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Savings Plans, Pension Plans and Other Postretirement Employee Benefits
12 Months Ended
Dec. 31, 2011
General Discussion of Pension and Other Postretirement Benefits [Abstract]  
Pension Plans and Other Postretirement Employee Benefits [Text Block]
Savings Plans, Pension Plans and Other Postretirement Employee Benefits
Substantially all of our employees are eligible to participate in 401(k) savings plans and are covered by noncontributory defined benefit pension plans. In 2011, 2010 and 2009, we made matching 401(k) contributions on behalf of employees associated with continuing operations of $1.4 million, $1.2 million and $1.3 million, respectively. We also provide benefits under company-sponsored defined benefit retiree health care plans, which cover certain salaried and hourly employees. Most of the retiree health care plans require retiree contributions and contain other cost-sharing features.
We recognized the underfunded status of our defined benefit pension plans and other postretirement employee benefit obligations on our Consolidated Balance Sheets at December 31, 2011 and 2010. We recognized the changes in that funded status, in the year in which changes occurred, through our Consolidated Statements of Comprehensive Income.
We use a December 31 measurement date for our benefit plans and obligations. The change in benefit obligation, change in plan assets and funded status for company-sponsored benefit plans and obligations are as follows:
(Dollars in thousands)
 
  
PENSION BENEFIT PLANS
OTHER POSTRETIREMENT
EMPLOYEE BENEFITS
  
2011

2010

2011

2010

Benefit obligation at beginning of year
$
395,086

$
399,875

$
72,619

$
82,074

Service cost
4,456

4,633

446

415

Interest cost
21,325

21,649

3,486

3,972

Plan amendments


(5,805
)

Actuarial loss (gain)
27,916

106

(913
)
(6,147
)
Closures and special termination benefits

(432
)

65

Medicare Part D subsidies received


741

552

Benefits paid
(30,532
)
(30,745
)
(5,379
)
(8,312
)
Benefit obligation at end of year
418,251

395,086

65,195

72,619

Fair value of plan assets at beginning of year
329,064

318,590



Actual return on plan assets
2,500

38,863



Employer contribution
11,126

1,729



Benefits paid
(30,532
)
(30,745
)


Spin-off of Clearwater Paper

627



Fair value of plan assets at end of year
312,158

329,064



Funded status at end of year
$
(106,093
)
$
(66,022
)
$
(65,195
)
$
(72,619
)
Amounts recognized in the consolidated balance sheets:
 
 
 
 
Current liabilities
$
(1,712
)
$
(1,708
)
$
(6,460
)
$
(7,809
)
Noncurrent liabilities
(104,381
)
(64,314
)
(58,735
)
(64,810
)
Net amount recognized
$
(106,093
)
$
(66,022
)
$
(65,195
)
$
(72,619
)

Amounts recognized (pre-tax) in “Accumulated other comprehensive loss” on our Consolidated Balance Sheets consist of:
(Dollars in thousands)
 
  
PENSION BENEFIT PLANS
OTHER POSTRETIREMENT
EMPLOYEE BENEFITS
  
2011

2010

2011

2010

Net loss
$
256,536

$
209,232

$
45,793

$
50,673

Prior service cost (credit)
3,929

4,613

(70,384
)
(73,115
)
Net amount recognized
$
260,465

$
213,845

$
(24,591
)
$
(22,442
)

The accumulated benefit obligation for all defined benefit pension plans was $412.3 million and $388.9 million at December 31, 2011 and 2010, respectively.
On January 1, 2011, we froze our pension plans to any new salaried and hourly non-represented employees hired after that date.
In late 2009, we restructured our health care and life insurance plans for the majority of our retirees, with the changes effective January 1, 2010. The level of subsidy was frozen for retirees so that all future increments in health care costs will be borne by the retirees. In addition, the retiree medical plans were redesigned for all retirees. For retirees under age 65, a high deductible medical plan was created and all other existing medical plans were terminated. These retirees were transferred to the new medical plan effective January 1, 2010. For retirees age 65 or over, the medical plan is divided into two components, with the company continuing to self-insure prescription drugs and providing a fully-insured medical supplemental plan through AARP/United Healthcare. Both medical plans require the retiree to contribute the amount in excess of the company subsidy in order to continue coverage. Finally, vision, dental and life insurance coverage for these retirees was terminated. The effect of these retiree plan changes was a reduction in the accumulated postretirement benefit obligation of $76.7 million, which was recognized as of December 31, 2009. The retirees from our Arkansas wood products manufacturing facility are represented by a bargaining group and their retiree medical plan is covered by the collective bargaining agreement.
Information as of December 31 for our pension plans, all of which had accumulated benefit obligations in excess of plan assets, was as follows:
(Dollars in thousands)
 
 
2011

2010

Projected benefit obligation
$
418,251

$
395,086

Accumulated benefit obligation
412,322

388,934

Fair value of plan assets
312,158

329,064


Pre-tax components of net periodic cost (benefit) recognized in our Consolidated Statements of Operations were as follows:
(Dollars in thousands)
 
  
PENSION BENEFIT PLANS
OTHER POSTRETIREMENT
EMPLOYEE BENEFITS
  
2011

2010

2009

2011

2010

2009

Service cost
$
4,456

$
4,633

$
4,289

$
446

$
415

$
980

Interest cost
21,325

21,649

22,588

3,486

3,972

9,015

Expected return on plan assets
(31,804
)
(33,133
)
(35,309
)



Amortization of prior service cost (credit)
684

875

993

(8,536
)
(8,891
)
(984
)
Amortization of actuarial loss
9,916

8,174

3,890

3,967

4,631

4,445

Net periodic cost (benefit)
$
4,577

$
2,198

$
(3,549
)
$
(637
)
$
127

$
13,456


 
Other amounts recognized in our Consolidated Statements of Comprehensive Income were as follows:
(Dollars in thousands)
 
  
PENSION BENEFIT PLANS
OTHER POSTRETIREMENT
EMPLOYEE BENEFITS
  
2011

2010

2009

2011

2010

2009

Net loss (gain)
$
57,220

$
(6,682
)
$
(7,902
)
$
(913
)
$
(6,477
)
$
27,553

Prior service cost (credit)


539

(5,805
)
715

(76,725
)
Amortization of prior service (cost) credit
(684
)
(875
)
(993
)
8,536

8,571

984

Amortization of actuarial loss
(9,916
)
(8,174
)
(3,890
)
(3,967
)
(4,631
)
(4,445
)
Total recognized in other comprehensive loss (income)
$
46,620

$
(15,731
)
$
(12,246
)
$
(2,149
)
$
(1,822
)
$
(52,633
)
Total recognized in net periodic cost (benefit) and other comprehensive loss (income)
$
51,197

$
(13,533
)
$
(15,795
)
$
(2,786
)
$
(1,695
)
$
(39,177
)
Pre-tax net periodic benefit cost (benefit) related to continuing operations
$
4,577

$
2,198

$
(3,549
)
$
(637
)
$
127

$
13,456


The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $14.8 million and $0.8 million, respectively. The estimated net loss and prior service credit for OPEB obligations that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $3.9 million and $9.1 million, respectively.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 introduced a drug benefit under Medicare Part D and a federal subsidy to sponsors of retiree health care benefit plans that provide an equivalent benefit. Our actuaries determined that certain benefits provided under our plans are actuarially equivalent to the Medicare Part D standard plan and are eligible for the employer subsidy. During 2011 and 2010, we received subsidy payments totaling $0.7 million and $0.6 million, respectively.
Weighted average assumptions used to determine the benefit obligation as of December 31 were:
 
  
 PENSION BENEFIT PLANS
OTHER POSTRETIREMENT
EMPLOYEE BENEFITS
  
2011

2010

2009

2011

2010

2009

Discount rate
4.95
%
5.65
%
5.65
%
4.85
%
5.40
%
5.65
%
Rate of salaried compensation increase
3.50

4.00

4.00





Weighted average assumptions used to determine the net periodic benefit (cost) for the years ended December 31 were:
 
  
PENSION BENEFIT PLANS
OTHER POSTRETIREMENT
EMPLOYEE BENEFITS
  
2011

2010

2009

2011

2010

2009

Discount rate
5.65
%
5.65
%
6.15
%
5.40
%
5.65
%
6.15
%
Expected return on plan assets
8.50

8.50

8.50




Rate of salaried compensation increase
4.00

4.00

4.00





 
The discount rate used in the determination of pension and OPEB benefit obligations in 2011 and 2010 was calculated using hypothetical bond portfolios consisting of “AA” or better rated securities that matches the expected monthly benefit payments under our pension plans and OPEB obligations. The portfolio consisted of approximately 50 to 60 bonds which were well-diversified over corporate industrial, corporate financial, municipal, federal and foreign government issuers. Prior to 2010, the discount rate used in the determination of pension and OPEB benefit obligations and net periodic benefit (cost) was a weighted average benchmark rate based on high-quality fixed income investment interest rates, as well as the amount and timing of expected benefit payments.
The expected return on plan assets assumption is based upon an analysis of historical long-term returns for various investment categories, as measured by appropriate indices. These indices are weighted based upon the extent to which plan assets are invested in the particular categories in arriving at our determination of a composite expected return.
The assumed health care cost trend rate used to calculate OPEB obligations as of December 31, 2011 was 0% for our salaried and non-represented plans and a certain group of participants over age 65 in our hourly plan; 6.8% for our Arkansas participants covered by a collective bargaining agreement, grading ratably to an assumption of 5.0% in 2070; and 5.2% for a certain group of participants under age 65 in our hourly plan, grading ratably to an assumption of 5.0% in 2070. The assumption of a 0% medical trend rate for several plans and groups of participants was due to the restructuring of our health care plans in late 2009 as previously discussed in this footnote.
A one percentage point change in the health care cost trend rates would have the following effects:
(Dollars in thousands)
 
 
1% INCREASE

1% DECREASE

Effect on 2011 total service and interest cost components
$
70

$
(63
)
Effect on OPEB obligations as of December 31, 2011
725

(665
)

The weighted average asset allocations of the pension benefit plans’ assets at December 31 by asset category are as follows:
 
  
PENSION
BENEFIT PLANS
OTHER POSTRETIREMENT
EMPLOYEE BENEFITS
ASSET CATEGORY
2011

2010

2011

2010

Domestic equity securities
21
%
22
%


Debt securities
41

34



Global/international equity securities
24

29



Other
14

15



Total
100
%
100
%
%
%

We utilize formal investment policy guidelines for our company-sponsored pension plans. These guidelines are periodically reviewed by the board of directors. The board of directors has delegated its authority to management to insure that the investment policy and guidelines are adhered to and the investment objectives are met.
The general policy states that plan assets will be invested to seek the greatest return consistent with the fiduciary character of the pension funds and to allow the plans to meet the need for timely pension benefit payments. The specific investment guidelines stipulate that management will maintain adequate liquidity for meeting expected benefit payments by reviewing, on a timely basis, contribution and benefit payment levels and appropriately revise long-term and short-term asset allocations. Management takes reasonable and prudent steps to preserve the value of pension fund assets and to avoid the risk of large losses. Major steps taken to provide this protection include:
 
Assets are diversified among various asset classes, such as domestic equities, global equities, fixed income, convertible securities and liquid reserves. The long-term asset allocation ranges are as follows:
 
Domestic and global equities
36
%
-
60%
 
Fixed income and convertible securities
35
%
-
60%
 
Hedge funds
9
%
-
21%

The ranges are more heavily weighted toward equities since the liabilities of the pension plans are long-term in nature and equities historically have significantly outperformed other asset classes over long periods of time. Periodic reviews of allocations within these ranges are made to determine what adjustments should be made based on changing economic and market conditions and specific liquidity requirements.
Assets are managed by professional investment managers and may be invested in separately managed accounts or commingled funds. Assets are diversified by selecting different investment managers for each asset class and by limiting assets under each manager to no more than 25% of the total pension fund.
Assets are not invested in Potlatch stock.
The investment guidelines also provide that the individual investment managers are expected to achieve a reasonable rate of return over a market cycle. Emphasis will be placed on long-term performance versus short-term market aberrations. Factors to be considered in determining reasonable rates of return include performance achieved by a diverse cross section of other investment managers, performance of commonly used benchmarks (e.g., S&P 500 Index, Shearson Lehman Government/Corporate Intermediate Index, Morgan Stanley World Index, Merrill Lynch Investment Grade Convertibles Index, Russell Value Index), actuarial assumptions for return on plan investments and specific performance guidelines given to individual investment managers.
Fair Value Measurements at December 31, 2011:
(Dollars in thousands)
 
ASSET CATEGORY
QUOTED PRICES IN
ACTIVE MARKETS FOR
IDENTICAL ASSETS
(LEVEL 1)

SIGNIFICANT
OBSERVABLE
INPUTS
(LEVEL 2)

SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)

TOTAL

Cash and equivalents
$
4,309

$

$

$
4,309

Equity securities:
 
 
 
 
U.S. large cap1
30,173



30,173

U.S. small/mid cap2
18,343



18,343

International companies
6,925



6,925

Mutual funds3
127,657



127,657

Collective investments:
 
 
 
 
U.S. small/mid cap4

15,581


15,581

Developed markets5

34,166


34,166

Emerging markets6

33,863


33,863

Hedge funds7


42,940

42,940

Securities pledged to creditors:
 
 
 
 
Money market8

4,728


4,728

Mortgage-backed securities9

1,941


1,941

Subtotal
187,407

90,279

42,940

320,626

Payable held under securities lending agreements10
(8,468
)


(8,468
)
Total
$
178,939

$
90,279

$
42,940

$
312,158


1 
These are managed investments in US large cap equities that track Russell 1000 Value strategy.
2 
These are managed investments in US small/mid cap equities that track Russell 2500 Growth strategy.
3 
The mutual funds were 50% invested in high-quality intermediate and long-term investment grade securities and 50% invested in a diversified portfolio of fixed-income instruments of varying maturities, which may be represented by forwards or derivatives such as options, futures contracts or swap agreements and high-yield securities that are rated B or higher.
4 
These are managed investments in US small/mid cap equities that track Russell 2500 Value strategy.
5 
These collective investments are invested in equity funds of developed markets outside of the US & Canada, that track the MSCI EAFE.
6 
These collective investments are invested in equity funds of emerging markets outside of the US & Canada, that track the MSCI Emerging Markets.
7 
The hedge funds are 52% invested in long/short and event-driven equity, 13% invested in long and short credit, 11% in relative value, 6% invested in distressed debt, with the remaining 18% in other investments.
8 
The money market holdings are invested in the Mount Vernon Securities Lending Trust Prime Portfolio.
9 
The mortgage-backed securities are maintained in the U.S. Bank Illiquid Securities Liquidating Trust.
10 
This category represents a payable under the securities lending agreements.

Fair Value Measurements at December 31, 2010:
(Dollars in thousands)
 
ASSET CATEGORY
QUOTED PRICES IN
ACTIVE MARKETS FOR
IDENTICAL ASSETS
(LEVEL 1)

SIGNIFICANT
OBSERVABLE
INPUTS
(LEVEL 2)

SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)

TOTAL

Cash and equivalents
$
5,700

$

$

$
5,700

Equity securities:
 
 
 
 
U.S. large cap1
34,475



34,475

U.S. small/mid cap2
19,352



19,352

U.S. small/mid cap3
20,001



20,001

International companies
10,303



10,303

Mutual funds4
112,648



112,648

Collective investments:
 
 
 
 
Developed markets5

44,194


44,194

Emerging markets6

40,195


40,195

Hedge funds7


44,201

44,201

Securities pledged to creditors:
 
 
 
 
Money market8

4,719


4,719

Mortgage-backed securities9

2,322


2,322

Subtotal
202,479

91,430

44,201

338,110

Payable held under securities lending agreements10
(9,046
)


(9,046
)
Total
$
193,433

$
91,430

$
44,201

$
329,064


1 
These are managed investments in US large cap equities that track Russell 1000 Value strategy.
2 
These are managed investments in US small/mid cap equities that track Russell 2500 Growth strategy.
3 
These are managed investments in US small/mid cap equities that track Russell 2500 Value strategy.
4 
The mutual funds were 50% invested in high-quality intermediate and long-term investment grade securities and 50% invested in a diversified portfolio of fixed- income instruments of varying maturities, which may be represented by forwards or derivatives such as options, futures contracts or swap agreements and high-yield securities that are rated B or higher.
5 
These collective investments are invested in equity funds of developed markets outside of the US & Canada, that track the MSCI EAFE.
6 
These collective investments are invested in equity funds of emerging markets outside of the US & Canada, that track the MSCI EAFE.
7 
The hedge funds are 34% invested in long/short and event-driven equity, 27% invested in long and short credit, 10% invested in distressed debt, 10% invested in fixed income and 8% invested in convertible bonds, with the remaining 11% in other investments.
8 
The money market holdings are invested in the Mount Vernon Securities Lending Trust Prime Portfolio.
9 
The mortgage-backed securities are maintained in the U.S. Bank Illiquid Securities Liquidating Trust.
10 
This category represents a payable under the securities lending agreements.

The following table sets forth a summary of changes in the fair value of the plans’ Level 3 assets for the years ended December 31: 
(Dollars in thousands)
 
  
Hedge Funds
 
2011

2010
Balance, beginning of year
$
44,201

$

Purchases, sales, issuances and settlements, net

42,000

Unrealized gains (losses) relating to assets still held at the reporting date
(1,261
)
2,201

Balance, end of year
$
42,940

$
44,201


Refer to Note 12 for discussion of the framework for measuring fair value.
Following is a description of the valuation methodologies used for assets measured at fair value:
Corporate common and preferred stocks are valued at quoted market prices reported on the major market in which the individual securities are traded.
Registered investment company funds are valued at the net asset value, or NAV, of shares provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, less its liabilities, divided by the number of shares outstanding. Thus the values are based on quoted prices in active markets and are classified as Level 1.
Investments in common and collective trust funds are valued using the NAV of the fund. The NAV of a collective investment is calculated based on a compilation of primarily quoted market prices in active markets. However, some investments in these funds may trade in markets that are not considered to be active and values may be based on dealer quotes or valuations provided by alternative pricing sources supported by observable inputs, so these are classified as Level 2.
Investments in hedge funds are based on valuations provided by the respective investment managers. These investments are based on inputs that are unobservable and significant to the fair value measurement and are not traded in an active market. These investments are classified as Level 3.
Investments in liquidating trusts that maintain investments in mortgage-backed securities are valued on the underlying net asset value of the securities and classified as Level 2.
At December 31, 2011, ten active investment managers managed substantially all of the pension funds, each of whom had responsibility for managing a specific portion of these assets. Plan assets were diversified among the various asset classes within the allocation ranges established by our investment policy.
As a result of the steep downturn in the stock market in late 2008 and early 2009, our company-sponsored pension plans were underfunded at December 31, 2011 and 2010. In April 2009, an Internal Revenue Service pronouncement provided significant funding relief to single-employer defined benefit plans sponsors. Consequently, we were not required to make contributions during 2009 to our defined benefit plans. We were also not required to make contributions during 2010 as a result of carry-forward credits that we earned from discretionary contributions made in prior periods. In 2011, we made contributions of $5.0 million to our qualified salaried pension plan and $4.4 million to our non-represented pension plan, with $5.8 million being discretionary funding. Our minimum funding requirement for 2012 is $9.7 million. We plan to fund approximately $22.0 million for our qualified pension plans by taking a loan against our company owned life insurance plan, or COLI, from the cash surrender value that has accumulated in that plan over the years. We estimate payments of approximately $1.7 million to our non-qualified pension plan. Payments made for OPEB obligations represent benefit costs incurred during the year by eligible participants.
Estimated future benefit payments, which reflect expected future service are as follows for the years indicated:
(Dollars in thousands)
 
 
PENSION
BENEFIT
PLANS

OTHER
POSTRETIREMENT
EMPLOYEE
BENEFITS

2012
$
29,597

$
6,460

2013
29,491

5,974

2014
29,235

5,610

2015
29,110

5,346

2016
28,936

5,067

2017 – 2021
143,053

20,132