The District government's Retirement Board, facing an unfunded liability of more than $5 billion, has adopted a more aggressive investment strategy to make the fund grow faster -- but top board officials say the approach carries much greater risks.

As an example, the board's $1.6 billion fund lost about $100 million in the value of its investments during the third quarter of 1990 as the stock market dropped precipitously. When the market rebounded in the fall, the board's fund recouped all of its loss, board Executive Director Adrian P. Anderson said yesterday.

The roller coaster ride of losses and earnings may be unavoidable under the new strategy, which, according to Anderson, eventually will place about 60 percent of the fund's assets in stocks. The board now has about 47 percent of its money in stocks, with most of the remainder in bonds.

Anderson said the $1.6 billion fund should continue to grow through its strategy of diversified investments in stocks, bonds, real estate and venture capital. Other analysts, however, caution that because the fund is seriously underfunded, it could not weather a sustained downturn in the domestic and foreign financial markets.

Board Chairman Carolyn L. Smith, a certified public accountant, said the board may be exposed to the risks of the stock and bond markets, adding that the risks were justified by the expectation of greater earnings.

Smith and Anderson said the $100 million third-quarter loss was a result of the sharp downturn in the stock market. The large earnings of the fourth quarter were a product of a substantially improved market, they said.

The board's investments are managed by a group of about 30 financial managers, each of whom is given a fund to invest. The managers and their firms are selected by the board based on their specialties, from growth stocks to income stocks to long- and short-term bonds.

Pension experts say the fund should have assets of more than $7 billion -- instead of the current $1.6 billion -- to guarantee payment of future pension benefits to police officers, firefighters, teachers, judges and other city employees.

The $5 billion difference -- what actuaries call unfunded liability -- is expected to grow to more than $8.5 billion during the next 13 years.

Although the board is working on a long-term plan to reduce the unfunded liability, Smith warns that if the fund's liability continues to grow, the board could reach the point where it could no longer pay city government retirees.

"Where is that point? No one can say," Smith said. "But it is certainly farther off than 2004," which is the date that federal government payments to the fund are scheduled to end.

Dave Williams, a consulting actuary with the Detroit firm of Gabriel, Roeder, Smith & Co., said in an interview that the seriousness of the District's unfunded liability is "significant from the standpoint that it's expected to get bigger . . . . The liability isn't necessarily a major problem as long as it's being responsibly retired."

Williams, who specializes in advising large public pension plans, said most retirement firms that have large stock holdings have experienced significant fluctuations, but he said the District's experience seemed unusual.

"It doesn't sound good," Williams said of the wide swing. "You would think that with 30 financial managers you would be minimizing your risk exposure pretty well."

Williams said the District's fund could run into trouble in a sustained period of market decline.

Most public pension funds invest in stocks; a handful of states restrict investments to fixed-income bonds.

In financial terms, the board's unfunded liability does not mean the system is bankrupt. Rather, it means the fund does not have the money on hand now to guarantee it can meet its future obligations. The problem is serious, however, and analysts say the liability already is threatening the city's municipal bond rating, making it more expensive for the District to borrow.

The amount of the fund's liability is calculated by actuaries according to a complex formula that computes how much money the retirement board must have on hand to guarantee that all predictable future benefits will be paid. The fund is supported by contributions from the District and the federal government, which at one time carried a large number of city workers on its payroll.

The District inherited the unfunded pension liability when it became responsible for the retirement system after gaining home rule. To aid in reducing the liability, the federal government agreed to make annual payments of $52 million until 2004.