ALBANY, N.Y. (AP) -- Wall Street's volatility has hit state pension funds just as they were beginning to recover from the recession, turning what was merely a troubled forecast into a potentially stormy future for taxpayers who are on the hook for billions in unfunded liabilities for government retirees.As for the millions of government clerks, engineers, janitors, teachers and firefighters in the retirement systems, they are protected by law or, as in New York, by the state constitution, to be backed up by tax dollars if necessary. Their benefits remain safe for life in guaranteed "defined benefit" pension plans that are disappearing in the private sector, where most employees are left to fend for themselves with 401(k) plans that they mostly or entirely fund themselves.California's main public-employee pension fund, the nation's largest, has lost at least $18 billion off its stock portfolio since July 1, about 7.5 percent of its $237.5 billion total asset value on June 30.Florida's pension fund has lost about $9 billion since June 30, a decline of 7 percent for a fund valued at $119.4 billion on Thursday, while the Virginia Retirement System shrank from $54.5 billion on June 30 to about $51 billion by week's end, a decline of 6.4 percent, said its director, Robert P. Schultze.New York's state comptroller will not say how much the state pension fund has lost during the latest Wall Street roller coaster, but the fund was 5 percent below its pre-recession value before the recent losses and remained nearly $8 billion below its pre-recession value.And Kentucky, which has more than $20 billion in unfunded pension liabilities, has seen the value of its public pension fund decline $1.7 billion -- or 15 percent -- since July 1, falling to a total value of $9.7 billion.Nationwide, states have a combined $689.5 billion in unfunded pension liabilities and $418 billion in government retiree health care obligations, according to data collected earlier this year by The Associated Press. Those benefits are protected by state law or, as in New York, by the constitution.Pension fund managers say there is no risk current government retirees will miss a monthly check and that they are remaining calm and taking the long view in their investments. Some say the market plunge is even providing a great opportunity to buy stocks at fire-sale prices.Kentucky Retirement Systems Chief Investor T.J. Carlson said his fund has not made significant changes to its investments in response to the market turmoil."We haven't changed our long-term strategy in any way," he said.Critics of the defined benefit plans, which guarantee pensions for life to public employees and are rarely found any longer in the private sector, say the recent stock market plunge underscores the need for fundamental changes.The amount state and local governments are being forced to funnel into pension payments is rising as retirees live longer and elected officials have awarded more generous pension benefits in recent years, taking taxpayer money away from core public services.At the same, pension funds promise returns on investments -- 7 percent to 8 percent or more a year -- that many critics say are unrealistic in the future.E.J. McMahon, a senior fellow at the conservative Manhattan Institute for Policy Research, said the asset levels of virtually all public pension funds are below 2007 levels despite the recovery of the market in 2009 and 2010."They still think there is a 'long-term norm,'" he said of fund managers. "The events of the last two months are a reminder of how wrong that might be."As recently as last month, California's two public pension funds reported investment gains of more than 20 percent for the fiscal year ended June 30, largely driven by rising stock values.The increase came as both funds -- one for teachers, the other for state and local government workers -- were clawing their way back from losses in 2008 and 2009 that cost them up to one-third of their asset value.The recent losses are stoking fears again that taxpayers will have to bail them out at the expense of other programs that already have been subject to deep budget cuts. The state already faces an estimated $75 billion in unfunded public pension liabilities."The stock market volatility just shows that the public budget should not be subject to the Dow Jones Industrial Average," said Dan Pellissier, president of California Pension Reform, a group that is preparing a ballot initiative to limit the amounts governments can spend for future pensions.Pellissier himself will qualify for a $5,000-a-month state pension when he turns 55 in five years after working in state government for two decades. Despite his own government pension, Pellissier said public employees should bear the investment risk for retirement benefits just as private-sector employees do through 401(k) plans.New York state Comptroller Thomas DiNapoli said public pension funds work well. New York has reduced pension benefits in the past year for newly hired workers and lowered its performance outlook to 7.5 percent, while most states remain at 8 percent."This is a fund that has worked and been able to pay out benefits for 90 years," he said. Managers also note the "funding ratio," which is the percentage of the fund needed to pay out all its obligations, is more than 80 percent in many states, which pension managers say is positive.As an example of pension funds adapting to meet changing conditions, the $51 billion Pennsylvania Public School Employees' Retirement System increased its cash allocation to 8 percent after the 2008 market crash so it could pay benefits without having to sell assets. It has lost as much as 3 percent in value since July 1.After a strong showing last year in a rebounding market, many state pension fund managers are confident they will ride out the latest gut-churning gyrations on Wall Street.While Virginia's fund has an unfunded liability of $17.6 billion, it diversified after the stock market losses in 2008 and 2009, allowing it to better weather stock market swings. New Jersey's pension portfolio is more diverse than ever and includes real estate, hedge funds and private equity investments."It's a hedge against the kind of market conditions we've seen over the past two weeks," state Treasury spokesman Andy Pratt said. "We have significant protection against the ups and downs of the stock market we're seeing now."He said returns for the last fiscal year were between 17.5 percent and 18.5 percent, the best year since 1998.In Massachusetts, investments are being diversified and loopholes to accrue pension benefits are being closed. The state also added 15 years to its deadline for fully funding the retirement system, pushing it to 2040.Julie Graham-Price, spokeswoman for Ohio's Public Employees Retirement System, said the fund's bond holdings gained this week even as stock values sunk, evidence of a balanced portfolio."We have no idea yet what July and August will look like except to say it's not good when the market is volatile and has dropped like it has," said David Urbanek, spokesman for the Illinois Teachers Retirement System. "It's a cyclical thing. We will ride it out, just as we have overcome numerous other downturns over the last 72 years."Even with the steady-as-she-goes response from pension fund managers, critics of the system say taxpayers should be nervous about their future liabilities to government retirees, said Jim Waters, vice president of the Bluegrass Institute, a nonpartisan group that has pressed for a defined contribution system for government employees in Kentucky."Without pension reform, Kentucky could be headed for bankruptcy and the inability to provide necessary services for its neediest citizens," he said. "Kentucky's been in a hole for a while now, but continues to dig ... There's no way we can rely solely on the stock market or even individual contributions alone to close the liability gap."Associated Press writers Roger D. Alford in Frankfort, Ky.; Angela Delli Santi in Trenton, N.J.; Bill Kaczor in Tallahassee, Fla.; Johanna Kaiser in Boston; Bob Lewis in Richmond, Va.; Mark Scolforo in Harrisburg, Pa.; Julie Carr Smyth in Columbus, Ohio; Adam Weintraub in Sacramento, Calif.; and Christopher Wills in Springfield, Ill., contributed to this report.