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7.
Benefit plans
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Pension
plan
TVA has
a defined benefit plan for most full-time employees that provides two
benefit structures: the Original Benefit Structure and the Cash Balance
Benefit Structure. The plan is controlled and administered by a legal
entity separate from TVA, the TVA Retirement System (TVARS), which is
governed by its own independent board of directors. The plan assets
are primarily stocks and bonds. TVA contributes to the plan such amounts
as are agreed upon between the TVA and the TVARS boards of directors,
which in no event is less than the amount necessary on an actuarial
basis to provide assets sufficient to meet obligations for benefits.
No TVA contribution is legally required when the plan’s assets
are sufficient to meet its accrued liabilities, as determined by an
independent outside actuary. This situation has existed for several
years.
The pension benefit
for a member participating in the Original Benefit Structure is based
on the member’s years of creditable service, average base pay for
the highest three consecutive years and the pension rate for the member’s
age and years of service, less a Social Security offset.
The pension benefit
for a member participating in the Cash Balance Benefit Structure is
based on credits accumulated in the member’s account and member’s
age. A member’s account receives credits each pay period equal
to 6.0 percent of his or her straight-time earnings. The account also
increases at an interest rate equal to the change in the Consumer Price
Index (CPI) plus 3.0 percent, which amounted to 5.8 percent in 1998.
During 1999, plan amendments were effected such that the rate may not
be less than 6.0 percent nor more than 10.0 percent. The actual change
in the CPI for 1999 was 1.6 percent, resulting in the minimum of 6.0
percent for 1999.
During 1998, plan
amendments were effected such that certain pension benefits were enhanced,
resulting in approximately $590 million in additional pension plan benefit
obligations.
During 1999, TVA
changed its accounting policy for the method of determining the market-related
value of pension assets, resulting in a one-time gain of approximately
$217 million. This gain is presented on the Statement of Income under
the caption “Cumulative effect of change in accounting principle.”
This accounting change also had the effect of increasing 1999 pension
income approximately $64 million.
The discount rate
used to determine the actuarial present value of the projected benefit
obligation was 7.5 percent in 1999, 7.0 percent in 1998, and 8.0 percent
in 1997. The assumed annual rates of increase in future compensation
levels for 1999, 1998, and 1997 ranged from 3.3 to 8.3 percent. The
expected long-term rate of return on plan assets was 11.0 percent for
1999, 1998, and 1997.
In 1998, the FASB
issued SFAS No. 132, “Employers’ Disclosures About Pensions
and Other Postretirement Benefits.” This statement modifies current
financial statement disclosure requirements from those required under
SFAS Nos. 87, 88, and 106. SFAS No. 132 requires additional information
be disclosed regarding changes in the benefit obligation and fair value
of plan assets, but does not change the existing measurement or recognition
provisions under the aforementioned standards. SFAS No. 132 was effective
for fiscal years beginning after December 15, 1997.
Other
postretirement benefits
TVA
has sponsored an unfunded postretirement plan that provides for non-vested
contributions toward the cost of certain retirees’ medical coverage.
The plan generally has covered employees who, at retirement, are age
60 and older (or who are age 50 and have at least five years of service).
TVA’s contributions are a flat dollar amount based upon the participants’
age and years of service and certain payments toward the plan costs.
In connection with
the pension plan benefit amendments, TVA also effected other postretirement
benefit plan amendments during 1998 such that certain TVA contributions
to retiree health benefits were discontinued, resulting in approximately
$120 million in reduced other postretirement benefit obligations.
The annual assumed
cost trend for covered benefits is 9.5 percent in 1999, decreasing by
one-half percent per year until reaching 5.0 percent in 2008 and held
constant thereafter. For 1998 and 1997, an annual trend rate of 10.0
percent and 10.5 percent, respectively, was assumed. The effect of the
change in assumptions of the cost basis was not significant. Increasing/(reducing)
the assumed health-care cost trend rates by one percent would increase/(reduce)
the accumulated postretirement benefit obligation (APBO) as of September
30, 1999, by $12 million/($11 million) and the aggregated service and
interest cost components of net periodic postretirement benefit cost
for 1999 by $1 million/($1 million).
The weighted average
discount rate used in determining the APBO was 7.5 percent for 1999,
7.0 percent for 1998, and 8.0 percent for 1997. Any net unrecognized
gain or loss resulting from experience different from that assumed or
from changes in assumptions, and which is in excess of 10 percent of
the APBO, is amortized over the average remaining service period of
active plan participants.
Other
postemployment benefits
Other
postemployment benefits include workers’ compensation provided
to former or inactive employees, their beneficiaries and covered dependents
for the period after employment but before retirement. Adoption of Statement
of Financial Accounting Standards No. 112, “Employers’ Accounting
for Postemployment Benefits” (SFAS No. 112) in 1995 changed TVA’s
method of accounting practice from recognizing costs as benefits are
paid to accruing the expected costs of providing these benefits. This
resulted in recognition of an original transition obligation of approximately
$280 million. During 1996, TVA made adjustments to certain assumptions
utilized in the determination of the obligation at September 30, 1996,
which resulted in an increase in the original transition obligation
of approximately $194 million. In connection with the adoption of SFAS
No. 112, and related approval by its Board of Directors, TVA recorded
the transition obligation as a regulatory asset. The regulatory asset
is being amortized over approximately 15 years, whereby the annual expense
approximates the expense that would have been recorded on an as-paid
basis.
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