google 'fresh air intake'

This might be what someone was trying to do. don't know if that is legal by your city's code.

Your furnace and hw heater need air to mix with the gas to burn properly and being yours are in a closet, someone might have tried to add to this air.

Definitely combustion air. If you do not have the proper amount of combustion air you will generate carbon Monoxide. I feel it could have been done more neatly but that is what you have. They could have just put grilles with boxes above them to an area above the insulation. I am assuming you have roof and soffit vents.

"In the closet there is our hot water heater and furnace..."

Sounds like a non-code solution for make up air for the heaters.

The actual cross section of the air supplies is specified in the mechanical code based on the heat capacity of the appliances and the size of the room they are installed in.

One intake near the ceiling, another near the floor are required.
Some holes in the ceiling are not adequate.

LOL that hideous thing right next to the flue hat on the hw heater is sort of near the floor (and right next to the combustion gases)

I wonder where they go? They certainly look big enough to bring a lot of air in, although I know there's a square inch requirement.