The unfunded liability of the state’s largest pension fund is expected to rise this year after the Employees’ Retirement System portfolio posted its first fiscal year loss since 2009.

Hawaii’s ERS fund, which was in the black after the first nine months of the fiscal year, fell 1.9 percent in the quarter ended June 30 to finish fiscal 2012 down 0.5 percent, according to a report Monday from Pension Consulting Alliance Inc., which advises the ERS board of trustees. It was the portfolio’s first losing year since the 12-month period ended June 30, 2009, when it tumbled 18.7 percent.

Total assets in the fund decreased by $288.4 million last quarter and were down $377.8 million from a year ago to end the fiscal year at $11.3 billion. The fund provides retirement, disability and survivor benefits to 111,648 active, retired and inactive state and county employees.

ERS Administrator Wes Machida said the fund’s unfunded liability will increase from the $8.2 billion level it was at on June 30, 2011. The actuary’s report for the fiscal year ended June 30, 2012, will be released in December. The unfunded liability is the difference between the estimated pension liabilities and the assets of the pension fund.

The unfunded liability will go up in part because the fund managers did not meet the investment return goal of 8 percent for fiscal 2012, Machida said.

In the recently ended Legislative session, the goal was lowered for fiscal 2013 to 7.75 percent.

The fund had posted two straight positive quarters and 10 gains in the previous 12 quarters until slipping in the final three months of the fiscal year. But the tone for the fiscal year was cast in the fiscal first quarter (July 1-Sept. 30, 2011) when the fund lost 11.2 percent. Despite gains of 5.5 percent and 8.3 percent in the second and third quarters, respectively, they weren’t enough to overcome the double-digit percentage loss in the fiscal first quarter.

"There is a boatload of old news in the fiscal first quarter, and it’s a disappointing number for the fiscal year," said Neil Rue, managing director of Portland, Ore.-based Pension Consulting. "The results of the first fiscal quarter have affected the entire fiscal year."

Rue said that some of the ERS fund’s portfolio managers "didn’t do what they were supposed to do" during the first quarter when the market was tanking due to problems with the U.S. debt ceiling and the election in Greece. Subsequently, Rue said, two large-cap growth managers and two emerging market managers were fired.

Regardless, Rue said it was a tough year for the 26 other pension funds that have assets of $1 billion or more. The peer funds had a median 12-month return of just 1.4 percent, and the return among the top 10 percent was only 3.3 percent. He said the market has become more "normalized" since the end of the fiscal first quarter.

Since Jan. 1 the ERS fund is up 7.76 percent through July compared with its benchmark — consisting of various index funds — of 6.99 percent.

"What we’re looking at is what we can control, and there were a lot of things in the (fiscal first quarter that ended Sept. 30) that were beyond our control," said Vijoy "Paul" Chattergy, ERS interim chief investment officer.

"We’re trying to construct a portfolio for the long term, and when the markets start to perform as we expect them to for the long term, that’s when we’ll start to get our performance back, like we’re starting to this (calendar) year."

The ERS’ negative 1.9 percent return in the fiscal fourth quarter trailed the median peer return of negative 1.8 percent and its policy benchmark of negative 1.6 percent. That was largely due to a subpar performance in its international equities, which fell 7.8 percent in the quarter and lost 14.4 percent for the year. Domestic equities were down 4 percent last quarter and eked out a 1.1 percent gain over the past 12 months.

The shining star among the major asset classes was total fixed income, which includes both domestic and international holdings. It rose 2.5 percent in the quarter to end the fiscal year up 7 percent.