Lee presented the $6.83 billion budget Wednesday to the Board of Supervisors and many other city officials who gathered at City Hall for the announcement.
The board will have to give final approval to the budget by the end of July and can also propose changes to it.
Lee said his proposed budget "reflects a very solid collaboration" between city officials and residents and will "create a foundation for years to come."
His budget includes more than $106 million in reductions to city departments, including $31.7 million from the Department of Public Health and $25.8 million from the Police Department.
Much of the savings to the police budget come from the mayor's request that a wage increase set to go into effect on July 1 be avoided.
Lee said his proposed budget includes no layoffs to police officers or firefighters.
A large part of the budget deficit was also bridged by higher tax revenue than expected, partly due to a drop in unemployment in the city from 10 percent in January to 8.5 percent this month.
"The city is on the rebound already," Lee said.
The mayor's proposal came after 10 budget town hall meetings around the city and many meetings with city officials, as well as labor, business and neighborhood leaders that resulted in about $28 million in changes to the plan before it was submitted to the board.
Supervisor Carmen Chu, who worked closely with Lee on the proposal, said the collaborative budget process this year was a change from previous years with former Mayor Gavin Newsom, who was elected last November as the state's lieutenant governor, and should lead to less acrimony when the board debates the proposal.
"The key difference is a very concerted effort to work together ahead of time," Chu said.
But other supervisors worried that some departments are being more hard-hit than others in Lee's proposal.
Board President David Chiu said, "It's important for us that we're sharing the sacrifice."
For more information about the mayor's proposed budget, visit www.sfmayor.org/index.aspx?page=415.