Public pension funds in US states are facing their worst year of losses in history, exacerbating existing funding shortfalls and putting pressure on state governments to shore them up.

In the nine months to the end of September, the average state pension fund lost 14.8 per cent, according to Northern Trust, a fund company. The loss has grown since, as financial markets slumped further in October. The previous highest loss for state funds was 7.9 per cent for the full year in 2002.

California’s Calpers, the US’s biggest pension fund, last week reported a loss of 20 per cent of its assets, or more than $40bn, between July 1 and October 20 this year.

State and local pension funds comprise a patchwork of 2,700 funds that manage $1,400bn on behalf of 21m employees, including teachers, firefighters and other municipal workers.

About 40 per cent are underfunded, meaning that they would not be able to pay the future pensions that employees have been promised. State governments have lifted pension benefits – a move that is politically popular – but have often failed to put in more money to pay for them.

Richard Daley, mayor of Chicago, this year convened a taskforce to address the shortfalls in Illinois funds. For example, funding for the Police Fund has fallen to less than 50 per cent.

A Chicago police officer told the Financial Times: “We are risking our lives here every day, but we have no idea if the pension we have been guaranteed will be there when we retire.” The officer called on the city to start contributing more to the fund.

Susan Uhran, managing director of the Pew Center on the states, said: “They [the states] will have to increase their annual contributions, and they may also ask employees to lift their contributions too.”

“This is going to be a vicious cycle of pressure on pension funds,” said Greg Pai, managing director of Paradigm, a money manager. “They have previously looked to state and corporate subsidies, but  . . . [state governments] have lower tax revenue and are under pressure to cut costs.”

Many states face their own budget crunches, and members of Congress are pushing for a second fiscal stimulus package, in part to alleviate some of the pressures on state funding. Nancy Pelosi, speaker of the House of Representatives, cited money lost from pension funds in her push this month for the $150bn second stimulus.

But the funds themselves have limited options, said Mr Pai. Many are under pressure to move away from shares into less risky investments, but that would mean reducing returns.

Critics say the underfunding is worse than official data show. The calculation is based on an assumption of annual returns of 8 per cent, but few funds will reach that in the next few years.