Changing up the child care block grant to meet market challenges

Across the Ninth Federal Reserve District, it’s easy to find stories about communities’ struggles with a challenging child care market. Rural employers will tell you it’s a struggle to recruit young workers because there aren’t spaces available for infants at local child care providers. Families will tell you that when child care is available, high prices put it out of reach. And despite the high prices, child care operators will tell you that it’s difficult to find employees and balance their budgets.

Local leaders are starting to feel like something has to give.

“We lose good, young teachers from the school system every year because they can’t find a provider with a spot for their baby,” said Jane Wildung Lanphere, executive director of southwest Minnesota’s Luverne Area Chamber of Commerce. “Meanwhile, children aren’t in the most enriching environments, because parents can’t find—or afford—quality child care. And child care providers are leaving the industry, because they see they can make more money doing just about anything else.”

The 2014 reauthorization of the federal Child Care Development Block Grant (CCDBG) provides an opportunity to examine how changes in public policy address some of the challenges facing child care markets. The CCDBG, a program of the U.S. Department of Health and Human Services, provides federal funding that combines with state dollars to provide child care subsidies targeted to families earning relatively low wages.

Earlier this year, Congress added $2.4 billion to CCDBG funding for Fiscal Year 2018, in part to help states fund changes made to the program through the reauthorization. The addition brings the total CCDBG amount to $5.2 billion and represents the most significant increase in funding for the grant since its inception in 1990. However, the total will still fall far short of covering the cost of care for the majority of eligible children nationwide.¹  Estimates show that child care subsidies reach less than 20 percent of the more than 13 million eligible children in the U.S.² 

According to some state administrators, child care providers, and industry leaders, the program changes that accompanied the 2014 reauthorization spurred improvements for parents and child care providers alike, such as reducing some paperwork requirements and providing more resources to improve program quality. But observers note that reauthorization fell short of fully addressing other challenges. For example, reimbursement rates for providers continue to fall short of the market-rate cost of providing quality child care, and funding shortfalls and eligibility requirements leave many low- to moderate-income families without access to subsidies.

A vital resource

Like other federal block grants provided to states, the CCDBG provides federal funding with some guidelines attached but gives states latitude in how they design their programs. Among funding streams for public child care assistance, the CCDBG is the largest and can be combined with other streams, like Temporary Assistance for Needy Families, Head Start, or state-funded pre-K dollars.

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CCDBG subsidies are often a vital resource for almost 1.4 million children in more than 820,000 families and for the child care providers that serve them. Among Ninth District states, not including Michigan, more than 33,000 families and about 58,000 children access subsidies. Children are eligible for subsidies until they turn 13.

Nationwide, public child care assistance represents about 30 percent of the revenue child care programs collect, according to data from the 2012 Economic Census. Families paying out-of-pocket tuition represent the majority of money in the child care market.³ 

More money in family budgets can create a bigger child care market overall. “CCDBG allows some families to purchase quality child care when they otherwise would not be able to, which increases the number of child care providers,” says Patty Butler, Early Childhood Services Bureau chief, Montana Department of Public Health and Human Services, who oversees the administration of the CCDBG in Montana.

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CCDBG subsidy programs have typically provided payments to child care providers in all sorts of settings. Language in the reauthorization of CCDBG emphasizes formal, licensed, home- and center-based child care sectors as opposed to unlicensed family, friend, and neighbor (FFN) care.⁴  Still, of the states in the Ninth District, only Wisconsin prohibits payments to FFN providers.

The choice about provider settings is one of several decisions state policymakers can make regarding the CCDBG program, within certain federally determined boundaries. Some others relate to family eligibility parameters, provider requirements, and reimbursement.

Reauthorization revisions

Prior to the 2014 reauthorization, the federal government’s CCDBG program rules were primarily focused on parents’ participation in the labor force. But with the reauthorization, which represented the first significant changes to the block grant in 20 years,⁵  came new rules that reflect the important role child care settings play in a child’s early development.

Major changes to the CCDBG include:

• Allowing more flexibility regarding continuity of care for children as their families’ economic situation changes—i.e., changing program parameters to make it easier for children to remain in the same child care environment regardless of fluctuations in their parents’ work situation.
• Establishing a baseline for health, safety, and quality across states, such as annual monitoring of providers and comprehensive background checks for child care staff.
• Ensuring all families have access to information about child care providers. One provision is to maintain a consumer education website that lists provider information, such as quality ratings.
• Increasing the amount of CCDBG funding states are required to devote to quality improvement.⁶ 

Every state in the Ninth District took a different approach to implementing the rule changes, depending on their existing programs, their legislative calendars, and decisions of their agencies that manage CCDBG funding. According to conversations with state administrators and child care providers, reauthorization changes have been implemented gradually, and this year’s federal funding increase offset some of the associated cost increases.

Implementation effects and considerations

So, how is the implementation of the 2014 rule changes affecting the child care market? Ninth District child care providers note that the increased flexibility introduced in the CCDBG reauthorization has improved continuity of care for children and that an accompanying reduction in paperwork burden has freed up resources. Some states are reducing “cliff effects” that occur when benefits drop off at a specific income level and leave families worse off if the parents take advantage of higher-paying opportunities at work. States are also aligning reimbursement rates based on higher levels of quality. However, the reauthorization hasn’t enabled the CCDBG program to reach every eligible family, and it hasn’t been universally praised.

Flexible schedules, reduced paperwork

The rule changes regarding continuity of care were particularly sought-after by many providers and families, said Heidi Hagel Braid, chief program officer at First Children’s Finance, a Minneapolis-based nonprofit that provides financial and business-related technical assistance to high-quality child care providers that serve low- to moderate-income families.

According to child care center owner Mary Rotter, the changes to CCDBG reflect both the demands on providers and the unpredictable work hours of the parents they often serve. Rotter’s center is in Detroit Lakes, a small city in northwestern Minnesota. She was inspired to return to her home city to open a child care program after teaching kindergarten in St. Paul, where she witnessed the advantage high-quality early learning programs gave children when they entered the K-12 system.

Prior to Minnesota’s changes in the wake of reauthorization, a family’s child care hours were often tied to the hours a parent worked at the time of their initial application. That created a lot of uncertainty for parents with unpredictable schedules and the providers who served them.

“It’s not like they’re losing their jobs or bouncing around—they just don’t get a regular schedule,” Rotter explained. “We had one mom whose hours varied a lot depending on what contract her manager was working on. It was beyond her control.”

Those sorts of schedule changes would create chaos for Rotter and the family alike, she said. While county workers recalculated and reprocessed the case based on the mother’s new schedule, Rotter would often wait several weeks for payment, without any assurance that it would actually arrive.

The need to ensure efficient use of their licensed capacity makes this sort of uncertainty risky for child care providers, according to Hagel Braid. “Before the changes, a parent might have their authorized hours jump around when their schedule changes,” she said. “For providers, filling in shifting gaps in a schedule can be difficult and create unpredictability in their cash flow.”

In South Dakota, Pam Ramp said the changes brought on by CCDBG reauthorization have been a “godsend” in helping reduce the amount of required paperwork. As the owner of Banana Bunch Learning Center in Rapid City, her work includes maintaining compliance with child care subsidy requirements. Child care assistance helps pay the costs for roughly half of the nearly 200 children attending her center.

“Before the changes, we’d fill out pages and pages of paperwork,” she said. “I understand the need to follow the rules, but the level of oversight went way too far.”

Back then, compliance meant constant paper shuffling, frequent payment delays as the county sorted out a family’s new eligibility, and frustration for everyone involved. Now, a family’s schedule is typically adjusted on an annual basis, and subsidies are less tied to a parent’s specific work hours.

In addition to easing the process for families and their child care providers, the new flexibility about schedules and the longer renewal timelines are likely to have a positive impact on the caseworkers who manage the subsidies. For example, the Montana Child Care Resource and Referral Network provides case management for Montana families who have child care subsidies. A staff member may be responsible for managing as many as 150 cases. Reducing the frequency with which caseworkers must recalculate eligibility and report relatively small changes in a family’s income or work hours can free up those workers’ time to respond to other family issues and questions.

Decisions, decisions: Costs vs. goals

The 2014 reauthorization increased the minimum share of federal CCDBG funding states must set aside for quality from 4 percent to 9 percent. This directed more funding to quality enhancements, such as training teachers and implementing research-based curricula, and reflects research showing that high-quality programs have features consistent with supporting child development.

However, devoting a larger share of the block grant to quality enhancements leaves less federal money for states to spend on payments to child care providers. Therefore, state policymakers must often choose whether to serve fewer families, reduce reimbursement rates to providers, or use additional state revenues to make up the difference.

State programs have set different income-eligibility levels, parent copayments, provider reimbursement levels, and other requirements. State policymakers use these levers to balance funding constraints and program goals, creating different pools of eligible families from state to state and offering programs with varying access to environments rated as high-quality.

Some states also set different income-eligibility levels for entering and exiting the program. For example, the maximum income a single parent with two children can earn in a year before he or she begins accessing child care assistance is lower in Michigan and Minnesota than in North Dakota. (See Figures 1 and 2.) However, if the parent is already accessing subsidies, a Michigan or Minnesota family can earn a much higher income than a family in North Dakota. As families in Michigan and Minnesota earn more money, their subsidy value decreases until they reach an exit threshold, helping to lessen the “cliff effect.”

This fall, the Wisconsin Department of Children and Families (DCF) is also implementing a higher exit level and a method to mitigate a sharp drop-off in benefits.

“We believe that no government program should discourage people from accepting a promotion or working more hours,” said a spokesperson for the Wisconsin DCF. Under this plan, “parents remain eligible to receive the child care subsidy while they move up the job ladder. For every $3 they earn, their subsidy is reduced by $1 until they have phased off or reached 85 percent of state median income [$75,413 in 2017].” (See Figure 1.)

Families generally make co-payments when they access child care assistance. These also vary greatly across the Ninth District. For example, a single parent with two children who earns $26,000 pays $780 per year in Michigan or Minnesota, but $3,120 per year in South Dakota. (See Figure 3.) Co-payments decrease with more children in a family or lower levels of income.

The differing eligibility income levels and co-payments add nuance to a conversation about how many families states within the Ninth District serve. For example, Minnesota is the only district state that doesn’t serve every eligible family applying for child care assistance. The state maintains a waiting list for families that qualify but are unable to gain access to services because all of Minnesota’s combined state and federal funding for child care assistance has already been committed to other families.

However, while other states lack a waiting list, their income limits may be lower and co-pays may be higher than in Minnesota. As a result, those states serve a smaller portion of low-income families with young children. In addition, families with child care subsidies in these states may lose access to child care assistance before their wages allow them to cover the full cost on their own.

Even when they do maintain their access to assistance, high co-payments leave little room for error for parents who are walking a financial tightrope. And parents aren’t the only ones who may feel pinched: the reimbursement rate paid to child care providers by state governments often fails to cover the true cost of providing high-quality child care.

Rethinking reimbursement rates

States have a considerable amount of flexibility in determining how much they pay child care providers for their services. Rates are typically set based on a statewide survey of providers. In Minnesota, survey data determine rates by the age of the child, the type of child care provider, the provider’s location, and a time unit—hourly, daily, or weekly. As a result, a provider will receive one of more than 2,000 listed rates. Meanwhile, North Dakota has 34.

With so many variables involved, reimbursement levels vary widely across the Ninth District and within states. The reauthorization of CCDBG encouraged states to set child care provider reimbursement rates that would cover tuition at the 75th percentile price in a state’s most recent child care market rate survey. Only South Dakota meets this standard within the Ninth District.

Apart from South Dakota, the reimbursement rates in Ninth District states can be 25 or 30 percent lower than what those providers actually charge their clients. They also may fall far short of the actual cost of care. As we detailed in an earlier article, some states pay higher rates to providers that have achieved a high quality score—but even these bonus payments can fall short.

In the Ninth District’s Sawyer County, Wisconsin, the maximum monthly rate paid by the state for an infant in a child care center is $552.⁷  Staffing ratios require one worker for every four infants. A center serving four infants would thus receive about $26,500 per year from the state to cover a full-time worker’s salary, plus the costs for space, equipment, and other resources necessary to care for infants. Even a highly rated center receiving the state’s quality-based bonus payments would receive only $33,100.

In Minnesota, Rotter said that her county’s quality-boosted reimbursement rate still falls short of the full cost of providing care. While it is discouraged by language within the CCDBG reauthorization, states can require parents to pay the balance between a state’s reimbursement rate and a provider’s full tuition. The extra payments come on top of a parent’s co-pay, and may place high-quality care out of reach for parents with low incomes.

“If the state increased reimbursement rates, parents would have a lot more choices,” said Rotter. “Right now, especially for infants, open slots are so rare that parents just pick the first place that fits within their budget. And if the family is using their child care assistance allowance as their budget, that allowance might not cover the highest quality.”

Hagel Braid said that having low reimbursement rates is especially problematic in a field like child care, where a 3 percent profit margin is considered wildly successful.

“We pay a lot of attention to program quality in child care, which is extremely important,” she said. “But we need to pay a lot more attention to business quality in the field, and that requires understanding what it actually costs to care for children.”

Hagel Braid cited the language in the CCDBG reauthorization that allows states to experiment with rate-setting. She said a cost study, which would inform state lawmakers about the actual costs of providing child care, would likely be a better basis for setting rates than the current survey methodology.

Cyndi Cunningham, a longtime home-based child care provider and the public policy director for the in-home-child-care-focused Minnesota Child Care Provider Information Network, echoed the need for higher reimbursement rates in Minnesota. Managing the gap between reimbursement rates and a provider’s tuition can be particularly difficult for in-home providers because of the unique relationship between providers and parents.

“At a child care center, there are likely back-office staff collecting payments from parents, as opposed to teachers collecting,” she said. “For in-home providers, we’re collecting the money ourselves—and it becomes a very hard dynamic to manage when we have to ask parents for more money, especially when we know it is difficult for them to afford the co-pays as it is.”

Confusion over conflicting requirements

Still other parts of CCDBG reauthorization can be challenging for providers to manage. For example, the regulations increased the number of background checks that will be required for staff and adults who potentially have unsupervised access to children, such as people living in a residence where a home-based child care program operates.

According to Cunningham, changes to licensing and safety requirements can be especially confusing in a state like Minnesota, where rule changes are implemented by the counties. It’s not unusual for providers to serve families from multiple counties, she said, which can result in providers receiving what feels like conflicting information.

“In-home providers do not have administrative staff,” Cunningham said. “It’s just us trying to manage all of the rules and regulations after spending all day with the children.” Truly simplifying paperwork for family providers might require a one-stop portal that bypasses the need to navigate different county systems, she added.

Looking ahead

As states continue to implement their reauthorization plans, state administrators, child care providers, and market observers will watch the impact of CCDBG reauthorization on subsidy use, continuity, and provider availability. While more is likely needed to reach all low- to moderate-income working families and allocate enough resources to providers, reauthorization has led to changes that will likely benefit families and their children.

“In general, we anticipate a reduction in the number of families who have previously fluctuated on and off of the program and an increase in the stability of child care,” said a Wisconsin DCF spokesperson.

Looking ahead, continued funding is needed in order for states to meet reauthorization guidelines. That reality has implications for the decisions a state makes. For example, if a state raises provider rates this year with the funding increase, but CCDBG funding drops off in the future, states would be left facing budgetary shortfalls—requiring them to serve fewer families, devote additional funding to the program, or make other cuts that could affect program quality.

“To implement those provisions you need some longevity in funding. If the federal funding doesn’t stay, we’re all in trouble, because we put all of these good things in place but we won’t be able to afford to continue them,” Montana’s Patty Butler said.

Butler also noted that one way to improve the CCDBG program is for states to establish processes for sharing best practices in policies, procedures, and strategies, as all states are wrestling with similar issues regarding child care subsidies. Meanwhile, a Wisconsin DCF spokesperson noted states would benefit from more flexibility, as “the current act is unnecessarily prescriptive on many levels.”

Overall, the 2014 CCDBG reauthorization changes appear to have helped keep families in child care assistance, increase resources for provider quality improvements, and support higher reimbursement rates to providers. While reauthorization has addressed a number of stumbling blocks in child care markets, challenges remain. For example, reimbursement rates continue to fall short of the cost of quality and many low- to moderate-income families still don’t have access to subsidies. As the CCDBG program evolves, its impact will continue to affect children’s experiences in child care settings and the ability of parents to enter the workforce.

Endnotes

1 Child Care in the FY 2018 Omnibus Spending Bill, Center for Law and Social Policy, 2018.

2 Nina Chien, Factsheet: Estimates of Child Care Eligibility and Receipt for Fiscal Year 2013, U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation, 2017. Note that eligibility here relates to federally recommended eligibility guidelines, and not to the state-determined guidelines that ultimately determine families’ eligibility.

3 Child Care in State Economies, Committee for Economic Development, August 2015. This resource includes all sources of public child care assistance, not just CCDBG.

4 Home-based child care is typically provided in a regulated home environment, usually by one or two people, while child care centers provide care in a regulated space constructed or modified specifically for caring for children. Centers typically serve much larger numbers of children compared with home-based child care.

5 Overview of 2016 Child Care and Development Fund Final Rule, U.S. Department of Health and Human Services.

6 Ibid.

7 Child Care Subsidy Maximum Rates, Wisconsin DCF.