NOTE 11. SAVINGS PLANS, PENSION PLANS AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS

SAVINGS PLANS

Substantially all of our employees are eligible to participate in 401(k) savings plans. In 2016, 2015 and 2014, we made matching 401(k) contributions on behalf of our employees of $2.1 million, $2.1 million and $2.0 million, respectively.

Certain eligible employees who earn awards under our annual incentive plan are permitted to defer receipt of those awards. These employees may defer receipt of a minimum of 50% and a maximum of 100% of the award pursuant to rules established under our Management Deferred Compensation Plan. Eligible employees may also defer up to 50% of their base salary under the Management Deferred Compensation Plan. At the employee's election, deferrals may be deemed invested in a company stock unit account, a directed investment account with certain deemed investments available under the 401(k) Plan or a combination of these investment vehicles. If company stock units are elected, dividend equivalents are credited to the units.

PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

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 other postretirement benefit plans, effective January 1, 2010. The level of health care subsidy was frozen for retirees so that all future increments in health care costs will be borne by the retirees. In addition, for retirees under age 65, a high deductible medical plan was created and all other existing health care plans were terminated. 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 health care plans require the retiree to contribute the amounts in excess of the company subsidy in order to continue coverage. Finally, vision, dental and life insurance coverage for these retirees were 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.

We use a December 31 measurement date for our benefit plans and obligations. We recognize the underfunded status of our defined benefit pension plans and other postretirement employee benefit obligations on our Consolidated Balance Sheets. We recognize the changes in the funded status in the year in which changes occur through our Consolidated Statements of Comprehensive Income.

The change in benefit obligation, change in plan assets and funded status for company-sponsored benefit plans and obligations are as follows:

	Pension Plans						Other Postretirement Employee Benefits
(Dollars in thousands)	2016			2015			2016			2015
Benefit obligation at beginning of year	$	(382,071	)	$	(417,694	)	$	(35,471	)	$	(41,561	)
Service cost		(6,508	)		(6,159	)		(14	)		(22	)
Interest cost		(17,020	)		(17,012	)		(1,421	)		(1,456	)
Actuarial gain (loss)		(13,997	)		27,094			(313	)		3,778
Benefits paid		34,135			31,700			3,882			3,790
Benefit obligation at end of year	$	(385,461	)	$	(382,071	)	$	(33,337	)	$	(35,471	)

Fair value of plan assets at beginning of year	$	292,200		$	337,059		$	—		$	—
Actual return on plan assets		28,626			(14,970	)		—			—
Employer contributions and benefit payments		2,984			1,811			3,882			3,790
Benefits paid		(34,135	)		(31,700	)		(3,882	)		(3,790	)
Fair value of plan assets at end of year	$	289,675		$	292,200		$	—		$	—

Amounts recognized in the consolidated balance sheets:
Current liabilities	$	(1,824	)	$	(1,791	)	$	(4,015	)	$	(4,182	)
Noncurrent liabilities		(93,962	)		(88,080	)		(29,322	)		(31,289	)
Funded status	$	(95,786	)	$	(89,871	)	$	(33,337	)	$	(35,471	)

The accumulated benefit obligation for all defined benefit pension plans is determined using the actuarial present value and was $379.5 million and $375.5 million at December 31, 2016 and 2015, respectively.

PENSION ASSETS

We utilize formal investment policy guidelines for our company-sponsored pension plan assets. Management insures 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 the following:

•

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 international equities	24%	-	48%
Fixed income securities	38%	-	58%
Alternatives, which may include equities and fixed income securities	12%	-	18%
Cash	0%	-	5%

•

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., Russell 2500 Index, Barclays Long Credit Index, Morgan Stanley Capital International Index), actuarial assumptions for return on plan investments and specific performance guidelines given to individual investment managers.

The asset allocations of the pension benefit plans’ assets at December 31 by asset category are as follows:

	Pension Plans
Asset Category		2016		2015
Domestic and international equities		36	%	35	%
Fixed income securities		48		48
Other (includes cash and equivalents and alternatives)		16		17
Total		100	%	100	%

The pension assets are stated at fair value. Refer to Note 10. Financial Instruments for a discussion of the framework used to measure fair value.

Following is a description of the valuation methodologies used for assets measured at fair value:

•

Cash and cash equivalents are classified as Level 1. Corporate common and preferred stocks with quoted market prices on major securities markets are classified as Level 1. Investments in registered investment company funds for which market quotations are generally readily available on the primary market or exchange on which they are traded, and are classified in Level 1.

•

Level 2 assets consist primarily of collective investment trust funds, which are valued at their respective net asset value (NAV) and fully redeemable in the near-term.

•

Investments in funds that may not be fully redeemed in the near-term are generally classified in Level 3. We had no Level 3 investments at December 31, 2016 or 2015.

Fair value measurements are as follows:

(Dollars in thousands)	December 31, 2016
Asset Category	Level 1		Level 2		Total
Cash and cash equivalents	$	2,845	$	—	$	2,845
Domestic equity securities¹		25,409		26,279		51,688
International equity securities²		—		26,555		26,555
Emerging markets³		12		26,391		26,403
Fixed income securities⁴		138,897		—		138,897
Alternatives⁵		—		43,287		43,287
Total	$	167,163	$	122,512	$	289,675

(Dollars in thousands)	December 31, 2015
Asset Category	Level 1		Level 2		Total
Cash and cash equivalents	$	5,591	$	—	$	5,591
Domestic equity securities¹		26,253		25,619		51,872
International equity securities²		411		25,733		26,144
Emerging markets³		1,831		23,681		25,512
Fixed income securities⁴		138,906		—		138,906
Alternatives⁵		—		44,175		44,175
Total	$	172,992	$	119,208	$	292,200

¹	Level 1 assets are managed investments in U.S. small/mid-cap equities that track the Russell 2500 Growth index or Russell 2500 Value index. Level 2 assets are collective investments, which are invested in U.S. large-cap equities that track the S&P 500.

²	Level 1 assets are managed investments in small/mid-cap equities across developed markets around the world. Level 2 assets are collective investments in equity funds of developed markets outside of the United States and Canada that track the MSCI EAFE Value index or MSCI EAFE Growth index.

Level 1 assets are mutual funds which are invested in the common stock of companies located (or with primary operations) in emerging markets that track the MSCI Emerging Markets index. Level 2 assets are collective investments in the common stock of companies located (or with primary operations) in emerging markets that track the MSCI Emerging Markets index.

⁴	Level 1 assets are mutual funds and investments in a diversified portfolio of fixed income instruments of varying maturities representing corporates, sovereign debt, U.S. treasuries and municipals that track the Barclay's Long Term Credit index.

⁵

Level 2 assets are collective investments in inflation-indexed bonds, securities of real estate companies, commodity index-linked notes, fixed income securities, foreign currencies, securities of natural resource companies, master limited partnerships, publicly listed infrastructure companies, floating-rate debt, securities of global agriculture companies and securities of global timber companies.

PLAN ACTIVITY

Pre-tax components of net periodic cost (benefit) recognized in our Consolidated Statements of Income were as follows:

	Pension Plans									Other Postretirement Employee Benefits
(Dollars in thousands)		2016			2015			2014			2016			2015			2014
Service cost	$	6,508		$	6,159		$	5,081		$	14		$	22		$	25
Interest cost		17,020			17,012			19,184			1,421			1,456			1,741
Expected return on plan assets		(18,999	)		(20,804	)		(24,512	)		—			—			—
Amortization of prior service cost (credit)		518			605			748			(8,877	)		(9,312	)		(9,641	)
Amortization of actuarial loss		16,339			17,937			14,451			1,717			2,047			2,186
Net periodic cost (benefit)	$	21,386		$	20,909		$	14,952		$	(5,725	)	$	(5,787	)	$	(5,689	)

Other amounts recognized in our Consolidated Statements of Comprehensive Income were as follows:

	Pension Plans									Other Postretirement Employee Benefits
(Dollars in thousands)		2016			2015			2014			2016			2015			2014
Net amount at beginning of year	$	128,244		$	134,261		$	117,167		$	(13,741	)	$	(15,869	)	$	(18,447	)
Amounts arising during the period:
Net loss (gain)		4,370			8,680			43,223			313			(3,777	)		(3,229	)
Taxes		(1,704	)		(3,386	)		(16,857	)		(122	)		1,473			1,259
Net amount arising during the period		2,666			5,294			26,366			191			(2,304	)		(1,970	)

Amounts reclassified during the period:
Amortization of prior service (cost) credit		(518	)		(605	)		(748	)		8,877			9,312			9,641
Amortization of actuarial loss		(16,339	)		(17,937	)		(14,451	)		(1,717	)		(2,047	)		(2,186	)
Taxes		6,574			7,231			5,927			(2,792	)		(2,833	)		(2,907	)
Net reclassifications during the period		(10,283	)		(11,311	)		(9,272	)		4,368			4,432			4,548
Net amount at end of year	$	120,627		$	128,244		$	134,261		$	(9,182	)	$	(13,741	)	$	(15,869	)

Amounts recognized in accumulated other comprehensive loss on our Consolidated Balance Sheets, net of tax, consist of:

	Pension Plans				Other Postretirement Employee Benefits
(Dollars in thousands)	2016		2015			2016			2015
Net loss	$	120,006	$	127,307	$	8,778		$	9,634
Prior service cost (credit)		621		937		(17,960	)		(23,375	)
Net amount recognized	$	120,627	$	128,244	$	(9,182	)	$	(13,741	)

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 year are $15.4 million and $0.3 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 over the next year are $1.6 million and $8.9 million, respectively.

EXPECTED FUNDING AND BENEFIT PAYMENTS

We are not required to make contributions to our qualified pension plans in 2017. Our non-qualified pension plan and other postretirement employee benefit plans are unfunded and benefit payments are paid from our general assets. We estimate that we will make non-qualified pension plan and other postretirement employee benefit payments of $5.8 million in 2017, which are included below.

Estimated future benefit payments, which reflect expected future service are as follows for the years indicated:

(Dollars in thousands)	Pension Plans		Other Postretirement Employee Benefits
2017	$	28,846	$	4,015
2018	$	28,534	$	3,727
2019	$	28,189	$	3,470
2020	$	27,964	$	3,255
2021	$	27,609	$	2,987
2022–2026	$	132,424	$	11,940

ACTUARIAL ASSUMPTIONS

The weighted average assumptions used to determine the benefit obligation as of December 31 were:

	Pension Plans							Other Postretirement Employee Benefits
		2016		2015		2014			2016		2015		2014
Discount rate		4.40	%	4.65	%	4.25	%		4.10	%	4.25	%	3.90	%
Rate of salaried compensation increase		3.00	%	3.00	%	3.00	%		—		—		—

The weighted average assumptions used to determine the net periodic cost (benefit) for the years ended December 31 were:

	Pension Plans							Other Postretirement Employee Benefits
		2016		2015		2014			2016		2015		2014
Discount rate		4.65	%	4.25	%	5.10	%		4.25	%	3.90	%	4.45	%
Expected return on plan assets		6.50	%	6.75	%	7.50	%		—		—		—
Rate of salaried compensation increase		3.00	%	3.00	%	3.00	%		—		—		—

The discount rate used in the determination of pension and other postretirement employee benefit obligations was calculated using hypothetical bond portfolios to match the expected benefit payments under each of our pension plans and other postretirement employee benefit obligations based on bonds available at each year-end with a rating of "AA" or better. The portfolios were well-diversified over corporate industrial, corporate financial, municipal, federal and foreign government issuers.

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 expected rate of return assumption that will be used to determine net periodic cost for 2017 is 6.50%.

The assumed health care cost trend rate used to calculate other postretirement employee benefit obligations as of December 31, 2016 was 7.90% for a certain group of participants under age 65 in our hourly plan and our Arkansas participants covered by a collective bargaining agreement, grading ratably to an assumption of 4.20% in 2086.

A one percentage point change in the health care cost trend rates would have the following effects on our December 31, 2016 Consolidated Financial Statements:

(Dollars in thousands)	1% Increase		1% Decrease
Effect on total service cost plus interest cost	$	3	$	(3	)
Effect on accumulated postretirement benefit obligation	$	67	$	(64	)