By Peter Horsley - Washington Post Staff Writer

Tuesday, October 28, 2008; D01

The market downturn is ravaging public pension funds across the United States, with many state and local governments seeing more than 20 percent of their retirement pools swept away in the turmoil.

Even before the financial crisis, many large pension funds already were considered to be inadequately funded, according to the Government Accountability Office. The losses could force some states and local governments to ask taxpayers to pay more into the funds or to demand more contributions from the police, teachers and other government employees whom the benefits cover.

Public pension funds dropped 14.8 percent in value for the year ended Sept. 30, according to Northern Trust, an investment company. The funds, which typically have most of their money in stocks, have probably dropped far more than that because the markets have dropped 20 percent more since then.

"We expect this is going to be the worst year we've seen since we've been tracking the funds," said William Frieske, of Northern Trust Investment Risk and Analytical Services, which began watching the funds 14 years ago. "It's got all the hallmarks of a bad -- really bad -- year."

Virginia's retirement fund, for example, has dropped about 20 percent since July 1, plummeting from $55 billion to $44 billion. Most of that fund was invested in stocks.

The California Public Employees' Retirement System has lost 20 percent of its portfolio since July 1.

The Maryland pension fund was down 17 percent for the year ended Sept. 30, and with about 58 percent of the fund invested in stocks, officials are expecting further significant drop-off when October's market plunges are calculated in.

"We have losses," said R. Dean Kenderdine, director of the Maryland retirement fund. "We anticipate that the market is going to return as it always has. How long that will be is uncertain.

"In the meantime, we will continue to meet our obligations to our beneficiaries," he said.

Public pension funds pay for more than 27 million people, according to federal statistics. The funds are supported through a combination of taxpayer money, investment returns and employee contributions.

From 2000 to 2006, an increasing number of those funds have been inadequately funded to support future payments to retirees, according to the GAO. Twenty-seven of 65 large pension funds were inadequately funded as of 2006, the GAO reported.

The shortfall stems from the market decline in 2001, an increase in pension benefits and a decrease in taxpayer contributions, pension administrators say.

But some critics have said one of the problems is that many public pension funds unwisely project that their investments will return 8 percent annually on average -- when in fact, returns could be far lower.

The market plunge played havoc on the careful calculations actuaries make to ensure there are enough savings to cover future retirees. Roughly 60 percent of public pension funds are invested in stocks, according to the National Association of State Retirement Administrators.

The impact of the recent market drop-off on state and local governments will probably be somewhat delayed, however.

Many public funds do not recalculate what is necessary to replenish their funds until June 30. By then, the market may have recovered some.

Moreover, many funds recognize gains and losses over a five-year period, not straight away, to avoid reflecting the volatility of the markets.

Earlier gains in Virginia's fund, for example, have helped balance some of the recent losses, officials said.

"Pension funds are long-term and designed to ride out short-term volatility," said Keith Brainard, research director for the National Association of State Retirement Administrators. "As with all investors, public pension funds have taken a hit. But they won't have to pay out all of their money next year, either."