Connecticut's retirement plans have under-performed by billions of dollars since 2005. And a recent report by the nonprofit Pew Center on the State said there remains "serious concerns" on the state's long-term ability to pay all its pension and health-care benefits.

In recent years Connecticut has been among the four worst states for funding pensions, joining Illinois, Rhode Island and Kentucky. The Pew Center report raised the concerns despite the fact that Gov. Dannel P. Malloy last year won a multi-billion-dollar package of concessions from state unions that drastically changed the benefit structure for new state employees and that he pledged to invest more in state pensions.

State officials routinely project robust returns on investment ranging from 8.25 percent to 8.5 percent, but as the state's pension and trust funds ended the fiscal year June 30, its annual return was less than negative-1 percent.

With lower investment income, the state may have to supplement the pension and benefit pools for upcoming generations of state retirees and their spouses, while rethinking its long-term strategies.

"If you're missing your investment targets, the only way to get out of the hole is to increase pension contributions," said Peter Gioia, chief economist for the Connecticut Business and Industry Association. "After 2008, when the stock market took the tumble, it has powered back, but now it's up and down. It's more important than ever to look at the retirement funds and see if they're meeting a plan and if they're not meeting plan, develop a plan to carry it out."

At stake are taxpayers, who may be forced in the future to make up a pension-funding shortfall; and retirees 10 and 15 years from now, when the Malloy and the current members of the General Assembly are memories.

The negative .9 percent illustrates a continued plunge from the projected 1.13-percent return rate on the $24.7 billion market value of pension investments reported by Treasurer Denise L. Nappier at the end of March.

Nappier concedes that the investment landscape has a roller-coaster aspect to it, but the state's in for the long haul, so state officials, employees and taxpayers should get used to it.

"The fiscal year 2012 performance results pale when compared to the 2011 fiscal year return of nearly 21 percent -- which was the highest in 23 years," she said last week after announcing the end-of-year returns dated June 30. "Such a significant swing in performance results only underscores the wild global financial ride that hasn't quite come to a full stop yet."

Fred V. Carstensen, director of the Connecticut Center for Economic Analysis at UConn, said recently that while some of the state's investment funds have been losing money, the overall rate has not been bad in the current slow economy.

"In the 1990s the state did extremely well, with a 15-percent rate of return, but the stock market now is bumping around, going down," Carstensen said. "It really hasn't made progress in the last 10 years."

All things considered, the seven-year return rate might not be that bad, he said.

"But if we sustain 5 percent for the next 20 years what that does is bury us in terms of unfunded liabilities." He said the period of 7 percent returns, let alone the more than 8 percent state officials have projected, may be over.

"You can go into smaller investment areas and if you're smart you can get above-average returns, but the bigger you get, the harder it is to out-perform the market," Carstensen said.

Gioia agreed that the assumption of 8 percent or more is outdated.

"They're not hitting their targets," Gioia said during a recent interview. "Just about every state is dealing with these enormous challenges."

Ben Barnes, who as secretary of the state Office of Policy and Management is Malloy's budget chief, said it's a trap to look at pension fund investments in chunks smaller than 20 years or so.

"I understand the concerns that somehow the world has changed and we can't expect 8 percent returns," said Barnes.

He said there is currently not enough financial pressure to further change investment strategy.

The state is on track to invest a billion dollars during the current fiscal year.

State investments break down to about 57 percent in stocks, 28 percent in fixed-income holdings, 5 percent in real estate, 10 percent in private equity and 2 percent in alternatives, said Mark Luschini, chief strategist at the Janney Montgomery Scott LLC investment firm.

"This looks like a fairly typical institutional account allocation," Luschini said. "You can debate the individual fund performance or the asset allocation but neither the returns nor the asset mix seem out of character."

The Pew Center reported that between 2005 and 2010, the state paid its entire annual pension contribution only three times. The retirement system was only 53-percent funded in 2010 and had a $12-billion funding gap.

Nappier said three-year investment gains of 10.54 percent will help reduce the unfunded liability of the teacher and employee retirement plans. She said is imperative that Connecticut continues on track to make its annual contributions to the pension plans for employees and teachers.

In a series of written answers to questions about the fund, Nappier blamed high unemployment and "sluggish" growth in a recovering economy.

"Until then, the performance of the pension fund, much like that for most of our public pension peers, will continue to pose challenges in meeting the assumed rates of return of 8.25 percent (for state employees) and 8.5 percent (for teachers) over the long-term," she said. "The simple truth is that the respective retirement systems and their fund actuaries may have to accept that long-term expectations for investment performance may need to be modified to reflect a new reality that full recovery will take time."