(Bloomberg) -- The Dallas Police and Fire Pension System, onceapplauded for a diverse investment portfolio that included Hawaiianvillas, Uruguayan timber and undeveloped land in Arizona, findsitself needing to dig out of a deep hole.

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A $1.2 billion change last year in the difference between thevalue of its assets and what the pension owes retirees left the $2.6billion fund with just 45 percent of the assets needed, down from64 percent at the end of 2014. The pension, which was 90 percentfunded a decade ago, could be out of cash in 15 years at thecurrent rate of projected expenditures, according to a SegalConsulting report last month.

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The sudden burgeoning deficit shows the bind public officialsacross the country are grappling with as investments and fundinglag promised benefits. The city and pension fund members now sendan amount equal to 36 percent of officers’ pay to the pension, butthat percentage needs to more than double to fully fund the pensionover the next 40 years, according to Segal.

“It’s hard to cut benefits,” Dallas City Councilman PhilipKingston, a member of the pension’s board, said in an interview.“But this plan needs a lot of capital and it’s hard to know whereit’s going to come from.”

The board met Thursday to discuss long-term options for ensuringit has the resources to pay benefits to its 9,600 members.Meanwhile, decisions about funding that pension and another forother city workers will come into play this month as Dallas putsthe final touches on a proposed $3.1 billion budget for the fiscalyear starting Oct. 1. The Dallas City Council is considering ameasure that would have voters ask some city workers to delayretirement, and possibly other changes.

The city expects to increase funding for the police and firepension in its next budget to 37.5 percent of the workers’salaries, the maximum under state law. The city’s share will be28.5 percent, up from 27.5 percent. Segal recommends increasingthat to about 73 percent.

Kingston said the proposals being discussed this week may seehoped-for city funding reduced.

“It requires too much of a contribution from the city,” Kingstonsaid. “But it is a step to returning the fund to stability.”

Besides the effect on the budget, pensions concerns have led tocuts in the city’s credit ratings, which has increased the cost ofissuing bonds.

Similar situations are playing out in cities such as Chicago andstates including Illinois, Kentucky and New Jersey. But in many ofthose instances, the pension liabilities grew over many decades astheir government sponsors failed to provide the required amount offunding to invest to pay future benefits. Junk-rated Chicago willpay at least $902 million in 2017 to its four retirement funds thatare only 23 percent funded, according to a financial analysis.

Dallas’s police and fire pension, on the other hand, has seenits funding ratio decline precipitously as it recognized losses onits ill-fated investment strategy. Last year the fund lost 24percent.

The pension fund’s board diversified in 2006 to reduce risk fromstocks, based on studies that projected safer and greater returnsfrom other types of asset. Under former administrator RichardTettamant the fund was trying to beat stocks and bonds to achieve atargeted 8.5 percent return.

Over time it wound up with 52 percent of assets invested inalternative investments including a $200 million apartment tower inDallas, the “American Idol” production company and the rebuildingof a Dallas freeway, among others. But it also invested in luxuryhomes in Hawaii that fell in value after the real estate marketimploded, a Napa Valley vineyard and a patch of Arizonadesert.

In 2010, Money Management Letter cited the Dallas plan as “oneof the best-diversified funds in the U.S.,” when it named the fundmid-sized public pension of the year. Research firm Preqin Ltd.said later that the fund had the riskiest strategy of any pensionfund with so much of its assets tied up in alternatives.

The fund reported a 14.8 percent gain in 2012, but the gainsturned to losses starting in 2014. That year, Tettamant resignedafter two decades, and the pension began re-appraising its assets,including the luxury homes in Hawaii. The pension has since adopteda new investment strategy that has about 65 percent of its assetsstocks and bonds and the rest in real estate and otheralternatives.

The 45 percent funding level became worse when new accountingrules for public pensions are used, according to the city. Underthe rules, which required a lower return assumption, the netpension liability rose to $6.9 billion last year from $5 billion,giving the fund just 28 percent of the assets needed.

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