US State Pensions 2026: USD 5.5 Trillion of Trust Money, an 80 Percent Funded Aggregate, and the CalPERS, CalSTRS, Texas TRS Allocation Reset

USD 5.5 trillion in trust, USD 1.4 trillion short: the aggregate map #

Federal Reserve Z.1 table L.120.b puts US state and local defined benefit pension assets at roughly USD 5.5 trillion at end Q4 2024, the largest pool of long duration capital under public fiduciary control after Social Security. The Public Plans Database (Boston College CRR) paired with Pew Charitable Trusts' State of US Pensions marks accrued liabilities at USD 6.7 to 6.9 trillion, leaving an aggregate unfunded gap near USD 1.4 trillion and a funded ratio in the 80 to 85 percent band on market value. That is the strongest aggregate read since 2007, but the distribution is what matters.

The gap concentrates in a small set of plans. Illinois carries roughly USD 142 billion of unfunded liability across the five state systems with a combined funded ratio near 47 percent. New Jersey carries roughly USD 65 billion against a 55 percent funded ratio. Kentucky ERS non hazardous remains in 20 percent funded territory. Wisconsin, Tennessee Consolidated, South Dakota, North Carolina TSERS, New York State and Local, Washington PERS, and Idaho PERSI sit at or above 90 percent funded. The aggregate flatters the dispersion.

The 2024 return cycle: 9.7 percent median, 12 percent at the top #

Fiscal year 2024, which closes on June 30 for most US public plans, delivered the second strong return year in a row. NASRA and Wilshire TUCS show a median public plan return near 9.7 percent for plans above USD 1 billion, against a 7.0 percent median assumed return. CalPERS reported 9.3 percent, CalSTRS 8.4 percent, Texas TRS 11.5 percent, Nevada PERS 12.6 percent, Massachusetts PRIM 11.2 percent, New York State Common 11.6 percent, Florida SBA 9.7 percent, Ohio PERS 9.5 percent. Plans heavy in US large cap and developed international cleared 11 percent; plans heavy in private real estate and core fixed income cleared 7 to 8 percent.

The 2024 print was a bookend, not a trend. NCPERS, Cliffwater, and Pew flag a 6.5 to 7.0 percent forward expected return at current allocations. NASRA tracks the aggregate dollar weighted discount rate from 8.0 percent in 2001 to 7.5 percent in 2018 to roughly 6.9 percent in 2024. Each 25 basis point cut raises reported liabilities by 3 to 4 percent. The cumulative 2018 to 2024 walk added USD 600 to 700 billion in reported liabilities, absorbed by employer contribution ramps in California, Texas, Illinois, New Jersey, and Connecticut.

The allocation reset: 25 percent in alternatives, hedge funds out, private credit in #

The asset side has been re engineered over 2014 to 2024. NASRA and Cliffwater show the aggregate state and local portfolio at roughly 47 percent public equity, 22 percent fixed income, 13 percent private equity and venture, 7 percent real assets, 4 to 5 percent hedge funds, 3 percent private credit, residual cash and overlays. Total alternatives sit at 25 percent and rising. A decade earlier the mix was 55 percent public equity, 26 percent fixed income, 8 percent private equity, 5 percent real assets, 7 percent hedge funds, near zero private credit. The shifts: equity beta down 8 points, hedge funds down 2 to 3, private equity up 5, private credit built from zero.

CalPERS' 2024 SAA runs 42 percent global equity, 30 percent income, 17 percent private equity, 15 percent real assets, with a leverage overlay up to 5 percent. CalSTRS' SAA targets 38 percent global equity, 12 percent fixed income, 14 percent private equity, 15 percent real estate, 10 percent inflation sensitive, 9 percent risk mitigating strategies. Texas TRS runs 54 percent total equity, 21 percent stable value, 21 percent real return, 4 percent risk parity, with private equity at 14 percent. New York State Common runs 47 percent public equity, 23 percent fixed income, 11 percent private equity, 9 percent real estate, 4 percent absolute return. Singapore's GIC and Norway's NBIM still cap private equity below 10 percent. CalPERS at 17 percent and CalSTRS at 14 percent run near the top of the global pension cohort.

Hedge funds are the cleanest casualty. CalPERS exited in 2014. CalSTRS phased its allocation down through the 2018 to 2022 cycle. New Jersey cut hedge funds from a 12 percent peak in 2014 to under 4 percent by 2024. Illinois TRS trimmed from 10 percent in 2015 to under 3 percent in 2024. The replacement is private credit. Cliffwater shows state and local private credit allocations rising from under 1 percent in 2018 to roughly 3 percent in 2024, with a 5 to 7 percent target trajectory at OPERS, Pennsylvania PSERS, North Carolina, Oregon PERF, and Indiana PRS. Apollo, Blackstone, KKR, Ares, Blue Owl, Sixth Street, Golub, and HPS are the marginal pricers.

CalPERS, CalSTRS, Texas TRS: the price setters #

CalPERS at USD 540 billion of assets at September 2024 is the largest US public pension and the most watched private equity LP in the world. The 2024 SAA runs a 6.8 percent expected return target, anchored by a 17 percent private equity target with USD 92 billion deployed and committed. The in house private equity build out under CIO Stephen Gilmore lifted the direct and co investment share of new commitments above 30 percent. The 73.4 percent funded ratio in the 2023-24 ACFR understates the cushion: the system holds an actuarial smoothing buffer and an employer contribution ramp through 2032. Risk concentrates in climate and credit cycle exposure inside the private equity book, plus a 30 percent income sleeve that crystallises duration risk if the long end repriced.

CalSTRS at USD 358 billion in September 2024 runs a 7.0 percent return target with a 75 percent funded ratio, supported by the AB 1469 funding plan that ramps contribution rates through 2046. The SAA carries a 14 percent private equity target and 15 percent real estate. CalSTRS' Sustainable Investment and Stewardship Strategies team retains the most explicit climate alignment policy of any large US public pension under the 2021 Net Zero pledge. Engagement through Climate Action 100 plus and proxy votes at Exxon Mobil, Chevron, and Berkshire Hathaway make CalSTRS the test case for fiduciary climate policy, although Texas SB 13 and Florida HB 3 do not reach a California chartered system.

Texas TRS at USD 211 billion in August 2024 runs a 7.0 percent return target with a 78.6 percent funded ratio, the strongest large Sun Belt result. TRS posted an 11.5 percent fiscal 2024 return, driven by 18 percent private equity and 16 percent real return book performance. The policy mix runs a 54 percent total equity target with private equity at 14 percent and a deliberate over weight to energy, industrials, and Texas anchored real estate. TRS sits inside the SB 13 perimeter that bars Texas plans from BlackRock, State Street, and other managers identified as boycotting energy companies. The Texas Pension Review Board and Wharton's Pension Research Council estimate 30 to 50 basis points of fee drag from forced manager substitution.

Reform levers: COLA, retirement age, employer contributions, pension obligation bonds #

The reform menu is unchanged from 2010 to 2014 but the politics have hardened. Cost of living adjustments are the largest unprotected lever. Illinois Public Act 96 0889 capped Tier 2 COLA at the lesser of 3 percent or half of CPI on the first USD 49,000 of annuity. Rhode Island's 2011 reforms suspended COLA until the system reaches 80 percent funded. New Jersey's 2011 P.L. 78 froze COLA across active plans and the freeze remains in place 14 years later. Pew shows COLA suspended, capped, or contingent in 22 states.

Retirement age increases and Tier 2 design are the second lever. California PEPRA in 2013 raised classic safety retirement age from 50 to 57 and miscellaneous from 55 to 62. Illinois Tier 2 raised unreduced retirement age to 67 and is under federal scrutiny because the benefit may fall below Social Security safe harbor. The third lever is the employer contribution ramp. CalPERS' State Miscellaneous employer rate rose from 17 percent of payroll in 2014 to 31 percent in 2024. Illinois statutory contribution is set to climb from USD 10.5 billion in fiscal 2025 to USD 17.6 billion in fiscal 2045 under the Edgar ramp.

Pension obligation bonds remain the most contested lever. Illinois issued USD 10 billion in 2003 and USD 3.5 billion in 2010 with mixed multi decade outcomes per Boston College CRR. New Jersey debated a USD 7 billion POB under Murphy in 2020 and stepped back. GFOA formally advises against POBs. The 2024 to 2026 issuance window is closed for most stressed states because the long Treasury rate is no longer comfortably below the assumed return. The cleaner path remains contribution discipline, Tier 2 fixes, and realistic discount rates.

ESG, anti ESG, and what trustees, regulators, and asset managers should watch in 2026 #

Climate and proxy voting politics have hardened into a state by state legal patchwork. Florida HB 3 (May 2023) bars social, political, or ideological factors and requires the Florida SBA to vote proxies solely on pecuniary merits. Texas SB 13, enforced through Comptroller Hegar's published list, bars state systems from contracting with managers identified as boycotting energy companies. The list has included BlackRock, BNP Paribas, Credit Suisse, UBS, Nordea, Schroders, and Svenska Handelsbanken. West Virginia HB 2862 imposes a similar restricted list. The State Financial Officers Foundation tracks 17 states with active anti ESG legislation. California, New York, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, Oregon, and Washington mandate or permit climate aligned investment policy under fiduciary frameworks endorsed by the relevant attorneys general.

The 2026 indicators that matter are five. First, the discount rate path: another 25 to 50 basis points of compression is plausible by 2027 with material liability impact. Second, private equity capital call rhythm against distribution slowdown, where Bain, Pitchbook, and Cambridge Associates flag a 2022 to 2025 cumulative DPI shortfall against the 2010 to 2019 cohort. Third, private credit allocation crowding, with Cliffwater showing 27 state and local plans at or above a 5 percent target. Fourth, the manager exclusion lists in Texas, Florida, and West Virginia and how they propagate through co investment and secondaries. Fifth, demographics: the active to retiree ratio has fallen from 2.4 in 2001 to 1.3 in 2023 per NASRA, raising liquidity demand. For trustees: discipline at the alternatives ceiling, private equity pacing, and a deliberate Treasury liquidity sleeve. For regulators: discount rate realism and Tier 2 stress testing against Social Security safe harbor. For asset managers: fee compression, co investment rights, and a clean separation of climate risk policy from political messaging that will not survive Florida HB 3 or Texas SB 13 review.

Sources #

• Federal Reserve Z.1 Financial Accounts of the United States, table L.120.b state and local government employee retirement funds, Q4 2024
• Pew Charitable Trusts, The State of US Pensions 2024
• Public Plans Database, Boston College Center for Retirement Research and MissionSquare Research Institute
• NASRA Public Fund Survey 2024 and Issue Brief on Public Pension Plan Investment Return Assumptions
• NCPERS 2024 Public Retirement Systems Study
• CalPERS Annual Comprehensive Financial Report FY 2023-24 and Investment Office allocation disclosures
• CalSTRS Annual Comprehensive Financial Report FY 2023-24 and Sustainable Investment and Stewardship Strategies
• Teacher Retirement System of Texas Comprehensive Annual Report 2024
• New York State Office of the State Comptroller, Common Retirement Fund disclosures
• Florida State Board of Administration FRS Pension Plan Investment Report 2024
• Ohio Public Employees Retirement System Annual Comprehensive Financial Report
• Cliffwater 2024 State Pension Asset Allocation Report
• Wilshire Trust Universe Comparison Service public plan return data
• Texas Comptroller of Public Accounts, financial companies that boycott energy companies, list maintained under SB 13
• Florida HB 3 (2023), text and analysis, Florida Legislature
• Reuters, public pension allocation and CalPERS, CalSTRS, Texas TRS coverage 2024
• Financial Times, US public pensions and private equity 2024 to 2025 coverage