Reform Child Care Financing and Fund Child Care as a Public Good
In This Section:
- Base child care funding on the true cost of care.
- Adopt equitable, robust, stable, and durable revenue-generating policies that infuse significant, additional public investment into the system.
- Create morę stable and less burdensome financing mechanisms.
Without a diverse, well-trained, and well-compensated workforce, we will fail to implement a transformative new vision of child care.
Yet, for that vision to become a reality, policymakers must recognize child care as a public good that requires substantial, ongoing investments. Unfortunately, the current business model of child care is a case study in broken markets, where public funding is not correlated with the actual cost of care, families have trouble finding affordable options that meet their needs and budget, and quality and equity are unattainable. This is especially true for infant-toddler care and family child care educators and the families who use those programs. The heavy reliance on a market model based on what families can or are willing to pay, rather than on public funding, was crippling the child care sector, even before the COVID-19 pandemic.
Dismantling this broken system means reimagining how much public funding we invest, where the funding comes from, and how it gets to individual programs, educators, and communities. In the past 3 years, many states began to take the following actions to move towards a child care system that relies more on public dollars to support programs and the workforce, provide families financial relief, and offer every child—whatever their ZIP code or their race—a strong start in life.
Base child care funding policies on the true cost of care.
The broken market and a federal history of underfunding core programs means that child care providers who are paid with public funds are routinely paid based on what parents are charged, rather than what it costs to provide care.
And, all too often, even the true cost faced by the provider does not include an adequate wage and benefits, condemning much of the early childhood workforce to accept poverty wages, work multiple jobs, and receive public benefits for food and housing. Recognizing reimbursing programs based on a “market rate” is unsustainable and inequitable, states began to embrace alternative approaches.
The number of states conducting cost of care studies increased during the pandemic. To date, New Mexico, Virginia, and the District of Columbia are the jurisdictions that have increased subsidy rates based on these studies. In addition, the 35 percent increase in subsidy rate approved in Vermont through H217 in 2023 is the state’s first effort to work towards a rate that approaches the cost of quality. Indiana also implemented a transitional rate structure that increases rates by at least 20 percent, while the state establishes a permanent structure that is based on actual cost of care.
In 2023, the California legislature approved an increase in reimbursement rates totaling $1.4 billion over two years, which is expected to increase wages for child care teachers. Lawmakers also included a charge to develop an alternative cost modeling methodology and to implement it by 2025, so that the state can determine future rates by the cost of providing services, rather than the market.
Virginia is among the first states to shift away from establishing reimbursement rates using a market rate survey. Market rates, which are based on a state’s examination of the average price families are charged, do not consider the actual costs of providing high-quality child care (like ensuring providers are paid fair and adequate wages and family costs are kept low). Instead, Virginia sought and received federal approval to use cost estimation modeling to calculate subsidy reimbursement rates as a way to more accurately determine the true costs to run a high-quality child care program.
The impetus for change came from supportive state policymakers in the legislature and Virginia’s Department of Education (VDOE). In January 2021, state Senator Jennifer McClellan introduced legislation that would provide portability for background checks, allow the state to contract with providers based on enrollment (instead of attendance), and direct VDOE to identify and analyze advance financing strategies that reflect the true cost of care. At the time, Virginia was using data from a triennial market rate survey to set its provider payment rates.
VDOE has been a key player in moving Virginia to more accurately reimburse providers based on the true cost of care. After enactment of the legislation in 2021, VDOE sought federal approval to use an alternate cost modeling methodology to estimate what it actually costs providers to deliver high-quality care. VDOE partnered with national experts to develop an alternate cost estimation model. The state agency then asked local providers, advocates, and policy experts for feedback to ensure it addressed Virginia’s unique needs. As a result, the cost estimation model considers program setting, size, and geographic variations in wages and operating costs. Licensing standards serve as the baseline for the cost of meeting basic health and safety standards. The cost estimation model uses enrollment capacity and assumes the need to offer competitive compensation for educators. There is also a hold harmless provision in place, so a provider’s rate won’t decrease from what it was using the prior triennial market rate survey.
In May 2022, Virginia received federal approval to use the alternative cost estimation model in lieu of a market rate survey. In 2022, despite a shift in the state’s political landscape after the 2021 elections flipped the governor and House of Delegates, resulting in a divided state government, Virginia was still able to include language in its final budget bill (page 122) requiring child care reimbursement rates to be based on the true cost of care using the methodology developed by VDOE over the next two years.
Moving to an alternate cost estimation model also brings changes to the structure of family copayments. As of January 2023, the updated copayment structure will help reduce the burden on families by setting the maximum fees for monthly family copayments to not exceed seven percent of family income. Families earning less than the poverty level (who currently make up 43% of children enrolled) would not pay a fee under the proposed changes. Families at 100-200percent of Federal Poverty Level would pay $60 per month in comparison to the $135-185/month under the current structure.
Virginia’s road to reforming the way it funds its child care system— even with a divided state government— is built on having a strong coalition of advocates, the support of child care champions in the legislature, and a state agency willing to think innovatively. Moving away from the market rate survey and using the new cost model analysis will help Virginia’s child care sector achieve financial sustainability, while reducing costs for families.
Adopt equitable, robust, stable, and durable revenue-generating policies that infuse significant, additional public investment into the system.
A transformative child care system that helps all providers, educators, families, and children thrive requires substantial infusion of public funding. The ECE field has long known this. The pandemic made it impossible for advocates, practitioners, and families to stay silent on this issue.
Louisiana passed legislation in 2021 to dedicate 50 percent of the revenues from the NBA Pelicans specialty license plate and 25 percent of sports betting revenue (up to $20 million) to the state’s Early Childhood Education Fund, which provides matching dollars for localities that invest in early care and education.
In New Mexico, voters supported a ballot initiative in 2022 that amended the state constitution to distribute an additional 1.25 percent annually from the state’s Land Grant Permanent Fund, with 60 percent of that increase dedicated to early childhood education. The state estimates an additional $140 million to fund ECE programs in 2023.
The District of Columbia and Massachusetts both increased taxes on high-income households and dedicated a proportion of the revenue to early care and education.
Vermont enacted a .44 percent payroll tax in 2023 to fund new child care investments that will increase reimbursement rates to providers and make child care more accessible by expanding eligibility and waiving copays for families with incomes up to 175 percent of federal poverty guidelines.
In 2021, Washington State created a new capital gains tax, with a portion of the revenue dedicated to ECE. It was challenged on the basis that the state does not allow an income tax. In 2023, the state Supreme Court ruled that the tax is constitutional. This funding will support the main provisions from the 2021 Fair Start for Kids legislation around workforce support and expansion, increasing affordability for families, and adding infant and toddler care support.
Advocates in some states worked with elected officials to introduce bold funding proposals to address the unprecedented challenges faced by the ECE field. New York legislators introduced a bill that would have appropriated $5 billion annually to build a universal child care system. In Texas, a $2.3 billion funding request was introduced as an amendment to the FY24-25 budget bill to sustain recovery efforts in the child care system that have been supported largely by federal relief funds that expire in September 2023. While neither proposal was enacted, such public proposals by legislators are important to raise awareness of the scale of investment needed and to build momentum for future advocacy. In New York, advocates were able to secure a public commitment from the Governor to invest $7 billion in child care over 4 years.
Create more stable and less burdensome financing mechanisms.
Because of how our country finances child care, funding at the program level can be unstable and fiscally complex and burdensome to manage. In order to keep as many providers operating as possible during the pandemic, states came up with more supportive financing strategies, many of which could undergird a more effective and equitable child care system.
Over the last few years, many states began to base their payment to providers by their enrollment, rather than attendance, which creates more stability to providers’ finances. This includes Oregon, Vermont, California, Maine (ended September 2023), New Jersey, Montana, North Dakota,1 and New Hampshire.2
At least 10 states, including Texas, Massachusetts, Connecticut, Louisiana, Mississippi, North Carolina, New Mexico, South Carolina, Tennessee, and the District of Columbia, used data about community need (e.g., Social Vulnerability Index) to ensure that stabilization funds were allocated more equitably across the state.3
Washington State provided add-on’s to stabilization grants based on equity factors, such as serving child care deserts, communities of color or marginalized, low-income communities.
Massachusetts created a new item line in their state budget for the Commonwealth Cares for Children (C3) Grants and appropriated $475 million for it in FY24. Like the child care stabilization grants from the American Rescue Plan, the C3 grants are intended to be flexible dollars that all licensed providers can use to stabilize and improve their programs. The funds can support personnel costs, recruitment and retention, professional development, program quality improvement, rent or mortgage payments, facilities maintenance or improvements, etc. The formula for determining grant amounts includes an equity adjustment for programs that serve historically marginalized or low-income communities.
