The state Employees' Retirement System ended its fiscal year with $2.03 billion less than at the start of the period despite a lofty quarterly performance to cap the year.

ERS trustees yesterday were told the portfolio staged a comeback during the April-to-June quarter, regaining about $700 million and helping blunt losses racked up during the first three quarters of the fiscal year.

"It was a very big quarter for your portfolio," said Neil Rue, managing director of ERS adviser Pension Consulting Alliance Inc.

Rue, who called the gain historic, said the increases had continued into July, giving ERS trustees hope that another increase will be recorded when the current quarter ends.

The ERS trustees have had little to be happy about in the six previous quarters, when a slowing economy and slide in the stock market conspired to produce losses. The ERS is the state's largest pension fund, providing retirement benefits for Hawai'i's state and county workers.

It started the recently completed fiscal year on July 1, 2008, with $10.85 billion in assets.

But a financial crisis that occurred on Wall Street last September, along with the subprime mortgage and other housing industry problems, hurt investments during the first nine months of its fiscal year.

As of March 31 this year the portfolio had dwindled by 25 percent, or $2.72 billion, from the start of the year. But then Wall Street rebounded.

The $700 million earned in the quarter helped recapture some of the lost ground, and as the fiscal year ended the portfolio loss was reduced to negative 18.7 percent.

"It's a way more favorable number than 25 percent," Rue said.

He said the state's performance versus its public pension fund peers was lower for the quarter and year, in part because of the amount of bonds and other fixed-income investments and also because much of the big gains came in lower-quality stocks not in ERS' portfolio.

The ERS, which employs professional money managers to manage its investments, has for months been trying to move more of its investments from bonds and fixed-income investments into stocks to participate in gains as the economy improves.

It now has 52.5 percent of its investments in stocks, compared to about 47 percent at the end of March.

A decline in the value of the portfolio poses problems for the ERS since it has been trying to increase its funding for expected payments over the next 30 years.

As of June 30, 2008, its unfunded accrued liability measured on an actuarial basis stood at $5.168 billion, according to a report by ERS consultant Gabriel Roeder Smith & Co.

The ERS had a funded ratio of 68.8 percent at that time, one of the lower funding levels among public pension plans.

A decline in the portfolio such as what happened during the past year adds to the unfunded liability when all other variables are held constant.