The 2016-17 Budget

Analysis of Child Care and Preschool Proposals

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Introduction

In this report, we analyze the Governor’s child care and preschool proposals. In the first section, we provide a high–level overview of these proposals. In the second section, we provide background on California’s preschool programs and assess the Governor’s preschool restructuring proposal. In the final section, we provide background on California’s child care programs and assess the Governor’s child care restructuring proposal.

Overview of Governor’s Budget Proposals

Governor Proposes $3.6 Billion for Child Care and Preschool Programs in 2016–17. Of this amount, $1.9 billion is for child care programs and $1.7 billion is for preschool programs. As shown in Figure 1, the Governor’s budget augments these programs by a total of $95 million (3 percent) from the revised 2015–16 level. Proposition 98 General Fund covers the bulk of this increase ($83 million), with a relatively small increase in non–Proposition 98 General Fund. These increases in state funds are partially offset by a small net decrease in federal funds. Under the Governor’s budget, proposed funding would support an estimated 455,000 child care and preschool slots.

Higher Spending Due to Various Adjustments. Figure 2 shows proposed 2016–17 changes. The largest change is an $80 million increase to preschool programs (discussed further below), followed by $18 million for California Work Opportunity and Responsibility to Kids (CalWORKs) child care. The budget includes a total of $14 million for annualizing rate increases to the Regional Market Rate and license–exempt rate that were initiated on October 1, 2015. The budget also makes various other adjustments, such as providing statutory growth and cost–of–living adjustments (COLA) for non–CalWORKs programs.

Governor Proposes Major Restructuring of California’s Child Care and Preschool Programs. Specifically, the Governor proposes to consolidate funding streams for various existing preschool programs into a new block grant to serve low–income and at–risk children. The Governor also proposes tasking the California Department of Education (CDE) with creating a five–year plan to transition all child care subsidies to vouchers.

Governor’s Budget Adjusts Transitional Kindergarten and State Preschool Amounts Before Shifting Into New Block Grant. The fund shift from Transitional Kindergarten and State Preschool into the new block grant reflects the Proposition 98 funds that those programs would have otherwise received in 2016–17. The Transitional Kindergarten fund shift includes a $40 million augmentation, which reflects higher projected funding rates under the Local Control Funding Formula (LCFF). The State Preschool fund shift includes a $36 million Proposition 98 augmentation, which reflects annualizing the cost of certain slots, 0.13 percent statutory growth, and a 0.47 percent COLA. (Rather than shifting into the block grant, the Governor proposes leaving $3 million in related non–Proposition 98 growth in the General Child Care program.)

Governor’s Budget Does Not Move All Full–Day State Preschool Wrap Into New Block Grant. Currently, State Preschool wrap is provided by local education agencies (LEAs) and non–LEAs. The Governor does not move $143 million supporting the wrap provided by non–LEAs into the proposed block grant. This wrap component is currently funded out of General Child Care (non–Proposition 98). As a result of not moving these existing preschool wrap funds into the block grant, General Child Care slots increase by about 13,000 in 2016–17 under the Governor’s display.

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Preschool Restructuring

In this section, we provide background on California’s major preschool programs; describe the Governor’s proposal for preschool restructuring; provide an assessment of the Governor’s proposal; and offer a framework for developing a single, coherent preschool program.

Background

California Has Several Major Preschool Programs. Figure 3 highlights key features of California’s four largest preschool programs: center–based voucher programs, the California State Preschool Program (CSPP), Transitional Kindergarten (TK), and federal Head Start. As shown in the figure, the programs are similar in some ways and different in other ways. For example, three of the four programs determine eligibility based on family income whereas one determines eligibility by a child’s birthday. Two of the programs require low–income families to be working to receive full–day preschool whereas the other two programs do not have a work requirement. The programs operate out of school districts, subsidized preschool centers, or both places. The state funds each of the three state programs using a different funding method (family vouchers, direct state contracts, and school district LCFF payments). Though not shown in the figure, in 2014–15 the state also began providing $50 million annually for Quality Rating and Improvement Systems (QRIS) designed to promote improvement among some CSPP providers in some areas of the state. In addition to the programs already mentioned, some preschool in California is funded with federal Title I funds, local First 5 funds, and special education funding. Some children may benefit from multiple preschool programs. For example, some children are enrolled in both CSPP and Head Start.

For Some Programs, Available Slots Insufficient to Serve All Eligible Children. Some voucher programs, CSPP, and Head Start are unable to serve all eligible children. The number of available slots for these programs is determined by annual budget appropriations and priority is given to certain children. Voucher programs and CSPP must give priority to children receiving child protective services, children at risk of being abused or neglected, and children from families with the lowest incomes. Head Start providers are required to develop their own priority ranking based on the needs of the local community, but they too generally limit eligibility to children from low–income families. For TK, all four–year olds with September 2 to December 2 birthdays, regardless of family income, are guaranteed slots. School districts receive TK funding for these children automatically as part of their LCFF allotments.

Some Children From Low–Income Families Not Currently Served. Based on participation data from the four programs, we estimate between 60 percent and 80 percent of four–year olds from families that earn below 185 percent of the federal poverty level (FPL) are served by subsidized preschool centers and school districts. This range is large because we do not have data on the number of children enrolled in multiple programs. (The 185 percent threshold is used as an eligibility criterion for various K–12 education programs, including a major child nutrition program. In 2015–16, the 185 percent threshold equated to about $37,000 a year for a family of three.) Eligible children may not be participating for a variety of reasons. Some families may not be aware of subsidized programs, may choose not to enroll their children, or may be unable to find slots in nearby programs.

Many Children With Disabilities Not Currently Served in Mainstream Programs. Federal law requires that LEAs provide appropriate services, in many cases including preschool, to children with disabilities. Federal law also requires that students with disabilities be served in the least restrictive environment. For most three and four–year olds with disabilities, this means a program where they are served along with their mainstream peers, such as in CSPP. Because federal law does not require school districts to create a mainstream preschool program if they do not already have one, some children with special needs may not have a mainstreaming option available. In 2013–14, 41 percent of three and four–year olds with special needs were served in mainstream programs, 34 percent were served in specialized programs, and 25 percent did not receive any form of early education.

Programs Have Different Standards and Oversight. Figure 4 describes the standards that apply to the four preschool programs. Each program has a unique set of requirements related to teacher qualifications, staffing ratios, health and safety standards, developmental standards, and oversight. As shown in the figure, all programs are required to meet some minimum health and safety standards, although specific standards vary by program. Three of the programs must include developmental standards, but these specific standards also vary somewhat across the programs. Center–based voucher programs are not required to include developmental standards, but some may provide services similar to CSPP.

Governor’s Proposal

Governor Proposes Consolidating Three Existing Funding Streams Into New Block Grant. The Governor proposes to consolidate three existing preschool programs into a new $1.6 billion Early Education Block Grant. Specifically, the proposal would redirect funding from CSPP ($845 million), TK ($726 million), and the QRIS Block Grant for CSPP ($50 million). Funds from the new block grant would be given to LEAs and potentially other entities that currently offer CSPP to operate a developmentally appropriate preschool program. The providers also would be required to conduct some support activities, including family engagement, screening for developmental disabilities, and referral to supportive health and social services, if appropriate. The Governor’s proposal does not shift $33 million in CSPP funds that support preschool programs at 55 community colleges. (These programs serve the dual purpose of providing preschool for children of community college students and serving as a lab school for students training to become preschool teachers.)

Low–Income and At–Risk Children to Receive Priority. The Governor’s proposal requires block grant recipients to prioritize services to children from low–income families (as defined locally), homeless children, foster children, children with disabilities, children at–risk of abuse and neglect, and English learners. Although the proposal specifies which students should receive priority, the proposal does not require providers to serve any specific group of students.

Hold Harmless Provision for LEAs. The Governor’s proposal includes a hold harmless provision that ensures LEAs receive the same amount from the new block grant as they otherwise would have received from TK and CSPP contracts. The state would distribute any remaining block grant funds based on local need. (At the time of this writing, the administration’s proposed trailer legislation had no specific definition of “local need.”)

Administration Plans to Submit Additional Details of New Program as Part of May Revision. The Governor’s January proposal contains few details about the restructured preschool program. The proposal, for example, does not set forth specific eligibility criteria, the role of private providers, program standards, or clear funding rules. The administration intends to solicit feedback from stakeholders on these issues and release a more detailed proposal in May.

Assessment

Consolidating Funding and Prioritizing Based on Need Are Improvements Over Current Approach. The Governor’s proposal to consolidate three preschool funding streams into one program would help simplify and streamline the state’s existing labyrinth of preschool programs while improving transparency and coherence. Prioritizing funds for low–income children would ensure that the state’s available resources are directed to those most likely to benefit. Low–income families are both less likely than higher–income families to be able to afford preschool and more likely to benefit from access to preschool (according to most research). Prioritizing at–risk students would provide children who have had adverse early childhood experiences access to supportive environments. Finally, prioritizing children with disabilities as part of a larger mainstream program creates more opportunities for them to be served alongside their peers.

Allowing Income Eligibility to Be Locally Determined Likely to Result in Similar Children Receiving Different Levels of Service. We are concerned about the Governor’s proposal to let income eligibility criteria be locally determined. Allowing this core eligibility criterion to be set locally very likely would result in notable differences across the state in services and funding per child. This could result in similar children being treated very differently based on where they live. Neighboring school districts with similar levels of funding, for example, could target their program to a different set of students and provide significantly different levels of service.

Hold Harmless Provision Limits Ability to Allocate Funding Based on Need. We also are concerned about the Governor’s proposal to lock in districts’ funding allocations permanently. Because TK eligibility is based on birth month and not tied to need, school districts with relatively low and relatively high shares of low–income students currently may be operating TK programs that are similar in size. Thus, the Governor’s proposed hold harmless provision would result in some districts permanently receiving a disproportionate amount of funding relative to their numbers of low–income and at–risk children. These districts would be able to expand eligibility to serve a much larger share of their children or provide a much more expensive program for low–income or at–risk children in their areas. By contrast, some school districts with relatively high proportions of low–income and at–risk children would receive proportionately fewer resources. As a result, these districts would have to narrow eligibility or operate with notably less funding per child.

Recommendations

Key Features of Any Restructured Preschool Program. As discussed below, we believe certain features are important to include as part of any restructured preschool program.

One Consolidated Funding Stream. We recommend the Legislature consolidate all existing Proposition 98 funding for preschool into one new program. Under this approach, the state would consolidate nearly $1.7 billion in funding from CSPP, TK, and QRIS, as well as the set–aside for community college lab schools, into one program.

Specific Eligibility Criteria. To ensure similar children are treated similarly across the state, we recommend the Legislature set specific criteria for which students are eligible for the new preschool program. We think a reasonable approach would be to provide preschool to all four–year olds from families with incomes below 185 percent of FPL, and all four–year olds who are receiving child protective services, are at–risk of being abused or neglected, are homeless, or have disabilities. Providers under such an approach might choose to offer preschool to children above 185 percent of FPL, but they would need to do so using other resources.

Funding Linked to Children. To ensure that additional funding directly results in additional children being served, we recommend the Legislature allocate funding to providers based on the number of eligible children who participate in the program. This approach is similar to the current funding approach for CSPP and TK. (As discussed in the nearby box, setting a per–child funding rate is likely to be among the Legislature’s most difficult program decisions.) If the Legislature were to adopt a hold harmless provision for current providers, we recommend the provision only take effect during the transition to the new system, as this would better ensure funding upon full implementation is linked to children.

Convenience for Families. The Legislature could take a couple of steps to make participation easier for families. We recommend the state require providers to offer full–day preschool programs for children from low–income, working families. Without a full–day option, some families would otherwise be unable work or opt to place their children in less formal environments that have no specific learning expectations. We also recommend the Legislature create a streamlined eligibility verification process that reviews eligibility only once per year (at the beginning of the school year). Under such an approach, a child would remain eligible for the entire school year, regardless of changes in family circumstances.

Developmentally Appropriate Activities. We also recommend providers be required to include developmentally appropriate activities in their preschool programs. This could include using California’s Preschool Learning Foundations or an alternative framework, such as the Head Start Early Learning Outcomes Framework, that includes age–appropriate activities. Foundations such as these typically focus on helping children learn self–awareness and self–regulation, how to interact with peers and teachers, language and basic literacy, and basic numeracy. Because these types of frameworks are not overly prescriptive, providers still would retain a great deal of flexibility to develop a specific curriculum tailored to the needs and interests of their children.

Minimum Staffing Requirements. We recommend the Legislature set some minimum standards to ensure a baseline of services for all eligible children. At a minimum, we recommend the state require teachers to have some education in child development (for example, a Child Development Permit, as is required in CSPP) and set a maximum teacher–child ratio.

Basic Reporting Requirements. We recommend the Legislature also require basic information from providers. We recommend requiring providers to collect basic student demographic information, such as race, gender, family income, and disability status. This data would allow educators and policymakers to monitor program participation. The Legislature also could require CDE to report preschool participation rates by county. This would help the state identify geographical areas that consistently enroll relatively few eligible children, thereby allowing the state to make targeted efforts to increase preschool enrollment in those areas. To foster transparency, we also recommend the state require providers to create plans that would be available online. Such plans could include information on key elements of a program, such as the length of the program (hours per day and days per year), curriculum, process for measuring the program’s added value to the child, and family engagement activities.

Other Key Restructuring Decisions

Various Trade–Offs to Consider When Designing Remaining Features of Program. In addition to the above issues, the Legislature faces other important restructuring decisions. These decisions entail selecting providers, developing a method for disbursing funding, and figuring out how best to oversee the new program. Below, we discuss some trade–offs the Legislature faces in making each of these decisions.

Providers. One key decision the Legislature would face in restructuring preschool is identifying which entities should be responsible for providing the program. On the one hand, school districts and charter schools offer greater opportunity to ensure preschool is aligned with kindergarten and the rest of the K–12 school system. Additionally, because school districts already have specific district boundaries and are required to serve all school–aged children within those boundaries, they are well–positioned to ensure that all eligible children living within their catchment area have access to a new preschool program. (Smaller school districts, charter schools, and county offices of education also are familiar with forming joint powers agencies to help them coordinate program services within their vicinities.) Currently, no similar catchment system exists for non–LEA providers. On the other hand, many non–LEA providers have a long history and considerable expertise serving preschool–aged children. In many cases, these providers also provide wraparound services, such as infant or toddler child care and after school care. Furthermore, non–LEA providers may provide certain types of preschool options that have greater appeal to some families and may be more conveniently located for some families than their LEA options.

A Method for Disbursing Funds. Another important decision the Legislature would face in restructuring preschool is deciding how to disburse funds to providers. Disbursing funds to LEAs through the LCFF system is straightforward and requires no special administrative structure. Were both LEAs and non–LEAs to provide preschool programs, however, the state likely would need another funding disbursement mechanism. For example, it might continue issuing direct contracts with providers. Though direct contracts are somewhat more administratively burdensome than LCFF allocations, they still can keep funding linked with children served and track slots allotted to each provider.

Oversight and Accountability. Finally, if it pursues preschool restructuring, the Legislature will need to decide how to oversee program providers. On the one hand, having a robust state oversight system could result in greater consistency among programs statewide. On the other hand, a local oversight system could take into account local priorities and challenges while also providing more tailored feedback to local providers on improving their programs.

Some Program Components Fit Together Better Than Others. Some combinations of decisions seem to fit together better than other combinations. In particular, certain combinations of eligibility, provider, funding, and oversight decisions seem to go together. For example, if the Legislature were to decide to serve all low–income children, then relying on school districts becomes a relatively natural fit, as districts could be required to serve all children showing up for the program. If LEAs were selected as providers, then disbursing funds through LCFF and using local governing boards as oversight agents become more natural downstream decisions. Alternatively, were the Legislature to decide to select both LEAs and non–LEAs as providers, then disbursing funds through direct state contracts and using state agencies to perform some oversight activities become more natural downstream decisions.

Transition

Multiyear Phase In. Any effort to restructure California’s preschool programs into a single, coherent program will involve many decisions and take some time. By gradually introducing new eligibility, program, funding, and administrative requirements over a number of years, the state could minimize disruption to children, families, and providers while ensuring steady progress towards a better system. Given families typically make enrollment decisions and providers typically make staffing and budget decisions several months in advance, we recommend the Legislature allow plenty of time to notify them of any program changes.

Transition Plan. As part of restructuring, we recommend the Legislature create a transition plan that sets forth when certain changes would take place. For example, in the first year of a transition plan, the state could continue CSPP and TK under existing rules. In the second year, the state could replace CSPP and TK rules with new eligibility rules and begin changing funding allocations to match children served. In the third year, the state could fully transition to the new funding formula and begin to ramp up program oversight.

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Child Care Restructuring

In this section, we provide background on California’s major child care programs, describe the Governor’s proposal for child care restructuring, assess the current system, and set forth a package of recommendations for improving the system.

Background

California Has Several Child Care Programs Designed to Serve Low–Income, Working Families. Figure 5 highlights key features of California’s four main subsidized child care programs: CalWORKs child care, the Alternative Payment (AP) Program, General Child Care, and Migrant Child Care. All four of these programs generally are designed to serve low–income, working families during the hours that parents work or are participating in an education or training program. In addition to these programs, California funds the Care for Children with Severe Disabilities program, which provides child care to about 150 children birth to 21 in the San Francisco Bay Area. (The nearby box provides additional detail on the stages of CalWORKs child care.)

State Subsidizes Through Vouchers and Direct Contracts. The state provides subsidized child care in two ways. Families participating in the CalWORKs and AP programs receive vouchers that they may use to access care with different types of child care providers. The state subsidizes other families via direct contracts with certain licensed child care providers. Migrant Child Care provides services to children of migrant parents through both vouchers and direct contacts with licensed providers.

Voucher– and Contract–Based Care Provided in a Variety of Settings. Families receiving child care vouchers can choose from three types of child care settings: licensed centers, licensed family child care homes (FCCHs) and license–exempt care. Families in contract–based programs may access licensed centers and FCCHs. For both the voucher– and contract–based programs, centers typically are run by community–based organizations or LEAs and often serve more children than other types of providers. The FCCHs operate from providers’ homes, with each home typically serving 6 to 12 children. License–exempt care is provided by an individual of the family’s choosing—typically a relative, friend, or neighbor who provides care in a private home.

Some Standards Vary Across Voucher– and Contract–Based Programs. As shown in Figure 6, the state sets standards for each type of child care provider. All licensed providers must meet Community Care Licensing (CCL) health and safety standards. Licensed voucher–based providers also must meet certain CCL staff qualifications and staffing ratios. Collectively, these health, safety, and staff standards are commonly referred to Title 22 standards. Contract–based providers must meet Title 22 health and safety standards but have somewhat different staffing ratios. Contract–based providers also require teachers to have more training than teachers in voucher–based programs.

Contract–Based Programs Required to Include Developmental Component to Care. This requirement is a key difference from voucher–based programs, which have no explicit requirement to provide developmentally appropriate activities. Often the developmental component of contract–based programs is referred to as the “learning foundations” after the frameworks developed by CDE for the programs. The learning foundations describe the skills that children of different ages should be able to exhibit. Programs required to use the foundations focus their activities around supporting the development of these skills. Together, the health, safety, staffing, and developmental requirements that apply to contract–based child care providers are commonly referred to as Title 5 standards.

Reliance on Particular Child Care Settings Differs Between Contracts and Vouchers. Three–fourths of subsidized children are served in licensed settings. Based on the most recently available data, 38 percent of children are served in centers and 36 percent are served in FCCHs (see Figure 7). About one–third of children receiving vouchers rely on license–exempt care. License–exempt care is most common among CalWORKs families. More than one–third of CalWORKs children receive license–exempt care, whereas about one–fifth of non–CalWORKs AP children receive this type of care. (The General Child Care and Care for Children with Severe Disabilities programs do not allow for license–exempt care.)

Reimbursement Rate Structures Vary for Contracts and Vouchers. Providers running General Child Care, contract–based Migrant Child Care, and Care for Children with Severe Disabilities programs generally are paid a Standard Reimbursement Rate (SRR). The SRR is higher for centers than FCCHs. The SRR is adjusted to account for various characteristics of the child served—including age, limited English proficiency, or having a disability. In contrast, reimbursements for voucher providers and certain General Child Care FCCHs vary based on the county in which the child is served. These reimbursement rates are referred to as Regional Market Rates (RMRs) and are based on regional market surveys of private providers, conducted every two years as required by federal regulations. Like the SRR, the RMR is adjusted based on the age of the child and if the child has a disability. Unlike the SRR, the RMR sets rate “ceilings” for the maximum amount the state is willing to pay for a certain type of care. If a provider charges less than the ceiling, the state reimburses the actual child care charge. (The state currently reimburses license–exempt providers at 65 percent of each county’s maximum RMR for FCCHs.)

Rates Based on Historical Decisions. The SRR generally is based on rates dating back to the 1940s. Over the years, the state has updated the SRR to reflect increasing program costs. These adjustments, however, have not occurred every year. For the RMR, the state historically set the ceilings at the 85th percentile of the most recent market survey. (The percentile at which the state sets the RMR effectively reflects the purchasing power and amount of choice associated with a voucher. At the 50th percentile, for example, a voucher would allow a low–income family to select among the less–expensive half of all providers.) Over the past few years, the state has adjusted the RMR in various ways to reflect the increasing cost of child care. Today, the state sets the RMR at the greater of 104.5 percent of (1) the 85th percentile of the 2005 regional market survey or (2) the 85th percentile of the 2009 regional market survey, deficited by 10.11 percent.

Recent Rate Changes Have Resulted in Greater Differences Across Counties. Most notably, the deficit factor applied to the 2009 survey has resulted in inequities in access across the state. In counties where most child care providers charge at or about the same rates, a 10 percent cut in the value of the vouchers means that families do not have access to as much of the market as families living in counties with wide variation in provider rates.

State Has Higher Reimbursement Rate for Lower Standard of Care. While the RMR is below the SRR in some counties, most RMR rates are higher on average than the SRR rate, as shown in Figure 8. Since most providers that accept the RMR are not required to include developmental components in their care, this means that in many cases the state pays more for a lower standard of care.

To Help Administer Voucher Programs, State Contracts With AP Agencies. For CalWORKs Stages 2 and 3 and the AP program, the state contracts with AP agencies that determine eligibility for care and process payments to providers. (For CalWORKs Stage 1, the state funds county welfare departments that either issue payments to providers directly or subcontract this work out to AP agencies.) For Migrant vouchers, the state contracts with Migrant AP agencies to undertake similar functions.

State Continues to Make Efforts to Improve Quality of Care. The state makes efforts every year to improve the quality of voucher– and contract–based child care. On a longstanding basis, the federal government has required the state to spend a certain amount annually to improve the quality of care. In 2015–16, the state allocated about $70 million for this purpose. More recently, the state has worked with local consortia to establish local Quality Rating and Improvement Systems (QRIS) in some areas of the state, using a mix of federal, state, and local resources. These QRIS typically evaluate and monitor programs based on various metrics, including teacher qualifications, curriculum, and environment. Associated funding covers these evaluation and monitoring costs as well as supports staff development for providers. While federal and state spending (approximately $200 million since 2012) for these QRIS is set to sunset in 2015–16, First 5 California—a commission established to use tobacco tax revenues to benefit children birth through five—has recently announced that it plans to spend $190 million between 2015–16 and 2019–20 to expand and enhance QRIS.

Counties Serve Very Different Proportions of Low–Income Children. We estimate that counties in the Central Valley serve the lowest proportions of low–income children. The highest share of children served is in San Francisco County. Despite this variation among counties, almost all counties in California serve a relatively small proportion of low–income children, with most counties serving less than 20 percent. These estimates are based on our comparison of the number of low–income children by county with the total number of subsidized child care slots by county (excluding CSPP). (Because data on the share of low–income children with working parents is not available, we cannot know how many children actually are eligible for subsidized child care. Additionally, the state does not currently track the demand for child care among eligible families. Between 2005 and 2010, the state funded all counties to maintain centralized eligibility lists [CELs] that consolidated the waiting lists for all non–CalWORKs programs and allowed the state to track the demand for child care among eligible families.)

Governor’s Proposal

Initiates Five–Year Plan for Transitioning All Subsidized Child Care to Voucher System. The Governor has proposed trailer bill language that would require CDE to develop a plan to transition contracted funding (General Child Care and Migrant Child Care) to vouchers over the next five years. Under the plan, all contracted funding except for funds supporting the Care for Children With Severe Disabilities program would be converted to vouchers. The Governor’s proposal also would require CDE to make recommendations for redirecting quality funds from activities now benefiting only contract–based providers to activities that would benefit the expanded voucher system.

Assessment

Converting to Vouchers Would Offer Families More Flexibility in Selecting Providers. The Governor’s proposal to convert contracted slots to vouchers would give some families greater choice than they now have in selecting the child care providers that best meet their needs. Moreover, in an all–voucher system, every family would have the same level of choice in selecting providers that meets their needs. We believe this would be a significant improvement over the current system, as similar families currently receive different levels of choice.

Converting to Vouchers Could Result in Some Children Not Receiving Developmentally Appropriate Care. In 2015–16, about 35,000 birth through three–year olds received contract–based child care (including three–year olds in CSPP), thereby receiving care with a developmental component. Since child care providers that accept vouchers are not required to include development components, converting these 35,000 slots into vouchers could result in a corresponding loss of developmentally appropriate care. (Children older than three years of age could receive developmentally appropriate learning opportunities through preschool and school.)

Converting to Vouchers Likely Would Entail Additional Cost. Given the RMR ceilings are higher than the SRR in most cases, transitioning all slots to vouchers likely would entail some cost. Assuming all families previously receiving care in centers continued to choose center care when given the voucher option, converting SRR slots into vouchers would cost roughly $70 million. If families instead made similar decisions to families currently in the AP program and relied more heavily on FCCHs and license–exempt care, converting SRR slots into vouchers would cost roughly $25 million.

Converting to Vouchers Over Five–Year Period Minimizes Disruption, Allows for Better Planning and Implementation. A change to vouchers could cause substantial disruption to providers and families if not done gradually over time. At a minimum, the state would need to phase out contracts, adjust reimbursement rates, and determine what standards would apply to subsidized providers.

Recommendations

Below, we set forth a package of recommendations for building a more coherent child care system.

Create One Voucher–Based System. We recommend the Legislature pursue the Governor’s proposal to unify the existing child care system into one voucher–based program. Toward this end, we recommend converting General Child Care and all Migrant Child Care slots into vouchers. Converting to all vouchers would result in a simpler, more rational, and more transparent system that would be easier for families to use and easier for the state to administer. Under an all–voucher system, families now using contract–based care would be given greater choice in selecting convenient care providers. The change to an all–voucher system would affect roughly 300 subsidized providers that currently contract directly with CDE. Under our recommendation, we believe many of these providers would shift to accepting voucher clients. Though accepting vouchers is a somewhat less predictable business model for them than direct contracting, Title 22 centers and homes have been operating under a voucher–based business model for decades.

Special Considerations for Migrant Program. When converting all Migrant Child Care slots into vouchers, the Legislature would need to consider whether it wanted to continue giving migrant children priority access. If the Legislature wishes to prioritize these children, it could do so within a single voucher program or it could retain a stand–alone voucher program reserved only for migrant children. Both approaches have benefits and drawbacks. Prioritizing migrant children within a single voucher program would create a more unified system. This approach, however, could result in other low–income children receiving less access if slots are limited and migrant children end up receiving a greater number of slots under the integrated program. Continuing to rely on a separate voucher program for migrant children would result in a more fragmented system but allow the Legislature to target funds to a certain number of migrant children in certain areas of the state.

Require Programs Serving Children Birth Through Age Three to Include Developmentally Appropriate Activities. We recommend the Legislature require all centers and FCCHs serving subsidized children birth through age three to include a developmental component to their care. (Under our preschool recommendations, four–year olds would receive developmentally appropriate care through preschool.) Under the current system, only a small share of children in subsidized child care birth through age three can access programs that are required to include such a component. We recommend the Legislature direct CDE to develop standards for children birth through age three that are similar to current Title 5 standards but modified to reduce programmatic and administrative burden. Requiring a developmental component in programs for these children likely would require some existing Title 22 providers to obtain additional training. This training could be supported with one–time funds provided during a transition period or redirected quality dollars.

Provide Similar Levels of Access Across the State. Given the variation in the proportion of eligible families served across the state, we recommend the Legislature equalize access across counties. The Legislature could consider addressing the differences across counties in various ways, including:

• Serve Same Share of Families in Each County. Under this option, the Legislature could adjust funding levels to serve the same share of eligible families in each county.
• Serve Families Based on Statewide Income Cut–Off. Under this option, the Legislature could adjust funding levels to serve all families under a certain percentage of state median income (SMI).

The first option accounts for regional differences in family income and cost of care. Under this option, higher–cost counties might serve eligible families with incomes closer to the cap. For example, families whose incomes were 60 percent of SMI might receive child care in high–cost counties whereas families with similar incomes in low–cost counties may not receive child care because all available slots are taken by families with lower incomes. By comparison, the second option treats all families across the state similarly regardless of regional cost differences. Under the second option, those counties with a greater share of families at the bottom of the income distribution would see more families served than those counties with relatively higher–income families. We believe either option would be an improvement over the existing ad hoc service levels across counties.

Update Eligibility Criteria to Be More Transparent. To create more transparency in terms of who is being served, we recommend the state link the income eligibility cap with recent SMI data. For the past several years, the state has linked the income cap to 70 percent of the 2007 SMI. This cap equates to about 60 percent of the 2014 SMI, the most recent year for which we have data. Updating the income cap to this level imposes no additional program cost. For purposes of establishing voucher eligibility, we recommend the state update the SMI annually based on the most recent data available (for example, using the 2015 SMI when preparing the 2017–18 budget).

Create Simpler, More Transparent Reimbursement Rate Structure. As part of a new voucher–based system, we recommend the Legislature eliminate the current reimbursement rate structures and replace with one simplified, market–driven structure. Looking at the most recent RMR survey indicates that the differences across counties generally cluster into three groups. Urban and coastal counties tend to be the highest–cost counties, with monthly school–age rates varying less than 4 percent. The medium–cost counties (including San Bernardino and Sacramento) also have monthly rates that vary less than 4 percent. The low–cost counties (which tend to be the rural northern counties) have somewhat more variation, 7 percent on average. Given these groupings, we recommend the state create a system with three reimbursement rates (tiers 1, 2, and 3) to reflect basic cost differences among counties. This system would replace the state’s existing RMR structure which provides unique rates to every county. Understanding the new system therefore would be much easier yet the rates still would remain connected to the child care market and accurately reflect notable cost differences among counties.

To Start, Set Reimbursements at the 65th Percentile of Most Recent Survey. As a first step in moving toward a new rate structure, we recommend the Legislature link the rates to a specified percentile of the 2014 RMR survey based on available funding. We estimate that setting the initial reimbursement rates at about the 65th percentile would allow the state to serve the same number of children without additional cost. (This estimate assumes $143 million now used for CSPP wrap at non–LEAs is available for vouchers and slots for three–year olds now funded by CSPP are converted to vouchers.) For each of the three groupings of counties, the 65th percentile of the applicable counties could be averaged to set the corresponding rate. Setting the initial rates using the most recently available data helps lay a more appropriate foundation for the new rate structure. (To the extent additional funds were available, the state could link rates to a higher percentile in future years.)

Reinstate CELs so State Can Track Demand for Subsidized Child Care. To help families access care, equalize service levels across the state, and make corresponding funding adjustments, we recommend the Legislature reestablish consolidated waiting lists. We estimate restarting CELs would cost between $5 million and $10 million annually. (The previous CEL contracts cost approximately $8 million annually.)

Establish Regional Monitoring System for Programs Serving Children Birth Through Age Three. We recommend the Legislature establish a regional monitoring system for programs serving children birth through age three. Specifically, we recommend the Legislature direct CDE to contract with regional nonprofit or public entities (such as AP agencies or county offices of education) to inspect and monitor centers and FCCHs to ensure they meet required standards. Based on funding provided for similar monitoring systems within California, we believe the cost of the regional system would be in the low tens of millions of dollars. These costs could be covered by redirecting remaining quality dollars, redirecting existing administrative funds, or augmenting funding for AP agencies or county offices of education. (Moving forward, the state also could consider whether CDE should play a role in ensuring consistency in the monitoring of providers.)

Transition

Main Elements of a Transition Plan. In the first year of the transition to a fully voucher–based system, we recommend the state create a new reimbursement rate structure, monitoring system, and program standards, as well as develop associated regulations. In year two, we recommend beginning to implement the changes by applying the new reimbursement rates to all existing voucher slots, beginning to convert contracted slots to vouchers, beginning to equalize service levels across counties, providing some one–time funds to help providers learn about and meet any higher program standards, and designating a small amount of ongoing funds for reinstating the CELs. In years three through five of the transition, we recommend the state complete the phase out of contracted slots and the equalizing of service levels across counties.

Task CDE With Working Through Certain Implementation Decisions. Many implementation decisions will arise if the Legislature pursues the Governor’s proposal to convert contracted slots to voucher–based slots. We recommend the Legislature adopt the Governor’s basic proposal to have CDE develop a transition plan but be more specific in what CDE is to address in the plan. Consistent with the elements laid out in the above paragraph, we recommend the Legislature task CDE with certain responsibilities, including developing regulations relating to modified program standards and a plan for converting contracted slots to vouchers.

After Initial Restructuring Plan Completed, Recommend State Examine Three Other Related Issues. After addressing the overarching issue of converting contracted slots to voucher slots, we recommend the Legislature consider three other areas for possible restructuring: (1) the CalWORKs stages of child care, (2) care for school–age children, and (3) the funding model for AP agencies. For CalWORKs care, the Legislature could explore ways to treat CalWORKs families more similarly to other low–income families. For school–age children, the state could consider alternative ways to coordinate and fund afterschool care and voucher–based care. For AP agencies, the state could consider funding models that might be more transparent and better linked to services provided.

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Conclusion

We commend the Governor for focusing attention on the state’s existing preschool and child care programs and putting forth proposals to improve them. As evident from earlier sections of this report, the state’s existing preschool and child care programs are fraught with inconsistencies in eligibility criteria, standards, funding rates, funding mechanisms, and oversight systems. Under these existing programs, otherwise similar children are treated differently for reasons such as their birth month or location. Given the breadth and depth of these existing problems, we encourage the Legislature to pursue restructuring of both subsidized preschool and child care. In both areas, our packages of recommendations are intended to help give the Legislature starting points. Should the Legislature wish to pursue restructuring, much work remains to be done. The Legislature would need to dedicate concerted attention over the next several months to develop plans for restructuring, then allow at least a few years for implementing those plans.