17. ACCRUED WORKERS’ COMPENSATION AND PNEUMOCONIOSIS BENEFITS

Certain of the ARLP Partnership’s mine operating entities are liable under state statutes and the Federal Coal Mine Health and Safety Act of 1969, as amended, to pay pneumoconiosis, or black lung, benefits to eligible employees and former employees and their dependents. In addition, the ARLP Partnership is liable for workers’ compensation benefits for traumatic injuries. Both black lung and traumatic claims are covered through the ARLP Partnership’s self-insured programs.

The ARLP Partnership’s black lung benefits liability is calculated using the service cost method that considers the calculation of the actuarial present value of the estimated black lung obligation. The ARLP Partnership’s actuarial calculations are based on numerous assumptions including disability incidence, medical costs, mortality, death benefits, dependents and interest rates. Actuarial gains or losses are amortized over the remaining service period of active miners.

The ARLP Partnership provides income replacement and medical treatment for work-related traumatic injury claims as required by applicable state laws. Workers’ compensation laws also compensate survivors of workers who suffer employment related deaths. The ARLP Partnership’s liability for traumatic injury claims is the estimated present value of current workers’ compensation benefits, based on its actuarial estimates. The ARLP Partnership’s actuarial calculations are based on a blend of actuarial projection methods and numerous assumptions including claim development patterns, mortality, medical costs and interest rates. The discount rate used to calculate the estimated present value of future obligations for black lung was 4.69% and 3.78% at December 31, 2013 and 2012, respectively, and for workers’ compensation was 4.11% and 3.22% at December 31, 2013 and 2012, respectively.

The black lung and workers’ compensation expense consists of the following components for the year ended December 31, 2013, 2012 and 2011 (in thousands):

	2013		2012		2011

Black lung benefits:
Service cost	$	3,810	$	3,758	$	3,345
Interest cost	2,253		2,372		2,382
Net amortization	670		776		(223)
Total black lung	6,733		6,906		5,504
Workers’ compensation (benefit) expense	(110)		17,572		18,996
Total expense	$	6,623	$	24,478	$	24,500

The following is a reconciliation of the changes in the black lung benefit obligation recognized in AOCI for the years ended December 31, 2013 and 2012 (in thousands):

	2013		2012

Net actuarial gain	$	16,750	$	2,156
Reversal of amortization item:
Net actuarial loss	670		776
Total recognized in accumulated other comprehensive income	$	17,420	$	2,932

The following is a reconciliation of the changes in workers’ compensation liability (including current and long-term liability balances) at December 31, 2013 and 2012 (in thousands):

	2013		2012

Beginning balance	$	77,046	$	73,201
Accruals	18,544		24,812
Payments	(10,639)		(10,477)
Interest accretion	2,481		2,739
Valuation gain	(24,523)		(13,229)

Ending balance	$	62,909	$	77,046

The valuation gain component of the change in benefit obligation in 2013 and 2012 was primarily attributable to favorable reserve adjustments for claims incurred in prior years. The 2013 valuation gain was also favorably impacted by an increase in the discount rate used to calculate the estimated present value of future obligations.

The following is a reconciliation of the changes in black lung benefit obligations at December 31, 2013 and 2012 (in thousands):

	2013		2012

Benefit obligations at beginning of year	$	60,991	$	55,605
Service cost	3,810		3,758
Interest cost	2,253		2,372
Actuarial gain	(16,750)		(2,156)
Benefits and expenses paid	(744)		(715)
Acquisition of Onton (Note 3)	-		2,127

Benefit obligations at end of year	$	49,560	$	60,991

Amount recognized in accumulated other comprehensive income consist of:

Net actuarial (gain) loss	$	(8,511)	$	8,908

The actuarial gain component of the change in benefit obligation in 2013 was primarily attributable to an increase in the discount rate used to calculate the estimated present value of future obligations as well as favorable changes in claims development and disability incident rate assumptions.

Summarized below is information about the amounts recognized in the accompanying consolidated balance sheets for black lung and workers’ compensation benefits at December 31, 2013 and 2012 (in thousands):

	2013		2012

Black lung claims	$	49,560	$	60,991
Workers’ compensation claims	62,909		77,046
Total obligations	112,469		138,037
Less current portion	(9,065)		(9,320)

Non-current obligations	$	103,404	$	128,717

Both the black lung and workers’ compensation obligations were unfunded at December 31, 2013 and 2012.

As of December 31, 2013 and 2012, the ARLP Partnership had $86.3 million and $81.4 million, respectively, in surety bonds and letters of credit outstanding to secure its workers’ compensation obligations.