>> good afternoon, everyone, and welcome to the san francisco board of supervisors budget and finance committee meeting for wednesday march 13, 2013. my name is mark farrell, i will xw chairing this committee, joined by supervisor eric mar, the vice chair, supervisor avalos, supervisor breed and supervisor scott wiener, i will like to thank sfgtv covering this meeting, as well as the clerk of the committee, mr. victor young. do we have any announcements? >> yes, please silence all phones and electronic devices, items acted upon today will appear on the march 19, 2013 board of supervisors agenda unless otherwise stated. >> thank you very much, and colleagues, we have two items on today's agenda, please call item number 1.

>> hear tog receive an update from the controller's office on the city's five-year financial plan. >> and we have ms. howard here, the mayor's budget director to talk to item number 1. >> hi, supervisors, thank you for having me here today to talk about the city's proposed five year plan, i have a presentation that i have distributed to you and will be walking you through that presentation, i'm happy to take questions during the presentation or at the end. what i thought i would cover today, just a quick reminder about some of the good work that the city has done regarding financial policies and planning over the last several years, i think that the deputy controller is also going to be talking with you a little bit about how some of the policies have play out through

our reserves in particular subsequently, talk about the goals to have plan, what are the major assumptions in our base case projection, walk you through that projection and some of the fiscal strategies to adopt a balance five-year outlook. over the last several years, we've began a number of steps to strengthen the city's financial management and reduce volatility in our budget process, one of the biggest and most recent steps is our move to two year budgeting which i think has certainly reduced that volatility and allowed for the city to make -- implement program ic changes over a longer period of time, we've implemented a consistent habit of doing long term financial planning in our overall fiscal city picture. in addition, the board has adopted fiscal policies that

contribute to that responsible fiscal management including the increasing the city's reserves, limiting the use of one-time sources, and codifying some of our debt policy, so, as you know, the five year financial plan is essentially a road map for the city's financial outlook over the city's next five year plan, it is a collaborative effort that are jointly -- it's jointly done by the mayor's office, the board's budget analyst swes the controller's office, so i would like to thank ms. campbell and [inaudible] for all the work we did together on putting this together. the plan itself highlights key financial issues specifically drivers of any gaps between revenues and expenditures and then monitors our overall progress on the city's

structural deficit. as you'll also remember, the five-year plan, it requires that we both present what that gap is and then propose financial strategies about how to eliminate the gap between revenues and expenditures. so, what i thought i would do is kind of walk through some high level assumption and then talk about in more detail about what's going on in the five-year financial outlook, so the plan itself assumes the budget that was adopted last year for 13-14 as the base case in most scenarios, so that means things like our capital funding is assumed at the level that it was adopted in the budget last year, inflation on materials and supplies on grants to non-profits that's assumed at the level it was adopted last year, the one

major difference that i would highlight for you now and i'll mention it again later is how we're treating the prop h public education enrichment fund baseline in which we defer to contribution last year in the second year and our projection today assumes that that's fully funded. >> ms. howard, just to refresh memories, the amount of the capital plan that was funded last year, so the assumptions are that it isn't 100, is that correct? >> it's approximately 40 million dollars that was include in the bujd for 13-14 that was adopted by the board, the capital plan recommends nearly 80 million dollars, such a significant reduction from what the plan recommends. >> so, if we were going to fully fund that going forward, we'd have another 40 million shortfall in essence looking at it right now? >> that's right, supervisor. another assumption that i would highlight for you, the five-year financial plan in the

joint report typically don't make any assumptions about increasing service levels or adding additional employees and that plan is consistent with that unless there are known policy plans such as the opening of san francisco general hospital. regarding reserves, the plan doesn't include at this point an additional allowance for any state or federal losses, it also assumes that becausour revenues are growing, we're not eligible for rainy day withdrawal. >> supervisor avalos? >> thank you, chair farrell, could there be withdrawal for allocation to the school district for the rainy day reserve, that's still a possibility? >> that's correct, supervisor. i think there is still work at the controller's office will need to do to determine whether the school district will be eligible for a rainy day

withdrawal in fiscal year 13-14, however my expectation is that they will be eligible. on wages and benefits where contracts are closed, we assume no cost increases and no changes in those closed labor agreements, the plan assumes inflationary increases equivalent to inflation, the consumer price index on open mou agreements beginning in fiscal 15-16. the plan also incorporates savings that have been generated through the passage of proposition fee or pension reform measure and the plan identifies a number of department specified issues that i'm happy to talk to you more about and there's certainly more detail in the report itself. so, at the highest level, the plan identifies a gap between revenues and expenditures over the five year period of 487 million dollars, as you can see

in the chart that's on the screen, over the five years, our city revenues are projected to grow by 13%, but our expenditures are expected to grow by 25% over that same period of time. and that difference creates our projected deficit shortfall that we're going to talk about how to close. on the revenue side, i would highlight, these are strong revenue projections and so over the next five years, 578, nearly 600 million dollars of revenue growth to the city. the growth is supported by, you know, the overall economic condition of the city including our property tax base, so housing prices, the strength of our tourism economy as well as job growth.

as you might imagine, revenue projections are sensitive to the overall economic condition of the city so to the degree that the pay for the recovery is slower or federal spending cuts are more significant than what we -- than we're factoring in at the moment, those projections could change. overall, the plan assumes more conservative growth rates on revenue in the third, fourth and fifth years of the plan. one to have reasons for that is that we are now going into a pretty -- into a sustained period of economic recovery and over the last number of years, we know that we haven't been able to -- we've seen booms and busts in our economy so we need to be i think responsible in our revenue projections in

those third, fourth and fifth years. there's still growth rates assumed but just at a lower level. >> ms. howard, quick question for you, and i appreciate that comment, i think as you look at economic cycles and so forth, you can make an argument that we're going into a shorter economic swing, have you guys done any look at all about a down side scenario if you will? >> the plan doesn't project a down-side scenario, what we did do though and i didn't put it in the presentation but if you look in the plan itself, if each year we had 1% less revenue growth than we project in the plan, that would be about 134 million dollars loss, so to the degree that revenues come in lower than expected, the deficit would be larger, so there is some sensitivity here. >> and that's 134 million over five years? >> over five years, that's

right. >> got it, thanks. >> so, going back to just in term of what compromises that 578 million dollars of revenue growth, the largest portion of that being our property tax which is our largest overall local revenue source, though business taxes and our hotel and sales taxes are as growing over that time period. this slide highlights for you wla the projected growth rates are in the plan, so you can see, you know, stronger growth rates in the early first two years and more moderate projections in the subsequent years. on the expenditure side, our -- the city's expenditures are projected to increase by 1.1 billion dollars over the five year period, that's about 25%

growth, and the largest share of that is our salary and fringe benefit costs which are growing we're projecting 460 million dollars, there are a number of citywide cost increase that is are assumed in this plan, things like fully funding our capital plan, our it plan and equipment costs, the plan also assumes that we fully fund inflation on grants as well as other non-personnel services, so that's all the contracts, grants, and other types of expenditures that are not staff costs. >> supervisor breed? >> yes, can you please explain what you mean by fully fund capital plan? >> happy to answer that question, supervisor, so the capital plan which will be before you in two weeks i think recommends a certain level of expenditure on the city's

capital assets, it includes things like streets, facilities, maintenance, that sort of thing. the plan recommends a certain level of general fund support. this year, i believe it's approximately 80 million dollars, and that number grows over the life of the plan. one of the recommendations that the capital plan makes is that the city should fund the level that it's funding today and then grow that amount by 10% every year, and the reason for that is that the city has a significant backlog in term of maintaining our facilities, maintaining the facilities that we own. >> so, and fully funding it, it would include long-term maintenance rather than deferred because it would help address those deferred maintenance issues? >> that's right, and the director of the capital planning program will be eager

to talk to you about this, the capital plan that's before you this year, it will be the first plan that during the ten year planning window, we begin to make progress on that backlog which would be real progress if we were able to do that. now, i would point out to you and i think many of you know this, the city has not been able to fully fund the capital plan ever, and so, you know, i think there's one of the things that this five-year financial plan recommends is taking a look at what we can really afford and what are realistic expectations given that the city hasn't been able to make those commitment ins the past. >> thank you. >> other highlights that i would note for you here, the contributions that the city will be required to make to our baselines and reserves grows over the five-year period, so

that's our general reserve as well as transfers to the new housing trust fund to the children's fund, and other baselines, mta as well. the last line here, department specific costs is related to all other costs that are really connected specifically to a department, so that could be things like the cost of elections, it could be the cost of our human services aid budge and how that changes over time, the largest component though of this is our cost related to the health department, so you'll see in the plan and as we talk about this that there's some hard work that the city needs to do with the health department about what can we

afford and how do we structure our system of care so that we maintain a safety net that's really viable. >> just so you know, we're having a separate hearing on the health department and the issues ms. howard just identified, quick question for you, within the salary and fringe benefit cost, obviously the largest increase over the next five years, in terms of percentages, what is that salary versus fringe benefit cost and then within fringe off the top of your head, and if i'm calling you out inappropriately, you can call me out to task in that. >> you're not calling me out inappropriately. let's see here. so, the -- i'm looking at page 17 of the overall plan which is table 4, and so what you'll see is a sub table there that

describes salaries and benefits and you can see that in the early years, our closed labor costs and the annual are about 60 million dollars and when we start to apply inflation into those open labor contracts and that's just a projection, we'll negotiate with our employees, that's about 180 million there, so of that total, 460 million dollars in wages and benefits, it's approximately 200 million, 220 million or so in salaries and the remainder in benefits. >> thank you. >> one thing to note here is that over the next two years, so we'll see about 50 million dollars in continued increased

cost in the city guide for our pension benefits and the next year, another 50 million, so in the next two years, 100 million dollars in pension contributions, prop c has made a difference but we're still feeling the effects of the recession and the smoothing that

we talked a little bit about capital already, and so what dpsh the numbers and the plan are based on assuming that we reset our capital spending to the level that's included in the budget that you all adopted last year, so that 40 million dollar level and that we then grow from there. so, that would be a significant reduction to our capital spending, but i think it's certainly something we need to think about. one caveat to that is you all will remember that the voters passed the road repaving and streets bond several years ago and it will expire in fiscal 14-15, so this plan does assume that the full cost of maintaining our streets is

funded. and then secondly, we've i think the controller's office has done a very good job over the years at actively managing our debt portfolio so we are able to generate savings to the general fund and to the city as we're able to do that, and so that is another strategy that i think we should continue to pursue. on the wage and benefits side, we talked a little bit about this, you can see the plan essentially assumes proposing at a lower rate, so instead of growing from 2.3 billion dollars a year to 2.7, to growing to 2.67 billion dollars, and this will require a combination of efforts from the city. this will require the city to negotiate contracts that potentially fund less than inflation each year.

it would require the city to consider not funding positions, so every 100 positions that the city fills costs 14.5 million dollars, just a lot of money, so the average wage and benefits for one of the city employees is about 140 thousand dollars, so to hold positions vacant, that could be part of this position. i would also note that i think the department of human resources, our partners in labor and the health service system have been doing some good work around wellness and i think that there is some opportunities there to try to manage our health care costs. and all of those things together will need to fit into this overall approach. the next strategy is really

about revenues and for the chart below, it shows you potential revenue growth above what's already assumed in the projection, so there are a number of different ways to accomplish that including gradually increasing few revenues as costs escalate, identifying new fees where it's appropriate and then also looking at new taxes and other revenues. one example that i think people -- that i've heard many people talk about is the vehicle sense fee that local jurisdictions are able to now impose, and just for a sense of the magnitude of that, if the city were to institute a local vehicle license fee, we believe that it would generate about 55 million dollars in new revenue. the next strategy is really

about our baselines and revenue allocations, as you know, there are a number of different set-asides, baselines and revenue allocations that many of which have provisions that allow the city to defer part of the funding or reduce part of the funding given financial conditions, and so the plan recommends that in each year where the city's shortfall exceeds 100 million, so the last four years of the plan, that the city not fully fund the proposition h piece baseline. as i mentioned earlier, the plan does assume it will be funded in the first year of the plan, the shortfall that's projected is 123 million dollars, so we don't believe that the city will be in a position to defer that contribution this year. we also have a choice that we

make on an annual basis about fully funding the growth in the hotel tax and providing that growth to arts organizations, and so the plan before you recommends capturing all of the growth in hotel tax during the first two years and then allowing that growth to accrue to hotel tax funded entities in the last three years of the plan. and then to the degree that there are other sources of revenue or balances in other funds, the plan recommends utilizing those. >> supervisor breed? >> thank you. so, i just wanted to go back to the hotel tax and the recommendation. so, what you're recommendation is has more to do with the

upcoming fiscal year in terms of continuing because basically the city has taken those hotel tax revenues and have captured them for the past -- i'm not certain how many years -- because there's not necessarily been an increase to revenues in the arts community in particular that are -- receive hotel tax revenue, so you're basically suggesting in this five-year plan that that continues for two years and the recommendation for the last three years of the five-year plan is to no longer capture it from the hotel -- i mean no longer capture it in the general fund but to increase it directly in the arts hotel tax supported entities? >> that's correct, and you're remembering correctly, supervisor, so i believe the last time that the city was able to fund the hotel tax allocations at the level that

the code recommends was fiscal year 2007-2008, so it's been a number of years that we have deferred that or captured that growth for the general fund, and you're also correct to say that the fiscal 13-14 budget that was adopted last year assumes that the growth in the hotel tax benefits the general fund, so that's already been -- the board last year made a choice to utilize those hotel tax resources for the general fund rather than allowing for growth. >> just for a point of clarification around the hotel tax legislation, how is the general fund able to absorb that increase separately from what's required according to the legislation based on the cap of what art entities receive? i know that it's not to

decrease or increase, i think it's either 5 or 10 percent and anything above that can be captured by the general fund and so i'm trying to understand exactly how the general fund has been able to capture that without increasing those hotel tax recipients? >> i think it's a good question, supervisor. the code that's related to the hotel tax, as i understand it, and i know my colleagues will correct me if i'm misspeaking, provides that growth in the hotel tax would be allocated to certain arts related programs. as is the case with most legislation, that allocation is