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Unfunded Liability
The amount by which the reserve balance is lower than one of the following reference standards:
In other words, it is the reserve backlog as of a particular date, typically measured to the end of the current fiscal year.

Below are two different examples to illustrate the concept of unfunded liability relative to a targe funding level.
  • Our reserve study indicates that we should ideally have $100,000 in our reserve account to prepare us for upcoming projects. However, we have only been able to accumulate $60,000 in the account so we have an unfunded liability of $40,000.
  • Our capital load for all projects forecast over the next 30 years is $30 million. We are setting aside $500,000 each year so our unfunded liability is approximately 50% of our capital load.

There are a variety of techniques, or reinvestment formulas, for calculating the unfunded liability, which differ essentially in their interpretation of the base year relative to the placed in service year.
The level of underfunding is expressed in a variety of different ways, including:
The underfunding is expressed either as a Dollar value or percentage of total capital load calculated over a planning horizon

Listed below are some of the key attributes of an unfunded liability:

Listed below are some of the potential consequences of an unfunded liability, the severity of which will vary depending on the size of the funding backlog:

Management Principles
Included below are some asset management principles to consider in mitigation and control of the unfunded liability:
  • Commission a reserve study to quantify the size of the reserve backlog.
  • Arrange for the necessary reinvestment.
Graphical representation of unfunded liability (catch-up) relative to base year
Fig. Graphical representation of unfunded liability (catch-up) relative to base year.

Spectrum of funding levels ranging from "weak" to "strong"
Fig. Spectrum of funding levels ranging from poor/weak ("red") at the left side to strong/good ("green"). The lower the current funding the higher the unfunded liability is likely to be.

Owners attending a Special General Meeting (SGM).
Fig. Owners holding a special general meeting to raise additional funds resulting from a funding shortfall

See also:
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