Pensions & Investments has a nice chart showing the evolution of public pension investment portfolios. Back in the early 1980s, public employee funds were made up of around 38% stocks, 50% bonds, 7% cash, and 5% "alternative investments," which include hedge funds, private equity, and so forth. Fast forward to the present: Today, it's about 52% stocks, 27% bonds, just a couple of percent cash and over 19% alternatives. To simplify, in the early 1980s about 43% of public pension holdings were "risky," meaning either stocks or alternatives. Today, around 72% of pension assets are in stocks or alternatives.
It's hard to argue that today's portfolio is somehow optimal. In choosing investments, a pension should think first about risk and second about return. By matching the risk of the plan's assets to the risk of its benefit liabilities - which are generally guaranteed by law or state constitutions - the pension effectively "immunizes" taxpayers against having to bail the program out at a later date. So a pension that is "fully funded" using this approach really is fully funded - there's not a huge contingent liability that taxpayers may need to tackle later.
Public pensions do it the other way around: They chase an 8% return pretty much regardless of how much risk it takes to get there. Even small reductions in assumed returns have big effects on how much plans are required to contribute each year, so there's a lot of political pressure to keep assumed returns high. Back in the early 1980s, you could get 8% on Treasuries. Today, with long-term Treasury yields of around 3%, to get the same expected return you need to take a lot more risk. And so they do. But since benefits are still guaranteed, a higher-risk portfolio imposes a multi-trillion dollar contingent liability on taxpayers to bail the plan out if the investment returns go south.
But public pensions don't believe in reporting these contingent liabilities.