For Democrats the skies over California after the election were azure blue. Contrary to the national trend, they swept all but one of the statewide constitutional offices (and that one, for attorney general, is still undecided). Jerry Brown, who was once the state’s youngest governor, will soon become its oldest. He will have a solid majority in both houses of the legislature and voters did away with the provision that the state’s budgets must have a two-thirds majority to be enacted. 

Does this means clear days ahead? On the contrary, what Brown & Co. are facing are skies of darkest midnight blue. They face a probable budget deficit for the 2011-12 fiscal year of $19 billion–and that’s for starters. The state has three major public employee pension funds — CALPERS (California Public Employees Retirement System), CalSTRS (California State Teachers’ Retirement System) and the University of California Retirement System. Together, they are facing unfunded liabilities of $500 billion. That is approximately six times the size of the state’s entire budget this year. 

As a postscript to these problems, the state’s unemployment insurance fund is expected to be $10 billion short by the end of this year and about $13 billion a year from now.

How did all this happen? Back in 1999 when the state was enjoying surpluses, then-Governor Gray Davis (later recalled by the voters) and the Democratic majorities in both houses enacted large increases in public employee pensions and nearly doubled weekly jobless benefits, from a maximum of $230 a week to $450. Many counties and cities followed suit with their own employees’ pensions.

Could the state afford this? CALPERS studied several cost scenarios and reported only the rosiest to the governor and legislature who, with no independent analysis, swallowed it whole.

They knew that the surplus was essentially a one-time phenomenon and should have been saved for a rainy day or, at the very least, spent on one-time projects. Instead, they embedded overly generous pensions and unemployment payments in law permanently. 

These problems will constitute the pile on Governor Jerry Brown’s desk in January. And, with large legislative majorities and no more two-thirds-for-passage rule on the state’s budget, they will no longer have Republicans to blame for holding the budget hostage. (They must still get a two-thirds vote for tax increases and may not disguise such increases as “fees.”)

What can Brown do? This is no longer “Governor Moonbeam” of the late ’70s. When he ran in the primaries against Bill Clinton in 1992 he proposed a flat income tax for the nation. As Mayor of Oakland, he pushed for charter schools (including a military academy) and promoted revival of the downtown. 

If anyone can get the powerful public employee unions to agree to reforms, it is Jerry Brown. 

The overblown pensions (and the unemployment benefits) are a large part of California’s now annual fiscal crisis. Brown is fully capable of doing a Nixon-to-China event. If he does, the state’s skies could yet turn azure. If he doesn’t, it faces the equivalent of bankruptcy. Thus, credit would dry up, most public services and public payrolls would be slashed (not trimmed), unemployment would rise, taxes would jump (and more high-income people and investors would move away), and businesses would close. Looks as if Governor-to-be Brown has a clear choice.

Mr. Hannaford was Assistant to the Governor and Director of Public Affairs when Ronald Reagan was Governor of California.