supplemental >> the supplementals would be originated by my office. of course, this board cannot bind a future board of supervisors to approve a supplementals. if there is a default, the bank gains certain rights. they gain the right to hire a chief restructuring officer to advise, and they have the right to raise ticket prices at the museum to the average of three museums in california. that is the remedy here. that is the best outcome at the end of this if all the worst- case scenarios are met.

no one intends to get there. but if you are asking for the maximum exposure, that is it. supervisor mirkarimi: with the dual objective of drawing down the debt after the transfer, how is it that a capital campaign enhances the attractiveness of getting greater visitation so that revenue is significantly increased, i assume, so that it is staving off the potential of us being in this position? >> i will return to jay shu. i think the financial nut to crack -- in all of the conversations we had with the museum, the foundation, and the board in the past couple of months, it is clear that long- term the asian art museum

benefits from a much more robust endowment than they have today. it's standard museum practice is not to operate on an endowment as minimal as this one is. in essence, it is pledged to make debt service payments on the building we have already constructed. we are still somewhat short. our hope is that the capital campaign can be driven to finish the financing on this building. it can continue above and beyond that needed to make the financing work and leave the asian art museum and foundation of the end of this with a true endowment that is there to spin off entrance -- interest earnings and support the is in going forward. that is our hope at the end of all of this. this is still a comparatively young museum, in the larger municipal or geological cents. we are talking about a museum that, for many years, until they relocated to this facility, was

in essence a part of the young and golden gate park sharing space. there are still growing as a stand-alone museum. part of that will be growing and endowment overtime beyond what is needed to make this work. supervisor mirkarimi: i am also hearing other museums that are struggling, yet we are not stepping up to cosign for them or to provide that kind of a backstop. >> that is very true, and i think this is a very unique circumstance, where the collection was gifted to the city in a perpetual trust. it is a requirement in our charter that we persuaded -- that we displayed it. there are very few cases out there where we have museums that meet that test. in essence, we are the owner of the art. we have no authority or ability

to give it to anyone else. our own charter gives us the responsibility to display the artwork. there are only a couple of museums like that in the city. the young is one, the region of honor is another, and the academy of sciences is the third. in the universe, the asian art foundation is by far the most precarious the financially secure with him. the academy of sciences and the young both benefit from much larger endowments, much more stable structures. this is the one that was at risk. unfortunately, we find ourselves in the position of having to backstop. supervisor mirkarimi: in the early warning signs that are built in for the next era of the museum that helps us steer clear of these potentials -- >> in entering into this agreement, the city has, by necessity, built into these much more oversight and involvement in the foundation's activities. we gain a couple of key seats,

where we will have city- appointed members attending and monitoring he committees, like the capital campaign committee. we will be more active in that way. these agreements require us to do so. it additionally requires my office to review the annual budget on the nonprofit foundation side and approve it each year. we have similar arrangements for some of our parking garages, our parking garage leases. it is a similar story, where my office will be responsible for reviewing the annual budget every year and approving it. supervisor mirkarimi: because this was a voter-blessed in its creation and interfaced well with the city, have audits tracked this particular direction are unfolding -- or

unfolding of the museum's predicament? >> i am not aware of anything by the board of the asian art museum in the past decade. supervisor mirkarimi: how is that, based on process, considering that we go through a healthy rotation of audits usually? >> it is a good question. i would have to get back to you about the last time it was touched on. as you know, the agreement here requires a consulting review that will take place in the next six months. it will in essence be a performance audit of the organization. the thing i think is important to remember here is that a lot of this is attributable to the financial market changes that happened in 2008. the municipal bond -- markets

crashed. the endowment of the foundation, that had been much higher, loses 20% or more of its volume in the market crash. that affected our pension fund, affected our investments as a city, affected a number of other nonprofit institutions. it is within the last two years we have had that loss of the endowment. that is a key part of the problem here. also what happened at that time was the disappearance of municipal bond insurance as an industry, which happened globally. you may recall at the time the city spent a number of months, and really a year, working our way out of places where we had pieces of our financial arrangements insured by mbia and others. no one before 2008 was anticipating this entire industry would cease to exist. it is those few things. on this transaction, given how

they have been structured, when municipal bond insurance no longer existed, it triggered all of these divisions in the form of financing arrangements that no one anticipated would get preferred, such as the collateral-boosting requirement and the need to buy the expensive letter of credit that will keep the deal whole. i do not know that there would have been warning bells we would have seen before 2008, even if we had conducted a complete financial audits. we had several with the calamitous events all happen in a year that really dramatically deteriorated the financials. supervisor mirkarimi: thank you for the information. i absolutely agree that this is a very important institution that requires all our efforts to make sure that it has a long life and a real healthy place in the field of important museums

in san francisco and california. thank you. chairperson chu: i know the director of the asian art museum is here. i wonder if he would like to say a few words. >> good afternoon, chairman chu, supervisor ross mirkarimi. on behalf of the staff of the asian art museum, we are profoundly grateful for the city leadership in restructuring the debt that can allow this wonderful organization to go forward and improve. since the founding of the museum in 1969, when the museum opened in golden gate park, the museum has provided an educational artistic service to the community. since the museum relocated seven years ago, in 2003, as our controller pointed out, it is still a young museum.

it has just been full-fledged for seven years. there are many growing pains, one of which is hard to address, the debt issue that enabled the foundation to help the city to refit the former public library building to offer to the public this wonderful collection and program. without this leadership, the city would not have a helpful structure that would enable the museum to move forward. we are profoundly grateful. this is a wonderful testament to the city leadership, both from the mayor's side and the board of supervisors. i think everybody has come together to make the structure work.

we have confidence with the city leadership that it will indeed work. chairperson chu: thank you. a quick question for you, based on the agreement here. a large part of that is premised upon the foundation being able to have a successful capital fund-raising campaign that generates $20 million over the next three years. what is your sense of that, and how have you been making progress in that regard? >> in the work leading to today, one key milestone will be a press conference held in the museum on june 6, in which our former mayor gavin newsom, jerry brown, carmen chu, and others spoke after the press conference. there is an overwhelming consensus that under the city leadership when we work

together, we have confidence to finding the donors and supporters that will work within the museum's existing structure as well as outside the museum's existing structures. under the city's leadership, i think the foundation does have the confidence to accomplish this fund-raising campaign. with me now is also covered chair of the commission at the foundation. all of us have been working closely along with the city. any questions i would be happy to further its answer. supervisor kim: is there any comment you would like to make to the presentation already made? >> thank you very much. my name is tony sun.

i am a chair of the asian art museum commission. i was elected to this post last september. i anticipated the bond issue coming to you in december, but at that time i thought it would be a negotiation that would be done quietly, because our bonds were fully insured. when i first met the bond insurer, i was surprised to find out they had no intent of making good insurance. the only collect premiums, but do not pay out liabilities. that made life very difficult for the museum until the city stepped in and help as restructure the bond. i am very grateful for the city leadership. i want to think -- thank ben and his staff for making this happen. i commit that we will be successful in raising the funds. we have three years to do so.

with the city's help, it will be a successful capital campaign. chairperson chu: thank you. why don't we open this item up for public comment? i have one speaker card, tomas piccorello. no? are there any other members of the public that wish to speak on this item, item six? seeing none, public comment is closed. as a comment, i do want to think the tremendous effort that was put forward by the controller's office and the mayor's office with regards to helping to structure this. i think the item before us has a lot of good things. one is the fact that we are going to be able to continue to operate and run our asian art museum for the benefit of san franciscans and visitors to the city. i also think it is a good deal in that we have every party coming to the table to provide a piece of work on the issue.

from the j.p. side, we see the bonds are now refinanced with a 30-year fixed rate loan at 4.6, a pretty competitive rate. we terminated a swap that was not working for the city's interest without any cost for the foundation. there was a return of $15 million related to that slot and a forgiving of $20 million of the outstanding debt. that is a good thing to see from j.p. from the asian art and foundation side, the commitment to raise $20 million over three years and to conduct audits to make sure the budget approvals go through our city department or to our controller's office. this is a good start. on the city side, we spoke about the precedent this might set.

i think for anybody looking out for city finances, we are always concerned about what the type of precedent will be that is set by any transaction, and whether or not we continue to become the backer of organizations that might be failing. in this situation, taking a look at the specific and unique charter restrictions and charter requirements of the collection, making sure the city is actually obligated to display this collection, we see that the financial risks here are much greater, potentially, if we do not step in. we are not only talking about the financial institutions and markets as we go out to bid for future bonds, but also the fact that currently the asian art museum condition supplements our general fund contribution to the rate of $11 million every year. should the asian foundation no longer exist, the city would be obligated to fund another $11

million every single year to create an asian art museum offering. i think that is something that is not to be looked at lightly. i also think that with the insurance agreement in the ability for the board of supervisors and future mayor to be able to weigh in on whether there is a default that occurs is also an important one. when we think about the risk to the city, we know the risk is potentially $11 million in increased operating costs to fulfil our charter obligations. but should things go south, should there be a default on the loan, the only obligation the city currently has is for the controller to submit a supplemental for us to consider and potentially put money in the budget to make sure repay that loan. there will be many conversations to make sure we never get to that point. but we appreciate all the work that has been put into this. i think this is a very solid

deal. >> do we have a motion? supervisor mirkarimi: motion to approve the agreement with recommendation. chairperson chu: without objection. item five, please. >> item 5, hearing to consider the annual review and approval of the board of supervisors' budget guidelines. >> good afternoon. angela calvio, clerk of the board. i am here to discuss with you the board of supervisors' budget for fiscal year 2011-12. i have included a copy of the packet -- a copy of this power point in the packet for the viewers watching on sfgtv.

in preparation of the department's budget, the finance committee will hold two public hearings. today, we will review the annual guidelines and a draft budget. i will come back to the committee in february to review a balanced budget that reflects the direction from the committee and ask for your approval of the proposed budget for some middle at that time. i will then return -- four submittal at that time. i will then return in june. chairperson chu: the mind if we take a two minute break? it has been a long meeting. >> not at all. chairperson chu: thank you.

chairperson chu: we are back to the regular meeting of the budget and finance committee. we are good to pick up on item five. our clark is making a presentation. >> thank you. i will just continue. in preparation of the budget, the budget and finance committee will hold 2 you "public hearings to review the draft guidelines of the -- will hold two public

hearings to review the draft guidelines of the budget. i will ask for your approval to submit the proposed budget to the controller and mayor on february 22. i will return in june to review any changes that need to be made, with the benefit of the budget analysts review and report. -- budget analyst's review and report. i am sure the mayor's budget director, greg wagner, will make a thorough presentation in the near future. to the next slide, to our current purpose. this hearing is to divide -- is to define guidelines on development of the department's budget. we will have to get into the weeds a little bit. you will review the budget for the current year and historically. we will look at budget trends

and workload changes. we will review the presented budget and secure approval of the in your guidelines. -- of the annual guidelines. my objective is to provide for the functions and duties of the legislative branch of the bridge of government enumerated in the charter and administrative code, the maintenance of the the dislike of record for the -- of the public record. this includes a budget and legislative analysts' services. the board cannot provide other duties to the department and minister, including the sun side ordinance task force, use commission, lafco, and others.