Analysis of the 2008-09 Budget Bill: Education

Child Care and Development

The state supports a variety of child care and development programs. It also supports efforts to improve the quality and availability of these programs through community, parent, and provider education. Although the specific objective of each program is unique, collectively the programs aim to provide high–quality supervision and/or early education experiences to children from birth through age 12 (or longer for children with special needs). As shown in Figure 1, in 2008‑09, the Governor proposes to spend nearly $3.1 billion to provide these services to more than 437,000 children.

In the remainder of this write–up, we:

• Provide background on child care and development programs, including details on program objectives, administrative control, participation, and funding.
• Discuss the administration’s budget reduction proposals and the consequences of these proposals.
• Raise concerns with the Child Care and Development (CCD) budget and offer recommendations for addressing them.

Child Care and Development Programs

Of the entire CCD budget, approximately 83 percent is used for child care programs, 14 percent is for preschool programs, and about 3 percent is for related support activities.

Child Care and Development Programs

In general, child care programs are designed primarily to supervise children whereas child development programs have a focus on early childhood education. In reality, these programs frequently have many points of overlap and coordinate to serve the same children. The state programs serve children of families in the California Work Opportunity and Responsibility to Kids (CalWORKs) program as well as non–CalWORKs low–income families.

CalWORKs Guarantees Families Child Care. In exchange for engaging in work or work preparation activities, the state guarantees child care to CalWORKs recipients. Thus, the demand for CalWORKs child care is driven by CalWORKs caseload. CalWORKs child care is supported by state General Fund (Proposition 98), federal Temporary Assistance for Needy Families (TANF), and federal Child Care and Development Fund (CCDF) monies. The program involves three stages of child care.

CalWORKs Stage 1. This stage begins when a participant enters the CalWORKs program. The child care component is administered by the Department of Social Services through county welfare departments. It is funded completely with TANF monies. In 2008‑09, the Governor's budget includes $554 million to serve more than 63,000 children in Stage 1 care.

CalWORKs Stage 2. The CalWORKs families are transferred to Stage 2 when the county determines that participants’ schedules become stable. Families remain eligible for Stage 2 as long as they are participating in CalWORKs and up to two years after the family stops receiving a CalWORKs grant. This stage is administered primarily by the California Department of Education (CDE), although the California Community Colleges also have a small administrative role. It is funded with a combination of Proposition 98 and TANF monies. In 2008‑09, the Governor's budget includes $497 million to serve approximately 75,000 children in Stage 2 care (including nearly 3,000 children served in community college centers).

CalWORKs Stage 3. When they have exhausted their two–year limit in Stage 2 (referred to as “timing out”), a family is eligible for Stage 3 as long as their income remains below 75 percent of the State Median Income (SMI) level and their children are younger than age 13. Stage 3 also is administered by CDE. It is funded with a combination of Proposition 98 and CCDF grant monies. In 2008‑09, the Governor's budget includes $420 million to serve approximately 60,000 children in Stage 3 care.

Non–CalWORKs Families Not Guaranteed Child Care. In addition to CalWORKs Stage 2 and 3, CDE administers general and targeted child care programs to serve non–CalWORKs, low–income children at little or no cost to the family. (See the box below for a brief description of the various types of non–CalWORKs child care programs.) The base eligibility criterion for these programs is family income at or below 75 percent of SMI relative to family size. Because the number of eligible low–income families exceeds available child care slots, waiting lists for this care are common. These programs are funded with a combination of Proposition 98 and CCDF monies. In 2008‑09, the Governor's budget includes almost $1.1 billion to serve approximately 130,000 non–CalWORKs, low–income children. The Governor's proposal also includes freezing SMI at the 2007–08 level (see second box below for discussion). The CDE estimates approximately 200,000 eligible children are on the wait–list for non–CalWORKs child care. The majority of those children need full–time care.

Over 110,000 Low–Income Children Currently Served by State Preschool Each Year. In California, CDE administers two preschool programs for low–income and/or disadvantaged children: State Preschool and the Pre–Kindergarten Family Literacy (PKFL) program. Both state preschool programs are part–day, developmental programs for three to five year–old children from low–income families. In addition to educational activities, the programs require some level of parental education or involvement, provide meals or snacks to children, and refer families to health and social services agencies. The PKFL program, started in 2006–07, gives priority for funding to providers in the attendance areas of low–performing elementary schools. In all other regards, this program is very similar to the larger State Preschool program. Preschool programs are run by local educational agencies, community colleges, community–action agencies, and private nonprofit agencies. Funding comes entirely from the state. In 2008‑09, the Governor's budget includes more than $413 million to provide preschool to approximately 110,000 low–income children. Currently more than 40,000 children who meet eligibility requirements for state preschool are on CDE’s wait–list.

Support Activities and Services

A small portion of total Proposition 98 and CCDF monies are used to fund programs that do not provide direct services to children but rather provide support services designed to improve program effectiveness. Some support programs are geared toward parents and providers. For example, resource and referral agencies provide information to parents and the community about child care available in the area and offer training to providers. By comparison, some are geared more toward government planning. For example, the county–based Local Planning Councils are responsible for assessing need, planning, and coordinating child care services within the county. The CDE also maintains a Centralized Eligibility (wait–) List. Other support programs, collectively called “Quality Programs,” are intended to improve the quality and availability of child care. In 2008‑09, the Governor's budget provides approximately $100 million for these support services.

Two Types of Service Models

Currently, the state funds child care and development programs through two main mechanisms: vouchers to families and direct contracts with providers.

Most Families Receive Child Care Through a Voucher System. The CalWORKs families in any of the three stages of child care usually receive a voucher from an Alternative Payment (AP) organization or their county welfare department. In addition, the state provides vouchers for non–CalWORKs working poor families through AP organizations. In total, approximately 70 percent of the children in state–subsidized child care are served through a voucher system. Families may use vouchers in one of three settings: licensed centers, licensed family child care homes, and license–exempt care. The licensed programs must adhere to the requirements of Title 22 of the California Code of Regulations and are often referred to as Title 22 programs.

Voucher Providers Are Reimbursed Using the Regional Market Rate. Title 22 providers are reimbursed for services up to a maximum of 85 percent of the rates charged by private–market providers for the same service in the same region. License–exempt providers may earn a maximum of 90 percent of Title 22 providers in the same region. The cost of child care in specific regions of the state is determined via the Regional Market Rate (RMR) survey of public and private child care providers. The RMR survey is conducted every year, new regional maximums are posted in October, and providers may adjust their rates for their voucher clients after that time. Although the RMR increase for a particular region may vary from less than 1 percent to nearly 10 percent depending on market factors, the average RMR increase is typically around 2 percent each year. Thus, a slight increase in RMR is typically built into budget projections. The Governor has assumed an average cost of care increase of 2.8 percent for the CalWORKs voucher programs in his proposed 2008‑09 budget. The Governor has assumed no cost of care increase for the non–CalWORKs voucher program.

CDE Contracts Directly With Child Care and Preschool Centers. For non–CalWORKs child care and preschool, CDE contracts directly with over 750 different agencies through approximately 1,300 different contracts. These providers must adhere to the requirements of Title 5 of the California Code of Regulations and are generally referred to as Title 5 providers.

Title 5 Providers All Receive Same Rate. These providers are reimbursed at the Standard Reimbursement Rate (SRR). The SRR is adjusted for factors such as the age of the child or for special needs. (For instance, the reimbursement rate for an infant is 1.7 times the SRR, and the reimbursement rate for a severely handicapped child is 1.5 times the SRR). It is not adjusted for regional market differences. The Governor has proposed to maintain the current SRR of $34.38 per day per child for full–day care (either full–day child care or part–day preschool/part–day child care) and $21.22 per day per child for preschool only.

State Needs to Address Underlying Budget Problem

We recommend the Legislature adjust the Child Care and Development budget by making a one–time alignment to correct for chronic carryover, funding growth, and then taking steps to reduce the amount of unspent funds in the future. Although our alternative budget funds Child Care and Development at the same level as the Governor's plan (nearly $3.1 billion), we recommend taking additional action to correct the root problems that generate chronic carryovers.

The Governor's budget provides $3.1 billion for CCD in 2008‑09. As with K–12 programs, the Governor first builds a workload budget for 2008‑09—including a cost–of–living adjustment (COLA) for all programs, growth for non–CalWORKs programs, and caseload adjustments for CalWORKs programs (see Figure 2). From that workload budget, the Governor proposes to reduce Proposition 98 General Fund support for CCD by $199 million, resulting in a total year–to–year reduction of $44 million, or 1.4 percent. The Governor estimates this proposal will result in a loss of approximately 8,000 existing full–time equivalent (FTE) slots but assumes that normal attrition rates in these programs should reduce the likelihood of a currently enrolled child losing his or her slot. The Governor's proposal effectively results in eliminating funding for growth and COLA and proportional reductions across all programs (except CalWORKs child care, which would still receive a minor increase in an attempt to fully fund that entitlement program). This approach to building a 2008‑09 workload budget would be appropriate if the 2007–08 budget was a good reflection of existing CCD expenditures. However, this is not the case.

Governor's Approach Leaves Underlying Budget Problems Unaddressed. The state‘s CCD budget has chronic carryover of unspent funds.

For each of the past five fiscal years, at least $200 million of the CCD appropriation has gone unspent (and has been “carried over” to fund future years of service). Although the bulk of unspent funds for a particular fiscal year are typically identified within 12 months after the close of that fiscal year, it may take up to five subsequent years to identify all unspent funds. There are many reasons that these funds go unspent but they generally fall into two categories:

• Unobligated Funds. The first situation is the result of CDE being unable to award contracts up to the level of the full appropriation. This could be due to staffing issues at CDE, the required to conduct a Request for Application, or lack of interest from providers.
• Unearned Funds. The second situation is the result of providers not serving the exact number of children, or spending money on allowable expenses, up to the full amount of their contracts. The reasons for this so–called “under–earning” are many but can include such things as delays in planned facilities expansions, difficulty filling slots when children exit the program, or just the sheer complexity of tracking allowable expenses and calculating earnings.

The result of chronic carryover is that less children are served than intended and more children remain on the waiting list.

Governor's Proposal Overstates the Impact of Proposed Reduction. Figure 3 shows that the Governor's proposed funding level would result in the loss of roughly 16,600 FTE slots from non–CalWORKs programs. However, it is unlikely that any child currently in care will lose a slot based on these reductions. As mentioned above, CCD programs have an average of $200 million in unspent funds each year. That equates to approximately 22,000 slots (using an average cost of care) across the non–CalWORKs programs. As shown in Figure 3, this level is consistent with the number of unused slots in recent years. In fact, for 2007–08, CDE has already identified $102 million in unspent funds ($80 million of which the Governor has proposed to carry forward to fund the 2008‑09 budget), which equates to more than 18,000 slots. Based on recent trends, we anticipate additional unspent 2007–08 funds will materialize in the coming years. Thus, the Governor's proposal would unquestionably result in a reduction in funded slots but not a reduction in used slots.

LAO Alternative Cleans Up Budget. Our recommended alternative approach to the CCD budget (see Figure 4) arrives at the same funding level as the Governor but with different assumptions. From the 2007–08 budget, we adjust for the chronic CCD carryover—using $120 million as a conservative estimate of 2007–08 funds likely to go unused. Unlike the Governor's plan, we recommend the Legislature fund growth (calculated at $10 million after adjusting the 2007–08 budget for chronic carryover). This growth adjustment maintains the relative size of the wait–list to the pool of children receiving service. Then we include the same adjustment for CalWORKs caseload estimates as the Governor ($66 million) and, like the Governor, would not provide a COLA. Under our alternative, the 2008‑09 CCD budget is nearly $3.1 billion (the same level as under the Governor's plan).

Recommend Action to Address Underlying Issues. Our alternative includes a one–time alignment of funding with service. However, if the systemic issues that cause chronic carryover are not addressed, the problem will continue. Every year fewer children will be served than intended and funds will go unused. Although there likely is not one easy solution to this problem, various groups have made valid reform suggestions. These include: (1) procedural changes enabling CDE to reallocate contract funds among existing providers in good standing who are under–earning or over–earning (shifting funds from under– to over–earners), (2) grant–based contracts with minimum attendance requirements instead of reimbursement–based funding, and (3) increasing flexibility to allow providers to shift funds between separate CCD programs. We recommend the Legislature hold an informational hearing this year to consider these various options. We believe that solving the problems that cause chronic carryovers likely will require a multifaceted approach, possibly with different solutions for different programs. We also believe that new options might need to be explored to ensure the underlying incentive problems are adequately overcome.