The value of the Employees' Retirement System's portfolio fell almost $1 billion during the recent financial market meltdown as stocks plummeted in July, August and September.

The ERS, a retirement fund for state and county employees in Hawai'i, yesterday was told the value of its investments dropped $974 million to $9.87 billion in that quarter.

Over the past 12 months, the plan's assets plunged almost $1.8 billion.

The investment fund's stunning reversal was yet another example of a financial meltdown that has hammered stock portfolios and the retirement savings of individuals. The cratering of markets has produced losses for pension funds across the country, with the biggest, the California Public Employees' Retirement System, losing more than 20 percent in the same period.

The Hawai'i pension plan's results could pose long-term funding issues, but for now, the ERS will have no problem covering about $800 million a year that it pays in pensions to more than 35,000 retirees, survivors and beneficiaries. The plan also did better than many of its public pension fund peers in losing less on a percentage basis during the quarter.

"A lot of plans have lost billions and billions in the value of their portfolio," said Neil Rue, of Pension Consulting Alliance Inc. Rue, appearing before ERS trustees, said it had been a challenging period for investment managers.

But "your portfolio has weathered the crisis better than your peers have."

The ERS' 8.5 percent decline during the quarter was less than the median 9.4 percent drop of other funds.

The report left the ERS trustees hoping for a continued market recovery and improved performance by its money managers.

The ERS doesn't invest the money itself. Instead, it entrusts it to investment managers who put money in holdings ranging from individual stocks and bonds to real estate and timber land.

But like most pension and retirement accounts, it is heavily invested in stocks. A Congressional Budget Office report last month said that nationwide, such accounts may have lost $2 trillion since the beginning of the year.

The numbers are disquieting on a local and national level and may have implications here for state and county budgets because of the way the ERS is funded.

'UNFUNDED LIABILITY'

Each year, public employers pay into the fund an amount that's less than what's needed to cover the benefit payments. The rest is made up through the ERS placing the money with investment managers with the goal of producing an 8 percent return each year.

When there is a shortfall in either side of the equation, there is a chance that something known as "unfunded liability" grows. That's the difference between the amount the ERS has and the amount it is projected to owe in future pension payments.

At the end of the 2007 fiscal year, the plan had an unfunded liability of $5.11 billion out of its total liability of more than $15 billion.

That meant the state had funded about 68 percent of its liability, one of the lowest levels nationally.

A LOOK AT THE FUTURE

Yesterday, ERS Investment Committee trustees discussed what continued market turmoil would mean, including whether the state and counties may have to increase their contributions.

They discussed other issues related to the lower return, including having to switch some of the portfolio to shorter-term investments that could be sold to help fund pensions, or looking at more aggressive investments that are riskier but could produce larger returns, they said.

They also were told at least one other government pension plan has broached the subject of increasing contributions.

Last month, the California Public Employees' Retirement System said it might have to seek a 2 percent to 4 percent increase in what state and county governments contribute.

More will be known next month when the ERS actuary presents the Hawai'i plan with its annual report and discusses the plan's funding shortfalls.