until well after we adopt a budget luckily. supervisor wiener: could you talk about that state assumption? i know that in years past we have underestimated, sometimes we overestimate. what is the assumption? >> it is a very rough guess, based upon the amount the city set aside in the current fiscal year. we assumed a $30 million of state losses in the current fiscal year. we assumed the same amount next year. looking ahead to next year, it seems likely we will have much deeper reductions from the state than we have in recent years. the state has been heavily relying on borrowing and other short-term solutions to bring their own budget into alignment, and seems much more appetite at the state to make hard decisions that will result

in positive things for the state going forward, which will create much more negative consequences for those who rely on state funding, and that includes us. supervisor wiener: could you even gas and magnitude of what would happen if we had to do all cuts state budget as opposed to some revenue state budget? >> no one has seen what in all cuts state budget looks like it. the government will propose in early may his revised budget and we'll have a better sense of the governor's thinking then. even order of magnitude is hard to estimate. just for way of comparison, governor schwarzenegger's final genworth budget -- final january budget would have resulted in something like $200 million in reductions for san francisco if we back filled all the programs he proposed to cut. the final budget as adopted

caused more like $17 million impact on us. the choices the state makes have profound and incredibly varied consequences for us. supervisor chiu: thank you. >> moving to the spending side of the ledger, salaries and benefits for city employees. we are projecting $110 million increase the coming fiscal year, broken down to wages and benefits. the majority of our labor contracts are closed in the coming year. are estimations of the cost of closed labor contracts the next year are fairly well known. the majority of bargaining units and the city continue to have no change your every year, but continue furloughs and other measures that result in cost savings for the city.

the $24.3 million in projected costs of closed labor contracts in the first year is really the result of wages that are scheduled for police, fire, and nurses in the coming fiscal year. in the years beyond, the second year, there is a significant increase, $83.5 million. we have to send those two years agreements expire and that employees, the furlough days expire and employes will effectively receive just short of a 5% wage increase as these contracts expire. we assume in the third year, a cpi on local contracts. that assumption in the second year will change as the city enters negotiations with our employer organizations next year at this time. on the benefits side, $80 million in cost increases

projected for the coming fiscal year. as we have talked about many times before, the majority of that is $60 million increase in our projected contributions out of the general fund for retirement benefits. $60 million of that t, $57 milln to the local organizations, $3 million to calpers. there are significant increases, driven by the costs and projected continued increases in pension contributions. supervisor chu: just a quick question. he mentioned that -- you mentioned in the fiscal year 2013 budget, the number is driven to expire from labor, so the furlough days and other things that would be done with, that is going back to what it was before? >> exactly.

supervisor chu: okay, and the $61.5 million in fiscal years 2013-2014 it is open contracts? >> and at that time, pretty much every labor contract in the city will be open. isupervisor chu: if you do a comparison between page 9 and page 4, on page 9 we see the labor costs, broken down by salaries and benefits and fringe benefits. if we look at page 4, about what the revenue expectations are, for example, fiscal year 2011- 2012, it is expected to be $30 million increase, but on the fringe benefit alone if we don't change a thing there, we expect the expenses to be $80 million. 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 min