion of assets with strong investment returns meeting our expectations and prudent risk management."
TVA has pledged to provide at least $300 million in annual contributions to the pension plan for 20 years or until the plan is fully funded. In 2017 ,TVA also put $500 million into the pension plan.
Differing rates of return
Sue Collins, TVA's senior vice president and chief human resources and communications officer, said the drop in interest rates and changes in mortality rates adjust the value of the retirement plan in any given year. The effective discount rate used to calculate future obligations for what TVA has promised retirees dropped from 4.35% to 3.2% this year, boosting the amount of the unfunded liability by $1.61 billion., Collins said.
"The change in interest rates drives up the liabilities, but we continue to fund the plan and we're still very confident we are right where we need to be with the plan," she said.
TVARS uses its own actuarial consultants, Mercer, which uses a higher projected 6.75% return on investments to estimate that TVA's pension plan is 85% fully funded, Meigs said. Over the past decade, the TVA plan has averaged an investment return of more than 8% so TVARS officials insist the 6.75% return assumption is still appropriate despite the drop in interest rates for the safest of investments.
But Dan Pitts, a TVA retiree who has analyzed the funding shortfall and published articles in Pensions & Investments magazine about TVA's retirement plan, said he remains concerned about the funding status for TVA's pension, especially after TVA earned record profits in the past year.
"It is worrisome that TVA continues to resist accelerating funding of the pension to a safe level," Pitts said Monday. "The longer it takes to get to a safe level, the more likely a catastrophic event could threaten the long term viability of the plan."
Pitts cited Pacific Gas & Electric in California, which filed for bankruptcy last year, as proof that electric utilities can get in trouble and not be able to pay their obligations. And unlike PG&E and private businesses whose pension are guaranteed by the Pension Benefit Guaranty Corp. (PBGC), TVA as a federal agency is not covered by PBGC insurance.
"TVA's pension is funded at a dangerously low level and is not insured by the PBGC," Pitts said. "Betting on interest rate changes to save the pension is a "crap shoot" that pensioners are losing."
Since July 1, 2014, TVA has frozen its defined benefit pension plan for existing employees and switched future retirement benefits for existing workers or additional benefits paid to those hired in the past five years to an employer match for individual 401(k) plans.
TVA's executive pensions
The drop in the discount rate also required TVA to boost the effective compensation value for fiscal 2019 in the pension benefit guarantees for TVA top executives, which is paid from a supplemental executive retirement plan separate from TVARS.
For TVA's new CEO Jeff Lyash, for instance, the value of his pension represented 73% of his reported total compensation package of $8.16 million in fiscal 2019 and the value of TVA's annual pension contribution for TVA Chief Financial Officer John Thomas jumped more than six-fold from 2018 to 2019, rising to nearly $1.1 million, or nearly 30% of his total compensation. Much of those reported pension costs for TVA in fiscal 2019 was caused by the extra money needed to offset the lower investment returns from the drop in interest rates.
Read the TVA Retirement System reportView
While Lyash qualified to potentially receive millions of dollars in pension benefits when he agreed to come to TVA this year, the CEO must stay five years to receive the benefits. TVA is obligated to report the potential value of those benefits in its year-end report, Collins said.
When Lyash was hired, the board agreed to allow Lyash to apply his previous 10 years of federal employment with the U.S. Nuclear Regulatory Commission into the supplemental executive retirement plan TVA pays its top leaders.
Collins noted that when former TVA Chief Operating Officer Chip Pardee left TVA in 2016 after only three and a half years with the agency, he forfeited millions of dollars in pension benefits included in the executive compensation reports because he didn't stay the required five years for such payments.
Contact Dave Flessner at email@example.com or at 757-6340.