California Gets a Clean Audit – Now Comes the Hard Part

After years of embarrassing delays that left taxpayers and municipal bond investors flying blind, California has finally produced its audited financial statements before the state’s budget is finalized. On May 12, State Controller Malia Cohen released the Annual Comprehensive Financial Report for the 2024-2025 fiscal year. While still missing the standard nine-month reporting deadline by 42 days, the filing delay was much shorter than it had been in recent years. And, for the first time since 2019, the state received an unmodified, or clean, audit opinion from the state auditor.

The audit filing delays began under former Controller Betty Yee, peaking at about 12 months in the 2021 fiscal year. Given this record of failing to properly execute a key responsibility of a state controller, it is shocking that Yee was a serious candidate for Governor and a relief that she suspended her campaign. Although Malia Cohen seemed like a questionable replacement for Yee given her lack of relevant experience, she deserves credit for overseeing a marked improvement.

The restoration of a clean audit opinion reflects a necessary, albeit delayed, cleanup of the catastrophic failures at the Employment Development Department. For the previous several years, auditors were forced to issue modified opinions because the state literally could not verify its own accounting for the Unemployment Trust Fund. During the pandemic, the agency’s spectacular internal control collapse allowed tens of billions of dollars to flow to international crime rings and prison inmates, an institutional failure extensively covered by the Globe. While the 2024-2025 financial statements finally untangled the massive web of fraudulent pandemic-era unemployment payments sufficiently to pass an audit, taxpayers and businesses will be paying higher payroll taxes for decades to backfill the multi-billion dollar deficit left behind by bureaucratic negligence.

Effective financial management is essential given the enormous size of California State government. According to the government-wide Statement of Activities, total primary government expenses reached $520 billion in the 2024-2025 fiscal year up from $320 billion in 2018-2019, the last pre-COVID fiscal year.

Managing a half-trillion-dollar expense base requires strong internal controls, yet the California State Auditor’s accompanying Internal Control and Compliance Audit Report reveals that major departments are still unable to maintain basic financial hygiene. Nowhere are these deficiencies more alarming than at the Department of Health Care Services, where the auditor identified material weaknesses and severe understatements of expenses within the Medi-Cal program. So it should not be surprising that the federal government is withholding $1.3 billion on Medi-Cal matching payments until the state can provide assurance that the money is not being lost to improper payments.

This inability to track health care spending accurately is particularly dangerous given the state’s aggressive expansion of Medi-Cal eligibility. California recently extended full health coverage to all low-income residents regardless of immigration status, a decision that has driven unprecedented cost increases and blown a massive hole in the budget.

So while this year’s less-delayed, clean audit is a step toward fiscal responsibility, it is only the first step of many. Hopefully, voters will choose elected officials that will demand more progress in 2027.