Berkeley finance director and new auditors report clean FY2024 opinion but flag internal-control weaknesses and corrections

Finance Director Carl Johnson presented the City of Berkeley’s fiscal year 2024 financial report and said independent auditors issued an unmodified opinion while also documenting multiple internal-control weaknesses and corrections to prior-year accounting.

The most consequential correction addressed invoices misallocated at June 30, 2023. Johnson said auditors and staff corrected errors that had left the water and sewer fund artificially low; after adjustments, "we have $73,000 worth of cash in our water and sewer fund," he said. The audit report and Johnson’s presentation showed the correction redistributed roughly $1.5 million among funds (reducing the major streets and infrastructure balances and increasing the water and sewer balances) and removed an interfund borrowing that had appeared on prior reports.

Greg Soul, partner in charge of the city audit, told council the engagement was the auditors’ first year on the account and that, given transitions in staff and prior documentation gaps, findings were not uncommon. "It is a clean or an unmodified opinion," Soul said of the audit opinion. He also told the council the audit was filed on time with the state and that required communications to council were included in the report package.

Johnson and the auditors identified a mix of operational positives and weaknesses. Highlights included an unassigned general fund balance of about $4.7 million (roughly 35 percent of expenditures) and a stronger-than-expected self-insurance result that helped the year-end position. Johnson said the city ended the year showing a $1,033,000 increase to fund balance before routine carryovers; after rebudgeting known encumbrances the net increase was roughly $475,000.

Areas the auditors and staff flagged for corrective action included: - Budgetary variances disclosed in the audit (three department-level variances, two in the general fund and one in the major streets fund) tied partly to how prior auditors and the new auditors presented capital outlays and to a clerical mis-posting of an amendment. - Bank reconciliations that were late or lacked a second-person review at year end; Johnson said turnover in the finance department left some reconciliations unsigned when auditors began fieldwork but that the reconciling items have since been posted and reconciliations completed. - A small number of stale outstanding checks (four checks more than a year old) that require vendor follow-up. - Missing or undocumented policies and procedures on key topics (capital-asset policy, cash-handling guidance, debt closing documents for older drain bonds) because prior documentation could not be located on the city’s drives or through prior auditors; Johnson said staff are drafting and compiling policies now and are obtaining missing records from the county where necessary. - Human-resources records issues: change-in-status forms and personnel files with missing signatures; new HR director Jessica Stover and staff have begun a complete records review.

Pension and long-term-liability figures were highlighted in the presentation: Johnson reported a public-safety pension liability of about $32 million with roughly $20 million funded (about a 67 percent funding level). The Municipal Employees’ Retirement System (MERS) portion showed a funding level below 60 percent, and the city’s other postemployment benefits (OPEB) trust was about 55 percent funded (roughly $8 million set aside against a calculated $14 million liability).

Johnson told council the city remains operationally sound but faces capital and infrastructure funding pressure — most notably the federally driven lead-service-line replacement effort. He warned that the water and sewer enterprise is effectively operating on a cash basis and said the annual water rate increases currently in effect (he noted recent 10 percent increases) may not be sufficient over time to cover mandated work.

Councilmembers asked for a six-month progress update on corrective actions, and the auditors said repeated findings in next year’s audit would be a red flag. Soul and Johnson both recommended continuing the corrective-action work plans, completing documented policies and procedures, and sustaining month-end close discipline to prevent repeat findings.

Ending: The audit presentation was followed by a question-and-answer session with council and an offer from the auditors to be available to council for follow-up; no formal acceptance vote was required or taken — the item was presented to council for information and oversight.