Benefit Plans

Pension Plans

San Jose Water Company sponsors a noncontributory defined benefit pension plan (the “Pension Plan”) for its employees. Employees hired before March 31, 2008 are entitled to receive benefits under the Pension Plan using a benefit formula based on the employee’s three highest years of compensation (whether or not consecutive). For employees hired on or after March 31, 2008, benefits under the Pension Plan are determined using a cash balance formula based upon compensation credits and interest credits for each employee.

The Pension Plan is administered by a committee that is composed of an equal number of Company and union representatives (the “Committee”). The Committee has retained an investment consultant, presently Wells Fargo Advisors, LLC, to assist it with, among other things, asset allocation strategy, investment policy advice, performance monitoring, and manager due diligence. Investment decisions have been delegated by the Committee to investment managers. Investment guidelines provided in the Investment Policy Statement require that at least 25% of plan assets be invested in fixed income securities. As of December 31, 2011, the plan assets consist of approximately 42% bonds, 6% cash equivalents, and 52% equities. Furthermore, equities are to be diversified by industry groups and selected to achieve a balance of long-term growth and income combined with a goal of long-term preservation of capital. Except as provided for in the prospectus of any co-mingled investments, investment managers may not invest in commodities and futures contracts, private placements, options, letter stock, speculative securities, nor may they hold more than 5% of assets of any one private corporation. Except as provided for in the prospectus of any co-mingled investments, fixed income assets may only be invested in bonds, commercial paper, and money market funds with acceptable ratings by Moody’s or Standard & Poor’s as defined by the Investment Policy Statement. The investment manager performance is reviewed regularly by the investment consultant who provides quarterly reports to the Committee for review.

Plan assets are marked to market at each measurement date, resulting in unrealized actuarial gains or losses. Unrealized actuarial gains and losses on pension assets are amortized over the expected future working lifetime of participants of 12.37 years for actuarial expense calculation purposes. Market gains in 2010 and 2009 decreased pension expense by approximately $303 and $709 in 2011 and 2010, respectively.

Since the Pension Plan’s inception in 1984, the plan has achieved an 11.1% return on its investments while the applicable benchmark was 10.3% for the same period. The applicable benchmark is a weighted-average of returns for those benchmarks shown in the table below. For the 2011 fiscal year, the investment managers, following the required investment guidelines, achieved a 0.4% return on their investments, while the applicable benchmark was 0.9% for the same period.

Generally, it is expected of the investment managers that the performance of the assets held in the Pension Plan, computed on a total annual rate of return basis, should meet or exceed specific performance standards over a three-to-five-year period and/or full market cycle. These standards include a specific absolute and risk-adjusted performance standards over a three-to-five-year period and/or full market cycle.

San Jose Water Company calculates the market-related value of our defined benefit pension plan assets, which is defined under FASB ASC Topic 715—“Compensation—Retirement Benefits” as a balance used to calculate the expected return on plan assets, using fair value. Fair value for San Jose Water Company is based on quoted prices in active markets for identical assets and significant observable inputs.

San Jose Water Company has an Executive Supplemental Retirement Plan, which is a defined benefit plan under which San Jose Water Company will pay supplemental pension benefits to key executives in addition to the amounts received under the retirement plan. The annual cost of this plan has been included in the determination of the net periodic benefit cost shown below. The plan, which is unfunded, had a projected benefit obligation of $11,726 and $10,432 as of December 31, 2011 and 2010, respectively, and net periodic pension cost of $1,241, $1,209 and $808 for 2011, 2010 and 2009, respectively.

Other Postretirement Benefits

In addition to providing pension and savings benefits, San Jose Water Company provides health care and life insurance benefits for retired employees. The plan is a flat dollar plan which is unaffected by variations in health care costs.

Flexible Spending Plan

Effective February 1, 2004, San Jose Water Company established a Flexible Spending Account for its employees for the purpose of providing eligible employees with the opportunity to choose from among the fringe benefits available under the plan. The flexible spending plan is intended to qualify as a cafeteria plan under the provisions of the Internal Revenue Code Section 125. The flexible spending plan allows employees to save pre-tax income in a Health Care Spending Account (“HCSA”) and/or a Dependent Care Spending Account (“DCSA”) to help defray the cost of out-of-pocket medical and dependent care expenses. The annual maximum limit under the HCSA and DCSA plans is $2.5 and $5, respectively.

Medicare

In December 2003, federal legislation was passed reforming Medicare and introducing the Medicare Part D prescription drug program. San Jose Water Company determined that the new legislation has no impact on its postretirement benefit plan under ASC Topic 715. Because San Jose Water Company has a union contract with its employees whereby San Jose Water Company provides medical benefits at a fixed cost to its retirees, San Jose Water Company’s medical costs for postretirement benefits would not be affected by cost fluctuations resulting from the Medicare Part D prescription drug program.

Deferral Plan

San Jose Water Company sponsors a salary deferral plan that allows employees to defer and contribute a portion of their earnings to the plan. Contributions, not to exceed set limits, are matched by San Jose Water Company. San Jose Water Company contributions were $1,001, $962 and $974 in 2011, 2010 and 2009, respectively.

Special Deferral Election Plan and Deferral Election Program

SJW Corp. maintains a Special Deferral Election Plan allowing certain executives and a Deferral Election Program allowing certain directors to defer a portion of their earnings each year and to realize an investment return on those funds during the deferral period. Executives and directors have to make an election on the distribution and payment method of the deferrals before services are rendered. San Jose Water Company records the investment return on the deferred funds as compensation expense once the deferrals are made. Executives and directors had deferred $2,306, $2,103 and $1,890 to the plan as of December 31, 2011, 2010 and 2009, respectively. San Jose Water Company recorded an investment return of $117, $98 and $76 as of December 31, 2011, 2010 and 2009, respectively, on the deferred funds as compensation expense.

Assumptions Utilized on Actuarial Calculations

Net periodic cost for the defined benefit plans and other postretirement benefits was calculated using the following weighted-average assumptions:



	Pension Benefits				Other Benefits
	2011	2010		2009	2011	2010	2009
	%	%		%	%	%	%
Discount rate	5.48	5.92/5.51	*	6.06	5.40	5.83	6.20
Expected return on plan assets	7.00	8.00/7.00	*	8.00	7.00	8.00	8.00
Rate of compensation increase	4.00	4.00		4.00	N/A	N/A	N/A

* San Jose Water Company updated its expected return on plan assets assumption in November 2010 to reflect the approved redistribution of investments held between equity and fixed income securities in the plan asset portfolio. As a result, San Jose Water Company remeasured the plan assets and benefit obligation as of that date and the discount rate applied was updated accordingly.

The expected rate of return on plan assets was determined based on a review of historical returns, both for this Pension Plan and for medium- to large-sized defined benefit pension funds with similar asset allocations. This review generated separate expected returns for each asset class. These expected future returns were then blended based on this Pension Plan's target asset allocation.

Benefit obligations for the defined benefit plans and other postretirement benefits were calculated using the following weighted-average assumptions as of December 31:



	Pension Benefits		Other Benefits
	2011	2010	2011	2010
	%	%	%	%
Discount rate	4.34	5.48	4.25	5.40
Rate of compensation increase	4.00	4.00	N/A	N/A

San Jose Water Company utilized each plan's projected benefit stream in conjunction with the Citigroup Pension Discount Curve in determining the discount rate used in calculating the pension and other postretirement benefits liabilities at the measurement date.

Net Periodic Pension Costs

Net periodic costs for the defined benefit plans and other postretirement benefits for the years ended December 31 was as follows:



	Pension Benefits							Other Benefits
	2011			2010		2009		2011			2010		2009
Components of net periodic benefit cost
Service cost	$	3,516		3,171		2,500		$	273		229		213
Interest cost	5,313			5,231		4,548		467			433		403
Expected return on assets	(4,289		)	(3,599	)	(2,945	)	(129		)	(130	)	(115	)
Amortization of transition obligation	—			—		—		57			57		57
Amortization of prior service cost	450			470		449		197			197		197
Recognized actuarial loss	2,147			2,129		1,903		96			48		8
Net periodic benefit cost	$	7,137		7,402		6,455		$	961		834		763

Reconciliation of Funded Status

For the defined benefit plans and other postretirement benefits, the benefit obligation is the projected benefit obligation and the accumulated benefit obligation, respectively. The actuarial present value of benefit obligations and the funded status of San Jose Water Company’s defined benefit pension and other postretirement plans as of December 31 were as follows:



	Pension Benefits					Other Benefits
	2011			2010		2011			2010
Change in benefit obligation
Benefit obligation at beginning of year	$	102,783		87,145		$	8,731		7,531
Service cost	3,516			3,171		273			229
Interest cost	5,313			5,231		467			433
Amendments	—			167		—			—
Actuarial loss	15,732			10,000		1,641			821
Benefits paid	(3,440		)	(2,931	)	(316		)	(283	)
Benefit obligation at end of year	$	123,904		102,783		$	10,796		8,731
Change in plan assets
Fair value of assets at beginning of year	$	58,761		45,056		$	1,993		1,597
Actual return on plan assets	(27		)	5,610		(20		)	135
Employer contributions	7,469			11,026		567			499
Benefits paid	(3,440		)	(2,931	)	(219		)	(238	)
Fair value of plan assets at end of year	62,763			58,761		2,321			1,993
Funded status at end of year	$	(61,141	)	(44,022	)	$	(8,475	)	(6,738	)

The amounts recognized on the balance sheet as of December 31 were as follows:



	Pension Benefits			Other Benefits
	2011		2010	2011		2010
Current liabilities	$	705	494	$	56	53
Noncurrent liabilities	60,436		43,528	8,419		6,685
	$	61,141	44,022	$	8,475	6,738

Upon implementation of ASC Topic 715, San Jose Water Company recorded a regulatory asset, including a gross-up for taxes, on the projected benefit obligation of the postretirement benefit plans. The following table summarizes the change in regulatory assets:



	2011			2010
Funded status of obligation	$	69,616		50,760
Accrued benefit cost	(6,827		)	(6,864	)
Amount to be recovered in future rates	62,789			43,896
Tax gross-up	43,199			30,200
Regulatory asset	$	105,988		74,096

The estimated amortization for the year ended December 31, 2012 is as follows:



	Pension Benefits		Other Benefits
Amortization of prior service cost	$	414	197
Amortization of loss	3,642		199
Total	$	4,056	396

Plan Assets

Plan assets for the years ended December 31 were as follows:



	Pension Benefits					Other Benefits
	2011			2010		2011			2010
Fair value of assets at end of year:
Debt securities	$	26,271		21,333		$	938		785
	42		%	36	%	40		%	39	%
Equity securities	32,653			24,985		921			828
	52		%	43	%	40		%	42	%
Cash and equivalents	3,839			12,443		462			380
	6		%	21	%	20		%	19	%
Total	$	62,763		58,761		$	2,321		1,993

The following tables summarize the fair values of plan assets by major categories as of December 31, 2011 and 2010:



				Fair Value Measurements at December 31, 2011
Asset Category	Benchmark	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents		$	4,301	$	4,301	$	—	$	—
Actively Managed (a):
U.S. Large Cap Equity	Russell 1000 Growth	3,716		3,716		—		—
U.S. Small Mid Cap Equity	Russell 2500	1,814		1,814		—		—
U.S. Small Cap Equity	Russell 2000	6,303		6,303
Emerging Market Equity	MSCI Emerging Markets Net	3,547		3,547
Non-U.S. Large Cap Equity	MSCI EAFE Net	4,271		4,271		—		—
Passive Index Fund ETFs (b):
U.S. Large Cap Equity	S&P 500/Russell 1000 Growth	5,525		5,525		—		—
U.S. Mid Cap Equity	Russell Mid Cap	69		69
U.S. Small Mid Cap Equity	Russell 2500	617		617		—		—
U.S. Small Cap Equity	Russell 2000	143		143		—		—
Non-U.S. Large Cap Equity	MSCI EAFE Net	4,356		4,356		—		—
REIT	Nareit—Equity REITS	3,213		—		3,213		—
Fixed Income (c)	(c)	27,209		—		27,209		—
Total		$	65,084	$	34,662	$	30,422	$	—

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The Plan has a current target allocation of 55% invested in a diversified array of equity securities to provide long-term capital appreciation and 45% invested in a diversified array of fixed income securities to provide preservation of capital plus generation of income.


(a)	Actively managed portfolio of securities with the goal to exceed the stated benchmark performance.


(b)	Open-ended fund of securities with the goal to track the stated benchmark performance.


(c)	Actively managed portfolio of fixed income securities with the goal to exceed the Barclays Capital Aggregate Bond, Barclays Capital 1-3 Year Government/Credit, Citigroup World Government Bond Index, and Merrill Lynch High Yield Master II performance.



				Fair Value Measurements at December 31, 2010
Asset Category	Benchmark	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents		$	12,823	$	12,823	$	—	$	—
Actively Managed (a):
U.S. Large Cap Equity	Russell 1000 Growth	3,822		3,822		—		—
U.S. Small Mid Cap Equity	Russell 2500	1,850		1,850		—		—
U.S. Small Cap Equity	Russell 2000	5,961		5,961		—		—
Emerging Market Equity	MSCI Emerging Markets Net	62		62		—		—
Non-U.S. Large Cap Equity	MSCI EAFE Net	101		101		—		—
Passive Index Fund ETFs (b):
U.S. Large Cap Equity	S&P 500/Russell 1000 Growth	5,597		5,597		—		—
U.S. Mid Cap Equity	Russell Mid Cap	63		63		—		—
U.S. Small Mid Cap Equity	Russell 2500	625		625		—		—
U.S. Small Cap Equity	Russell 2000	128		128		—		—
Non-U.S. Large Cap Equity	MSCI EAFE Net	4,617		4,617		—		—
REIT	Nareit—Equity REITS	2,987		—		2,987		—
Fixed Income (c)	(c)	22,118		—		22,118		—
Total		$	60,754	$	35,649	$	25,105	$	—

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(a)	Actively managed portfolio of securities with the goal to exceed the stated benchmark performance.


(b)	Open-ended fund of securities with the goal to track the stated benchmark performance.


(c)	Actively managed portfolio of fixed income securities with the goal to exceed the Barclays Capital Aggregate Bond, Barclays Capital 1-3 Year Government/Credit, and Merrill Lynch High Yield Master II performance.

In 2012, San Jose Water Company expects to make required and discretionary cash contributions of up to $10,300 to the pension plan and other post retirement benefit plan.

Benefits expected to be paid in the next five years and in the aggregate for the five years thereafter are:



	Pension Plan		Other Postretirement Benefit Plan
2012	$	4,075	$	376
2013	4,332		411
2014	4,573		436
2015	4,853		469
2016	5,187		505
2017 – 2021	31,273		3,021