utilization of pier 35 once it's a secondary cruise terminal or development of pier 31 and 33 so those opportunities can help us over the next 5 years. we didn't include them because either they are speculative or we believe they are outside the time hoer rise upb. maritime revenues, the real story on our projections here is that cruise is driving the lion's share of the growth in maritime revenues beyond typical cpi and that's really from continued enhancement in the increase in the number of passengers that are visiting san francisco from 202,000 projected in 2013 to 261 for our projection period. we're also assuming that $6 passenger facility charge and special events and parking revenue from pier 27 which at the end of the 18, about 1.8 million. so the cruise investment is paying off in the maritime revenue.

so for operating expenses the drivers of our future expense are primarily labor, a lot of it is what we have and paying for increases in fringe benefit costs and cola adjustments, et cetera, and the other part is from adding new resources and positions that we believe are critical to meet operating efficiencies, protect our revenue and respond to who we are today. also in prior years we had that non-cash adjustment for pier 70, the reduction of that environmental liability that we don't project having into the future. so this graphic just shows the main drivers, personnel expenses in the dark blue, charges for other city departments, other expenses, professional services. so expense growth is projected to outpace revenue growth

resulting in a negative net income position throughout the projected period. atz i said, it still shows we can cover operating and almost get to renewal, but it's really the grants and contributed capital line again that small line starts at 25.8 million out to 1.8 in 1718 that is going to enhance our position. so it's other sources of revenue, it's the general obligation bonds, it's grants from other city agencies -- i'm sorry -- grants from other grantors and just contributed capital that continues to improve our position. here i'm showing you that contributed capital line again in the light green which are the partnerships that we

project to continue to have success in forming that drives an improved financial position. we project debt service coverage levels to at least 1.3 mile 81 1.3 times but far above that, 4.7 times, well above the requirement for the next 5 years. so our coverage looks very good. so in terms of summarizing what the past tells us and what the future suggests, our operating revenues are diverse and stable. we have a very healthy cash position. our debt portfolio is structured conservatively in terms of structure and leverage. we are projecting operating expenses outpacing operating revenue which shows that we will, unless there is careful intervention, we will not be

able to address the renewal costs in the way we should and we need to seek additional revenue generating opportunities to continue to improve our position as we experienced in the last 5 years. and you'll be hearing about the capital plan shortly and you'll see that for the first time the backlog projected at year 10 is smaller than you've seen in prior years and that's a very significant milestone because it is hard for us to keep up with just escalation costs and all of the investment we have done in the prior years has gotten us there. so for capital the strategies are really to pursue development projects that leverage private investment to support city policies while reducing our backlog and you will see in the capital plan that development projects are 43 percent of our identified sources over the next 10 years and those

development projects we're showing to address 243 million of backlog. we need to continue to rebuild our aprons and bring sheds up to code with port maintenance. this is an initiative we advanced last budget year by adding a pile driving crew and we're seeing results and will continue to see results from that strategy. we need to continue to address date of good repair through implementation of your capital policy and also investment criteria and invest in new properties and continue to build new partnerships. we're funding an initial phase of the seawall study and are partnering with external the city and other external agencies to size the problem of the seawall and develop a financing strategy. we also are funding grant

matches so when we receive home land security and other sources we have the match there to receive those funds. on the operating budget, it's really to maintain the operating reserve in the capital policies to support only new positions that meet strategic goals to address our changing environment or protect recovery knews and increase operating efficiencies and we have limited all other expenditure growth to 3 percent of actuals. it's to seek reductions in operating expenses that do not undermine effective operations and every year we'll be looking to find those and also to ensure that south beach harbor, the south supporting program prior to its transfer and to offset expenses for development proposals through cost recovery. so as i looked at all of these numbers i really saw two types

of strategies. one is to look toward incremental improvement and change in areas we can control, controlling operating expenses, growing our revenue, setting aside the right amount for capital, and the past shows that incremental strategy is showing really really good results. and the other strategy is more of an external strategy where we seek innovative financing, partnerships with the san francisco electric, for example, for the 2008 and 2012 bonds and those changes the hopes of ifd in terms of a source. the go bonds, those are game changers for our position. the incremental strategies that we can control we really show very good incremental results but it's those external strategies that show dramatic, really dramatic

changes. so i think that this look back shows a lot of success and it also shows caution looking forward and that we have to continue to be as creative in the future as we've been in the past. so with that i'll close and i'm open to any questions now or we could move to the other items. >> move to the other items? >> i would prefer to address this one before we go to capital, ma'am, if i could ask for comment first. >> any public comment? seeing none, commissioners. >> i want to commend the staff for putting both the historical and the future projections in one presentation. i know it was a lot of work and a lot of time but i think it's good to see the two side by side and i think there is a lot of insight

that we do see. a couple things, one we've already talked about, in the future i think it would be useful to have an operating cash flow for the period historic and going forward because i think we can see cash is increasing versus the fact net income on an accrual bases is declining. that's one thing to watch as well. i guess i, if we've talked a little bit, the key thing in these forecasts is really understanding the assumptions that go into it and i guess i would hope that we could also list out at any future presentation some variables to the projection so we can understand exactly what the sensitivity of those assumptions are and in this and the real estate revenue, i think the question i had is whether, how granular we were able to do the analysis versus a cpi increase of rental rates because at this point the trend line of the exact the expenses are going up faster than the

revenue is not a good sign. and i know that you are generally quite conservative but i think it's important to go sort of very granular here to understand if there is anything on a pure operating level that could improve this forecast going forward so there should be more of an understanding what is coming up for renewal and not just a cpi increase or major leases so if there is some money that will be coming in on the revenue side that we can take a look at that. i think that's, and the sensitivity of both the positive and my understanding is the expense side is kind of fixed, we can't really do too much, but we're seeing that the operating revenue is not going to have enough to do the capital renewal. and we'll get to the capital plan but that's a major issue but we want to be able to sustain an operating level and the forekafrt right now is not showing that trend so that is very alarming, given that we have other pressures coming on us in terms of other

negotiations down the line and my understanding is that this point you have included the interim revenue from any of the piers that have been freed up from ac34. >> yes, that's right. i think it's a good suggestion to do a more granular level of projections. we have certainly done due diligence on sites that either we know will turn over or are vacant or underutilized. for ac34, we are assuming interim parking either shed or all those other facilities it enhances revenue substantially during the projection period. it's about 5.4 million in fiscal year 17-18 so that's assumed. we also, as i mentioned but probably didn't go into much detail, i assume pier 38

revenue for 15-16 at 360,000. we assume the upstairs portion is rented resulting in $202,000 of revenue in 15-16 and pier 31 as well, resulting in revenue at $765,000 so we did assume those particular sites and you mentioned it would be nice to see the variables to the projections and what would make them go up or down and the variables that would make this revenue projection for real estate go up is fuller utilization of 35 is one example when it becomes a secondary cruise ship terminal and i know the maritime division is working on some concepts for that site. the back lands but i don't believe we'll see that revenue in this projection period so that's why i didn't include it, but that's a very good opportunity site. i think that in these

projections in general there's really big risks so the biggest risk i would say to the capital plan is a change in the real estate market or a change in the political context vis-a-vis port development. we've talked about $250 million of state of good repair assumption from the development projects. the biggest risk to operations and to the budget is not growing enough to allow for us to operate efficiently or, conversely, growing too much and we're really trying to strike that balance and the biggest risk to the financial projections is this negative net revenue that you are discussing and not being able to overcome that. i think the past shows it took a lot of intervention and careful decision making and strategy to have us generate positive income, address the backlog,

and gain ground. we have a very big capital plan. so i think it does take a lot of effort to show positive results. >> right, but then the other question, i know you have been conservative but i guess the encouragement in terms of being able to be very aggressive and identifying more grants and other contributed capital because that's the only way we are going to get into a positive change in net assets and if we're going to incur a higher net income loss under the current projections and assumptions it's incumbent therefore to look for third party and we also know the mood in sacramento and washington so it's not going to be easy to get our share of grants but that's imperative and that's the take away we have to look at here in terms of the projections going forward. i also want to mention i think on the cruise ship terminal you

have assumed aggressive growth in the cruise ship calls and then you have a passenger facility fee which at this point is flat in this projection but that will be as we learn whether there is going to be elasticity in that because that could change and increase revenue. all i'm saying is every single stone has to be looked over to look for revenue source because this trend cannot continue the way it is. >> agreed. >> questions? just had a couple -- in terms of some of the projections i also am a little concerned and some of the revenue projections are fairly significant with increase, for example, of cruise passengers. are we fairly confident that those numbers, we have the commitments from the cruise ships? >> i think so. i can turn

over to marilyn ye but i believe this is based on bookings going forward, actual books. so i think it's a reasonably optimistic projection. before i step up, i do appreciate commissioner woo ho's comments. >> good afternoon, marilyn yee, financial analyst, maritime division. yes, it is, currently we have some defined booked and 261,000 passengers. >> i guess assuming the economy continues as it is. you also noted one of the reasons we did quite well these last couple years was in terms

of, you lumped it under grant funds but there's a range of things. do you see any opportunities for us to get similarly -- similar funds coming in or that seems to me it was more sort of a one or two time? >> i think there is future opportunity. i think the 2008 decision of the city to add the port to the general obligation for parks has proven to be an on-going relationship and i think it's now the rec and park and ports bond and our next will be placed on the ballot in 2020 for the schedule of the capital planning committee. that's a big source to us, a big kupb tripbtor to this line and a game changer to this position. i think we were very successful in prior years with home land security grants and ward appropriations, i think that will continue but maybe at a slower clip and one of the

things that is difficult here as we do projections of contributed term, as we know new term but as we look out hopefully they will do much better. you see a huge drop off in the last year, a million plus, and our generate is more like 20 million but we just don't know what those opportunities will be and they really vary. so i don't do a straight line because they are so depen depblt on making alaitionships, applying for the grants, making the business case for the investment or the public's case. >> in terms of trying to maintain a state of good repair, also also a difficult one to project. have we left it any potentially large issues we might be facing from that stand point for expenditures. >> i think we have known since 2006 that we are underinvesting

in state of good repair. if you look at this line, which is a good indicator of what we ought to be spending, almost double with our capital budget. it's not there but it's close. i think it's always our strategy to push whatever surplus earnings we have or net income into capital and to hold down operating expenses to the extent possible. the risk you are pointing out is that the backlog continues to grow and that we are, we can't keep pace and just the inflation costs on our backlog becomes such a large number, becomes such a large number that we can't chip away. because of the position we're in, our expenditure plan, but the risk of not having enough for state of good repair is an increasingly large backlog.

>> may i comment on that as well, president? i thought that was a really excellent question. in listening to the conversation i am reflecting back on my arrival at the port when we were dramatically cutting our budget i think from the first 10 days i was here we cut it by 20 percent, which was very painful. and if you were to look at a 5 year projections then the numbers much much more horrific than it is now and i think the lessons learned in the historical presentation is really important and it has been that the capital plan has really helped us to guide our investments but also to guide our negotiations with our regulatory partners to be more persistent and effective in seeking grant funds when with we have been shut out in the past and one example of that has been with respect to expenses of the ship repair

yard and the water basin that is there, they have worked very hard to try to get us reclassified from a federal perspective to be eligible for those grant funds. in 2006 our capital plan showed that we would lose 8 piers. one of those piers was pier 38, we now have a new plan for that. one of those piers was pier 31, we now have a new plan for that, and we continue to work at these things. with but as we went along negotiating the master permits for both the cruise ship terminal and the america's cup, worked very very hard to try to direct those investments into state of good repair. some of those investments were the removal of derelict facilities, piles in the pier 64 area, and those are really important as well but making sure that we now one of those repairs was

repairs to the aprons around pier 19 which has a dual purpose of giving us exiting to be able to put more population in pier 19 and that has a direct public benefit for public access but also a revenue benefit. i think the steps we have taken over the last 5 years culminating with the sdig of the council of designation of capital has helped drive those conversations and what you have focused on is we're not done, it wasn't that magic bullet we really need it to be, but i hope that looking backwards gives you confidence that we have the ability to look forward and take action, it's just not going to be easy. >> still a few of my closing remarks. >> please reiterate for the record, it would be music to my ears. >> i really want to commend you and the staff and also led your team for the way you put it together, but i really do,

having seen and probably kim you know better than any of us where we've been and where we are today, it really does reflect a tremendous amount of work and effort. the concerns that we've all raised have been thought about and we are investing well so i want to thank you and your staff. >> i'd like to make one more comment to be clear. i think in terms of what i think would be good for the commission and the staff as far as the next step is concerned, i always hi it helps to do the what-if scenarios and what the options are. i think we're making the case today we have to look a little more urgently and dramatically to be sure the trend lines mirror more what we've seen in the past and i appreciate you've put a lot of conservative assumptions and you have mentioned that management interventions will be necessary, so i think the request i would make is that if you could look at the variables and say, and the ones that you mentioned, what would they and then it helps you to

prioritize, what you should work on faster in terms of what you've put in as a base line. perhaps this could be brought back to the commission in another 6 months so you could see with the benefit of more thinking and more analysis and to work with the real estate division on a little bit more granular basis and make everyone aware whether it's in maritime or real estate what are some of the stones that can be unturned, turned over to be looked at. this is really everybody involved from this stand point to work forward. it's nice to have a goal, it's a little bit different from the public sector from the private sector, but you are getting close to a hundred million. i would challenge you, how close can you get to a hundred million in revenue, maybe better than this forecast. >> thank you, those were excellent suggestions. >> i'd just like to make a

comment. great questions, great answers, very great report. you may not have this information for me right now but maybe you can get it. how much approximately or what percentage do we put back into the ports every year like for structural repairs and all that stuff, do you have any idea? or you can answer that another time. >> i think we'll be able to answer that in the capital plan item, there's a table to that effect. but our policy is to try to reinvest 20 percent of our operating fund. >> so it's about 20 percent. >> it's between two years, the current budget and what we've designated as capital so what we set aside for the next year. the actual capital budget is not 20 percent of the revenues, but we are moving to 25 percent per year policy in 2018 so that will push us closer to that.

when marilyn goes over it she can show you exactly the percent going to the capital budget. >> you can't, it's being recorded, megan >> probably over the last 5 years we have averaged around 13 million dollars a year, anywhere between 10 on the low end and even over 15 million on the high end over *fr for a 5 year period. >> okay, just curious. the other question i had, may be in here somewhere and maybe i've missed it, you say your percentage of -- your vacancy rate now for everything in the port, parking, restaurants, piers? >> i can answer some of it. >> is there any room there for revenue? >> you dpbtd miss -- didn't

miss it in the report, we didn't cover vacancy rates. between our executive director we can get that to you but i don't have it on the tip of my tongue. >> i can tell you. overall vacancy rate for all products is about 8 percent if i recall correctly. in warehouse space it is 0.03 percent, we have virtually no warehouse space left except for some very odd configurations. we have zero restaurant space that is vacant although we have a restaurant that is under construction, that's the former jelly's so we should see those revenues come online and we have a restaurant that eventually we will inherit from the redevelopment agency that's in bankruptcy right now so there might be a opportunity right there. we have a vai tail retail space opportunity at pier 33 which you will be hearing about at your next

commission meeting, but more or less those vacancies are pretty low. i forget the office vacancy rate number. and i don't believe we have any parking stalls that are vacant but we mostly sell parking on an hourly basis per our permits. i think that covers most everything. then on the maritime side there's capacity at the car go facilities probably. >> how about on the ship repair side of it, can that be expanded? >> that's a great question for a director of maritime. >> i *r and i think if nate could tell us what assumptions for vacancy did you put in the forecast. >> in the ship repair capacity in the last 5 years it's grown. the total revenue by ba systems has gone from there 35 million to last year about 60

million, so we have really grown that business to unprecedented levels. there's a finite amount of days with the dry docs we have. if we could get another dry dock forward that could help but right now it is reaching into the high part of its utilization. >> nate is going to answer a question. >> i think what we'll do is a table that details the vacancy rate of the various facilities and send that to the xlition. it is going to be in the report you will hear in two weeks but neither nate and i can remember the figures but we were just working on the figures so we'll get it over to you. >> nate cruz with the real estate division. the vacancy assumption for the forecast that you have been presented with is basically a stable rate, i don't recall the exact

percentage, i apologize for that, but it includes a similar, very, very low vacancy rate which the director just pointed out. i did also want to point out, we talked a little bit about granularity of forecasts, our budget forecast has been within 2 percent and the methodology we have kept true in prior periods. where i was a little too conservative was the parking forecasts and based on conversations we have had in former years i got a little more aggressive and hopefully we will see a tighter performance of budgity to actuals in the future. >> the question would be the leases. did we have some leases executed a long time ago and even with cip increases if they were to come online today would the jump be