Unfunded Liability
The difference between a pension plan's projected liabilities (what it owes to current and future retirees) and its current assets. Also called the unfunded actuarial accrued liability (UAAL).
How It Works
Unfunded liabilities represent pension promises that the city has made but not yet funded. They are essentially hidden debt — not recorded on the city's balance sheet under older accounting standards, though GASB 67/68 now requires disclosure. Large unfunded liabilities crowd out other spending as cities increase pension contributions to close the gap. Collectively, U.S. state and local pension plans have over $4 trillion in unfunded liabilities.
Related Terms
- Funded Ratio — The percentage of a pension plan's projected liabilities that are covered by current assets. A plan with $80 in assets for every $100 in liabilities has an 80% funded ratio.
- Defined Benefit Pension — A retirement plan where the employer guarantees a specific monthly payment for life based on years of service and final salary — the traditional government pension.
- Actuarial Assumption — The financial and demographic projections used to calculate pension costs and liabilities — including expected investment returns, employee life expectancy, and salary growth.
- Pension Obligation Bond (POB) — A bond issued by a city to make a lump-sum payment into its underfunded pension system, betting that investment returns will exceed the bond's interest rate.
About This Definition
This definition is part of the CitySpend Municipal Finance Glossary — 59 terms explaining how city governments fund and manage public services. All definitions are written in plain language for taxpayers, journalists, students, and municipal bond investors.