270 people put on the cat. >> it is not just a bookstore. it is a store. can you talk us through some of your favorites? >> these are made in china, but they are made out of cattails. >> these pieces of here, you have a whale head and various animals and their health over there, and they are jewelry. >> we do fund raisers for nonprofits, so we are doing a project for the magic theater, so there are some pretty funny cartoons. they are probably not for prime time. >> you sort of have a kind of holistic relationship where you might do merchandise in the store that promotes their work and practice, and also, prince for them. maybe we should go back and look at the print operation now. >> let's go. >> before we go into the print shop, i noticed some incredible

items you have talked back here. what are we standing in front of? >> this is william wiley, only one earth. this is a print edition. there are only eight total, and what we wanted to do was expand the idea of printmaking. this is really an art object. there we go. >> besides the punball machine, what do you produce in limited edition? >> there is the slot machine. if you win the super jackpot, you have saved the world. >> what about work? >> the right design, it was three volumes with lithographs in each volume. the cab of count dracula with 20

lithographs inside and lined with beaver fur. really special. >> let's move on to the print shop. >> ok. the core of what we do is making things. this is an example. this is a print project that will be a fund-raiser for the contemporary music players. we decided to put it in the portfolio so you could either frame at or have it on your bookshelf. >> so nonprofits can come to you, not just visual are nonprofits, but just nonprofits can come to you, and you will produce prints for them to sell, and the profits, they can keep. >> the return on investment is usually four times to 10 times the amount of investment. this is for the bio reserve in mexico, and this is one of the artists we represent. >> you also make prints for the

artists that you represent. over here are some large prints by a phenomenal artist. >> he writes these beautiful things. anyone who has told you paradise is a book of rules is -- has only appeared through the windows. this is from all over coffee. we are contract printers for all kinds of organizations all across the country. >> thank you very much for showing us around today. i really appreciate you taking the time to let me get better acquainted with the operation and also to share with our "culturewire" team.

supervisor chu: l.l.. welcome to the regular meeting of people budget and finance committee. i am joined by my colleagues. we will be joined shortly by supervisor mercury me and supervisor -- supervisor mirkarimi and supervisor kim. mr. young, do we have any announcements today?

>> yes. please turn off all cellular phones and pagers. you wish to speak, please fill up a speaker card and return it to myself. items acted upon today will be on the board of supervisors agenda for march 29, 2011, unless otherwise stated. supervisor chu: thank you, mr. young. we do have a number of items today to consider. these are hearings to lay out the cost goes associated with the city budget. we have hearings on employee benefits, labor contracts and where we stand with those, and we also have a hearing for discussion surrouupcoming budge supervisor farrell:.

we have the desire -- the upcoming budget year fy2011- 2012. we have the desire to have those proposals out there. we are really endeavoring to make that happen. i asked you to call item no. 1. >> item #1 -- hearing to receive an update from the department of human resources on the status and provisions of city labor contracts. supervisor chu: this is to talk about general trends and lay out the big picture. i will ask the city comptroller to take us through a short presentation. we also have members with us. i believe we also have a member from the health services system who will be with us. let's have the comptroller's office just start with a brief overview, and if you want to add

anything, we can have you added to comments. >> could afternoon, supervisors. i have -- good afternoon, supervisors. i have a brief presentation. we have a 2000-foot view of employee benefits that affects the city and county employees. as you noted, madam chair, the director from the retirement system is here with the director from the health services system, and they can interrupt me. i was hoping to talk to a brief history of protection and benefit costs and provide a handful of facts, and then a

conversation about retirement benefits and health benefits. starting at the highest level, three key points that will probably roll through everything it will talk about today. i think it is most important to start with a couple of points about performance, and to highlight the fact that the san francisco employee retirement system is healthier than most if not all of our peers in california. the health service system has taken significant steps in recent years to control employer-paid health and benefit -- health and dental benefit costs. you'll see that in some of the numbers here. if we have problems in the future, it is not for the lack of these things. our current projections to indicate the city is in the midst of a fairly rapid ramp up

in terms of our projected costs for benefits, in particular over the next three to five years. it is most heavily influenced by the market downturn in 2008. health benefit inflation is an issue that employers nationwide are grappling with. when we talk about, and i know there are a lot of conversations at the moment regarding what the city can do to mitigate cost increases in the future -- a high-level financial point. pension benefit changes that apply to new employees hired after a change is an active can

generate significant savings over time, but those savings accrue as the worth -- as the work force turns over. therefore, the horizon is typically very long. changes that apply or would apply to current either active employees or prior employees would yield more savings in the shorter term. looking at the past decade, when we talk about our bundle of benefit costs, starting in 2001 and ending in 2011, our combined benefit cost load has grown approximately 9% annually, with cpi during that decade of approximately 2.5%. this is driven by cost increases in each of the benefit buckets,

which will highlight on the next page. this decade began with an abnormal or a typical situation -- or atypical situation with a pension holiday, where we did not have to make any contributions to the pension fund at that moment in time. chairperson chu: primarily when we are talking about benefit costs, we are talking about pension contributions as well as health insurance costs. what you have laid out is that we have seen over the past 10 years and annual increases averaging around 9% for our pensions and health insurance combined cost. we've seen the cpi grew by 2.5%. how does that compare to our revenue? is cpi a good measure for revenue? >> revenue grew more quickly than cpi as well. average annual revenue growth was probably in excess of 5%. i can get that number for you. chairperson chu: even if look at

revenue growth, which is higher than cpi for the past decade -- use of 5% or 6%? >> tax revenues during that decade grew more quickly. chairperson chu: we are seeing that our pension and health insurance costs growing at 9% is outpacing our revenue growth? >> i think that is fair to say. the expectation trend continues for the next several years. in terms of what benefits the city provides, this is a high level chart that shows this as colors. the bottom line on this chart is in blue. it is our contributions toward pension funds. it is important to note here that we have employees covered by two different pension plans

or pension systems, with the san francisco employee retirement system, but also some employees that are in the state plan. that is predominantly the deputy sheriffs and smaller miscellaneous groups. you can see the trend here picking up in recent years during this decade. this is showing the employer- required contribution for pensions and also includes the negotiated employer pickup of the employee share of pension, which is phasing out as we speak. it does account for these costs, in particular early in the decade. the dark red or rust-colored bar represents health insurance costs for active employees of the city and county. the light green bar is health benefit costs paid for a retired city employees. we do have other benefits we offer that make up this larger

number, predominantly social security contributions we make as an employer. the you can see on this chart that depiction of growth at a faster clip than cpi, which is shown as the blue line. looking ahead for the next decade, we start the financial year with approximately $1 billion in employee benefit costs out of the his $6 billion operating budget. we then, in projecting forward, our offices used a handful of different economic scenarios. that is critical to point out when we talk about looks forward over the horizon like this. no one knows what the world is going to hold 10 years from now. we do have to make planning and modeling assumptions. we base fees on three different sets of assumptions -- moderate

positive, moderate, and moderate negative scenarios. it is possible the actual economic performance will exceed this and possibly be lower in future years. it is also possible that we have a more immediate downturn that would affect these numbers the other way. we see cost increases looking ahead to financial year 15 between $400 million and $300 million. that is driven by contributions that will be required from us as an employer for pension benefits. the second half of the decade is likely to show a lower rate of growth, or even decline. the majority of those cost increases are likely driven by health inflation, which we can talk about later. this is a graphical depiction

of those three scenarios, again moderate cases. these are in current dollars. we have adjusted this for inflation to give a sense of what costs would look like in today's costs. again, you can see that the slope of the chart at the beginning, during the first half of the decade, is likely steeper and leveling or growing during the second half of the decade. it always strikes me when looking at these charts that the differences in our economic assumptions, while they greatly affect projections out in years five through 10, have less impact during the shorter term. i think that is predominantly driven by the market's losses in the pension fund in 2008. they are an order of magnitude higher than gains we have modeled here.

the different scenarios truck or closely in the shorter term. chairperson chu: can you elaborate on this? many of us have had conversations about the assumptions with each of the scenario. just quickly, for members of the public to understand fully what the moderate, a base case, and more negative outlooks assume. "see the three different scenarios the smuggling is based upon. the variants we are modeling here is the return receipt in the investment in the san francisco employee retirement system during this time. the actuarial assumption that our own retirement system employees is that over a long horizon we will employ -- we will acquire a 7.75% rate of return. that is a more moderate scenario

here, that we simply need that actuarial assumption every year. the moderate positive assumes that coming off of market losses the couple of years ago we see more robust growth for the coming five years, in this scenario, at 10.5%. the moderate-says economic growth could be somewhere during the next five years -- could be slower during the next five years, 4.5% growth. investment returns to date this year have exceeded the optimistic scenario here. that will have an effect again on the shape of the curve in future years if we do not see a corresponding loss. chairperson chu: we do have assumptions about going from 4.5% for five years for your moderately negative case, 7.75% assumed growth for your base case, and an almost 11% growth

in the value of our fund for the moderately positive. even given that discrepancy of almost 6.4%, the curve in the beginning, in the more current years -- we are still going to bear the cost of paying higher costs in the short term. >> that is correct. turning to retirement, for a bit of a high-level walk through, the san francisco retirement program has been in place for many years now. the sea several charts showing the asset market value of the fund over time. i will highlight a couple here. we really reached a peak toward the end of fiscal year 07.

we then had losses occurring predominantly in 08 that took us down to a low of $11.90 billion. we have been growing at a substantial cut coming back from that. $13.10 billion at the end of the most recent fiscal year. unaudited current year, $15.20 billion. we have seen growth. we are just got back to the prior peak. it will take some time for us to get there. we talked a little bit about the actuarial rate of return, the 7.75%, the moderate case here on which the core projections of costs are based. you can see here with the actuals have looked like overtime. the 2000 decade, from 2002 to 2010, slightly lower than 7.75%. that was a decade that began and

ended with a downturn here. that certainly affected it. if you look back over a 20-year horizon, we are in excess of 7.75%, 9.35%. there has been a lot of conversation nationally about whether we can really expect these sorts of investment returns on long-term. i can say that the 7.75% sign that san francisco has adopted at the retirement board is moderate to conservative compared with our peers. in california, the median is slightly higher than that. you do see other large employers that are using assumptions of 8.25% and the like. we are comparatively conservative in our assumptions compared with most of our peers. we do it employed five-year smoothing gains and losses to smoot dramatic year-to-year

changes, given changes in the market value. absence moving, we would've seen a faster increase a few years ago when the pension form lost value and seen a rapid declines as the fund began to grow back. this moving does stabilize our contribution rates over time. it serves our benefit. it will serve in our benefit in the short term. it will also mean that if the fund picks up the value we will not see the benefit of those gains fully realized for five years forward. we talked about the different scenarios. this is taking a look at just the employer contribution rates for the retirement system that underlie the earlier projections of cost. this is the projection of payroll the city is required to contribute to the pension fund.

we are at 13.5% in the current fiscal year. rates are set for the next year to increase to 18.1%. you can see again the expected increases in the years beyond that as we continue to smooth the losses from prior years. the backside of this hill, the rates of decline after that are heavily dependent on what we see in the shorter-term, with the blue line being the more positive, moderate scenario, the green line being moderate negative, and the red line being the 7.75% return. in the shorter-term, the lines pretty closely track. we can expect to see fairly large year-to-year increases in our pension contributions as an employer regardless of what used to assume here.

that was a very quick went through. spurs, i don't know. i can take any questions you have on the pension side before shifting to help. chairperson chu: while we are on sled 11, what we are seeing here is that even if we assume that in the next five years we will earn close to 11% in returns in our pension fund, which i certainly do not get on my savings account, but pensions are different and how we invest is different. >> you do not have $13 billion in your savings account. chairperson chu: i definitely don't. [laughter] we still don't expect that the percentage of our dollars -- they are going to inclined in the coming budget year. >> this is not the best and

worst case scenario. we could see returns that are better than this. we could see the recovery extended, where me -- where we may be to the more positive scenario here. that would affect the 28%. it would not affect as dramatically the years before. it would have the most dramatic impact on the rate of decline after the peak. i do not want to say that we are certain we will rise to a 28% contribution right -- late, but it is going to be dramatic. chairperson chu: with 10% increase, what is the value for us? >> that is approximately $300 million. chairperson chu: approximately

$300 million in all funds? >> shifting to health very quickly, our current year budget includes $319 million in payments for active employee health, vision, and dental plans. the growth rate would only adopted -- recently adopted brings our race increase -- our rate increase to 3.1%, which is much lower than the 8% average for large employers in california. the health service system has piloted some pioneering efforts

to control costs in future years, including accountable care and employee wellness approaches, which we hope will have impact on future-year costs. in terms of mechanics, our health system and the with plans are designed and improved -- the way it plans are designed and approved works differently than our pension system. while the pension benefits and cost sharing in san francisco are determined in our charter, and this is not the norm for many jurisdictions in california -- generally, our retirement benefits are determined by the charter. it is more complicated by our health benefit packages. health benefit plans are determined by the health service system board and approved by the board of supervisors. you've recently seen the health benefit plans for the coming

year and approved them. the total cost and total plan -- we have more control over it without an action of the voters. the cost sharing is determined through a complex mechanism for active employees. the charter sets a floor, which is based on a 10-county survey of other jurisdictions. above that, we collectively bargained through our labor negotiation process to establish a mix of the total cost borne by the employer and employee. that effectively means that for the most part how we share our cost with employees is determined by bargaining, not by the charter. for retirees, it is even more complicated. the charter formulas determine how costs are shared with retirees. those formulas have been built up over many charter amendments overtime. there are multiple components to them.

generally, cost sharing is determined by the charter, with some indexes back to what we are paying our electives. very complicated formulas, in particular on the retiree side. we have really three basic plans for health for our employees at the moment. we have two hmos with kaiser and blue shield that make up 87% of enrollees. city plan is a smaller plant making up 13% of enrollees, which allows more choice of doctor with higher copays and premiums. generally a more service-rich, higher-cost plan to both the employee and the city. the city also provides dental