Benefit Plans

Pension Plans

San Jose Water Company sponsors a noncontributory defined benefit pension plan (the “Pension Plan”) for its eligible employees. Employees hired before March 31, 2008 are entitled to receive retirement benefits using a 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 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, Wells Fargo Advisors Financial Network, LLC, to assist it with, among other things, asset allocation strategy, investment policy advice, performance monitoring, and investment manager due diligence. Individual investment decisions have been delegated by the Committee to the investment managers who are monitored by the investment consultant. 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, 2017, the plan assets consist of approximately 32% bonds, 6% cash equivalents, and 62% 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 managers’ performance is reviewed regularly by the investment consultant who provides semi-annual 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 12.82 years for actuarial expense calculation purposes. Market losses in 2016 increased pension expense by approximately $200 in 2017 and market losses in 2015 increased pension expense by approximately $898 in 2016.

For the past 10 years, the plan has achieved a 6.07% return on its investments while the applicable benchmark was 6.34% for the same period. The applicable benchmark is a weighted-average of returns for those benchmarks shown in the table below. For the past five years, the investment managers, following the required investment guidelines, achieved a 8.55% return on their investments, while the applicable benchmark was 9.22% 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 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 the 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. The fair value is based on quoted prices in active markets for identical assets and significant observable inputs.

Officers hired before March 31, 2008 are eligible to receive additional retirement benefits under San Jose Water Company’s Executive Supplemental Retirement Plan, and officers hired on or after March 31, 2008 are eligible to receive additional retirement benefits under San Jose Water Company’s Cash Balance Executive Supplemental Retirement Plan. Both of the plans are non-qualified plans in which only officers and other designated members of management may participate. The annual cost of the plans has been included in the determination of the net periodic benefit cost shown below. The plans, which are unfunded, had a projected benefit obligation of $24,832 and $19,051 as of December 31, 2017 and 2016, respectively, and net periodic pension cost of $2,186, $1,729 and $1,542 for 2017, 2016 and 2015, respectively.

Other Postretirement Benefits

In addition to providing pension and savings benefits, San Jose Water Company also provides health care and life insurance benefits for retired employees under the San Jose Water Company Social Welfare Plan. 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.

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 $1,585, $1,242 and $1,149 in 2017, 2016 and 2015, respectively.

Special Deferral Election Plan and Deferral Election Program

SJW Group maintains a Special Deferral Election Plan allowing certain executives and a Deferral Election Program allowing non-employee 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 non-employee directors have to make an election on the deferral and distribution method of the deferrals before services are rendered. Executives and non-employee directors had deferred $4,528, $4,250 and $4,073 under the plans as of December 31, 2017, 2016 and 2015, respectively.

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
	2017	2016	2015	2017	2016	2015
	%	%	%	%	%	%
Discount rate	4.04	4.24	3.88	3.93	4.10	3.80
Expected return on plan assets	7.00	7.00	7.00	7.00	7.00	7.00
Rate of compensation increase	4.00	4.00	4.00	N/A	N/A	N/A

The expected rate of return on plan assets was determined based on a review of historical returns, both for the 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 the 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
	2017	2016	2017	2016
	%	%	%	%
Discount rate	3.52	4.04	3.45	3.93
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.

In 2017 and 2016, San Jose Water Company adopted the newly issued MP-2017 and MP-2016, respectively, Mortality Improvement Scales to determine mortality assumptions. The tables and scales reflect increasing life expectancies of participants in the United States. See also “Reconciliation of Funded Status” below.

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
	2017			2016		2015		2017			2016		2015
Components of net periodic benefit cost
Service cost	$	4,699		4,447		5,072		$	529		527		379
Interest cost	6,993			6,830		6,342		634			655		504
Expected return on assets	(7,888		)	(7,288	)	(6,984	)	(376		)	(292	)	(283	)
Amortization of prior service cost	94			376		376		198			197		197
Recognized actuarial loss	3,844			3,527		4,005		273			316		188
Net periodic benefit cost	$	7,742		7,892		8,811		$	1,258		1,403		985

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 projected 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
	2017			2016		2017			2016
Change in benefit obligation
Benefit obligation at beginning of year	$	174,097		164,268		$	16,461		16,420
Service cost	4,699			4,447		529			527
Interest cost	6,993			6,830		634			655
Actuarial (gain)/loss	16,552			3,967		1,124			(528	)
Implicit rate subsidy	—			—		(196		)	(179	)
Benefits paid	(6,134		)	(5,415	)	(549		)	(434	)
Benefit obligation at end of year	$	196,207		174,097		$	18,003		16,461
Change in plan assets
Fair value of assets at beginning of year	$	113,895		104,953		$	5,366		4,462
Actual return on plan assets	17,298			5,936		736			295
Employer contributions	8,301			8,421		702			793
Benefits paid	(6,134		)	(5,415	)	—			(184	)
Fair value of plan assets at end of year	133,360			113,895		6,804			5,366
Funded status at end of year	$	(62,847	)	(60,202	)	$	(11,199	)	(11,095	)

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



	Pension Benefits			Other Benefits
	2017		2016	2017		2016
Current liabilities	$	1,099	1,032	$	86	87
Noncurrent liabilities	61,748		59,170	11,113		11,008
	$	62,847	60,202	$	11,199	11,095

San Jose Water Company recorded a regulatory asset, including a gross-up for taxes, on the projected benefit obligation of the postretirement benefit plans as follows:



	2017			2016
Funded status of obligation	$	74,046		71,297
Accrued benefit cost	(5,490		)	(6,239	)
Amount to be recovered in future rates	68,556			65,058
Tax gross-up	—			44,737
Regulatory asset	$	68,556		109,795

For a discussion on the change in the tax gross-up for the regulatory assets related to postretirement pensions and other medical benefits as of December 31, 2017, see Note 5, “Income Taxes.”

The estimated amortization for the year ended December 31, 2018 is as follows:

Plan Assets

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



	Pension Benefits					Other Benefits
	2017			2016		2017			2016
Fair value of assets at end of year:
Debt securities	$	42,784		38,887		$	1,710		1,627
	32		%	34	%	25		%	30	%
Equity securities	83,352			66,022		4,111			2,675
	63		%	58	%	60		%	50	%
Cash and equivalents	7,224			8,986		983			1,064
	5		%	8	%	14		%	20	%
Total	$	133,360		113,895		$	6,804		5,366

The following tables summarize the fair values of plan assets by major categories as of December 31, 2017 and 2016:



				Fair Value Measurements at December 31, 2017
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		$	8,207	$	8,207	$	—	$	—
Actively Managed (a):
All Cap Equity	Russell 3000 Value	6,413		6,376		37		—
U.S. Large Cap Equity	Russell 1000, Russell 1000 Growth, Russell 1000 Value	50,351		50,351		—		—
U.S. Mid Cap Equity	Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value	9,358		9,358		—		—
U.S. Small Cap Equity	Russell 2000, Russell 2000 Growth, Russell 2000 Value, Russell 2500	8,725		8,725		—		—
Non-U.S. Large Cap Equity	MSCI EAFE	5,973		5,973		—		—
REIT	NAREIT—Equity REIT’s	6,143		—		6,143		—
Fixed Income (b)	(b)	44,994		—		44,994		—
Total		$	140,164	$	88,990	$	51,174	$	—

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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)	Actively managed portfolio of fixed income securities with the goal to exceed the Barclays 1-5 Year Government/Credit, Barclays Intermediate Government/Credit, and Merrill Lynch Preferred Stock Fixed Rate.



				Fair Value Measurements at December 31, 2016
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		$	10,050	$	10,050	$	—	$	—
Actively Managed (a):
All Cap Equity	Russell 3000 Value	5,290		5,266		24		—
U.S. Large Cap Equity	Russell 1000, Russell 1000 Growth, Russell 1000 Value	39,534		39,534		—		—
U.S. Mid Cap Equity	Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value	7,021		7,021		—		—
U.S. Small Cap Equity	Russell 2000, Russell 2000 Growth, Russell 2000 Value	6,357		6,357		—		—
Non-U.S. Large Cap Equity	MSCI EAFE	4,832		4,832		—		—
REIT	NAREIT—Equity REIT’s	5,663		—		5,663		—
Fixed Income (b)	(b)	40,514		—		40,514		—
Total		$	119,261	$	73,060	$	46,201	$	—

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


(b)	Actively managed portfolio of fixed income securities with the goal to exceed the Barclays 1-5 Year Government/Credit, Barclays Intermediate Government/Credit, and Merrill Lynch Preferred Stock Fixed Rate.

In 2018, San Jose Water Company expects to make required and discretionary cash contributions of up to $7,593 to the pension plan and other postretirement 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
2018	$	6,941	$	795
2019	7,032		817
2020	7,392		823
2021	7,741		868
2022	8,013		916
2023 - 2027	43,828		5,032

Pension Benefits

Other Benefits

Amortization of prior service cost

Amortization of loss