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The Tennessee Valley Authority managed to pay down its debt, trim its rates, and pay higher employee and distributor bonuses last year, but the utility still has a pension shortfall of more than $5.6 billion which got even worse in the past year, according to new financial reports filed with TVA's annual report.

At the end of fiscal 2020 on Sept. 30, TVA's pension plan had assets of about $8 billion, which is only 58% of what actuaries estimate is needed to cover all of the more than $13.6 billion of obligations for current and future retirees and dependents covered in the plan. Actuarial assessments by Willis Towers Watson calculate the shortfall for TVA's pension plan has grown over each of the past two years even after TVA contributed $300 million to the retirement program in the past year.

TVA officials blame the apparent growing shortfall on declining interest rates and yields, which changed the calculations for what is needed in the plan. TVA Chief Financial Officer John Thomas said the utility remains committed to paying benefits for both the existing 24,000 retirees now receiving benefits from TVA's retirement plan and to future TVA retirees and their dependents covered in what is one the South's biggest pension plans.

"With low interest rates and fair market value accounting sometimes this can be a bit confusing," Thomas said. "We put a plan together in 2014 to fully fund our pension plan and we are still on track to do. As a matter of fact, we're still a couple of years ahead of schedule on that original plan."

Thomas told financial analysts during an earnings call earlier this week that TVA "is very comfortable with where we sit today." Over the next decade and a half, TVA expects to contribute another $5 billion by contributing $300 million a year through 2036 and earning another $7 billion in investment earnings from an average return of 6.75% a year on pension investments. In 2017, TVA also put in a one-time $500 million extra contribution to the pension fund.

TVA pension plan by the numbers

* $8 billion of assets

* $13.6 billion of liabilities

* $5.6 billion shortfall

* 58% funded

Source: TVA 10K report for fiscal 2020 on TVA Retirement Plan due to drop in discount rate from 3.2% in 2019 to 2.75% in 2020.

TVA spokesman Jim Hopson said a major reason actuaries lowered the funding status for the pension plan was that the discount rate used to calculate the value of investment returns for the future declined from 3.2% in 2019 to 2.75% in 2020, reflecting the drop in most interest rates. That decline in the discount rate increased the pension's liability by $713 million, Hopson said.

The TVA pension plan had a similar drop in its funding status in 2019 when actuaries said the pension fell from being 63% funded in 2018 to about 60% funded in 2019. Because the discount rate used to calculate future obligations for what TVA has promised retirees dropped from 4.35% in 2018 to 3.2% last year, TVA incurred another $1.6 billion of liabilities in the plan in fiscal 2019.

In fiscal 2020 even with the pandemic-induced recession and market volatility, TVA's pension assets returned 5.1%, yielding $397 million in investment earnings. Combined with TVA's $300 million of annual contributions to the pension plan, TVA essentially matched the estimated $700 million of benefits paid to pension recipients in the past year.

To help shore up previous shortfalls in its pension program, TVA capped cost-of-living increases in some future years and limited matching payments in a related retirement program in both 2009 and 2016. TVA also quit enrolling new employees in the pension plan and agreed to make annual contributions of at least $300 million a year to the retirement program.

U.S. Sen Lamar Alexander, the outgoing Tennessee Republican lawmaker who chairs the Senate appropriations subcommittee on energy and water that oversees TVA, praised the utility last week for tackling the pension funding shortfall over the past 12 years after the Government Accounting Office and others raised questions about the adequacy of the fund. As a government-owned corporation, TVA is not subject to the same regulatory oversight for pensions as are private corporations and its pension benefits are not backed by the Pension Benefit Guarantee Corp.

Although pensions are supposed to be fully funded to meet all future obligations, Thomas said TVA is well equipped to continue to contribute to the pension fund in the future to ensure its adequacy.

Despite a 9% drop in power sales during fiscal 2020, Thomas said TVA's financial condition is the strongest it has been in decades after paying down $1.6 billion of debt in the past year and more than $6 billion in long-term obligations over the past decade and a half. TVA's remaining $21.4 billion debt is only about 40% of the utility's estimated $52 billion in assets, Thomas said.

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

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