Texas Pacific Land Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Note 5 - Employee Benefit Plans

Note 5 - Employee Benefit Plans

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Pension and Other Postretirement Benefits Disclosure [Text Block]

(

)

Employee Benefit Plans

The Trust has a defined contribution plan available to all regular employees having

one

or more years of continuous service. Contributions are at the discretion of the Trustees of the Trust. The Trust contributed

$51,438,

$46,519

and

$41,172,

2016,

2015

and

2014,

respectively.

The Trust has a noncontributory pension plan (Plan) available to all regular employees having

one

or more years of continuous service. The Plan provides for normal retirement at age

65.

Contributions to the Plan reflect benefits attributed to employees’ services to date, as well as services expected in the future.

The following table sets forth the Plan’s changes in benefit obligation, changes in fair value of plan assets, and funded status as of

December

31,

2016

and

2015

using a measurement date of

December

31:

	201 6			20 15
Change in projected benefits obligation:
Projected benefit obligation at beginning of year	$	4,884,300		$	5,093,080
Service cost		152,743			160,133
Interest cost		215,006			199,538
Actuarial (gain) loss		(202,520	)		(355,346	)
Benefits paid		(216,451	)		(213,105	)
Projected benefit obligation at end of year	$	4,833,078		$	4,884,300

Change in plan assets:
Fair value of plan assets at beginning of year	$	4,551,061		$	4,338,820
Actual return on plan assets		413,144			(46,609	)
Contributions by employer		189,219			471,955
Benefits paid		(216,451	)		(213,105	)
Fair value of plan assets at end of year	$	4,936,973		$	4,551,061
Funded (unfunded) status at end of year	$	103,895		$	(333,239	)

Amounts recognized in the balance sheets as of

December

consist of:

	201 6		20 15

Assets	$	103,895	$	—
Liabilities		—		(333,239	)
	$	103,895	$	(333,239	)

Amounts recognized in accumulated other comprehensive income (loss) consist of the following at

December

31:

	201 6			20 15

Net actuarial loss	$	(1,484,936	)	$	(1,930,079	)
Prior service cost		—			—

Amounts recognized in accumulated other comprehensive income (loss), before taxes		(1,484,936	)		(1,930,079	)
Income tax benefit		525,373			681,173
Amounts recognized in accumulated other comprehensive income (loss), after taxes	$	(959,563	)	$	(1,248,906	)

Net periodic benefit cost for the years ended

December

31,

2016,

2015

and

2014

include the following components:

	201 6			20 15			20 14
Components of net periodic benefit cost:
Service cost	$	152,743		$	160,133		$	100,480
Interest cost		215,006			199,538			189,163
Expected return on plan assets		(311,170	)		(296,446	)		(278,521	)
Amortization of net loss		140,649			144,026			46,171
Amortization of prior service cost		—			3,511			5,570
Net periodic benefit cost	$	197,228		$	210,762		$	62,863

Other changes in plan assets and benefit obligations recognized in other comprehensive income:

	20 16			20 15			20 14
Net actuarial (gain) loss	$	(304,494	)	$	(12,291	)	$	1,188,262
Recognized actuarial loss		(140,649	)		(144,026	)		(46,171	)
Recognized prior service cost		—			(3,511	)		(5,570	)
Total recognized in other comprehensive income, before taxes	$	(445,143	)	$	(159,828	)	$	1,136,521
Total recognized in net benefit cost and other comprehensive income, before taxes	$	(247,915	)	$	50,934		$	1,199,384

The Trust reclassified

$91,422,

$95,899

and

$33,632,

net of income tax of

$49,227,

$51,638

and

$18,109,

out of accumulated other comprehensive income (loss) for net periodic benefit cost in

2016,

2015

and

2014,

respectively. This amount is reflected in our Statements of Income and Total Comprehensive Income within salaries and related employee benefits. The estimated net actuarial loss and prior service cost for the Plan that will be amortized from accumulated other comprehensive income (loss) into salaries and related employee benefits over the next fiscal year are

$107,510

and

$0,

respectively.

The following table summarizes the Plan assets in excess of projected benefit obligation and accumulated benefit obligation at

December

31,

2016,

and the projected benefit obligation in excess of Plan assets and Plan assets in excess of accumulated benefit obligation at

December

31,

2015:

	201 6		20 15
Plan assets in excess of projected benefit obligation:
Projected benefit obligation	$	4,833,078	$	4,884,300
Fair value of plan assets	$	4,936,973	$	4,551,061
Plan assets in excess of accumulated benefit obligation:
Accumulated benefit obligation	$	4,365,973	$	4,059,334
Fair value of plan assets	$	4,936,973	$	4,551,061

The following are weighted-average assumptions used to determine benefit obligations and costs at

December

31,

2016,

2015

and

2014

	201 6		20 15		20 14
Weighted average assumptions used to determine benefit obligations as of December 31:
Discount rate		4.25%		4.50%		4.00%
Rate of compensation increase		7.29		7.29		7.29

Weighted average assumptions used to determine benefit costs for the years ended December 31:
Discount rate		4.50%		4.00%		5.00%
Expected return on plan assets		7.00		7.00		7.00
Rate of compensation increase		7.29		7.29		7.29

The expected return on Plan assets assumption of

7.0%

was selected by the Trust based on historical real rates of return for the current asset mix and an assumption with respect to future inflation. The rate was determined based on a long-term allocation of about

two

thirds

fixed income and

one

third

equity securities; historical real rates of return of about

2.5%

and

8.5%

for fixed income and equity securities, respectively; and assuming a long-term inflation rate of

2.5%.

The Plan has a formal investment policy statement. The Plan’s investment objective is balanced income, with a moderate risk tolerance. This objective emphasizes current income through a

30%

80%

allocation to fixed income securities, complemented by a

secondary

consideration for capital appreciation through an equity allocation in the range of

20%

60%.

Diversification is achieved through investment in mutual funds and bonds. The asset allocation is reviewed annually with respect to the target allocations and rebalancing adjustments and/or target allocation changes are made as appropriate. The Trust’s current funding policy is to maintain the Plan’s fully funded status on an ERISA minimum funding basis.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date.

The fair value accounting standards establish a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into

three

levels based on the inputs used in measuring fair value, as follows:

Level

– Inputs are based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Since inputs are based on quoted prices that are readily and regularly available in an active market, Level

inputs require the least judgment.

Level

– Inputs are based on quoted prices for similar instruments in active markets, or are observable either directly or indirectly. Inputs are obtained from various sources including financial institutions and brokers.

Level

– Inputs that are unobservable and significant to the overall fair value measurement. The degree of judgment exercised by us in determining fair value is greatest for fair value measurements categorized in Level

The fair values of plan assets by major asset category at

December

31,

2016

and

2015,

respectively, are as follows:

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Cash and Cash Equivalents
Money Markets	$	1,048,282	$	1,048,282	$	—	$	—
Equities		445,155		445,155		—		—
Mutual Funds
Equity Funds		1,684,408		1,684,408		—		—
Fixed Income Funds		1,759,128		1,759,128		—		—
Total	$	4,936,973	$	4,936,973	$	—	$	—

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Cash and Cash Equivalents
Money Markets	$	827,692	$	827,692	$	—	$	—
Equities		196,380		196,380		—		—
Mutual Funds
Equity Funds		1,730,404		1,730,404		—		—
Fixed Income Funds		1,796,585		1,796,585		—		—
Total	$	4,551,061	$	4,551,061	$	—	$	—

Management intends to fund the minimum ERISA amount for

2017.

The Trust

may

make some discretionary contributions to the Plan, the amounts of which have not yet been determined.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid for the following

ten

year period:

Year ending December 31,	Amount
2017	$	214,910
2018		245,175
2019		268,755
2020		282,475
2021		276,299
2022 to 2026		1,287,248