Hawaii Adds New Tool to Monitor State Pension Fund

Regular stress testing will help track fund’s fiscal health

State pensions
© iStockphoto

Hawaii is the latest state to require regular analysis of the potential impact of future economic swings on its public pension funds. Known as stress testing, such calculations can help states monitor the fiscal strength and sustainability of these funds.

This spring, the Legislature unanimously approved a bill requiring the analyses, and Governor David Ige (D) signed it into law July 5. California, Virginia, and Washington already require extensive and routine sensitivity analyses on their public pension plans. Typically, these tests provide estimates of the future financial position of these funds under various economic and investment return scenarios. Interest among other states appears to be growing as well.

This type of analysis has become more important because of state pension funds’ increasingly complex mix of investments in recent decades, a shift that brought greater exposure to financial market volatility. For example, many state funds lost at least 20 percent of their portfolio value at the start of the Great Recession in late 2007. Overall, state pension investment returns over the past five years have ranged widely, from 1 to 17 percent.

Policymakers benefit from tools that help them understand the variability and uncertainty in state pension plans. Rules promulgated by the Government Accounting Standards Board (GASB) after the Great Recession went into effect in 2014 and require state and local plans to estimate and disclose liabilities based on projected returns that are 1 percentage point above and below their assumed rate of return. In 2014, the Society of Actuaries’ Blue Ribbon Panel on Public Pension Plan Funding also recommended this kind of stress testing. The information can show how a plan’s funding levels are shaped by its investment returns and other economic factors.

Many public pension funds across the country face mounting unfunded liabilities and limited budgets. At the same time, many pension plans are taking on increased risk in part to counter lower investment returns on fixed-income assets. Policymakers need to make sure they have the tools that help them understand the potential impact of these risks.

Hawaii has implemented a system that goes beyond the GASB requirements to make sure leaders have a feel for how well they can meet their pension obligations under different scenarios. Stress testing represents just one approach, but this type of analysis is critical in an uncertain economic landscape.

Greg Mennis and Tim Dawson are with The Pew Charitable Trusts’ public sector retirement systems project.

America’s Overdose Crisis
America’s Overdose Crisis

America’s Overdose Crisis

Sign up for our five-email course explaining the overdose crisis in America, the state of treatment access, and ways to improve care

Sign up
Quick View

America’s Overdose Crisis

Sign up for our five-email course explaining the overdose crisis in America, the state of treatment access, and ways to improve care

Sign up
Article

37 Scientists Pioneering the Future of Biomedical Research

Quick View
Article

Biomedical researchers are at the heart of nearly every medical advancement. From cutting-edge cancer treatments to breakthrough discoveries about emerging viruses, these scientists use creativity and ingenuity to explore new horizons in human health and medicine. And for nearly 40 years, The Pew Charitable Trusts has supported more than 1,000 early-career researchers committed to this work.

Composite image of modern city network communication concept

Learn the Basics of Broadband from Our Limited Series

Sign up for our four-week email course on Broadband Basics

Quick View

How does broadband internet reach our homes, phones, and tablets? What kind of infrastructure connects us all together? What are the major barriers to broadband access for American communities?