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."

High amounts of unfunded liabilities in a city or county pension system is 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[1] 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.[2]

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