(Bloomberg) -- The California Public Employees’ RetirementSystem, the largest U.S. public pension fund, faces awidening funding gap for the foreseeable future as its returns lagbehind obligations to retirees, Chief Investment Officer TedEliopoulos said Monday.

“The gap grows over time,” Eliopoulos said during a presentationto the CalPERS board. “If we return less than 7.5 percentalong this path, it gets wider and sooner.”

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CalPERS, with $301.5 billion inassets, has reported net outflows for five of the past seven fiscalyears, including $1.5 billion in the year ending June 30, accordingto a presentation by Eliopoulos. The gap, a measure of outlaysfor benefits compared with revenue from contributions and income,is expected to widen to $9.2 billion by fiscal 2031-2032, the finalyear in the presentation.

The projections are based on annualized returns of 7.5 percent,a target Eliopoulos said is overly optimistic given the currentlow-interest-rate, low-return environment.

CalPERS’ consultant Wilshire Associates projects annualizedreturns closer to 6 percent, which would require highercontributions to the fund from a combination of public employeesand taxpayers. The system also faces a wave of retiring babyboomers with lengthening life expectancy as the number of employeespaying into the system has plateaued or fallen, he said.

CalPERS must sell as much as $2 billion of securities ayear to help close the gap, Eliopoulos said, a situation likely toraise the risk of not meeting benefit needs if markets decline. Asof June 30, CalPERS had 68 percent of the money it needs topay projected health and retiree benefits.

“A significant drawdown would particularly be painful especiallywhen the current funded status of the fund is at just below 70percent,” Eliopoulos said. “It’s very difficult in a down market tosell assets to meet these benefits.”

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