compared with ongoing will impact the out years. it to the extent that we can identify ongoing savings or solutions, we helped drive down are out your budget deficits, right? and i wonder if this is an appropriate time to ask this question. we recently heard that moody's downgraded san francisco's credit rating, and i am just wondering what sort of the nature of that report was, what are the witnesses they identified for the city, and how that pertains to the conversation we're having today. >> yesterday, the city was downgraded by fitch, one of the three ratings agencies that rates the city's debt, to a tier below the other two ratings agencies, moody's and s&p. it really indicates a mixture of strengths and weaknesses with

the city's credit. the strengths are diversity of our economy, the fact our local economy has outperformed most of the stake, part property-tax base remains strong, and as a city and county combined, we have diversity that others did not have. generally speaking, the fiscal management within the confines of the fiscal year has remained very strong. we have demonstrated that time and again with revenue compared with the budget, the mayor and the board quickly responded for many years with solutions to keep the budget in balance. those are the strengths. the weakness which are driving to downgrade or a mixture of things. ithe city has drawn very heavily through its reserves and fund balances. we have drawn down over $100 million each year of the last three, which leaves are reserve position largely depleted. as a percentage of our general

fund operating expenses, our general fund reserves, including randy david reserves, are less than 1% -- including rainy day reserve, are less than 1%. we should be in the 5%-15% ratio. our reserves are dramatically depleted. they also noted that the city has balanced several recent budgets using a heavy reliance on one time funds, which leaves a structural imbalance between revenue and expenditures in the projections. buthat will require difficult choices for the mayor and board of the coming year. it last, it highlights both the steep cost the city faces for our pension contributions during this time, which is not unique to us but creates a significant challenge given our reserve position, and then our retiree health unfunded liability, which

is higher than most on a per capita basis. it supervisor chu: with regards to how not often that agencies will evaluate our credit rating, is there any time line when we expect to be re- evaluated by the agency? do we expect other agencies to follow suit? >> pretty much any time we go to the markets to sell debt, which is multiple times per year, we touch base with the rating agencies. we're talking to ratings agencies multiple times per year and they have the authority and right at any time to change our ratings are what they call our outlook, which is what they see the trend is being. with the downgrade yesterday, we are now on stable outlook with all three rating agencies, which is generally indication we're not going to see another rating action in the shorter-term.

there are always circumstances that the some changes, and we don't see any quick and immediate actions, but generally speaking a stable outlook is an indicator we're ok for now. with fitch's downgrade, we have been downgraded by two rating agencies in the last six months. moody's last fall downgraded the city. with fitch, we are now on par with both the city and county of los angeles, whereas we have historically been higher, and we remain higher with s&p and moody's. but things could happen at any moment, a reserve the outlook. supervisor chu: how does the rating agency's credit score impact us overall? >> generally speaking, a better rating is a sign of lower

borrowing costs. it is one piece of information an investor uses when they're deciding whether to buy san francisco bonds. the more potential buyers we have, the lower the interest rate because of competition. it is an important indicator. it is not the only indicator. i cannot tell you if this will cost this many basis points or debt service costs, but it is an important piece of information that investors use, and a lower rating generally means higher borrowing costs. supervisor chu: if we go out to purchase general obligation bonds, those will be investors looking at these reports? >> mm-hmm, and where the revenue stream is restrained, as were it largely is with these, higher borrowing costs mean that we get

less for our money upfront. supervisor chu: so if we are looking before the city's long- term health and to limit and lower our borrowing costs over time, which we will undoubtably go out to the market for many of our large projects -- whether it is building rec centers or repairing them -- we want to look at the criticism in this report and try to address those issues. at the takeaway i get is that the rating agencies are looking for us to have an identify more ongoing solutions to the budget deficit, it sounds like. second, they're looking for some kind of way for the city to get a handle on our pension and health costs, which are large drivers of where our expenses have been. last, it sounds like they've really want us to bolster the level of reserves and not spend our reserves. >> yes, that is exactly right. i've spent a fair amount of time on the phone with fitch

yesterday talking about rebuilding our credit, and those were the points they made. the only thing i would add to those, madam chair, i think the general expectation, like a lot of local governments, where the bottom of a recession. the expectation is not that we will be rebuilding a reserve in the next year or two years. the first thing is to address our structural budget issues, and the longer-term benefit after structural balance would be building reserves. if you are prioritizing, you're looking at those issues. supervisor chu: okay, that is helpful, thank you. >> if there are not other questions on the body of the report, i will turn it over to the mayor's director. >> thank you. greg wagner, mayor's budget

director. i will be quick, but i want to update what this news in the joint report means for our balancing status and our outlook for the next couple months. i think the way i would characterize it is that it is good news and welcome news, but it was largely anticipated and it is not enough to fundamentally change the issues we need to deal with to get this budget balanced. the slide that i have up on the screen is a comparison of what i have shown in the past, to where we are now. as you recall, i have walk you through that a couple of these committee hearings, just the big pieces of what are balancing plan might look like. in the left column, we start at $380 million deficit. that is the deficit when we

issue our budget instructions in december, and the right column starts with $306 million which is the current deficit. what we talked about in the past is we have about $71 million of city wide solutions, which includes reductions to capital budget, as the controller discussed, pulling the prop h trigger, differing purchasing, central city what solutions like that. -- differing purchasing, central city wide solutions like that. it is a 10% target and contingency. these are simple but calculations of these targets. but these numbers are essentially the benefit we would see in the budget if we accepted all of those solutions that departments have given us as part of their target reductions.

two things that i think are worth pointing out, first, the value of remaining 7.5% target number has changed. it the reason for that is that our single largest target and are single largest general fund department, the department of public health, has been discussed, some revenues to meet that target. that is, but above the line and a joint report. of our $74 million of good news in the joint report, about $20 million, $21 million of that it is outdph's revenue -- of that is dph's revenue to meet that target. some of that good news is driven not just by changes of the economy. some of that good news is driven by what dph is doing to generate

more revenue for the city. that leaves about $61 million remaining from the first 10%. it the contingency figures remain the same in both cases, but the bottom line, as i told you a few weeks ago, another previous deficit, if we were to take all of the ideas that have been contemplated by departments, that would leave us what the remaining $118 million dap. it with the new news from the joint report, if we take all of those ideas, it is better, but we still have a remaining $65 million gap. the second thing i want to point out is, i want to be clear because i have heard from a couple of people who have looked at this slide or some version. they have said, well, this is good, our deficit is $118 million. our deficit is not down to $118

million, or $65 million. at the point of this is if we take all of those proposed cuts for cutting police officers, if we're cutting drop-in centers, if we are producing contracts at dcyf, if we are taking out nutrition programs, if we take all of those proposals, we still have a $65 million gap remaining that we need to solve. i think the point of this slide is really not too be overly negative about the good news, and every is good news, but the point is that the news is not probably enough to fundamentally change the dynamic that this committee will have to tackle over this hearing process in the month of june. we still have a very significant challenge, and we are still in a position where we have to work

with departments to look at the contingency proposals beyond the first 10% and look at seriously some of the more difficult proposals that have been made by departments to get to balance on june 1. supervisor chu: thank you. supervisor wiener. supervisor wiener: thank you, madam chair. so the $65 million is after the 10%? >> that is correct. supervisor wiener: so it is painful, unbelievably painful, and we're left with $65 million. about that is correct. -- >> that is correct. supervisor wiener: in terms of the not structural, not one time, the things we have relied on in years past which have cost concerns to outside rating agencies in terms of not

addressing the structural imbalances, we have less options these years in terms of using those than in years past? >> i would say that is a correct characterization. some of the items that we have used have been one time in the past that are very big onetime items, and are certainly no longer available. the chief example is that last year we balance the budget with the hospital fee revenues and the remainder of the federal stimulus funding increases. those pieces together were over $100 million of one time revenues. those are gone and no longer available to us. there have beeother solutions that were one time savings that we were able to pull out that we have no longer available. there will be one times solutions available to us this year. i am certain it will be one time solutions that we used to

balance the budget, to some extent or another, but i think the options, to some extent, are more constrained at this point, and, again, there is also what is available to us. there is the larger policy discussion of whether it makes financial sense for us in the long run to exercise our ability to take some of those one times solutions. supervisor wiener: thank you. supervisor chu: supervised chiu? supervisor chiu: i appreciate the way you explained it, because i for one had a number of constituents who assumed we had a $380 million deficit that had shrunk, and that is not the case. iif i do the math correctly, if you add the initial 10% target and to% contingency, plus another $65 million, that is about 20% of overall cuts, and my right?

>> yeah, 28 -- supervisor chiu: 27%, 28%. in other words, it is somewhere around 8%, if the first $61 million was 7.5%? >> i see where. yes, that is correct, and that would be a calculation of the percentage of discretional general fund revenues. supervisor chiu: if we were simply to do across the board cuts, which we're not going to do, if we did, we're talking about 28%. have we looked at that number and tried to quantify what that would mean? is there a way to explain to the public with that magnitude looks like, so folks understand what a 28% cut across departments mean, either by the number of employees that we would have to consider or programs that would have to be cut back?

give us a sense of magnitude. >> sure, i will try off the cuff, without having calculations in front of me, but i appreciate the question. without holding me to the numbers, but the overall magnitude, if you were to, for example, solve the $300 million deficit with only layoffs or only position eliminations, we would be talking about thousands of positions eliminated. the other factor in that is where those positions are. as we discussed previously at this committee, our biggest general fund departments are some of the core pulte let -- core public departments. there are police and fire, social safety net departments, human services agency, the health department, dcyf. so it would be

disproportionately significant reduction in staffing capacity at those departments. on the contract side, i believe we have about five under million dollars, six under million dollars worth of general fund -- i believe we have $500 million, $600 million of general fund contracts, which is about half of the total budget for those services. if we were to actually go to the departments and say we want you say wea -- we want you to make a 28% reduction, it was significant impact their ability to provide services, both for staffing and community partners. i don't think our anticipation is how we will ultimately solve the deficit, by just doing across the board reductions, but the scale of this problem is significant, and that is why we

will hear from dcyf and dph and other departments in the future about cuts they would rather not make that the level of this deficit is forcing us to consider. supervisor chiu: thank you. supervisor chu: thank you, supervisor chiu. if we walk through this, this talks about the road map, how you get to zero or balance. i think everyone of these lines within it has millions of details that i think people are concerned about. i know, for one, just looking at the slide, the citywide solution on the $71 million, those are not easy decisions either, because we're looking at capital investment that we would otherwise want to make. that in an of itself is a line that i know some folks may take

issue with. on the value of the remaining 7.5% target, i would imagine within their there are some things that are easy to take, such as revenue increases at the the part of public health which i think of it has problems with, but within that target there may be items that might be controversial or may result in some reductions of service. with regard to the 10% contingency line, i understand, for example, within that $109 million, includes reductions from human services agency that the human services service agency commission actually disapproved. this lays chu: it shows me that we are pretty far away. you have to hear what the $109 contingency means we will be

talking about what those cuts are. when the mayor's office be able to share a tentative budget about decisions that will be made around what continuance the cuts will be taken? >> we are in the process right now getting into the details and going to the decision making process. we are in the process of taking a significant amount of input from the public before we finalize decisions. we have town halls across the city, we have a series of meetings going on right now where we are meeting with cbo's

to discuss the department's proposals. our expectation, we will be starting to form a picture of which of these reductions will be able to take to get to balance and starting to share that with members of the committee. and to get a sense of what will be required and get input on those decisions and have some conversations about what alternatives might be preferable to that proposal. supervisor chu: does that conclude your presentation? i know is a joint effort between the budget office and the analyst. with the budget analyst like to add anything to this

presentation? >> we don't have anything specific to add. we will be looking in detail at these issues as we review the mayor's budget in may and june. supervisor chu: if we don't have any other questions, i would like to open this item out for public comment. are there members of the public that would like to speak? >> that sounds like your lucky to end up with one penny. ♪ have you seen the budget coming have you seen the budget i have seen the budget when the cold wind blows

and the sweet music on the radio have you seen the budget have you seen it? why did the budget have to leave and go away i have been used to having a budget to lean on. i see your budget hands reaching out to me i wish you good luck on these years ♪ ♪ have you seen it why did the budget ever have to leave and go away and i hope it comes back soon ♪ supervisor chu: and many other members of the public that would wish to speak on item number one? public comment is closed.

and we have a motion to file this item to the extent that you have the comments that are made from the rating agency, can you share that with the committee? i think it can be informative. >> hearing for an update on the budget submission from the department of youth and families. supervisor chu: does the mayor's office when to kick it off for the apartment? >> just a question about if you

have extra power point presentation for the committee. i also have extra power point presentation is for the members of the public if they want to.

good afternoon, supervisors and the members of the board. it is my pleasure to be here. i am the director for the department of children, youth, and their families. i will provide you with a very brief overview. and walk you through some of our planning processes and conclude with our proposal for fiscal year 20112012 budget. -- 2011-2012 budget. it was created in 1991 through really wonderful efforts from children advocates throughout the city. the ballot measure that was put in front of the voters has

become known as the children's amendment. it set aside property tax revenue. that revenue source has been called the children's fund. the children's fund is used to fund services from ages 0 to 17. it is a wide range of services from child care to after-school, violence prevention, as well as employment and teams services. the children's amendment also created the children's baseline. it mandates the services before the amendment is passed. it mandates that it goes through very rigorous and inclusive planning processes.

it is a three-year planning cycle. we go through a community needs assessment. all 20 neighborhoods throughout the city, we have community meetings as well as intensive focus groups with certain populations. we gather that information, and with what we gather through the mayor's budget office, we do the allocation plan. this is how much money we have. how do we prioritized and early impact and have better outcomes on those needs? after we do that process, we go through the implementation of