Just days before he left office in January, then-New Jersey Gov. Chris Christie signed a law requiring the state pension funds to regularly stress-test their systems and disclose the results to the public.
Several other states, including Connecticut, Hawaii and Virginia, already require regular stress testing by public pension plans. Minnesota and Pennsylvania might soon join the ranks as their legislatures are considering a similar requirement.
I believe all public pension plans should regularly conduct stress tests. Those that don't risk having stress testing thrust upon them by lawmakers. More importantly, stress testing is critical to the long-term success of public pension plans.
Many public pension plans are experiencing a funding crisis as contributions become a larger share of government budgets. They are investing in riskier assets as pressure mounts to maintain their assumed rates of return. Some already have reduced benefits or closed their plans to new employees. However, in some cases this predicament could have been avoided if the plans had conducted regular stress tests to determine the likelihood of achieving their goals and the financial implications if they didn't.