Over 700 finance terms, Shmooped to perfection.
If a municipality offers a pension to its employees, often that pension results in obligations that won't come due for a long time, maybe several decades. It would be nice if the municipality put money in the bank on a regular basis to pay this obligation when it comes due, but there are two problems with this: (1) the municipality doesn't really known when this obligation will actually arise, and (2) it uses up money that politicians like to use for other things - things that get them reelected, for instance. As a result, the pension obligation is sitting on the books, but there's nothing yet going to pay for it. Until the city does start laying money aside, it's an unfunded obligation.