>> thank you, chair farrell, members of the committee. cathy wagoner, [speaker not understood]. the item seeks approval for the airport to accept and expend a grant from the california coastal conservancy for an amount of $200,000. this grant will be used to complete an existing coastal analysis of sea level rise of san francisco airport and to help us plan for future seawall construction. specifically, the grant will be used to consider and plans climate change relating to southern concerns along the san bruno and [speaker not understood] creek which are just northwest of the airport property. this grant is the result of an application between san francisco and san mateo counties and there is no airport match. so, there is not a budget analyst report associated with this and i just would like to say that i appreciate the committee's indulgence in scheduling this prior to the end of the fiscal year when the grant funds will expire.

be happy to answer any questions. >> thank you. i see no questions my colleagues. let's open this up for public comment. is there anyone from the public that would like to speak? ~ questions from my colleagues seeing none, public comment is closed. colleagues, can we have a motion on this item? >> so moved. >> so, it's moved. can we do this without objection? thank you. so, we're approving this without objection. [gavel] >> thank you. so, ms. wong, can we call item number 14? >> item number 14 is a hearing to consider the controller's revenue letter and discussion of the mayor's proposed budget for fiscal years 2014-2015 and 2015-2016. >> thank you. and i know it's sponsored by supervisor farrell. is there a report from the controller's office?

we have kate howard, the mayor's budget director. >> good afternoon, supervisors. kate howard, the mayor's budget director. i will speak briefly about -- to more vied a bit of a budget overview and how the mayor balanced the budget this year. i think following my presentation, the controller will offer some comments on that and then update on the controller's revenue letter. overall the budget this year has, i think you know, is growing to $8.6 billion from 7.9 last year.

the general fund budget is also growing, up from 3.9 to 4.3 billion. we also are increasing the number of staff, growing from about 27,700 to 29,000 over the next two years. this next slide just shows you the breakdown of where we are going to spend our resources. so, about a third in public works transportation in commerce. most of our enterprise departments in that third of the budget. about 19% on community health which is just the health department's budget. and about 13% on public protection as our other next largest category. in the general fund it's always helpful to remind ourselves where we get our resources in the general fund, about 30% coming from property taxes, about 21% from other local taxes. that includes things like our

hotel room tax and sales tax, and then finally about one in every $5 or one out of every $5 that the city takes in come from state or federal revenues. people have asked me why did the budget grow this year. a couple of reasons. the outcome of labor negotiations, several changes at the health department, new things we're doing at the health department including opening the new san francisco general hospital as well as the public safety building and implementing affordable care act. as you all also know, we are implementing public safety hiring plans that will bring on new police officers, firefighters, [speaker not understood] and deputy sheriffs. we also have commit today service increase at the mta which increases the number of staff there. this gives you kind of broad categories of how we balance.

so, [speaker not understood] report we were issued a combined budget shortfall projection of about $66.7 million in the first year and 133 million in the second year. revenue fund balance comprises the largest single solution that we have, about 140 million in the first year and $78 million in the second year. and changes in city-wide costs and departmental costs and solutions make up the remainder of how the budget was balanced. a little more detail on the next slide. general fund revenues growing compared to the joint report by about $18 million in the first year and 14 in the second year. one-time sources also growing by about 64 million in the first year and 34 in the second year. i think it is at notable that we've had some significant improvement in our health department revenue outlook. it's a combination of two things ~.

one, we believe [speaker not understood] revenues at the health department were likely to decline and what they are actually seeing is that they are more stable than they projected. that's a really good sign, a sign we're implementing the affordable care act as well well. secondly, we were assuming the [speaker not understood] realignment funding that we now project is the state will basically keep that level and only take back the $17 million that they took back this year. so, those two things together are largely reflected here in the [speaker not understood] public health revenues. city-wide, these are just major changes in the city-wide cost solution slides. you can look at it in more detail at your leisure. what i would highlight, additional labor costs, the second line, which is showing additional costs that we will incur due to negotiated labor agreements.

and then subsequently health and pension savings. you can see in the first year those saving in health and pension costs that the city is paying the cost almost the cost of our new labor agreement. in the second year slightly more than offset the additional cost than what we previously projected. you can see it also included a 1-1/2% cola for nonprofit service providers as well as minimum reserve in our budget. the budget also includes more funding for capital equipment and it than was projected at the time of the urgent report in the first year but a significant savings in the second year. again, departmental changes and solutions, i mentioned many of these changes already. so, opening the new san francisco general, we've added additional funding to support higher staffing levels for emergency medical transports as well as restoring mental health

and substance abuse treatment services and federal hiv and aids cuts. i mentioned this morning earlier the city came to a two-year labor contract with most of our employees which included a 3% wage increase the first pay period of october of 2014, a 3.25 wage increase in october of '15 and a range between 2.25 and 3.25 starting july 1st of 2016. i already noted the savings in health and pension costs and [speaker not understood] from the health service system remarked this morning about the investments in our employee wellness plans. we have made major investments in capital it equipment and we have made the decision to cash in those investments rather than use refinance or debt to pay for them. this slide just kind of shows you where we're spending in capital investments over the next two years, about $213

million in capital investments. the department receiving the largest amount of that money is the department of public works and that's largely because of the street and road resurfacing being fully paid for out of the general fund in the next two years and that's about $42 million [speaker not understood] of the budget. the next couple of slides just highlight some other thing that i think are notable across a number of policy areas. we talked a good bit about housing already today. the human rights and development side, we've included additional funding for senior nutrition programs and food stamp enrollment. we talked about these already. streets and transportation includes about almost $84 million for street repaving program. to continue to work towards the payment condition of good across the city we'll pave about 1700 blocks over the next

two years, $3 million funding for vision [speaker not understood] and we have eliminated [speaker not understood] over the next two years freeing up 7-1/2 million dollars of resources for the mta. cleaning the urban environment, we've added a new street cleaning crew and arborist apprenticeship program as well as urban forestry current rec and park [speaker not understood] all of which to try to enhance the livability of the city, improve the cleanliness and our tree maintenance. public health, i've mentioned it these highlights already as well the public safety highlights i have also mentioned ~. that is my very high-level summary of what's included in the mayor's budget. and i'm happy to turn it over to the controller to speak about the controller's commentary on the mayor's budget also known as the revenue letter unless you have questions. >> supervisor wiener. >> quick question.

of the 4.3 million -- i'm sorry if i missed this -- how much of that is discretionary versus locked up in some [speaker not understood]? if you don't know off the top of your head you can give it to me later. >> i don't have it off the top of my head, but typically the revenue letter may speak to this. it's usually somewhere around 1-1/2 billion is truly discretionary. the remainder locked up in [speaker not understood] or mandated state and federal programs. >> okay. and i think it's just important for the public to understand they see an 8.6 billion budget and the amount of discretionary general fund budget is actually significantly smaller. thanks. >> supervisor mar. >> thank you, ms. howard. i wanted to ask, could you just go through the labor -- additional labor costs with the negotiations with the various bargaining units, labor unions and over the next three years, what are the increases going to be?

>> are you speaking to the actual dollars of the increases or the percentage? >> percentage is fine. >> great. so, the first year it's a 3% increase starting on october -- the first pay period in october, i think it's october 11th this year. the second year it's 3.25%, also starting the first pay period in october. and the third year it's formula driven increase. ~ a formula driven increase. essentially cpi plus 2.2 -- sorry, cpi plus .25% with a minimum of 2% and a maximum of 3% on the cpi. so, the range effectively of that raise will be 2.25% to 3.25% depending on what cpi actually is during that year and that starts on july 1. >> and then on slide 3 where

you gave your overview, where you talked about the fte positions going up from 27,700 roughly employees in the current budget in the next couple of years to increasing to about 29,000, i was just curious, how does that compare to the past yearses as we had a much larger workforce in the city versus when we made severe cutbacksover the last few years? could you help us compare and understand as we increase it how that compares to prior years ~? >> sure. so, i think these are -- these will be sort of at that peak level of hiring for the city. during the downturn, we eliminated about 1800 positions and this will certainly bring us back to that peak and probably increase it somewhat over that peak. it's largely driven by the increase in staffing at the department of public health, the mta and then our police,

fire, and other public safety hiring plans. >> thank you. >> um-hm. >> okay, thank you, ms. howard. mr. rosenfield? >> so, very briefly, the charter requires the controller's office to comment on the reasonableness of the economic and tax revenue assumptions that's set under the proposed budget and we do that in a report we call the revenue letter which we have issued by 10 days ago. it's available on the website and you have a very briefly -- i'll very briefly talk through some of the highlights from that review ~. generally speaking we found the revenue estimates sitting under the mayor's proposed budget to be reasonable. they generally reflect strong but slow economic impacts revenue growth. i'll touch on a couple of key risk areas that we think we'll need [speaker not understood] in over the next couple of

years, but they include generally speaking continuation of the economic recovery, the strength of our local commercial real estate sector, the phase-in of the city's new gross receipts tax. and then lastly state cuts as they relate to the affordable care act. just to give you a sense of what growth rates are assumed in the budget, on slide 4 this reflects the growth rates that are assumed versus our current year projected estimates for the nine-month report. you can see the proposed budget does, [speaker not understood] and above norm growth rates for most major taxes in the city, [speaker not understood] over each of the two years. [speaker not understood] tax which is -- continues to be predominantly payroll driven growing by 7% in the budget year and then slowing. and you can see kind of a similar pattern with most of these major taxes. the two largest here in terms of kind of -- we'll come back

to commercial real estate market street -- real property tax and real property transfer tax driven heavily by the pace of churn in our commercial office sector in the city. to the extent [speaker not understood] it affects those growth rates. you can see we're expecting continued significant improvement. ~ in almost all of these. just graphically, to give you a sense, we are now back well above peak for all of our local tax revenues here in san francisco. you can see business tax on this chart growing to over -- approximately $600 million at the end of the two-year budget. hotel tax continue to grow. really only tax that is projected to be roughly flat during this horizon is property transfer tax which has been kind of riding this historic plateau for the last couple of years and that's projected to continue ahead into the next several years.

but again, continued economic expansion is assumed in the proposed budget. we think that's a reasonable assumption and it's driving growing but slowing revenue growth. when we -- supervisor. >> thank you. just a question looking at the second into the second year budget [speaker not understood] payroll gross receipts? >> good question. so, tax year -- so, it's tax years and calendar years are a little bit different, but this current calendar year, calendar year 2014 is 10% gross receipts. calendar year 2015 will be 25% gross receipts. calendar year 16 will be 50% gross receipts 50% payroll tax. and those calendar years kind of bridge fiscal years so we'll be in the midst of a couple of those steps during this horizon. we also comment in some depth

in the revenue letter on whether the mayor's proposed budget is meeting or exceeding required spending levels or whether there are certain revenue base lines that have been adopted by the voters with one exception that i'll mention. we do find that the mayor's proposed budget is either meeting or exceeding adopted voter requirements. [speaker not understood] baseline as it has been for many years above and beyond the minimum level adopted by the voters. the board had historically made decisions in the budget process that leads to larger appropriations here than the baseline itself. 13.4 million above the baseline in the budget year, of which a portion is one-time revenue sources. those declined, so, we're up approximately $3 million over the baseline level in the second year of the two-year budget.

>> and with the proposed children's fund, this is in line with the proposed children's fund amendment as amended last week? >> above and beyond the children's baseline, the mayor's proposed budget does assume a growth in the children's fund funding level in year two of the budget from 3 to i believe 3.17% of property tax. so, additional voter approval required. increase is expected there, not quite at the level that is currently pending in committee. i believe the version that is now pending in committee after last week is now 2.25% assuming that second year. but generally speaking, yes, in line with what's pending in committee. >> thank you. >> the only funding requirement that would pier not to be met in the requirement is policing and staffing levels [speaker not understood] would appear to remain below the property required count.

the only other thing to mention in the last bullet here is the other voter approved change that's assumed in the adopted budget is the mayor's proposed budget no longer offsets the peef's contribution to the school by in-kind allowance. for cash allocation is provided to the school district from the budget. again, that's consistent with charter measures pending at the board. just very briefly to touch on some of the reserve highlights from the budget, the budget does, as you know, we've been making current [speaker not understood] contributions to the rainy day reserve. as revenues have pushed up in the current fiscal year, the budget does withdraw the maximum permissible 25% from the school district in each of the two years. so, approximately $19.4 million is drawn out of the rainy day budget for schools in the proposed budget. no additional deposits are expected in either of the two years so we expect to end with

$24.9 million in the rainy day reserves. other one-time reserves which we comment in our 9-month reports, expense in the budget on various one-time budgets, that includes the budget savedings in the recollect and fund [speaker not understood] reserve. the general re serve as is consistent with the board adopted financial policy does grow to 1.5% of revenues in the budget year and then to 1.75% of general revenues in the second year of the two-year budget. and lastly there is a $$19 million, $19.1 million in the reserve [speaker not understood]. that is driven by property transfer tax remaining above the five-year rolling average. no additional deposit is expected in the second year of the two-year budget stabilization reserve so we would expect to end the stabilization -- this budget

period with $140 million in the budget stabilization reserve. so, just to give i a sense of how those reserves compare to our recent past, this is taking our view of the last couple of downturns and booms in san francisco shown as a percentage of general revenues where we're at versus where we were in our prior two cycles. where we were prior to the 2008 recession [speaker not understood] and prior to the .com bust before that. good improvement over the reserve in the last three years, essential not where we would hope to be headed into the next downturn, but we are hopeful we have some time to get there. i think we generally found our reserve position in each of the prior two to be insufficient to carry us through without the need for [speaker not understood] reduction.

briefly to end with a handful of key revenue riskseses, and of course any budget is a projection of future events ~ so any budget has risks associated with it. when we look at the revenue side of the ledger in the proposed budget, these are what we see as the key things to track. the first is that the budget assumes to sustain growth here in san francisco and the u.s. we're now five years removed from the recession. if we complete this two-year budget cycle within seven years, since the end of the last recession that would mark the fourth longest period of expansion in the u.s. in the last 115 years. so, it is certainly worth [speaker not understood]. strength of the commercial real estate sector, the city drives a lot of our revenue picture. we've seen extraordinary strength the last couple of years. property transfer tax remaining at high levels. it also fuels property tax for

us when properties turn over and reassessed. we know from past experience that one of the first places we see slowing is in commercial real estate and that would translate into slowing transfer tax revenues when that does occur. the implementation of the gross receipts tax has inherent risk. it's the largest tax revenue shift we've seen in the city the last 20 years and it does involve changing [speaker not understood] revenue source from one base to another. those mechanisms [speaker not understood] to insulate the city from some of that risk, but some risks remain. we will certainly be watching carefully and working with the treasurer as that new tax system is rolled out. and then one of the newer ones in the last couple of years as the state and federal budget pictures have kind of come to closure in a more stable state, the newer risk that comes from the state to us is really related to the amount of

realignment revenue we are likely to lose to the state of california to pay for their own budgetary costs associated with the affordable care act. very difficult for counties to estimate at this point. there are reasonable assumptions assumed in the mayor's proposed budget about the loss of realignment revenue to the state, but we really fundamentally may not know those for several years? some cases and, so, another one that we will be watching. a quick whirlwind through the revenue letter. i'm of course happy to answer questions the committee may have. >> thank you, mr. rosenfield. any questions, colleagues? anybody wish to comment in public comment? seeing none, public comment is closed. [gavel] >> can i have a motion to [speaker not understood]? >> [speaker not understood]. >> [speaker not understood] [gavel]. >> can i have a motion to rescind the motions to continue items 3, 4, 6 and 11?

motion to rescind those votes? motion, take that without objection. [gavel] >> and then i'd like to, colleagues, entertain a motion to go into recess and in particular until wednesday morning in particular we're going to just note that we're going to hear items 1, 2, 3, 4, 6 and 11 on wednesday morning. so, can i have a motion to that effect? we can take that without opposition. [gavel] >> we are in recess. thank you. [recess]