on that alone, we expect to outpace our revenues significantly. in 2012-2013, we expect revenues to go up, but the health and dental retirement benefit expenses are $54 million. we're not even talking about salaries and benefits, but just the fixed costs of retirement benefits and health benefits that we provide, we are already outpacing revenue coming in. about that is correct. -- >> that is correct. as you know, the chartered drives a number of contributions, from bass lines and different set asides that the voters have adopted. those include the most significant, $16.4 million increase heading into next year for the city's contribution to the public education and retirement fund. it is because the city pulled

the trigger on that measure and the career that allows us to reduce the funding allocated to the schools by 25%. the report a sense that we float back to the status quo contribution next year, although we know the mayor and the board have the discretion, given the fact the shortfall next year is over $100 million, to make a policy choice to reduce it by 25%, or about $15 million. in 2011-2012, increases and baseline requirements, the largest being mta, but also the library, parks, and others. this somewhat busy slide is our effort to pick up everything else included in the report, discussed in more detail.

$199 million in non salary- related cost increases for the coming fiscal year. the top line, $54.4 million, the capital plan that the city has adopted assumes a much higher level of investment from the general fund in our infrastructure, streets, and other buildings. if we assume that we return to the capital plans recommended level of funding, that would require just over $50 million increase in funds for capital. as mr. wagner discussed, the mayor's office is likely to propose a budget that reduces the amount of money for capital compared with this expectation. the report assumes, as we do for our own employees, cpi or cost of doing business increase for

city nonprofits and contractors and just general inflation on the non salary part of our budget, $17 million in the coming fiscal year. several lines down from there, the city's subsidy to our convention facility, projected to increase by almost $80 million the coming fiscal year. -- buy $18 million in the coming fiscal year. that is because the city took a onetime payment to balance our current year budget. there is a significant change here, year over year. that will expire. we have more elections schedule and the coming fiscal year, 2012, costing an incremental $12 million. it further down the page, there are inflationary and other increases. general inflation. changes to the delivery system, including a drawdown of federal

revenue on the revenue side. and other costs associated with electronic record implementation and all the things. those are discussed in more depth in the text of the report. i know as we have talked before, this report projects just status quo revenue and status quo expenditures for each of the years, and captures the difference between those lines, which is growing, as the projected shortfall. we are required to balance each year's budget, and how we balance it will have an impact on the future shortfalls. this is a simple illustration of the concept, three different balancing solutions, and won and led the station. and what the limitations will have. the first scenario is if pete fy 2011-2012 were resolved with

onetime solutions. it's all of that year, but none of those solutions continue in the years beyond. -- it solves that year, but none of those solutions continue with years past. the next scenario is probably more akin to how the city has balance its budgets in the last two years, which is a mixture of one time and won going solutions. the last fiscal year, it was approximately 50-50. if we balance with the same proportions, $153 million of the solutions would continue and bring down deficits in future years, and $153,000,000.10 time solutions. in this scenario, the shortfall next year remains higher than the coming fiscal year.

$327 million as a preliminary estimate for the coming years. the last illustration on this slide is simply if we made up $306 million of ongoing changes in this budget process, what would be the implications, and it has a more dramatic impact on future your deficits, bring us down to $174 million. still significant numbers, but much improved compared with the some areas of the top two. supervisor wiener: you are sitting in the last few years and has been 50/50? >> it has been close to that. we have the benefit, most of that is the benefit of these large state and federal revenue streams for this time. we had stimulus funds from the federal government and the hospital fees from the state. those were heavily one time or

time-limited temporary solutions that have expired. supervisor chiu: your thoughts on the one time solutions, it is tempting to go with onetime solutions. what sort of policies have we thought about to push us toward ongoing legislation? >> the city has adopted a number of changes that are designed to bring revenues and expenditures into line of for a long time and we are in the process of executing these. iproposition a, the reserve policy that will serve to set aside money in future years. the mayor will be presenting a five-year financial plan to the board of supervisors next month, which is one of the provisions in that measure, designed to focus on the city's finances long-term.

this time next year, for the first time, the city will be preparing a two-year budget, which requires us to have the discipline to a balanced two years at once, to be mindful of the implications in the second year. supervisor chiu: are you planning to use 50/50, though, or will that change? >> the answer to that is going to depend largely on what policy choices we make over the next couple months. as you pointed out, the history is, and i think for good reason, that often the on going reductions tend to be more difficult, in some respects, to stomach. the answer to that will depend on the types of decisions we are willing to make.

the ongoing solutions on the expenditure side tend to be in salaries and in contracts. those aren't thetwo -- those are the two types of expenditures in the budget. ifrom the proposals we have seen and are looking at, we have received a mixture of both, and we will have to have some discussions with you and the mayor will have to have some discussions with you about which of those proposals we're going to do. we will hear about some of those later today. i know that is kind of a non- answer, but that is the answer i can give, it depends on cholent -- it depends on policy choices. but the mayor is interested and i am interested in continuing to have this to your perspective.

i know you are very interested in that,, having been on the two-year budget amendment. i think that next year will really make us put our money where our mouth is because we will have to actually balance of around those choices, not just plan around them. ii think the answer remains to e seen. supervisor chu: thank you, supervisor chiu. it looks like the illustration here is really that the choices we make on this budget committee of how we two -- how we choose to balance the budget, how much of the solutions are one time 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 been other 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