Getting a handle on real-estate investments has to be one the first orders of business for Anne Stausboll, the new chief executive officer at California Public Employees' Retirement System. CalPERS has sustained steep declines in the value of its real estate holdings on top of even larger stock market losses.

The reason is simple: CalPERS made aggressive investments in real estate at the worst possible time, when inflated property values had peaked and were already beginning to decline.

As The Sacramento Bee's Dale Kasler detailed in a recent article, one CalPERS real estate misstep stands out in particular. In February 2007, CalPERS invested $922 million in a deal with LandSource Communities Development LLC that involved thousands of homes and lots in seven states including Florida, Arizona and California.

A month before the investment was finalized, Lennar Homes, a principal partner in the LandSource deal, announced it was writing off $500 million in real estate assets because of deteriorating market conditions. That should have served as a clear warning to CalPERS, but it did not.

Sixteen months later, LandSource filed for Chapter 11 bankruptcy. Depending on what assets the partnership sells to pay off creditors, CalPERS could lose its entire investment, nearly $1 billion.

Pension fund officials blame an unprecedented slide in housing values that caught them, other big investors and ordinary homebuyers by surprise. But experts told The Bee that CalPERS' LandSource investment was made at a time when the housing market "was clearly shifting." CalPERS officials say they saw the signs too. So why make such a high-risk investment?

Real estate represents only about 11 percent of CalPERS' portfolio. The housing portion of the pension fund's real estate holdings is just a fraction of that, and in the past it has earned hefty returns. Between 2004 and 2006, CalPERS invested $7 billion in housing, most targeted to Florida, Arizona and California where the housing boom was biggest. But those states experienced the biggest bust as well. The housing segment of the fund, once valued at $9 billion, has fallen by $3.2 billion.

Housing losses come on top of even more precipitous stock market declines. The overall value of the pension fund has dropped $51.1 billion since July 1, from $239 billion down to $187.9 billion as of last week.

The magnitude of the losses almost ensures that CalPERS will raise employer contribution rates. Pension fund officials have warned state and local governments that they may be hit with fee increases of between 2 percent and 5 percent of payroll beginning as early as 2010. If the recession deepens and sales and property taxes continue to fall, that will be a very difficult burden for governments to bear.

While CalPERs can be faulted for what in hindsight appears to be imprudent investment decisions, state and local elected officials must bear some part of the blame for the higher pension costs.

In recent years, as this page has frequently noted, cities, counties, special districts and the state have approved lavish retirement benefits. When investment returns falter, the burden of paying those benefits shifts to government employers – that is, to taxpayers.

In the short term, governments have no choice but to pay increased pension contributions. In the long run, they should reduce retirement benefits for new workers to more reasonable and affordable levels.