California Governor Jerry Brown inherited a $27 billion deficit from Arnold Schwarzenegger eight years ago. This month he’s leaving his successor a $13.8 billion surplus and a $14.5 billion rainy day fund balance. Pretty good right? Approximately 48 other governors would kill for those numbers.

Unfortunately it’s all a mirage. California, as home to Silicon Valley and Hollywood, lives and dies with capital gains taxes. In bull markets, when lots of stocks are rising and tech startups are going public, the state is flush. But in bear markets capital gains turn into capital losses and Sacramento’s revenues plunge. Put another way, the state’s top 1% highest-income taxpayers generate about half of personal income taxes. When their incomes fall, tax revenues crater.

That’s happening right now, as tech stocks plunge, IPOs are pulled and billion-dollar unicorns endure “down rounds” that shave major bucks from their valuations. So if this is a replay of the 2008-2009 bear market, expect California’s deficits to return to the double-digit billions.

But that’s not the real problem. Those currently-rosy budget numbers are only rosy because they omit the unfunded liabilities of public sector pensions, which are almost supernaturally large. Consider just Los Angeles’ schools:

Can we prevent the LAUSD budget crisis from taking down the California state budget?
(SGVT) – Even as its teachers consider going out on strike, the Los Angeles Unified School District’s budget clearly is in crisis. The problem is so big it might wipe out whatever surplus the roaring California economy might generate in 2019 – and then some.

The LAUSD just released its Comprehensive Annual Financial Report, or CAFR, for the fiscal year ending June 30, 2018. As I have been predicting, the LAUSD’s new CAFR doubled the size of its negative Unrestricted Net Position (UNP), the best number I’ve found for judging financial soundness. The reason was, for the first time, municipalities are now required to include unfunded liabilities for retiree medical care on their balance sheets.

The unrestricted net deficits for 2016 and 2017 were $10.5 billion and $10.9 billion, respectively. For 2018 it is $19.6 billion, or 80 percent higher! That’s what a $15 billion obligation will do when it’s recognized.

In bureaucratic language, the CAFR itself explained, the negative UNP “is largely the result of net other postemployment benefit (OPEB) liability and net pension liability for various retirement plans.” They blamed this transparency on the recent accounting standard they just implemented.

And here’s where it gets even more interesting. This fiscal implosion is about to collide with a wave of incoming liberal governors who have big plans for using the public budget to address society’s ills:

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