budget. and we're seeing that both throughout the state as well as throughout san francisco. hotel room taxes actually tracking where we expected it to be. but this is the online travel companies where we had estimated that we would see a gain, but that did not get approved by the voters in november. so we're recognizing that as a negative amount of receipts. and i think that the other big variance here is in property transfer tax. at the six-month mark we did report to the mayor and the board that we thought the transfer tax was going to be significantly higher than budgeted. but we also assumed that a lot of the transactions that occurred right at the end of the fiscal year was based on an acceleration of the sales because the transfer tax increase had been approved by the voters. but what we have seen in the last two months is exceedingly

high number of commercial transactions that have yielded up to $20 million of tax amounts. we have never seen those kinds of high yield tax months in property transfer. and so, again, this is our most volatile revenue. it's very difficult to project. we've applied a number of models, taking a look at averages and highs and lows. and, again, we have underestimated this particular revenue in the current year. as a matter of caution, we are recommending what we think is a prudent amount of property transfer tax for next year, assuming that we will not be receiving as much transfer taxes as we have in the current year. so, again, the good news is $61.6 million. we do need to fund the baselines with that additional discretionary revenue.

the baselines and setasides, the two transfers to the m.t.a. for both for transit and for parking is indicated here so that will help them balance their budget to some extent, the next fiscal year. the library is getting additional funding, as is the public education fund, a very small amount. departmental projections. so, again, the public health department had a $25 million revenue loss as well as over expenditures of $25 million. and the subject of the supplemental appropriation, where we took money from the reserve for state shortfalls, $8 million of general fund. and some of their other revenues for laguna-honda were greater, and so we were able to use that. the sheriff's department supplemental appropriation is included in here as is an

expected deficit in the city attorney's office. and the last three here have been subject to the corolla supplemental appropriation for the city attorney assigned to those departments. so this table identifies the departments with deficits. the lower table identifies the departments with surpluses. and taken together this results in about a $43.9 million shortfall. so we take a look at the good news and revenues and the netflix deficit in the department expenditures to yield our year-end. position. we focus on the general fund. but, of course, we have a number of enterprise departments that have fund balance. and so it's good to note that the building inspection

operating fund has a fund balance. they did have to lay off a significant number of employees in the last couple of years. and they have started to rebound. the children's fund has a surplus. the convention facilities fund, and the gulf fund and so forth. i think that another item of note is at the p.u.c., the water fund balance is significantly less than it has been. it's $11.5 million. that is a relatively low amount of fund balance for the water division of the p.u.c. you'll be hearing from them during the budget hearing tomorrow. but that is largely based on the fact that residents are conserving more. it has been raining more. they are selling much less to

their outside clients. and so they are concerned with the low level of fund balance in the water division of the p.u.c. so in conclusion, supervisors, what we show, about a $47 million improvement in the current year. those dollars is about $15 million more than what the mayor's office had been assuming when the mayor's office was working on the balancing plan. and then above and beyond that, we are taking a look at the property taxes and the property tax revenues for the current year and working very closely with the assessor. but it does appear as if there is more money in property taxes than we have reported in this nine-month report up to approximately $15 million. so those dollars are available to the mayor's office to assist

in balancing the budget for the next fiscal year. i'm happy to answer any questions that you might have. >> thank you very much. supervisor wiener? supervisor wiener: in terms of the rainy day fund it seems like kind of a perk in the fund -- if our general fund revenues, say, go down by 50% in one year and we can, therefore, draw on the rainy day fund and if the next year it goes back up by 10% so we're still 45% lower than we were before, does that mean we can't withdraw on the rainy day fund at all for the city? >> the rainy day fund can only be withdrawn under certain circumstances when our revenues are less than they have been in prior years. the 10% increase that you're

referring to is for the general reserve, general fund reserve. >> general fund revenues. >> i'm sorry? supervisor wiener: not the reserve. the revenues. >> so the rainy day fund, we initially thought when we built this year's budget that we would be withdrawing from the rainy day. because our revenues are higher than anticipated, we will not be able to withdraw from the rainy day reserve in the current year. so the $33.4 million that was in the reserve in the beginning of the year continues to be available, although we cannot draw upon it. >> so if you have a massive drop in one year and you're able to draw on it, and then you have a small increase in the following year or so, technically your revenues are going up, which is good. but they're still massively below what they were. you would be potentially precluded from touching the rainy day fund reserve. >> and, again, the formula is a little bit complicated, but we do take a look at prior year

peaks. supervisor wiener: right. >> and we have to be higher than a peak. so in instances where by our revenues drop severely in one fiscal year and are increased a smaller amount in the second fiscal year does not necessarily preclude us from withdrawing from the rainy day reserve. >> i presume -- even though i know our revenue picture was better than we thought it would be, i assume that compared to several years ago it's still significantly lower. >> we are approaching catching up in a number of our discussionry revenue, certainly in hotel tax and sales taxes, property taxes. supervisor wiener: thank you. chairwoman chu: thank you, supervisor wiener. just a question that i had to the budget office. when the good news came in from the six-month report and, again, from the nine-month report, it's

not enough to solve the entire budget did he ever sit that we're -- budget deficit that we're anticipating. i'm just wondering have you anticipated some of these in your projections? >> chair chu, we have in our budget planning, although in the kind of bottom line numbers that we anticipated, in the joint report, which was our $306 million deficit projection, we had not been assuming this additional revenue news in those numbers. however, i think as we've talked about at this committee and with many of you individually, i think we had a sense that there was going to be some good news at the nine-month report, particularly looking at the way that property transfer tax revenues were coming in, and just kind of overall strength in some of our indicators out there. so in terms of our internal planning purposes, we had been

anticipating that he would get some good news in the nine-month report that we'd be able to use to balance. however, this is better than we had anticipated. so there is some truly good news for us. very good news in terms of our bottom line assumed deficit number. but also some better news than we had anticipated even in our kind of informal planning. chairwoman chu: thank you. supervisor mirkarimi? supervisor mirkarimi: thank you. it's probably more comment than it is question. it's my fifth year on the committee here, and i have to tell you that in my first year we were in flush times. and then followed by three, almost four, very cold years of us dealing with landmark deficits. these some of the first positive numbers we have seen in literally about four years, it seems. at this time of the season, at

this stage, for us to get six and nine miff ho reports -- six and nine-month reports, i'm knocking on wood by making sure we take nothing for granted. but this must portend something larger about san francisco e emerging into a different phase of the economic downturn that's had us engulfed for the last four years. maybe you could just speak to some of those indicators. >> our barometer for the month of february was released, economic barometer, was released this past week it does show that unemployment is still high, both in san francisco and in the bay area, in excess of 9%. so that's at least three percentage points more than he would like to see in an absolute recovery. but, again, because our business taxes have come in a little higher than estimated, we do see that there is some recovery starting to take hold.

we do believe that we are experiencing a modest recovery, starting this year and next year. the issue, supervisor mirkarimi, is that our costs are growing at a greater rate than our revenues are growing. and that's what was indicated in the five-year financial plan. if we take a look at just the cost of living adjustments for salaries and paying the increased rates for pension and health care benefits, that exceeds the revenue growth by 1 1/2 times. and so although our recovery is taking shape, we suggest the mayor and the board take a look at the expenditures of budget and try to stem some of the growth and expenditures in a number of areas, as indicated in our five-year financial plan. but, yes, the recovery is starting to take hold.

we call it at this point a moderate recovery. supervisor mirkarimi: that's the more tempered response i was expecting. so it evens out the discussion, i think, nicely. i think it also speaks to general interest by the citizenry who hears reports from washington, you know, that there is some light at the end of the tunnel. but then when they hear about statistics, sustained high unemployment, then they wonder how real that those recovery predictions are. could it be more hollow where that is giving false hope potentially, even though that revenue is picking back up, general fund is looking to be much more endowed than it had been in the past. but yet, as you said, our costs and, frankly, unfunded mandates on pensions and everything else that we're facing down the road.

this is no time to really celebrate. i mean, this is to be cautious. >> to be cautious and to take the steps that are needed in order to build up our reserves so that when the next downturn occurs, we have sufficient money to stem some of the roller coaster type of cuts and increases to the cost of county government. supervisor mirkarimi: thank you. chairwoman chu: thank you, supervisor mirkarimi. just a question from me. on the property tax item. it looked like we were pretty much on the same level, 35.2 versus 34.2. it's about a million dollar less than what we expected often property taxes -- on property taxes. i'm just wondering if that has to do with reassessments or if that's a trend we should be expecting to see. >> this is the area write just spoke of where we're looking at additional information just received from the assessor's department. and we do think that there could

be up to $15 million of additional money from the working of the backlog. and so there may be about a $15 million increase to that particular line item on the revenue side. in san francisco, we have seen some foreclosures but nothing like the percentages you would find in other places up and down the state. our assess valuation has held. there has been about a 1% reduction that we had estimated in this year's budget. and it's close to budget. and for the next fiscal year, we are estimating a little bit of growth but not a lot. but again, in compared to a lot of the counties had seen 18%, 20% reductions. and so for us, property tax being flat is good news. >> thank you. there's no budget analyst report on this item. so why don't we open this up to

public comment. are there any members of the public who wish to speak on item 4? seeing none, public comment is closed. and we can file this item. without objection. item 5 and 6, please. >> up 5, hearing to review the mayor's proposed may budget fiscal year 2011-2012. item 6, ordinance appropriating all estimated receipts and all estimated expenditures for selected departments of the city and county of san francisco as of may 2, 2011, for the fiscal years ending june 30, 2012 and june 30, 2013. chairwoman chu: would you also call items 7 and 8.

>> item 7, proposed annual salary ordinance enumerating positions in the annual budge eliminate and appropriation ordinance for selected departments of the city and county of san francisco for the fiscal years ending june 30, 2012, and june 30, 2013. item 8, resolution concurring with the controller's certification that services previously approved can be performed by private contractor for a lower cost than similar work performed by city and county employees for the following services, employee and public parking management services, general security services, information booth services, shuttle bus services, airport, and janitorial services and security services. chairwoman chu: items 5 through 8 pertain to a budget for a few enterprise departments. there are documents being distributed to a i few members f the board. again, item 5 is a hearing. item 6 is the annual appropriation ordinance for the

departments. item 7 is a position authority or the salary ordinance for the departments. and, of course, item 8 are the existing prop j's that are part and parcel of those budgets. we've actually broken out the hearing such that we have four departments that will be heard today -- the san francisco international airport, the court, the rent board, appeals court. tomorrow we will hear the balance of those enterprised departments that are in these documents. in addition to that, the week after we will continue to have hearings on these department budgets again so if there's anything that we don't get to today, we can always continue the conversation in the week after. so with that, i would offer the mayor's budget office any opening comments that you might make. >> madam chair, thank you very much. the budget in front of you is, as you know, our may 1 budget submission. it includes a handful of departments for early consideration.

our june 1 budget will include these departments and every other department in the city currently in the process of developing that. so we're happy and available to answer any questions and look forward to getting the budget process underway. chairwoman chu: thank you, mr. wagner. so we do have a number of departments and department heads who are here to present so why don't we start with the san francisco international airport. colleagues, what i'd like to do is to have and invite the department head to come up to speak a bit about their budget to speak a little bit about their five-year financial outlook and plans. we will then go to the budget analyst's report and recommendations, and have a conversation around those recommendations. thank you. >> madam chair, members of the committee, i'm john martin, airport director. it's a pleasure to be here this morning. i thought i would provide an overview of the airport's business operation.

and then a very hollow overview of our budget, five-year financial projections, and then answer any questions. we're continuing to meet our mission to provide an exceptional airport in service to the communities we serve. in support of this, we have developed a new five-year strategic plan that will guide news a very detailed level, including 200 specific action items. and that will ensure we continue to be a leader among world airports and that we serve our communities in every possible way. our traffic continues to grow. we're seeing a 4% growth in passenger traffic this year. we're expecting a 1% to 2% growth next year so this is consistent with what we'll note are reported in the signs of recovery. we are targeting international growth. we expect to see stronger international growth, much stronger international growth than domestic. probably international traffic will be growing 5% to 6%.

that's the kind of growth we want. we want to see oakland and san jose begin to handle more of the domestic traffic in the coming years. the airport is in a very strong financial position. probably the strongest position we've been in in over 12 years. we continue to be one of the best performing airports in the nation, in our concession sales. we rank number one in food and beverage sales on a per passenger basis. number three in retail sales. and we're off the charts in terminal two in terms of our concession performance. terminal two has been a great success. we remain financially self-sufficient receiving no general fund support. our airline costs are now lower than most of the comparable airports, most comparable international gateway airports such as boston, new york, washington, miami, chicago. l.a.x. is the only major airport lower costs than san francisco. but in the coming two or three

years, they will be much more expensive for the airlines. each year we develop detailed five-year financial projections. so we have looked at those financial projections. we expect that our airline costs will continue to be very reasonable and will be lower than other u.s., major gateway airports. we have specific goals to continue to be a leader on the concession front. and to continue to grow the annual service payment, our contribution to the general fund, we expect 4% annual growth and the annual service payment for each of the next five years. for the next year, for the next budget year, we're projecting actually a 5% growth in the annual service payment, projecting that will grow to 30.3 million. that is calculated as 15% of our total concession revenue so that's why we put such a big emphasis on growing the concession revenue. in addition to that, we will be

contributing $82 million to other general fund departments for direct services. so primarily police and fire, but many other departments we pay at costs. and federal law says we can only pay for those services at the actual costs. in order to continue to improve our efficiency and customer service, we are putting a big emphasis on using technology. i think we're really a leader among world airports and using technology to improve efficiency, customer service, safety and security, even marketing. marketing to new airlines. we're able to market successfully to new airlines because we've taken over many of the i.t. functions that they used to perform themselves so we operate the flight information display system, baggage system, jet bridges, things that the airlines used to maintain to make them much easier for an

airline to start operation in san francisco when they don't have to make that investment. and it would also now operate as a telecommunications provider at the airport and realize about $2.5 million in annual revenue from the tenants buying those telecommunication services. just briefly, on service to the communities, we have about 100 interns per year. we really take great pride in our various internship program. we're maxed out in terms of a number of interns we can handle because it does take staff time. but we are very close to 100 interns. in the last year 37% of new concessions awarded went to small, local, and d.b.e.'s in san francisco. in q2, the hiring of almost 50% was first source hiring so we're see going progress there. and just finally in conclusion to touch on some of the upcoming

big projects for the airport. the major capital investments will continue. we need to always continue to reinvest in our facility to serve san francisco. we're starting work on remodeling boarding area e, the old american boarding area. we will also be doing minor remodeling throughout terminal three. and that will be done over the next year, about $50 million to $60 million in expense. we will be starting work on a new air traffic control tower, a project primarily funded by the f.a.a. we will also be starting work in expanding the run way safety areas to meet a new federal requirement. this is about a $200 million project. we're working to obtain at least 50% federal funding in support of that. and we're planning now, beginning planning work on a new boarding area b and renovating terminal one. this will be a very big project. $750 million to $1 billion. construction work will likely

start in three to five years. so these are some of the major projects underway at the airport. our primary increases in the budget this year relate to terminal two. first full year of debt service, $14.5 million. about $2.5 million increase. over 80 new positions, mostly maintenance positions to support terminal two. some additional police officers as well. we added them in the current year and full funding in the next year. i'll be happy to answer any questions in the budget. >> thank you very much. just a question for you on your five-year financial plan going out. what are some of the major expense pressure that you're expecting over the five-year period of time? and what are you counter balancing it with? i know you talked a little bit about some of the major capital construction projects that you will be embarking on to make sure that the airport is a competitive airport in the region. but also in terms of just your general operating expenses, where are you seeing your biggest cost pressures?

how are you working through that? >> i think the two biggest areas of expanse increases will be for debt service for the new facilities. and second, the labor cost increases. the same kind of pressure the general fund is experiencing with increasing costs for retirement and health care. we're feeling those impacts, too. so to mitigate that, we're putting particular emphasis on growing the concession revenue. and the concession revenue includes not only retail and food and beverage but also parking and rental car revenue. we have a general, philosophical management approach of attaining full cost recovery from our tenants for all services provided. these include costs for light, heat and power, for waste, water treatment, for accessing the roadways, all the commercial vehicles that use the airport.

supervisor mirkarimi: thank you. supervisor mirkarimi? supervisor mirkarimi: thank you, madam chair. director martin, i just want to say, and i think president chu would agree with me, that if all the departments were run like the airport -- [laughing] i think without question we have one of the most attractive metropolitan airports anywhere in the country. very inviting. sexy in some ways, i think. all the time that i've spent in airport as cross the country -- airports across the country, i think it has just the right combination of wanting to welcome people and almost becoming unto itself, strangely, a destination site. i've seen the art exhibits, the memorabilia exhibits. just really strong stuff. i have to say it's very

impressive the way that it has evolved. especially over the last five to seven years. so i think it's been very impressive. however, you have one thing that i would like, and that is police officers. i'm wondering if it's possible that in this season that there would be some review about the true assessment of how many officers you really need at s.f.o., and if there was any way that we might be able to negotiator renegotiate the release of those officers back into the interior of san francisco at some of the 10 district stations that are really suffering some staffing shortages. i know this has come up from time to time. but i've been