SACRAMENTO, Calif. — The California Public Employees' Retirement System, an investor in a $1 billion-plus real estate deal, is in negotiations to keep an embarrassing loan default from turning into a bankruptcy.

SACRAMENTO, Calif. — The California Public Employees' Retirement System, an investor in a $1 billion-plus real estate deal, is in negotiations to keep an embarrassing loan default from turning into a bankruptcy.

CalPERS, the nation's biggest public pension fund, and its partners acquired a controlling interest in 15,000 acres of undeveloped land in the Santa Clarita Valley early last year, before the meltdown in the housing market. The land, once owned by Newhall Land and Farming Co., was appraised at $2.6 billion at the time of the CalPERS investment but has dropped considerably in value since then.

Caught in a credit crunch, CalPERS and its partners in LandSource Communities Development are in talks with a loan syndicate headed by Barclays Capital Inc. to restructure $1.24 billion in debt. LandSource received a notice of default April 22 after missing a payment of an undisclosed amount, and a Standard & Poor's online newsletter, citing anonymous sources, predicted that LandSource would file for bankruptcy this month.

CalPERS President Rob Feckner said he hoped to forestall a bankruptcy but stressed that "if we incur any losses, they will be minor" because the pension fund is "very well diversified, in good shape."

The threat of a loss comes as CalPERS faces a leadership vacuum. Recently, the fund announced the retirement of its chief executive, Fred Buenrostro, and the resignation of its chief investment officer, Russell Read. Officials have said the departures were coincidental and unrelated to current investment strategies and performance.

MW Housing Partners, in which CalPERS is a major investor, acquired 68 percent of the Newhall property from home builder Lennar Corp. and LNR Property Corp., a unit of Cerberus Capital Management, which each retained a 16 percent interest.

Feckner said the land along the Interstate 5 corridor, 30 miles north of Los Angeles, was a solid investment. CalPERS officials wouldn't disclose the current assessed value.

"Whether today or somewhere down the line, it still is a good piece of property," Feckner said. "Real estate is going to make a rebound."

Yet a LandSource investment gone south could do more damage to the $242 billion fund's reputation for financial adroitness than to its bottom line, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp.

"It would probably be viewed by some people as an embarrassment because any time you make an investment and it goes into default, it's not good news," he said. The deep-pocketed pension fund has made a number of lucrative real estate investments in California and across the country over the last decade, but this year, "real estate has gone bad with a vengeance."

Real estate accounts for about one-tenth of CalPERS' holdings, worth $23.4 billion, reflecting a drive by the pension fund to diversify its traditionally equity-based portfolio. Although it posted earnings of nearly 24 percent for the past five years, returns from real estate slowed to 2.1 percent for the first quarter of this year.

CalPERS' LandSource investment is likely to pay off in the long term as continued growth in the Southern California economy increases pressure to build north of the San Fernando and Apple valleys, said Alonzo Pedrin, a principal at Alfred Gobar Associates, a real estate research company in Anaheim.

"The long-term vision may be worthwhile, but clearly they're grappling with short-term issues as relates to financing," he said. "The credit markets and the slowdown in housing create a challenge."

CalPERS' potential problems with developing Newhall Ranch could reach beyond current difficulties with tight credit and an economic slowdown, said Stuart Gabriel, director of the University of California, Los Angeles' Ziman Center for Real Estate. Because of escalating gasoline prices and longer commute times, Newhall Ranch might be too far from central Los Angeles to function as a traditional bedroom community, Gabriel said.

"Residential development in the future is going to look different than in the past. We're in a new energy price environment," he said. "The emphasis is going to be on reducing commutes and carbon emissions."