CalPERS missed its annual investment return target for the year, a shortcoming that will increase costs for local governments in the years to come.

The California Public Employees’ Retirement System reported a 4.7% return for the fiscal year ending June 30, falling short of the system’s 7% target amid a global market downturn, according to a Wednesday news release.

The largest state pension system’s value stood at $389 billion at the end of June, according to the release.

It’s the second consecutive year that CalPERS missed its investment target. Last year, the pension fund recorded a 6.7% return.

Even though the system fell short of its target, the positive return rate represents a rebound from when the fund’s value dove $70 billion in February and March as the coronavirus began to impact markets, according to the release.

“What started out as a health crisis turned into an economic crisis and severely affected investors everywhere, including CalPERS,” said Yu (Ben) Meng, CalPERS’ chief investment officer.

When the fund misses its target, the ratio of its assets to liabilities worsens. The system has about 70% of the assets needed to cover its long-term liabilities. It dedicates money each year toward the unfunded portion under a long-term plan to return to full funding.

In 2009, following the Great Recession’s hit to the system, CalPERS reported a negative 24% return. The system has made a number of changes since then to try to make the fund more resilient.

The fund’s return rate for public equity, which includes stocks, was just six-tenths of a percent for the year. Fixed income, which includes securities and bonds, returned 12.5%.

Private equity, which the fund has been expanding to try to boost returns, lost 5.1%, according to the release. That number reflects values through March 31, according to the release.

“The preliminary returns for private equity reflect the steep drop in economic activity during a period of unprecedented change,” Meng said. “No doubt significant uncertainty still remains, but with our focus on investing over many years we firmly believe that private equity will help us generate the returns we need to pay retirement benefits.”

Private equity has been the fund’s best-performing asset class, with a 10-year return rate of 10.4% and a 20-year rate of 7.5%, according to the release.

Local governments, which use tax dollars to pay CalPERS for public workers’ retirement benefits, have to pay more when the fund’s investments fall short. The shortfall will begin to affect local governments next year and the increases will be phased in over five years.

The local governments’ payments are based on a slightly higher return target of 7.25% for the last fiscal year. The 7% target is used to determine what state agencies owe toward the long-term unfunded liability and is used to calculate the system’s overall funded status.