The Washington Post reports that while official figures put state and local public pension shortfalls at $344 billion, some economists estimate the underfunding is more in the ballpark of $1.9 trillion.

The discrepancy occurs because of what the article calls the "government method of accounting."  Most states, including Washington, use the actuarial method of accounting in valuing liabilities.  Accordingly, Washington smooths gains and losses over an 8 year period and assumes a return on investment of 8 percent (it was increased from 7.5 percent in 2001).  Eight percent is the average among the states (the lowest is 7 percent and the highest 8.5 percent).  Using their assumed interest rates, states discount future benefit costs. 

The Post notes that

critics say the current method of calculating pensions is wrong not only because many doubt that the pension investments will return 8 percent but also because it understates the risks of investing, as pensions do, in the stock market.

Back in September, a story in the WSJ quoted our own actuary:

In 2009, Matt Smith, state actuary for Washington state, recommended that its retirement system cut its return expectation to 7.5%, from 8%. That advice was rejected by the state's pension-funding council.

Mr. Smith says he thinks Washington and other states eventually will lower expected returns, but that it will be a slow process because reduced assumptions "will increase the cost of pension benefits, and right now the budgetary environment is a big obstacle to that."

In 2010, the Washington Office of the State Actuary released a risk assessment (bolding mine):

Private sector plans calculate their funded status based on market value measures of both assets and liabilities.  We use the actuarial value with longer asset smoothing and a long-term interest rate assumption.  If we were to calculate the funded status for our public plans the same way that private plans do, our current funded status would be much lower.

We also noted another federal law applicable to these private sector plans.  They are prohibited from increasing benefits if the funded ratio would be less than 80 percent after the plan is amended, unless the employer immediately contributes the full value of the amendment to the pension fund.  The goal is to prevent insolvency and, ultimately, takeover by the Pension Benefit Guarantee Corporation, an independent agency of the United States government.  Our state-administered public pension plans are not subject to these kinds of federal laws or restrictions, nor is there an opportunity to transfer liability to another entity.

Currently, Washington is sitting fairly pretty compared to other states' public pension funding problems (PERS and TRS 1 are the biggest problems we have).  That said, apparently we've all been underestimating the problem.