The nation's largest public pension fund collected a dismal 1 percent annual return on its investments, a figure far short of projections that will likely bring pressure on California's state and local governments to contribute more money, officials said Monday.

The return reported by the California Public Employees' Retirement System was well below its projected return of 7.5 percent for the fiscal year that ended June 30 and is prompting administrators to consider changes to investment strategies.

The investment returns are critical because taxpayers are on the hook for the difference if the pension funds fail to meet their performance targets.

"The last 12 months were a challenging period for all investors," chief investment officer Joe Dear said about the stock market's performance amid the ongoing European debt crisis and slow global economic growth.

The fund was most impacted by a 7 percent drop in returns on global equities. Half the pension's assets are in public equities, Dear said.

The fund, known as CalPERS, runs a $234 billion pension system for more than 1.6 million state employees, school employees and local government workers.

The preliminary returns reported Monday were even lower than the state's pension fund for teachers, which earned just 1.8 percent from investments over the past year.

Dave Hitchcock, director of state and local government ratings at Standard & Poor's in New York, said the fund's low returns were symptomatic of the entire financial industry.

"We're in an age of lower global returns than what we saw 10 years ago," Hitchcock said.

Local government officials expressed disappointment with the return. They said it should underscore the need for pension reform.

Dwight Stenbakken, deputy executive director of the League of California Cities, said the current system relies too heavily on earnings. When stocks, bonds, real estate and other pension investments don't reach targets, the difference has to be made up by taxpayers.

"We are going to be experiencing this problem for a long time to come," Stenbakken said.

Dear said the CalPERS returns would result in increased contributions from the state, school districts and municipalities, most of which are already financially stressed. It wasn't immediately clear how much contributions would increase.

He said the fund's long-term 7.5 percent target remains realistic but noted that recent returns have been the lowest in a generation. For the past five years, CalPERS earned just 0.1 percent. Over 20 years, it collected 7.73 percent.

"It does imply that we're going to have to employ new strategies in terms of where we invest and how we manage risk if we were to retain that 7.5 return target," Dear said.

The fund has been actively restructuring its investments in global equity, private equity and real estate, he said.

California taxpayers are already on the hook for billions of dollars in pension and health care benefits promised to public workers when they retire. The current unfunded liability for CalPERS is around $85 billion and the California State Teachers' Retirement System is short by about $64.5 billion.

State spending on pensions has been on the rise. The latest budget includes $3.5 billion in pension contributions, nearly the amount the state spends to run its court system, from trial courts to the state Supreme Court.

Local governments, which have been cutting back police and fire services, have seen their pension burdens increase even faster.

The problem has been most evident in Stockton, which filed for Chapter 9 protection on June 28. The Northern California city of nearly 300,000 people became the largest American city ever to declare bankruptcy.

Its unfunded liability for those benefits is $417 million.

San Bernardino, a city of 210,000 people some 60 miles east of Los Angeles, is also contemplating bankruptcy in the face of a $45 million budget shortfall. While city officials blame weak tax revenues and a loss of redevelopment funds, they also cite escalating pension costs as a contributing factor.

"You just can't rely on these optimistic assumptions that somehow the investment returns are going to be so great that you don't have to worry about paying for this stuff," San Jose Mayor Chuck Reed said in an interview.

San Jose, the nation's 10th-largest city, overwhelmingly approved a ballot measure pushed by Reed in June to roll back municipal retirement benefits for current and future employees.

So far, Gov. Jerry Brown and Democratic lawmakers have not been able to strike a deal on statewide pension reform. Talks will continue after lawmakers return from a monthlong recess next month.

Brown, a Democrat, issued a comprehensive proposal last fall that focused on raising the retirement age to match Social Security and moving new workers to a hybrid system in which defined benefits are combined with a 401(k)-style plan widely used in the private sector.

Lawmakers said they want to allow workers to retire before age 67 with reduced benefits. They are refusing the governor's call for a defined contribution plan that places some of the risk on employees.