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I don't disagree, but both you and I know that the name (and folder) for the local settings file is complete arbitrary as long the file actually is included from the used settings.php file ;-)
Maybe, but I thought the difference in commands only appear if you try to update Drupal core separately? This questions is about updating everything in one go. I don't have time to test. If you verify that a different command is needed, feel free to edit.
You are correct. Sorry about the non-helpful comment. This is coming from Drush trying to backup your files before upgrading (or something). Drush doesn't use file_private_path - it uses it's own setting. See for example: stackoverflow.com/questions/26879225/…
The drupal.org documentation - drupal.org/docs/updating-drupal/… - says to use composer update drupal/core "drupal/core-*" --with-all-dependencies. Does it help?
Just for the record, since this question suddenly was listed as active again: Drush hasn't supported installation through Pear for many years. Read drush.org/latest/install for current install instructions which requires the use of Composer.
I assume that message is coming from the "Backup and migrate" module. If you disable it, are you able to update with Drush? If I'm right about B&M, I think you should check the module issue queue. You could update your question with version info for B&M.