City auditor warns of large pension and capital shortfalls in Berkeley's financial condition audit

The Berkeley city auditor and her team presented a financial condition audit to the City Council on April 28, highlighting long-term fiscal pressures that will affect upcoming budget deliberations. City Auditor Jenny Wong introduced performance audit manager Caitlin Palmer, who reviewed the report's key findings and recommendations.

"Overall, we found that Berkeley is facing ongoing challenges with its long term financial condition," Caitlin Palmer said, summarizing an audit that covers fiscal years 2016 through 2025 and that was adjusted for inflation. Palmer said the audit identified a structural general-fund deficit projected at about $30 million for fiscal years 2027 and 2028 and described multiple longer-term risks, including pension liabilities and deferred maintenance.

Palmer highlighted three headline figures: an estimated $695,000,000 net pension liability as of fiscal year 2025; a reduction in net retiree health-care (OPEB) liability to about $43,000,000; and $1,800,000,000 in unfunded capital and deferred maintenance needs. "One-time measures aren't sustainable when ongoing expenditures are growing," Palmer said, noting the city used transfers from other funds and a $3,000,000 Section 115 trust withdrawal in FY25 to meet pension obligations.

The audit listed nine recommendations to shore up the city's finances, including formalizing fiscal policies that favor sustainable budget strategies over repeated one-time fixes, establishing a policy to regularly assess and adjust enterprise fees with appropriate reserves, restoring Section 115 trust contributions after withdrawals, providing multi-year investment performance reports to the council, and developing a capital financing plan that lays out future funding options such as general obligation bonds.

"We noted that the city is considering placing a $300,000,000 general obligation bond on the 2026 ballot to help address unfunded capital needs," Palmer said, adding that the city's five-year capital improvement program lacks advanced planning on when and how new funding mechanisms should be proposed.

Council members pressed auditors on how the audit's actuals relate to the budgetary concept of a structural deficit. "These numbers in this graph show actuals," Palmer said, explaining that the audited figures reflect what happened and that the budgeting process must anticipate ongoing revenues and expenses. Several council members asked for benchmarks on pension funding; Palmer pointed to an 80% funded ratio used in some dashboards as a useful benchmark and noted Berkeley's funded ratio sits in the mid-60s compared with peer cities.

The auditors and council also discussed capital spending. Councilmembers asked how much annual investment would be required to bend the curve on a growing backlog of deferred maintenance; auditors said that precise answers would require a separate, in-depth study. The audit recommended that city management report back on implementation of the recommendations within a year.

Mayor Adina Ishii thanked the auditors and asked staff to provide an annual progress report on recommended changes. "I would be interested in seeing a report back in a year," she said. The council did not take formal action on the audit itself but requested follow-up reporting and discussion as part of the upcoming budget process.

The audit is posted in the meeting packet and on the auditor's website and will inform debates over the city manager's budget proposal due to the budget and finance committee on May 14 and the full council on May 19.