budget and to have to balance both years and that means that we will not be able to rely as much as the past. still leave a deficit in the following year. the mayor has been focused on implementing more long term planning with our five-year financial plan and this is a big step in those efforts. for the enterprise department, this will be the first time that we will have a fix to the the would-year budget, so the budget that is adopted for the next year would only be reopened in the second year if their revenues and expenditures vary by more than 5%. we are not quite there on the general fund side. it will still be a role in fund budget for the total departments, but for their pride departments, it will be a fixed two-year budget. hopefully, eventually will be applicable enough to buy the same thing on the enterprise

side. we have new adoption that will be impacted our budget. the first is increasing our general fund reserve. we funded a $25 million fund research. we will be wrapping that to $39 million, which provides additional cushion turn the fiscal year to whether any unexpected budgetary impact, for example, state or federal cuts, revenue losses. again, that is a proven and sound fiscal policy. we also have limits on our use of our abilities one-time revenue for ongoing expenses. again, hopefully, we will address some of the structural problem we have seen in our budget over the past several years. we have our five-year financial plan adopted unanimously by the board earlier this year that will provide guidance and our balance in efforts. again, emphasizes the need to implement ongoing reforms, structural changes to our budget. we have 27 labor contracts

expiring at the end of the year. essentially, all unions except for police officers and firefighters will be up for negotiation. that will have a big impact. about 50% of our budget which will have an impact. the mayor, like last year, is focused on having a great deal of engagement and involvement from the community and nonprofit partners. he has already begun the process of meeting with bob crawford rather than the lives to get feedback into the budget process. at very high level, next fiscal year, predictions -- projections, on the revenue side, as the seven previous meetings, we continue to see local tax revenue improvement in all our tax revenue sources. that is being offset by the loss of on the ballot that we use in the current year budget, other one-time revenues, as well as

reductions in state and federal funding. on the expenditure side, we continue to see increases in our personnel-related costs. we are assuming the loss of one time savings, reductions in our capital budget that were used in the current year to balance the budget. at the high level, good news on the revenue side of 75 loss of one time revenue. the big problem continues to be on the expenditure side. this is the bottom line for fy12, 13. predicting $52.7 million shortfall. for the following year, 13, 14, a shortfall of three of $75.3 million. this is the first time we're doing a two-year projections. the second year number is a cumulative number. this is a change from where we are right now in the current budget. to the extent we saw that for

the first year with ongoing solution that brings down that second year deficit, which emphasizes the boards of taking on going action to balance the first year. >> with " -- supervisor chu: does the general fund deficit assume any power increases, given our current topic? >> yes, based on conversations with busey, there is an assumption of the one-cent increase over the year. to the extent we can work with the puc to bring that down, we can talk about that in the next item and next meeting. that would help to offset the deficit. we it knowledge the need for something at the puc, but we also are not in the best financial position ourselves to be observing cost increases. supervisor chu: thanks. >> some key assumptions to give some context to our projections. we assume every year current staffing levels and service levels, except for known

changes, like implementation of health care reform. this does not represent new policy initiatives or increasing the city workforce. we are using our five-year plan assumptions as far as salary increases and health benefits. you want to be consistent with prior projections, with the report will come out in march. this includes the passage of prop. see, that i will talk more about it a minute. it assumed that we increase our state reserve back to $30 million from the $15 million that was included in the past budget. was included when we decided to move forward with proposition d. -- g. because our revenues are growing, we are assuming we will not be able to withdraw from the ring in david reserve -- rainy day reserves.

while we start with our lost up on balance we assumed in the current year budget, we have healthy growth and our tax revenues. $165.9 million next year. the year after, that is a good sign of our economic recovery, something that the mayor has talked about that he wants to make even more robust and speed up even more with his economic plan. it is a good sign, a sign that we are out of the recession in the city. however, we do have a revenue loss is projected. particularly from the state. as i have talked about in previous meetings, reductions in the metical rate at a good hospital, cuts in laguna honda. other states, particularly at

the human resources agency, other reductions at mental health, one-time revenue, various other changes. all in all, from this year to next year, the prediction is we will see a net change of $20 million in revenues, and the following year, $105 million in revenues. the problem in our deficit is not a revenue problem is more -- problem, it is more a deficit problem. driving personnel changes, predicting $94 million in salary increases next year with expiration of our labor agreements. approximately 12 furlough days with the concession that was made in most labor agreement that are expiring. the assumption is if those go away, that will feel like a 4.6%

year over year change in the cellar cost. we continue to see increases in health and dental benefits costs. this is not based on any actual information from the health services. you have not enacted on those rates yet. there are some kid is going on that health services from changing to a calendar year plan. we continue to see cost increases there. on the retirement side, contributions are expended to grow by $33 million this year, 7 $6 million the year after. however, we will be seeing savings from proposition c, as well as from the agreement that we negotiate with police and firefighters, largely offset the next year, division costs. other changes result in a total personal cost of $112 million this year, $105 million next year. other city-wide cost increases

include baseline funding increases, capital budget based on the 10-year capital plan. we assume inflation there pressures on our non-personal cost. assumptions about adequate funding, debt service cost increases, and our new general cost requirement that i mentioned earlier. on the department of side, a ton of things changing in the department's operations. some of the big ones are the convention facilities on, debt service costs, public health implementing an electronic records to comply with health care reform, county aid needs, and other costs that other departments as well. these are all projections and estimates. obviously, there are uncertainties early in the budget process. we are all concerned about the continued economic recovery and with what is happening internationally and that the

state level, we want to keep a close eye on the economy. our benefit cost growth, editor all estimates and projections. we will know the true increase in health and dental and retirement costs in the upcoming months. the state budget continue to be an area of great uncertainty with changes to the redevelopment agency, public safety, health and welfare realignment. we make no assumptions about current year's spending or even that supplemental spending, the single biggest uncertainty being the outcome of labor negotiations, which we will not know about until the spring. to provide history and our projections, the point of this slide is to show that over the past six months we have seen continued improvement in our finances. at the time we issue our joint report, we were projecting a $480 million deficit for next year, $642 million the year after. we issued are five-year

financial plan, it went down to 458. it just shows that we are seeing this ongoing revenue improvement but it is also because we have implemented on going measures in the current budget, particularly with the passage of prop. see, ongoing savings which have brought those projections down. things are looking up, but that is still a significant deficit to overcome. to move on to the final piece, what we have instructed the department to submit -- supervisor chu: what i would like is for us to cut over to the puc rates. and we have a context where the budget projections are, maybe we can have a conversation around the rates, given the time constraints of the general manager, and then come back with instructions.

>> good morning, supervisors. thank you for letting us speak about the water -- our rates for the public utilities commission. it is great it is in the context of the entire city works as well. if we could turn the overhead on and shrink it. the supervisors, as you'll notice, since the year 2002, we have not raised our power rates for municipal bond department at all. the power rates that were in effect in 2002, 3.7 5 cents per kilowatt hour are still in effect. at the same time, gasoline has gone up 140%, month adult passes, 177%.

the residential tuition at city college has gone up to 111%. it is unsustainable to think that we can continue to run our system with no rate increases for ever, so it is time to deal with that. we have had this discussion repeatedly over the years. in 1989, there was a discussion about the need to set targets that would approach the cost of service. we did a study and said we were not doing that. in 2001, 2002, we raised the rates a bit and have not raised them since. but since then, the board of supervisors has repeatedly passed ordinances and policy statements saying we should be charging the cost of service, but we have been tailored to that as part of the budget process. recently, in 2010, 11, the cost of delivering power to general fund department is about 8 cents to 9 cents per kilowatt hour. we are currently charging 3.7 5 cent per kilowatt hour. what that means is we are being

very good to general fund apartments, which is great. one of the reasons we have the system is so we do not have to pay pg&e rates. you will notice one of the largest users of our power is committed to real way. muni pays us under $500 million for their power. the cost to deliver that power is closer to $11 million. if we did not exist, hisham muni had to pay pg&e, it would be closer to $80 million. that is repeated through general fund department. this building pays no power rates at all for electrical power. it is time for that to change. the subsidy of $22 million a year is not sustainable for our organization. in the last year's budget, looking forward to the 10-year capital program, we have to start making cuts. over the years, we have built up a great reserve and has allowed us to keep the right flat. it allows us to do different programs, conservation programs

in the city, but with no additional money, those programs are in jeopardy. in this last year's budget, looking for for the next 10 years, we may cut over $220 million. some of the programs i just mentioned, energy efficiency, and nobles, in most cases, those budgets have been about $45 million over the next 10 years. in all 10 cases, we dropped by about two-thirds. our working assumption is we will need to cut those positions and cut those budgets unless something changes. we also looked at up-country transmission. we had hoped to transform some of our power facilities. we dropped that by $120 million because we are going to maintain the power lines we have, maintain the facilities, but we're not planning upgrades. so we have cut about $220 million from our budget, a tenure-objection. even doing that, we are doing --

showing falling off and having a negative fund balance in two years. within the framework of the two- year budget you're talking about, we would go negative. when the reason for that, we found all of our capital on a cash basis. since we have the rates in effect that are stable and set, but goes to the budget process every year, we are unable to have a rating and issue debt the way it currently exists. we are coming to you today with the idea that it is time to have a regular rate setting process that goes through the process we use for water and waste water, bring that to the board of supervisors to the commission and set rates, and then we will be able to issue debt, to long- term financing for the long-term capital needs of your organization. that is what we're here to talk about. i will turn it over to our cfo to propose what we're talking about. supervisor chu: in terms of a fund balance slide, slide 6, you talked about some of the

reductions that the puc had proposed. on the up-country transmission assumption, $119.2 million reduction, that assumes he will continue to maintain transmission assets but will not work on any upgrades to those transmission assets? >> correct. in the last couple of years, we had to pay $50 million penalty selling a lawsuit from the forest service because we were not maintaining our live properly, according to their standards. they believe we cost two of the fires and the stanislaus national forest. we are clearly putting enough money into making sure we maintain those lines, keeping them up to speed. we are also part of power grid for the country and state. there are additional regulations that require us to be much tighter in how we manage our power delivery, manage our power houses, and transmission lines. supervisor chu: in terms of all other power siepi cuts and deferrals, are these things that

the puc believes it is not necessarily mission critical in terms of keeping operations running? >> correct. what we have in there is a street light maintenance, working on our facilities. we manage hundreds of miles of transmission lines, but we also have our own roads in the sierra nevada. it leaves money to maintain those roads. supervisor chu: in terms of the projections you have with the amount dipping below what we expect, the use of fund balance, item seven, page 7, what kind of capital projects to resume in these projections? >> those assume those that are left, the one from page 6. they assume exactly what we're talking about. they assume we continue with up- country maintenance, taking care of the facilities. we have been spending quite a

bit of money in the past few years maintaining and somewhat upgrading our actual power generation facilities. the power plants that actually make the money and generate power. there is a little bit of that to do. there is an old power house in moccasin that we'd do some made bids on as well as those activities. it is mostly the maintenance. supervisor chu: existing power transmission lines and safety. >> right. at some point, we would like to a great power lines. if so, we can make more money. we can probably try to find a partner and that is outside of the support remark. supervisor chu: with regard to the bonding issue, the point you're making is the puc does not have a rating. we are not able to go out and get a favorable rate in order to bar a modest duties of the capital projects because we do not have a regular rate-setting process. in terms of going through a regular rate-setting process, we

would still be going for every year. the board have the ability to reject those rates. how does that change the bonding situation? >> we would be asking for a multi-year rate package. on the water rates, 3.5 years ago, we can with a five-year increase. we set those rates in place for five years. we will be asking you for setting those rates for a period of two to four years, enough time to stabilize. it will not get to the cost of service, but would be substantially closer and would allow us to go out and say to the bond rating agencies, these rates are set in the normal fashion, goes to the puc, board of supervisors, and we can expect to receive the money that those would generate. supervisor chu: thank you. >> good morning. habra reads from, cfo, assistant general manager.

tahrir charged with his stewardship of this most number of resources for the city and county, we have two options for your consideration and the liberation. those both satisfy the edge of sustainability and would allow the water and power program and project to borrow affordable bond proceeds. importantly, the two pennies over two years, as mentioned in the budget director's briefing as well, would mean, over the next two years, we would go from a 3.75 cent kilowatt-hour, up to 4.75, 5.7 5 cents, remain at that low thereafter. why this is important, it sends a strong signal to the bond markets and allows us to borrow power revenue bond proceeds. it balances the 10-year financial plan. also brings in the additional

revenues of about $4.5 million. annualize that to $9.1 million thereafter. this would also allow you consideration of another policy decision, the committee choice aggregation. it would also facilitate the ability to say yes and keep financially solvent hetch hetchy. showing what the next 10 years of rate index are to ensure full transparency for all our ratepayers. this allows us to satisfy and meet those requirements. in addition, and as mr. harrington mentioned, it does facilitate capital financing for facilities and transmission. before this, we have not been able to correlate with you on our strong water and waste water

credits. however, what this does not do is allow for any restoration of the city-owned renewables, they go sf programs, approximately $90 million in programs that we have to make as part of the capital process. supervisor chu: what is the current rate being charged to general fund department? >> 3.75 pennies. that is the top of slide 8. supervisor chu: if we look at the price, think about what the cost is, all told, $16.3 million cost to the city at the moment at the -- >> 3.70 5 cents for almost all general fund department. however, which charges zero for city hall and street lights. supervisor chu: if protect the current roster of the apartment as is, just as a starting point

of conversation, if we increased by two since, currently pay 3.75%, we should expect that impacted the ground $12 million? >> 9 per $1 million if we raise everyone from the current rate one penny. the two-percent option is not to vote from zero to 3.754 city hall lights. it is just a rate of one penny across the board. that is the value in that slide. to show that graphically for you and for the television audience, but that does is allows us to go from correcting this shortfall situation, which would be our status quo, and ability to buy low-cost bonds for the repairs, allows us to achieve that red line. that satisfies the green line,

which is the long term reserve policy. that has been adopted by our city and commission. the next option would be a four-cent option. as mr. harrington said, that takes us closer to cost of service. the cost of service assumption assumes adding back or restoring the city-loan renewals, coastal are sf, city efficiencies. your key bookends are two-sent status quo that allows us to be financially sustainable, or 4 cents, to allow us to have all of those same things, as well as add that the public our program to its previous level for city renewables, energy efficiencies.

again, a similar graphic or the satisfying of the reserve policy, not falling off of the financial cleiff. the overarching impact of the summary, the same departments that were highlighted earlier. what it would mean for the municipal railway. one additional penny in their costs would be $1.3 million. that is on a billion dollar-size but it, so it is a far the small%. only about a fraction of a percent. two pennies the following year would be $2.6 million, only a third of a percent of their budget. similarly, i know that you are reviewing public health budget as well. $600,000 of cost. is such a small portion of their 1 $20 billion budget, it does not even register, as far as a percentage of the budget.

less than a fraction of 1%. supervisor chu: with regards to the change in the budget amounts, i understand they are small portions compared to each of these large entities, and help me understand in terms of the cuts that we have made, it has been awfully hard to get $1 million in cuts from the department of public health because of the things that we do, leveraging state funding sources. even though it is a small portion, it is a significant impact, right? >> certainly. it will make it harder for the departments to meet the targets that i was -- i will present. >> with regards to the mta, we received an allocation based on trends and revenue. we expect they will probably get a bump up in revenue as a result of that. is that enough to cover this? >> generally it is more than

enough. however, they have other expenditure increases that are above what the baseline impact will be for next year. >> they might see increases to existing labor contracts and other thing that will exceed? >> they have already built in the power increase. projection that they have presented to their board have assumed this as well. you will see they are predicting multimillion on texas for the next few years. supervisor chu: thank you. >> in summary, it is approximately two pennies for the $4.5 million for the affected departments who have been able to have a discount in the past. that would be enough to bring the hetch hetchy from the back into structural long-term balance. that and be the most affordable option. the full restoration would be four since. we have reviewed this in detail

with the return the sport, as we are required to do under the charter. we have also had to make full rate making transparency contrasting with independent outside rate analysts to review the materials to ensure all costs are reviewed. we are happy to answer any questions. supervisor chu: with regards to the time line, does your commission plan to act on these rates at any time? what does that mean for the cost of the board to reject or let it stand? >> commissioners, the way the charter reads, the board has 30 days after our commission submits the rate increases to the board to veto the rate increases. the plan is to have at our commission next week on december 13. if we send it over on the same day, but would only give you your first meeting in january. what we planned to do is to hold that for a week and submit later on in dece,