The Pennsylvania State Employees' Retirement System's investment portfolio fell another $2.2 billion, to $21.8 billion, during the first quarter, staff told the board at its meeting today. That includes over $500 million in pension payments, plus investment declines. Domestic stocks fell 10.7% (vs. 9.5% for the S&P 500); foreign stocks fell 10.3%.

Worse: High-fee investments that were supposed to help diversify fund returns during market downturns did the reverse: They dragged values down. Private equity -- nearly a quarter of the fund -- dropped 16.5% in value.  Real estate -- one-ninth of the fund -- was down 14.8%. (Both those numbers actually cover previously unreported losses from the last three months of 2008, since SERS reports private investment returns months after the fact.)

By contrast, the state's hedge funds -- 27% of the fund -- actually rose nearly 1% during the quarter, said spokesman Robert Gentzel.

Chief investment officer John Winchester told trustees he saw "signs of recovery" as stock prices rose this Spring.
But he warned "this economic recovery is in its very early stages and there could be further setbacks."

SERS' funded ratio (liabilities vs assets) dropped to 89% at year-end, from 98% a year earlier, according to consultant Hay Group. The actual ratio is a lot worse; Hay "smoothed" the numbers using SERS's rolling five-year average calculation formula.

The ratio is important because it's used to calculate the fund's "employer contribution," which is projected to balloon from the equivalent of 4% of state workers' paychecks, to 31% in 2013-14, or $2 billion a year, up from $226 million this year, from taxpayers, unless legislators muddy the formula to put off the day of reckoning, as they have in the past.