According to standards established by the Public Sector Accounting Board (PSAB), municipalities must record all expenses incurred during the year. Some of these expenses will not have to be paid for many years. This creates long-term accounting liabilities which are reflected on municipal financial statements.

Municipalities have flexibility regarding the amount they set aside to pay for future liabilities. Municipalities may exclude certain expenses such as amortization, post-employment benefits and solid waste landfill closure costs, from their budgeted amounts. For more information, readers may wish to refer to:

An unfunded liability is an accounting liability that is not covered by existing assets, savings or investments. Since money has not been set aside to settle the liability, it is important for the municipality to plan for how it will pay for these liabilities in the future.

Unfunded Liabilities = Liabilities – Funds set aside to pay for the liabilities

When an accounting liability matches the amount set aside to pay for it, the liability is fully funded. If funds set aside are more than the liability, the liability is overfunded.

While carefully prepared, this document is a summary and does not take into account differing local circumstances. The laws and practices referred to are subject to change. Do not substitute this document for specialized legal, accounting or other professional advice in connection with any particular matter. Municipalities and other users are responsible for any use or application of the document.


Closure costs for solid waste landfills

In connection with their environmental duties or for other reasons, municipalities may have to pay for closure and post-closure costs for solid waste landfills.

  • The liability for closure costs begins when the site starts accepting waste and increases as the landfill site’s capacity is used up.
  • As the closure costs will likely not be paid out until the future, council may choose to set funds aside in a reserve to pay these costs.

Post-employment benefits

Some municipalities offer benefits to employees that are paid out after the employee has left the municipality.

  • Post-employment benefits are part of the cost of compensating existing staff and are recorded during an employee’s active service.
  • As the post-employment costs will likely not be paid out right away, council may choose to set funds aside in a reserve to pay these costs.

Budgeting for unfunded liabilities

Municipalities have flexibility in how much they set aside to pay for future liabilities. Therefore, the payment schedule for unfunded liabilities may vary from year to year.

However, budgeting for consistent spending each year, rather than the actual “peaks and valleys” of spending, will allow annual budget allocations to be more consistent and the impact of costs to be spread over many years.

Municipalities may also consider discussing unfunded liabilities and their funding plans as part of their annual budget process.

Unfunded liabilities & long-term financial planning

Reporting liabilities as they are incurred, rather than as they are paid, gives municipalities information for an accurate financial plan. This information helps give council and staff members an accurate picture of existing and future liabilities to inform financial decisions.

Municipalities may also consider overall budget implications for both current and future years to better assess how to address any foreseen future liabilities.

Example scenario

While you are still working and earning income (before you retire) have you set aside specific funds to cover the future costs of your own health, retirement and long-term care in old age? How about funds to cover the costs of caring for an elderly parent?

The sum of these costs may exceed your current savings and could significantly impact your future income. In other words, your own unfunded liabilities may be pretty high.

You may need a plan in place to start saving today to cover your payments tomorrow. Ignoring these costs may make it harder for you in the future. Municipalities face similar issues.


Unfunded liabilities cannot be ignored. Municipalities with unfunded liabilities will be pressed to generate revenue to pay off or fund the liabilities. A municipality without a funding plan for unfunded liabilities is moving obligations and pressures from the current taxpayers to future taxpayers or from the current budget to future budgets. A best practice is to adopt a funding plan that best suits municipal circumstances.