When Gov. Jerry Brown and Republicans failed to reach agreement on closing the state budget deficit, they also failed to resolve several budget-related issues – most prominently what, if anything, should be done to rein in public employees' pensions.

Pension costs are not yet a huge component of the state budget because the vast majority of its funds are given to others to spend.

But they are huge in local governments, especially cities, which spend most of their money on personnel – especially high-wage police officers and firefighters – and face rapidly escalating pension costs.

Republicans wanted to scale back pension costs as part of a budget deal. In the absence of a deal, it's unclear what will happen.

Brown and other Democrats say they want pension reform, but they have close political ties to unions that resist change. Most likely, Democratic pension changes will be largely superficial, such as curbing so-called "pension spiking."

Meanwhile, there are two drives under way to put pension reform on the 2012 ballot via initiative. But financing for such measures is iffy since no moneyed interests have a stake in pension change, and the two reform groups are feuding.

The pension change efforts inside and outside the Capitol – and the resistance to change – all deal with benefits, but that's the tail wagging the dog. The focus should be on the long-term viability of state and local pension trust funds.

We know that virtually all of the funds have "unfunded liabilities," but we really don't know how large they are because they are based on much-disputed actuarial practices.

Critics say the pension funds' "discount rates" are based on very rosy, perhaps unattainable, projections of earnings. But were they to reduce those rates to a safe level, the unfunded liability numbers would soar, and the political fallout would be intense.

The dynamics of pension accounting – and therefore its politics – are changing.

The Connecticut-based Governmental Accounting Standards Board is decreeing that state and local governments and their pension funds must not only fully report unfunded liabilities on their balance sheets as debt but must also include what those liabilities would be using super-safe bond earnings.

A Stanford University team has already analyzed California's three state pension systems on the latter basis and reported a half- trillion dollars in unfunded liabilities.

The pension funds and their union allies have denounced the super-safe alternative, but the new accounting rules will give it official status.

Get ready for a huge sticker shock, followed by political shock, as the vast size of this potential debt – far more than any bond debt – hits home.

It may mean that California's state and local governments are upside down, just like many homeowners.

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Call The Bee's Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters

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