Contingent Liabilities: Issues and Practice; Aliona Cebotari; imf working Paper 08/245; October 1, 2008

In addition to securing financing, contingency funds can make the cost of the contingent 
liabilities more transparent. When payments on guarantees are charged against the fund, 
the accuracy of the guarantee valuations can be judged over time, as fees should be expected, 
on average, to cover actual costs. In the case of some pension guarantee funds (U.S., Ontario 
Fund, the collapse of the Finnish fund in the early 1990s), it became clear that the premia 
paid by the employers are not adequate to cover the cost of the guarantees (Cooper and Ross, 
2003). Honohan (2008) discusses examples of guarantee schemes under which net fiscal 
losses of up to 15 percent of the outstanding guarantees per year were incurred due to the 
inadequacy of charges for the guarantees. Another benefit of guarantee funds, is that when 
they build up a sufficient scale of operations with guaranteed lending, they have the potential 
to offer services similar to those of credit bureaus, useful where credit bureaus do not exist or 
when the guaranteed borrowers do not have an established credit history (Bennett et al., 
2005).
Contingency funds can be actual or notional. Actual contingency funds (like those in Chile 
and Colombia discussed in Table 1) invest resources in financial assets (usually government 
bonds or AAA securities) and manage these assets. Notional reserve funds, on the other 
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The rainy day funds in the U.S. are typically funded through line-item budget appropriations or by 
designating portions of budget surpluses, although some states earmark a portion of the resource revenues to 
fund them. The use of the funds generally requires a simple parliamentary majority, with some states requiring a 
supermajority of 60 percent or more. Some states impose further limits on the use of the funds, including 
ceilings on the annual amount that can be withdrawn and requirements to pay back the used funds within a 
certain time limit. For more details, see “A Primer on State Rainy Day Funds,” the Institute of Taxation and 
Economic Policy, Policy Brief No. 25, 2005, and “State and Local Tax Policy: What are rainy day funds and 
how do they work?,” K. Rueben and C. Rosenberg, Tax Policy Center, Urban Institute and Brookings 
Institution, April 2008. 

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hand, are government finance accounts to which resources are paid and tracked, but which 
are pooled into the treasury single account and are therefore not invested separately (U.S., the 
Swedish guarantee fund).
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Because the resources from the actual funds cannot be used for 
general financing purposes, government’s borrowing requirements and hence gross debt are 
higher relative to notional funds. Net debt, however, would be similar under both types of 
funds, since the deposits held by the actual funds would offset the higher gross debt. The 
choice between actual and notional funds will depend on the country’s financial management 
practices and other considerations. These include, for example, whether governance 
structures are adequate for properly managing the assets and the associated risks, and 
whether setting actual resources aside for the payment of guarantees would be helpful in 
restricting their use elsewhere (see OECD, 2005a).