would have to incur anyway if we knew about these features during design. >> what's that again? >> 15%. so, essentially, if we knew about these feature during design, we would have known that the cost of that project would have been 85% higher than the changes we're looking at right now and we would still have proceeded with the implementation of that project because that reservoir is so critical to the water supply of our system. this is really the last slide here and when we discovered these features back in mid 2012, production on the project was impacted by four months essentially. but since then we have picked up and we are moving ahead full speed right now on the project. we are 35% done with the project. and i'd like to highlight the fact that the sods 117 million we are asking to you approve

today to transfer to the project will only cover the construction, the increase in construction costs. there will be a need for increases also what we call the soft costs, delivery costs for the additional 25 months. and there are also significant risks remaining on that project. so, we are at the same time negotiating a final change order for the discovery of those features with the contractors. all that to say that we will need to go back to our commission and to this committee in about april or may. we will come back and seek from you an approval for additional revisions to the program costs. now, any increases in the program on that project in the program, we will want to compensate by with savings. so, at the same time we are undertaking a very comprehensive assessment of all remaining projects with the goal of identifying savings that will be able to compensate

for these known increases that are to come. listed here are the two actions that we are -- >> excuse me, ms. la bonte, supervisor avalos. >> with the savings we'll expect there will be a need to come back or to find additional revenue after that or we can actually accomplish this project with savings from other projects [speaker not understood]? >> what i know for a fact, supervisor avalos, is there will be a need to reappropriate funds from one project to the other. now, whether we can find enough saving in a zero net increase has yet to be determined and that's what we're trying really hard to do. based on what i know at this point, if it is not -- if we are not able to compensate for a lot of them, the overall increase on the program would still be a very reasonable -- very low. but you should know that my goal and the goal of our team is to, you know, find equal savings. >> and if there needs to be additional funding brought overall with the project, what

[speaker not understood] to go ahead and issue more bonds? >> this would be probably more a question for todd read strong. >> todd read strong, cfo manager. we would have to do an initial process as well as work with the mayor's office to come back to the board which would be * which would consider the supplemental as well as financing authority and require a three-quarter vote for us to issue more bonds. in addition to what julie has mentioned, while we want to constrain the costs, we have also been achieving a great deal of savings on our revenue bond issuances. we have refunded every revenue bond that we could, achieving $52 million of rate payer saving over the last three years. in addition, we sold sewer bonds on monday morning and we were the first city department to sell bond since the city's geo bond rating was upgraded. and the market received us

very, very well. we saved rate payers over $150 million because of the aggressive bidding buyers wanted to buy san francisco sewer bonds. we achieved foreign rates at about 3.58%. so, while julie and i give you the good news and the bad news, we're balancing the budget and we want to do that to make sure rates stay as affordable as we can. >> another option we would have, too, supervisor, we have an ongoing capital program for our water enterprise and there's been question that some of the improvements in that program could be deferred slightly and some of the wsip improvements could be moved into that program. not to surpass the budget of the wsip. so, there's a few options we can look at once we determine exactly where we stand budget wise.

>> earlier in the project we were seeing much lower construction costs than we had anticipated. how are thing looking now in terms of construction costs? >> very good question. the most recent bid we got was a smaller pipeline project, but still a project worth about $40 million. the winning bid came in 9% under engineer estimates. that's still good, but that's not what we used to see. so, based on what i read in the trade journals and, you know, based on conversation with my colleagues on other program, i think there is a slow picking up of the workout there and i think we're -- the bids are not going to be quite as competitive as they've been in the last few years. >> and our savings won't be as big as we had? >> exactly. and in our case, since i only have sick projects, smaller projects left to put out to bid, there is not [speaker not understood] for additional saving there.

* six >> okay, thank you very much. colleagues, any further questions? all right. to the budget and legislative analyst report. >> mr. chairman, and members of the committee, on page 44 of our report, we point out that if you add the requested 117 million to the previously approved budget for the calaveras dam project of [speaker not understood] 416,845, that would provide a total budget of 53 2,6 87,834 [speaker not understood]. and the puc reports the increased construction costs would be absorbed within the existing overall water system improvement budget which is presently forecasted at 4,585,5 56,260. so, this request of 117 million together with available

contingency funds for this project of 6.9 million would result in an increased cost of 123.9 million dollars or total cost of 123,9 [speaker not understood], the department has provided a detailed budget on page 45 of that report adding up to the 123.9 million dollars. by releasing this requested 117 million, we point out on page 46 of our report the puc's requested the water system improvement program management reserve which presently has a balance of 117.1 million, would only have a remaining balance of 103 thou dollars and that clearly is inadequate for a $4.6 billion water system improvement budget. so, * we believe that -- and those additional costs, by the way, which could be -- which

could result or explain on page on page 46 of our report. * are so, our recommendations on page 47 of our report, we recommend that you request the puc to report to the budget and finance committee by may 31st of 2013 on the puc's responses to the bay area water supply and conservation agencies 10 recommendationses pertaining to further cost savings measures which may take place. and then we do recommend that you approve the requested release of the reserve funds. >> thank you very much. colleagues, any questions? just quickly to the puc, obviously -- and i want to thank you for your detailed briefing yesterday. much appreciated and look forward to being out there as well at the tunnel. obviously the reserve amount is a question going forward. are you comfortable coming back

reporting on the bay area, the water supply and conservation agency -- >> my intention would be to go to our commission on the 23rd of april and seek their approval for revision, then come before you. and at the same time, i would report on the 10 recommendations. >> okay. supervisor mar? >> i just wanted to thank julie for the great presentation. could you re-explain how you're going to replenish that reserve fund over time for the puc? >> yes, there are different areas of the program that i know for a fact have savings right now. for example, there are a few projects where we have awarded bids like the one example i just gave you where the bids came in lower than our budget. so, what i want to do is take money out of those individual projects, move them back into the program management reserve. another example, some of our projects get completed. there is a balance left in the project as we completed them below the budget. i want to move that. bay tunnel, we just holed through.

they've got a lot of contingency money in construction. the risks are much lower. i'm going to reduce our contingency, move that money back to the program. andrew ross sorkin there's a few areas i know for a fact i have savings. the question is whether i'll be able to find enough to compensate for also some of the known increases. >> okay, thank you very much. colleagues, any other questions? okay, thank you very much. at this point i'd like to open up to public comment. any members of the public wish to comment on items number 8 through 10? seeing none, public comment is closed. all right, colleagues, we have a number of items here before us. let me suggest a few thing. with item number 8, if i can make a motion continue to the call of the chair even though we have a number of years left on the program. >> we can have the update from bosla at that point when we have the next update for the system. >> that sounds great. we'll work together with the puc. we can did the update on those 10 recommendation as well as have the next quarterly update together at one point in time. * okay, we can do that without opposition.

as for item number 9, we need to adopt c-e-q-a finding with the calaveras dam project. move approval. we have a motion to approve item number 9, the c-e-q-a findings. we can do that without opposition. and as for item number 10, the hearing, we have to this stays here in committee but we have to make a motion to release the reserve funds in the amount of $117 million to the puc. >> so moved. >> and we can do that without opposition. mr. clerk, do we have to table -- excuse me, mr. clerk, sorry. do we have to table item number 10 because it was a hearing itself? okay, thanks very much. so, at this point, mr. clerk, can you please call item number 11? >> item number 11, hearing on the budget updates from the mayor, controller, budget and legislative analyst, and city departments, including balance, shortfalls, strengths, and additional revenues. >> thank you very much.

and we have two items today. first from ken howard regarding our budget and the budget instructions that were given out earlier this year as well as a report from the controller's office on the six-month update. so, we will start with ms. howard. >> so, happy to be here talking a little bit about budget instructions. the presentation that you -- that i'll be sharing with you is similar to the one that i have provided to department heads. please stop me if you have questions, otherwise, i won't go into as much detail. but this is really just a preview of what the instructions are and why the deficit is where it is. so, just as a reminder to you

and to members of the public who may be interested, we have currently a $7.4 billion budget, $3.5 billion in the general fund and in the current year nearly 27,000 employees. our largest revenue is the property tax and our largest cost is and as you all know, our largest department is the department of public health. * last year we moved forward with the first year of two-year budgeting for all departments. we have [speaker not understood] two-year budgets, mta, puc, [speaker not understood] and all others are rolling. which means this year again you will see all of the departments for an update, two-year budget, 13-14, 14-15, 15-16.

those must balance. [speaker not understood]. so, just to refresh our memories about how we balanced the budget last year, largely revenue growth some one-time solutions, some departmental and city-wide solutions, we deferred full funding for capital funding, it funding and equipment funding in the second year of the budget which means that that's going to contribute to our deficit in the projection that you'll see shortly. and just a reminder that our reserves are strong and growing. and i know the deputy control will update you on the position of reserve shortly. so, strong general fund reserve position. we have a state reserve which we just talked about. and then our rainy day fund which is continuing to be drawn down on and will continue to be depleted mostly by withdrawals from the school district and finally our budget stabilization reserve. both the rainy day and the stabilization reserve are of

the same kinds of triggers about when we can withdraw from them, only when our revenues decline. >> just a question on our budget stabilization reserve. we just established that in was it 2010? >> two years ago, that's right. >> so, how has that grown over the past few years? if you can remind the trigger of that growth is. >> we feed into the reserve 25% of revenue above the five-year average of property transfer tax. and end of year better than expected fund balance. we've been feeding this reserve significantly both as to -- the revenue and property transfer tax has been quite strong, but also when -- at the end of the year when we close our budget, some of that money has to get deposited. >> i was just surprise today

see 74.3 million dollars which is robust. >> [speaker not understood] will give you an update on this in a moev. but the number today is even stronger than what it was at budget instruction time because we've now closed our book for the end of the year. so, this is just a reminder about kind of looking ahead. we've got, again, two-year fixed budgets for enterprise departments, the controller's office will be reporting to you about whether there is a need to reopen their budgets. my expectation is that that's very unlikely. it's also significant planning year for the city so you'll be seeing here in this committee a five-year ict plan on information and communications technology, a ten-year capital plan, and then a five-year financial plan which is a -- will be a combination report, a both joint report and five-year financial plan.

you'll also remember that we have closed labor contracts in the first year of this budget and they do open up again in the second year. we also, as part of the election in november, had some changes that affect our outlook due to proposition c [speaker not understood] passing. so, overall this number will not be new to you. we have projected shortfall in the first year of $129 million and in the second year $263 million. largely driven by expenditures outpacing revenue growth. >> and ms. howard, just within that context with the expenditure growth, within that can you tell us a little bit more about what, what those line items are underneath that that contribute greatly to those numbers? >> sure. i think i'll answer that in the next two slides. and if i don't get it, then we can talk a little bit more about it. >> got it. >> so, the next slide just provides a high level of our

revenue picture. so, in our -- in the assumptions that i've made in our budget deficit projection, we're assuming we will want to have a state reserve so that costs us money those years. we assume that some of the one-time sources that we may have used to balance the budget last year are not available and then we have revenue growth in the general fund. and i have assumed that there will be about $50 million of revenue growth and -- in the first year and 128 million in the second year. on the expenditure side, what you can see is that our costs are growing largely because of personnel related costs. so, this is slide 9. the first line, so, $8.8 million of costs greater than what we -- what you adopted in the budget last year.

but recall that the budget we adopted for the second year already had $90 million of wage and benefit growth for our existing employees on the general fund. so, essentially what that means is that in 13-14 it will cost us $100 million to have the same employees that we have this year and the subsequent year it will cost another $100 million. so, $200 million in growth in wage and benefits. and that's largely driven by our benefit costs, approximately two-thirds on benefits less than wage. below this you'll see baseline funding increases. so, this is the effective prop h being fully funded. as we always project in our deficit number, and then a new baseline being created, the health and trust fund which cost $20 million. * in the first year and growing to 22.8 million in the second year.

lots of one time solutions. to the extent we didn't fully fund our capital plan, it investment, that's showing up in the second year, and changes to our reserves, and other departmental changes. so, that's where we are at the high level end uses >> quick question. you said two third benefit. mostly health care in that or are there other significant kind of health benefits is this >> it's [speaker not understood] pension. you'll recall that we saw some losses in our pension fund compared to the rates of return that we expected. and that we need to -- the way that we manage that is we smooth the rates over five-year period. and, so, the numbers that you're seeing here reflect increasing refund pension through the fiscal '15. following that's correct you'll see what's in the five-year plan, the cost to the city will go down on pensions. but our trends are on health

care continue to be really significant. >> okay. >> this side basically just recaps what we just talked about. just to highlight the assumptionses that under line these projections, we're assuming -- we're assuming in these projections adopted staffing levels. we're not assuming major changes to operations or lots of new staffing added. we have updated salary and benefit costs and the projections do reflect the november election. and then we're also assuming a state budget reserve which we didn't include in the fiscal '14 budget that was adopted last year and full funding of the city's capital plan. the second year it's important to remember that in the second year of the budget that we're talking about now, all of the costs of street resurfacing goes back onto the city's capital plan and that's more than $40 million a year because

the geo bond would have been fully spended. as you can see, we have significant revenue growth in both years that we would not be eligible for a rainy day withdrawal. in terms of remaining uncertainties, the economy of course is always -- there's some uncertainty, though, our revenues appear to be relatively healthy. benefit cost growth is a significant issue for us as well as our unfunded retiree health care liability which, as you'll recall, is $4.4 billion. our labor contracts, as i mentioned, will be open the second year of the budget. this budget -- the projection before you assumes no wage increase in the second year of the budget, but we will be negotiating with the majority of our labor unions not police and fire in the second year. we also, as you all have heard

and i think this will continue to be an issue that comes up at this committee and in other places, the effects of federal health care reform are really uncertain. the way that the department receives revenue is changing dramatically. the people who will be covered, it's a whole new expanded pool of people. they have choices about where to -- where to consume health care. do he they want to be a dph client, do they want to go somewhere else. there is a lot of uncertainty around that. the governor has made proposals about potentially shifting those responsibilities entirely to the counties which would have significant and -- significant costs and operational issues if that were to happen. finally, this projection does not make any assumptions about any current year supplemental appropriations. so, based on the actions of the board thus far, we have the

domestic violence supplemental which is about $1.9 million in annualized costs and the supplemental that we discussed today, the state supplemental. together those would add approximately $7.7 million to the shortfall. people always want to know where have we been and how do the targets or the instructions that the mayor have given compare in prior years. this table lays that out. you'll recall that 2009-10 was a really banner year for us in terms of shortfalls. we projected a $5 76 million deficit. i think it's notable, to me it's notable about this table is that this is the -- this year with $129 million shortfall is really the best budget outlook we've had since fiscal 2007 and 2008. and it's -- we have climbed out of a significant hole. the mayor in december gave

instructions to departments, asking them to reduce their ongoing general fund support by 3% over the next two years. so, 1-1/2% in each year. it's important to remember that 1-1/2% is only about $19 million. so, department solutionseses will always be a part of how the city balances its budget, but it certainly will not be the only way that we balance our budget. these are just more policy oriented instructions focusing on core functions, minimizing surface impacts. one of the things we're really interested in looking at is how are departments utilizing data to find opportunities for greater efficiency and to democrat on stray the effectiveness of their programs. and then of course to engage with their stakeholders. the last slide is the calendar of key dates and next steps. i think the ones that are notable for you are the capital plan, the it plan and the five-year financial plan.

the deputy controller will talk to you momentarily about the six-month support which has some behring -- bearing on this deficit projection. the first time we'll produce deficit number will be on march 1st with the five-year financial plan. happy to answer any questions you may have. >> thank you, ms. howard. colleagues, any questions at this time? okay. much appreciated. now to our six-month update.

>> good afternoon, mr. chairman, members of the committee. monique zamuda, deputy controller. i will be speaking from the powerpoint. i've also distributed another copy of the full report to the members of the committee and to the clerk's office. and if anybody from the public is needing copies of the report, they're available right here.

as we do every year, we advise the mayor and the board of supervisors of the status of the current year budget and this helps inform both the mayor's office, additional information regarding the balancing plan for next year and as well as the mayor and the board of supervisors for current year actions that may be required. in general, we are reporting that at the end of this fiscal year with the assumptions given in the report, we will end the year with a surplus of $38.3 million. largely because of city-wide revenue growth that has improved over the original budget projections. you may recall, supervisors, at the end of the budget process in june before you approved the budget, we did see some significant gains in city tax revenue. and that city tax revenue carried forward into the current year.

so, we are p projecting [speaker not understood]. beyond that the dollars we need to provide toward our baseline contributions, the results of the revenue shortages and increases and expenditure deficits and surpluses in departments and actions of the board of supervisors to impact -- to appropriate some of these funds will also impact this projection. so, the table on this page gives you a snapshot of both the starting balance in the current year and what the assumptions are over the course of the year resulting in an estimated fund balance of $38.3 million. we started the year with a balance 22