A Review of Trust Options & other Recommendations April 26, 2011

1. Evaluate a range of Trust Concepts for expenditure of remaining CHOICES funds that reduces services and extends the timeframe for expenditures up to the model that expends only interest. 2. Return with information on the drawdown of the fund balance (exit strategy).

3. Report recommendation for CHOICES future from Advisory Board. 4. Cease to expend funds on advertising. 5. Report recommendation from CHOICES Advisory Board on opinion of cessation of accepting new applications.

Completed actions: 1. Advisory Board recommendations sent to BoCC on February 18, Advertising cancelled February 2, 2011.

Current recommendation from CHOICES Advisory Board: 1. Continue operations of CHOICES program with a targeted end date of December 31, Continue accepting applications for new members.

3. Create adequate Claims Reserve Fund to cover run-out of claims. 4. Develop “exit strategy” to end program in an orderly, professional, and economical manner. At the April 4 Advisory Board Meeting these recommendations were reaffirmed by the Advisory Board.

Trust Options 1. Reviewed earlier studies of Trust discussions. 2. Discussed development of Trust concepts with actuaries and public investment professionals. 3. Developed several Trust scenarios. 4. Received return estimates from investment professionals.

5. Developed assumptions for actuary analysis. 6. Reviewed analysis with CHOICES Advisory Board.

 Current CHOICES Fund investments limited according to F.S  The portfolios are invested entirely in Federal Agency, U.S. Treasury, and Municipal Obligation securities. The securities are allocated among high quality issuers rated AAA and AA.  Could set up separate Trust Fund with different investment options.

 This Trust could, by Ordinance, be allowed to invest in higher risk/higher return investments.  Could cause loss of principle.  Would involve costs to set-up and maintain.

1. All Fund Balance in Trust; spend only earnings; assume benefits at 2008 levels with adjustments. 2. All Fund Balance in Trust; spend only earnings; assume benefits at 2011 level with adjustments. 3. Spend down principle; accumulate earnings to spend when principle fully expended.

 End CHOICES benefits Dec. 31,  Cease taking new applications June 1,  Release six employees August 1,  Release two employees Sept. 1,  Cancel contracts by Dec. 31,  End Dec with two staff to handle claims run-out, claims disputes, records, etc.

 During January-June 2012 monitor claims run-out, pay all bills, dispose of assets, close program.  Between April- June 2012 release all employees  If Option chosen continues CHOICES providing benefits release of employees changes.

100% Fixed Income (returns as of 12/31/2010) Category 1 YR 3 YR 5 YR 10 YR Enhanced Cash 0.97% 2.25% 3.45% 3.32% 1-3 YR 2.31% 3.78% 4.53% 4.16% 1-5 YR 3.33% 4.68% 5.16% 4.46% 1-10 YR 4.40% 5.42% 5.70% 4.63% Mean 3.52% 3.53% 3.53% 3.53% Source: Public Financial Management

Multi-Asset Class (Equity: Fixed Income) Equity/Fixed Mix 1YR 3YR 5YR 10YR 60%/40% 12.72% 3.67% 5.80% 3.53% 50%/50% 12.17% 4.77% 4.44% 3.99% 30%/70% 9.42% 3.71% 5.08% 4.82% Mean 11.44% 4.05% 5.11% 4.11% Source: Public Financial Management

1. Fixed Investment Only: Return 3.5% 2. Mixed Asset Equity/Fixed Mix 30% Equity/70% Fixed Return 5.0%

 Fixed Income Model Fund Balance Invested $38,896,375 Rate of Return (Fixed Income) 3.5% Annual Earnings $1,357,138  Mixed Asset Model Fund Balance Invested $38,896,375 Rate of Return (70% Fixed/30% Equity)5.0% Annual Earnings $1,938,769

 Benefits at 2006 level.  Eliminated dental benefits and all external funding.  Income identical each year.  Program expense rate increase 10% per year (primarily medical cost inflation).  Admin expenses increase 4% per year.  Solve for number of members to breakeven.

Sample Income Statement- Fixed Income Model- Benefits at 2008 Level Year Revenue 1.357M 1.357M 1.357M Program Exp..965M.950M.934M Admin Exp..391M.407M.423M Total Exp M 1.357M 1.357M Members at breakeven

Sample Income Statement- Mixed Asset Model- Benefits at 2008 Level Year Revenue 1.939M 1.939M 1.939M Program Exp M 1.532M 1.516M Admin Exp..391M.407M.423M Total Exp M 1.939M 1.939M Members at breakeven 1,

 Mixed Asset model may show principle loss.  How do we chose the 600-1,000 members?  What happens to the 3,000 who are dropped?  Do we develop new eligibility criteria?  Do we redesign the benefit package?  Will we maintain a waiting list?  Will eligibility change during the year?  How will we handle years when spending exceeds revenue?  Should we allow fewer in the program to minimize potential overspending?

 Dealing with a waiting list requires evaluating applications twice.  Should we consider a limit to how long an individual can be on CHOICES?  Removing up to 82% of membership will create incentive to use services as plan ends.  If Affordable Care Act goes into effect may have to reinvent CHOICES again.  Low membership puts Admin expense over 20%-25%.

 Medical & Rx Benefits at 2011 Level.  Eliminated dental and external funding.  Income same as Option 1.  Program and Admin expenses estimated as in Option 1.  Solve for number of members to breakeven.

Sample Income Statement- Fixed Income Model Year Revenue 1.357M 1.357M 1.357M Program Exp..965M.951M.932M Admin Exp..391M.407M.423M Total Exp M 1.357M 1.357M Members at breakeven

Sample Income Statement- Mixed Asset Model Year Revenue 1.939M 1.939M 1.939M Program Exp M 1.532M 1.516M Admin Exp..391M.407M.423M Total Exp M 1.939M 1.939M Members at Breakeven

 Mixed Asset model may show principle loss.  How do we chose the members?  What happens to the 3,000 who are dropped?  Do we develop new eligibility criteria?  Do we redesign the benefit package?  Will we maintain a waiting list?  How will we handle years when spending exceeds revenue?  Will eligibility change during the year?  Should we allow fewer in the program to minimize potential overspending?

 Dealing with a waiting list requires evaluating applications twice.  Should we consider a limit to how long an individual can be on CHOICES?  Removing up to 75% of membership will create incentive to use services as plan ends.  If Affordable Care Act goes into effect may have to reinvent CHOICES again.  Low membership puts Admin expense over 20%-25%.

How it works:  BoCC determines length of Trust.  Fund Balance is placed in Trust with expenditure limited to annual fraction of principle.  Interest accumulated to be expended after principle exhausted.

Assumptions:  Ten year life of Trust.  Earnings rates as with Option 1.  Benefits at 2008 levels; dental benefit and External Funding eliminated  Equal funds available until principle exhausted.  Expenses calculated as in Option 1.  Interest earned over life of Trust: Fixed Only: $8,650,856 Mixed Asset: $13,545,208

Sample Income Statement: Mixed Assets 2008 Benefits Year Revenue 3.890M 3.890M 3.890M Program Exp M 3.367M 3.345M Admin Exp..503M.523M.544M Total Exp M 3.890M 3.889M Members at Breakeven 2,249 2,090 1,904

Summary of members through 2021: Accumulated interest as 2021: $8,650,856 Could continue program for 2.2 years at lower membership Year Members1,7191,5531,4011,2641,

Mixed Asset Model Since starting Fund Balance is the same in both models, projected income statements are the same. Accumulated interest as 2021: $13,545,208 Could continue program for 3.5 years at lower membership

Sample Income Statement: Fixed Income 2011 Benefits Year Revenue 3.890M 3.890M 3.890M Program Exp M 3.365M 3.347M Admin Exp..503M.523M.544M Total Exp M 3.889M 3.890M Members at Breakeven 1,719 1,553 1,404

Summary of members through 2021: Accumulated interest as 2021: $8,650,856 Could continue program for 2.2 years at lower membership Year Members1,2681,1451,

Mixed Asset Model Since starting Fund Balance is the same in both models, projected income statements are the same. Accumulated interest as 2021: $13,545,208 Could continue program for 3.5 years at lower membership

 About 1,800-2,000 CHOICES members will have to be dropped.  How do we select the 1,200-1,700 to remain in the program?  All the issues of eligibility and benefits remain from Option 1.  If Affordable Care Act begins in 2014, CHOICES may have to be restructured again.

 Mixed Asset model could result in principle losses.  Around 2016 admin expense will exceed 15%.  Continuing CHOICES for ten years will continue public criticisms of the program.

 Developing a transition to a smaller CHOICES will be difficult.  We will essentially be running two operations at once: (1) Close down of a 3,600 member plan and (2) a start-up of a new plan.

 New eligibility rules may need to be put in place and applications will need to be evaluated.  If benefits are to be cut further we will need to work through adjudication issues with Blue Cross.  New benefit pricing will be needed from the actuary.  Public reaction is unknown