The stock market downturn is costing state and local retirement funds billions of dollars. The losses are only on paper right now, but the problem is already serious in some states.

Minnesota's Public Employees Retirement Association is in fiscal trouble because its investment losses are compounded by demographic problems: A large number of state workers have come on the job later in life or are leaving government employment early after becoming vested. The dovetailing of stock market lows with benefit-claim highs has created a projected funding deficit for the next 30 years of $1 billion. The pension plan has already come hat in hand to the legislature, looking for a bailout that will cost the state approximately $27 million a year.

Out in New Mexico, the problem isn't quite as acute. That state's Public Employees Retirement Association investment kitty lost about 4 percent of its value in the first three months of this year. Projected benefits were 99 percent funded as of June 2000, but Bob Gish, PERA's investments director, says that because of the recent dip in returns, it will be at least a couple of years before PERA is fully funded and free from worrying about having to ask the legislature for future payments.

For the most part, though, pension fund managers are putting their stock market losses in perspective. Retirement plans are, by their nature, investors for the long haul. "Losing money means you're selling," says Oregon State Treasurer Randall Edwards, "and we're not selling."

Oregon's $40 billion Public Employees Retirement Fund is aggressive but diversified: About 60 percent of the fund's money is in stocks, but the rest is in real estate, venture capital and fixed-income investments. If any aspect of the portfolio dips below a certain amount, the state's policy is to start buying more. So, rather than pulling out of equities, "we're getting close to a buy mode," Edwards says.

Most pension fund managers aren't too worried about losses for another reason. Many funds use actuarial smoothing techniques that spread losses--and profits--over a five-year period. So even with today's down market, the five-year returns look healthy, compared to historical rates of return. And state and local pension funds are doing a much better job of storing nuts against any coming winter: The value of assets to liabilities in 1998 was 95 percent, up from only 50 percent in the 1970s.

Retirement plan officials "have behaved very, very well from the standpoint of not panicking," says Girard Miller, president of ICMA Retirement Corp. "The vast majority of them understand that stocks do, in fact, go down."