Retirement Proposal From TVARS Board

August 3, 2009

The following is a message to TVA employees and retirees from the TVA Retirement System Board members Phil Reynolds, Janet Herrin and John Hoskins:

First, we would like to say that we are honored to be members of the TVA Retirement System (TVARS) Board and to be TVA employees.

As members of the TVARS Board, we take our fiduciary responsibility very seriously, and we know the other TVARS Board members do, as well. Our fiduciary responsibility requires that priority be placed both on the protection of benefits and the financial well-being of the TVA Retirement System.

Recently, we have received a large number of e-mails about TVA’s proposed contribution to the Retirement System, coupled with suggested benefit revisions and the impacts that the proposal would have. The TVARS Board has been working on this diligently for several months, and we appreciate the concerns that employees and retirees have shared with us. Between the three of us, we have over 85 years of TVA service. Our decisions impact many past and present co-workers, friends and family. This link to TVA’s past is why we invest so much of our own personal time, energy and passion on the TVARS Board.

Many are blaming the pension funding situation on the fact that TVA did not make contributions for five years. Each of these funding decisions was the result of recommendations from the TVARS Board and its actuary. The System was so over-funded in the 1990s that $1.9 billion of additional benefits were added to the System’s liabilities. With 20/20 hindsight, it is easy to criticize previous decisions. Previous funding and benefit decisions would have both been different if anyone had foresight of what was going to happen in the last half of 2008 when the financial markets experienced the largest decline in the 70-year history of the System.

Let us explain our understanding of vested versus non-vested benefits.

First, absolutely no consideration will be given to changing the benefits members have previously earned. Vested (non-forfeitable) benefits include everything currently in a retiree’s monthly benefit check: a pension, annuity (if applicable), supplemental benefit, and all cost of living adjustment (COLA) increases that have previously been awarded. TVA guarantees that all vested benefits will be funded.

Future COLAs have never been vested benefits of the System. TVA will continue to guarantee all vested benefits of its members. As TVARS Board members and future retirees, we have to evaluate TVA’s proposal from two points of view:

1) What is the impact on current and future retirees?

2) What is the impact on the long-term health of the plan?

The e-mails you may have received recently focus only on the change in the formula for the COLA. While we believe COLA reform is vital for the System to return to financial health, there are other points in TVA’s proposal to be considered, including the following:

TVA is offering to put 1 billion dollars ($1,000,000,000) into the System now for fiscal year 2010 and as an advance on its contributions through fiscal year 2013.

This would provide the System with an immediate 20 percent increase in assets. A billion dollars invested would help stabilize the fund, increasing it to a funded ratio of about 80 percent, up from its current funding ratio of 65 percent. The $1-billion contribution, along with the proposed $600 million in liability reductions, would reduce the System deficit from $3 billion to $1.4 billion. In other words, the $1 billion today would give TVARS the cash needed for its $560 million in annual benefit payments without liquidating the securities that are needed to provide the System with a chance at recovery. We believe this is an opportunity that the TVARS Board should carefully consider.

Utilities in the southeast provide a COLA that is paid when they can afford to do so. TVA’s proposal recommends that, beginning in calendar year (CY) 2010, the COLA calculation would be 1 percent below the increase in the Consumer Price Index (CPI), up to a maximum of 2.5 percent. We believe this approach would help a currently under-funded System have some reasonable chance of being able to pay all benefits over the foreseeable future. TVA is not proposing eliminating the COLA; instead it proposes adjusting its formula until the plan recovers.

The other proposal is that current TVA employees would not be eligible to receive a COLA until age 60. This is similar to the Federal Employees Retirement System plan that generally includes a COLA of CPI minus 1 percent starting at age 62. This change in starting age would not affect current retirees.

The interest crediting rate being proposed for the Fixed Fund would be a reduction from 7.25 percent to 6 percent for active employees. We are among the many TVA employees who contribute to the Fixed Fund, and we realize that this is a reduction. Still, 6 percent guaranteed is a healthy return, and we would be hard-pressed to find another investment with a no-risk return at 6 percent.

The annuity conversion rate for retiring employees’ Fixed Fund balances would be 8-and-3/8 percent for balances as of Dec. 31, 2009. The conversion rate for future contributions would be 6 percent. This proposal will not affect current retirees who are now receiving benefits.

The TVA proposal also calls for the TVARS Board to add investment professionals to its Investment Committee as advisors, in addition to Wilshire Consulting, our current financial advisor. We are strongly in favor of this. Although our current TVARS Board members, staff and consultants are competent and dedicated individuals, we believe that this addition would be a wise decision.

Last, we must address the executive compensation issue, which has been a topic of contention in several of the e-mails we have received. The additional salary credited in the TVARS System is the result of the Consolidated Appropriations Act of 2005, which eliminated the TVA salary cap, and not the result of an amendment to the TVARS Rules. The creditable salary limits in TVARS are those set by the IRS Code for all qualified pension plans, currently at $230,000. Pension plans are designed to replace a portion of all creditable compensation at retirement, up to the IRS limits. With the removal of the TVA salary caps in 2007, the additional liabilities to the System caused by increasing salaries totaled $12 million − or approximately one - tenth of 1 percent of over $8 billion in System liabilities.

TVARS engaged Mercer in January 2009 to prepare a “Recalibration Study” to provide alternatives to change the funding, investments and benefits of the plan so it operates as an ongoing plan on a sustainable basis.

Part of this study included benchmarking where Mercer stated that TVA's Retirement/Savings benefits are above average for both the Cash Balance Plan and the Original Benefit Structure compared to the TVA's peer group.

Are there other solutions? In a communique on May 23, a TVARS- elected board member stated that “Future cost-of-living adjustment (COLA) reductions seem to be a benefit reduction target, and these can be made to apply to everyone ...” He went on to state there would be a vote at the June 1 and June 2 quarterly TVARS board meeting in Knoxville. (That vote was delayed.) It is clear that consideration for changes in future benefits, including the formula for unvested cost-of-living adjustments and the corresponding amount of TVA contributions to the System, have been ongoing over several months. The line has been drawn in the sand by this particular TVARS Board member as no negotiations have been brought forth and the only recommendation has been for TVA to contribute unlimited amounts of money to the System for years to come, regardless of the impact on ratepayers.

Where does all of this lead us? TVA management is prepared to recommend to the TVA Board that a TVA contribution of $1 billion be made to the System to help its long-term sustainability. The contribution by TVA of $1 billion in fiscal year 2010, along with the proposed $600 million in liability reductions, will be an advance of the contribution to the System for fiscal year 2010 through fiscal year

2013. Once TVA’s contribution to TVARS is determined, it must be included in the approval of TVA’s overall budget at the Aug. 20 TVA Board meeting.

In closing, our choices are difficult, and sometimes it is necessary to make tough and unpopular decisions when dealing with issues of this magnitude. TVA cannot pass on an unlimited amount of new costs to its 9 million end-use customers, particularly at time of significant financial hardship for many individuals and businesses. Our votes will be what we feel is best for the System, based on all the available information.

The Retirement System is very important to all employees and retirees. We appreciate your reading this letter and thinking about this issue, and we encourage you to send your questions by TVA e- mail to Open Line at openline@tva.gov or to contact us directly. We will work hard to make sure you get answers.

Phillip L. Reynolds
TVARS Board Member
22-year TVA Employee

Janet Herrin
TVARS Board Member
31-year TVA Employee
WT 10D-K

John Hoskins
TVARS Board Member
32-year TVA Employee
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