Unfunded liabilities

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Unfunded Liabilities refer to liabilities that are not covered or backed up by assets. If a pension fund or other type of fund has projected debts that exceed its current capital and projected income and investment returns, it has "unfunded liabilities." In other words, a pension liability is the difference between the total amount due to retirees and the amount of money the fund actually has to make those payments.[1]

High amounts of unfunded liabilities in a city or county pension system are often referred to by pension reform proponents as indicating a pension fund that is in trouble and needs to undergo an overhaul. The unfunded liabilities of a pension plan are often quoted along with what percentage of funding the particular system features, which is a more accurate indication of the health of the fund. For example, while a very large city may have more in unfunded liabilities than a smaller city, the ratio of assets to liabilities actually indicates the health of the fund. Morningstar[2] considers funding of 70 percent to be the drop off point for stability, with anything below that not qualifying as fiscally sound. This means that unless the ratio of a fund's assets to liabilities is higher than 70 percent--70 percent of projected debts are covered by assets and projected income--the fund is considered unstable.[3]

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