Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Child Care and Development

The 2001-02 Governor's Budget proposes $2.1 billion from the General Fund and federal funds for child care and child development programs—$1.4 billion General Fund and $756 million federal funds—in the State Department of Education (SDE). This is an increase of $96 million from the current-year level of funding for the programs. This increase results from:

• $97.8 million decrease in California Work Opportunity and Responsibility to Kids (CalWORKs) Stage 2 child care, due to a decline in the estimated number of families whose work status has "stabilized."
• $41.7 million for the CalWORKs Stage 3 "set-aside," in order to annualize costs for those families exceeding their two years of Stage 2 child care in the current year ($31.7 million) and to fund those families making this transition in the first month of the budget year ($10 million).
• $66.8 million to annualize expansion of child care and state preschool programs begun in the current year.
• $46 million for a cost-of-living adjustment for child care and development programs.
• $20 million in half-year funding to expand the After School Learning and Safe Neighborhoods Partnerships Program. (We discuss this augmentation in further detail in the After School Programs section of this chapter.)
• $13.9 million for first-year implementation of the Kindergarten Readiness Pilot Program established by Chapter 1022, Statutes of 2000, (AB 25, Mazzoni).
• $5.4 million to help compensate child care and development contractors for increased costs associated with state minimum wage increases.

In addition, $58.3 million in unspent child care funds (General Fund) from 1999-00 are proposed for one-time expenditure in the budget year.

The Subsidized Child Care System

The SDE administers a variety of subsidized child care programs that serve low-income families at little or no cost. Figure 1 (see next page) summarizes these programs. As the figure indicates, certain alternative payment (AP) programs are reserved for current and former recipients of CalWORKs. All other programs, however, are also open to families when they leave CalWORKs-funded child care, based on space availability and income eligibility.

Figure 1 shows that SDE provides child care slots (on an average monthly basis) for roughly 500,000 children. Families receive child care subsidized by SDE in one of two ways, either by (1) receiving vouchers from the AP program providers that offer an array of child care arrangements for parents or by (2) being assigned space in public or private child care centers or "family child care homes" that contract with SDE to provide child care. (Family child care homes provide care in the home of the provider.) As indicated in Figure 1, the $2.1 billion total for SDE child development programs in the budget year includes:

• $977 million for centers or family homes contracting with SDE (commonly referred to as "center-based" programs).
• $906 million for AP programs.
• $122 million for other programs.

The remaining $127 million is for various activities and funding adjustments that support these programs.

The 2001-02 Governor's Budget provides another $681 million for CalWORKs child care in other departmental budgets, including $666 million in the Department of Social Services (DSS) budget. This brings the state's total child care and development expenditures from state and federal funds to over $2.7 billion in the budget year. This total does not include another important piece of California's subsidized child care system—the federal Head Start program, which provides preschool services at many sites in California but is managed directly by the federal government without state involvement. In federal fiscal year (FFY) 2000, the federal government spent nearly $643 million on Head Start programs in California, serving 92,000 children. The federal budget for FFY 2001 includes an increase of $93 million for California Head Start programs. This will serve roughly an additional 5,000 children.

Administration's Review of Child Care Policies and Resources

We recommend that the administration report to the Legislature prior to budget hearings on the progress of its review of child care policies and resources. This report should include (1) detailed information on the child care reform options being modeled and analyzed, (2) preliminary findings, and (3) the administration's plan for completing a final report in a timely manner.

In January of last year, the administration—with the State and Consumer Services Agency (SCSA) designated as the lead agency—launched a review of child care policies and resources, including ways of funding child care demand within available resources for (1) families transitioning off CalWORKs and (2) working poor families. The administration stated that the review would examine current eligibility standards, family fees, federal and state subsidy levels, and how existing resources may be more efficiently focused to serve more equitably the state's neediest families. The Supplemental Report of the 2000-01 Budget Act directed the administration to report to the State Board of Education, SDE, budget committees of the Legislature, and the Legislative Analyst's Office (LAO) by January 10, 2001, on the progress of its child care review. The language required that the report include detailed information on the child care reform options being modeled and analyzed by the administration. The supplemental report also directed the administration to submit a final report by March 1, 2001, on the findings and recommendations of its child care review.

The SCSA provided the Legislature the preliminary report on January 19, 2001. According to the report, the administration's child care review was delayed because SDE was late in providing much of the needed data on families receiving subsidized child care. (The 2000-01 Budget Act required SDE to provide various child care data reports to the Department of Finance (DOF), SCSA, and the LAO by September 1, 2000 for purpose of the review effort. The SDE did not provide this data until late December.) The SCSA is now using the data to test various economic models on how existing resources could more equitably serve low-income families. The administration intends to complete its child care review and provide a final report to the Legislature sometime in the spring.

In spite of any data collection delays, we believe the administration should be able provide the Legislature information about the types of child care models under consideration. We note in our discussion on CalWORKs child care that the 2001-02 Governor's Budget underfunds the estimated child care needs of former CalWORKs recipients. The administration's plan to address the needs of these families awaits completion of its child care review. Given the important budgetary and policy implications of the administration's child care review, the Legislature needs time to carefully review the administration's findings and recommendations as envisioned in the due dates established in last year's supplemental report.

In view of the above, we recommend that the administration report to the Legislature prior to budget hearings on the progress of its child care review, including (1) detailed information on the child care reform options being modeled and analyzed, (2) preliminary findings, and (3) its plan for completing a final report in timely manner.

The CalWORKs Child Care Program

The CalWORKs child care program is delivered in three stages.

Stage 1 is administered by county welfare departments (CWDs) and begins when a participant enters the CalWORKs program. In Stage 1, CWDs refer families to resource and referral agencies that help the families find child care providers. The CWDs then pay providers directly for the child care services.

Families transfer to Stage 2 when the county determines that the families' situations have become "stable"—that is, families develop a welfare-to-work plan and find a child care arrangement that allows them to fulfill the obligations of that plan. Stage 2 is administered by SDE through its voucher-based AP programs. Participants can stay in Stage 2 while on CalWORKs and for up to two years after the family stops receiving a CalWORKs grant. Because it is up to the CWD to determine when a recipient is stable, the time at which families transfer from Stage 1 to
Stage 2 varies significantly among counties. Some counties authorize the transfer to Stage 2 as soon as possible, while others wait until the family has left CalWORKs. The variance in county practice contributes to the state's uncertainty in budgeting child care funds for each stage.

Although Stages 1 and 2 are administered by different agencies, families do not need to switch child care providers upon moving to Stage 2. The real difference in the stages is in who pays the providers. In Stage 2, AP programs, operating under contracts with SDE, do this instead of CWDs.

Stage 3 refers to the broader subsidized child care system administered by SDE that is open to both former CalWORKs families and working poor families who never have been on CalWORKs. Once CalWORKs recipients leave aid, they have two years of further eligibility in Stage 2. During this time, they are expected to apply for "regular" Stage 3 child care (in contrast to the Stage 3 "set-aside" child care discussed below). We note, however, that typically there are long waiting lists for Stage 3 child care since demand from eligible families substantially exceeds available child care "slots." Families with incomes up to 75 percent of the state median are eligible for SDE's other subsidized child care programs, but priority is given to families with the lowest income. Most available slots therefore go to families with incomes below 50 percent of the state median. (In our Analysis of the 2000-01 Budget Bill, we recommended enactment of legislation to conduct a pilot test of a Wisconsin-style child care program in up to four counties in California, directed at addressing unmet needs of working poor families.)

The Legislature created the Stage 3 set-aside in 1997 in order to provide continuing child care for former CalWORKs recipients who reach the end of their two-year Stage 2 time limit. Recipients timing out of Stage 2 are potentially eligible for the Stage 3 set-aside if they have been unable to find regular Stage 3 child care. Provided funding is available—and legislative and administrative practice to date has been to fully fund estimated need—former CalWORKs recipients may receive Stage 3 set-aside child care as long as their income remains below 75 percent of the state median and their children are age 13 or below.

CalWORKs Child Care Budget

Current Year. As indicated in Figure 2 (see next page), the 2000-01 Budget Act provided $1.3 billion for CalWORKs child care. This total originally included a reserve of $127.9 million to be allocated to Stage 1 or Stage 2 depending on a subsequent determination of actual need. However, $100.3 million of this amount has since been allocated to meet the needs of Stage 1, leaving the reserve of $27.6 million shown in Figure 2. Spending for the Stage 3 set-aside is approximately $16 million greater than estimated at the time the budget act was enacted. The administration has proposed to fund this anticipated $16 million shortfall with savings from non-CalWORKs child care in the current year.

Budget Year. For 2001-02, the Governor's budget proposes $1.3 billion for CalWORKs child care. Of this total, $649 million is included in SDE's child care budget as shown in Figure 1. As indicated in Figure 2 (see next page), the proposed $1.3 billion total represents an increase of only $13.8 million over current-year spending. The major budget changes for the CalWORKs child care budget include a $41.7 million increase for the Stage 3 set-aside and a $97.8 million decrease in Stage 2 child care based on estimated caseload decline. (Below, we discuss the Governor's proposed funding for the Stage 3 set-aside.) The budget includes a reserve of $100 million. Of this total, $88.5 million is "held back" from the estimated need for Stage 1 and Stage 2. The remaining $11.5 million is above the estimated need and represents a "true" reserve for Stage 1 and Stage 2.

Governor's Budget Does Not Fully Fund Stage 3 Set-Aside

We recommend that the Legislature appropriate $61 million in new federal funds for child care to fully fund the estimated need for the Stage 3 set-aside, in order to (1) meet the Legislature's intent to provide ongoing child care to former California Work Opportunity and Responsibility to Kids (CalWORKs) families who exceed their two-year time limit in Stage 2, and (2) avoid the potential costs of families returning to the welfare system. We further recommend appropriation of an additional $35 million in new federal funds to provide more child care slots for non-CalWORKs working poor families.

As Figure 2 shows, the Governor's budget provides $157.4 million for the CalWORKs Stage 3 set-aside. This represents an increase of $41.7 million above the current-year estimate of $115.7 million. The state's practice so far has been to fully fund the set-aside on a year-by-year basis. Of the increased funds, $31.7 million would cover annualization costs for families who "timed out" of Stage 2 child care part way through the current year. For families timing out during the budget year, this leaves $10 million—or only enough to fund the estimated number of families who will time out during the single month of July 2001. This represents a shortfall of about $61 million for the child care needs of families expected to time out during the other 11 months of 2001-02. As mentioned above, the administration plans to address Stage 3 funding needs after its review of child care policies and resources. According to DOF staff, the proposed budget does not fully fund the child care needs of families who are expected to time out in the budget year due to possible budgetary and policy changes regarding the state's subsidized child care system. However, the DOF has been unable to provide an analytic rationale for funding only one month into the budget year.

As stated above, the Legislature's practice so far has been to fully fund the Stage 3 set-aside. We believe that the administration's decision to provide new funding only for the child care needs of former CalWORKs recipients exceeding their Stage 2 time limit during the first month of the budget year runs counter to the Legislature's prior decisions regarding the Stage 3 set-aside. Moreover, if former CalWORKs recipients are unable to find care for their children in the general subsidized child are system and consequently "fall back" on CalWORKs aid, state and local welfare costs could increase substantially.

The recently passed federal budget includes an increase of about $96 million in child care funds for California that is not included in the Governor's proposed budget. These funds can be used to support children of all ages in the state's child care programs for low-income families. In order to (1) meet the Legislature's intent to provide ongoing child care to former CalWORKs families who time out of Stage 2 and (2) avoid families returning to the welfare system, we recommend that the Legislature appropriate $61 million from these new federal funds to fully fund the estimated need for the Stage 3 set-aside. We further recommend that the Legislature appropriate the remaining $35 million in new federal funds to provide additional child care slots for non-CalWORKs working poor families, in order to meet unfilled child care needs of these families. (Increase Item 6110-196-0890 by a combined $96 million.)

General Fund Carryover

We recommend that the Legislature eliminate the statutory authority permitting the State Department of Education to carry over unspent General Fund child care funds, in order to restore the Legislature's authority and flexibility to use the funds for any Proposition 98 priority.

In addition to the new state and federal funding that is proposed to support child care and development programs in 2001-02, the budget also proposes to spend $58.3 million in state child care funds that have been carried over from 1999-00. The budget specifically provides:

• $44.6 million for the Child Care Facilities Revolving Fund.
• $6.7 million for instructional materials and for facilities renovation.
• $4 million for training, development, and dissemination of classroom curriculum linked to Pre-Kindergarten Guidelines.
• $2 million for accounts payable.
• $1 million for the Home Instruction Program for Preschool Youngsters.

The budget bill contains language under Item 6110-196-0001, Provision 2, that permits SDE to allocate up to $6 million above the estimated $58.3 million in carryover funds for instructional materials and equipment and for facilities renovation and repair as necessary. The proposed language also states that additional carryover funds in excess of this $6 million shall not be expended prior to approval of a plan by the DOF.

Education Code Section 8278 permits SDE to carry over General Fund appropriations for child care and development activities for two years. Funds not spent in one year may be carried over and spent on one-time child development activities described in statute. In general, carryover funds proposed for reallocation in the budget for a given year are generated from the child development appropriation from two years earlier. Thus, most of the carryover in the 2001-02 budget was generated in 1999-00.

Under existing law, the SDE has established criteria and procedures for the reallocation of funds not spent in child care contracts, in accordance with the following priorities: (1) paying outstanding balances on current accounts, (2) reimbursing AP programs for the provision of additional services not originally reimbursed, and (3) one-time child care expenditures, including instructional materials approved by SDE, maintenance of existing facilities, and the implementation of "capacity building" activities to increase the quantity of child care services. One type of capacity building activity often funded with carryover funds is the Child Care Facilities Revolving Fund, which assists child care providers with the purchase and relocation of child care facilities.

Increasing General Fund Carryover

At the time the Legislature originally authorized SDE to carry over unspent child care funds, the amount of General Fund carryover was relatively low. However, as indicated in Figure 3, the level of carryover has grown substantially in recent years (from $11.6 million in 1996-97 to an estimated $58.3 million in 1999-00). Moreover, the percentage of the carryover amount compared to the original appropriation for a given fiscal year also has increased. According to SDE, one of the reasons for carryover is the inability of child care providers to expand the number of available child care slots in a short period of time. As a result, we believe that the Legislature should take such constraints into account when considering large-scale expansion of child care programs and "ramp up" funding for these expansions on a deliberate basis.

Carryover Language Weakens Legislative Control

Given the increasing trend in the level of General Fund carryover from child care appropriations, we believe that the Legislature should reexamine SDE's authority to spend carryover funds on one-time child care expenditures, for two reasons. First, existing statute restricts the use of unspent funds to specific child development activities. We think the Legislature should have greater authority and flexibility on how to spend carryover funds. For example, under current law, General Fund carryover funds cannot be spent on one-time child care deficiencies, such as the estimated shortfalls in the current year for the child care needs of former CalWORKs recipients. Second, carryover funds can be used only for child development activities, which means these monies are unavailable for consideration in other education areas, even though these other areas may be of higher priority in any given fiscal year.

We believe that the Legislature should have the flexibility to use child care carryover funds for purposes aligned to its full range of education priorities. If carryover funds were treated like all other K-12 Proposition 98 expenditures, unspent child development allocations would be available for the Legislature to direct to any of its K-14 education priorities. The funds then would have to be appropriated in the budget or in another bill, thereby giving the Legislature an opportunity to determine the best use of the monies. Depending on the Legislature's assessment of education needs in any given year this might include child development or it might not.

In order to restore to itself full budgeting flexibility, we recommend that the Legislature eliminate the statutory authority permitting SDE to carry over unspent General Fund child care funds.

Other Issues

Child Care Data Collection

We recommend that the State Department of Education (SDE) report to the Legislature prior to budget hearings on its progress in developing a child care data collection and analysis system, including a time line for completing the feasibility study report authorized by the Legislature in the 1997-98 Budget Act. We further recommend that SDE explain why the state is not in compliance with federal reporting requirements and what steps the department is taking to come into compliance.

The state currently has little systematic data on key aspects of the state-subsidized child care system, including data on the extent of unmet need for child care by eligible low-income families. The Legislature, recognizing its need for better data on which to base policy and budgeting decisions, provided $22 million in one-time federal funds in the 1997-98 Budget Act for SDE to develop a child care data collection and analysis system. Of this amount, $2 million was for a feasibility study report for this system. The remaining $20 million was for other costs of implementing the system, and for interim data collection and reporting while the data collection and analysis system was being developed.

The department has made very little progress on the development of this system. Most of the funds provided for data collection in the 1997-98 Budget Act have been carried over in successive budgets. At the time of this analysis, SDE had encumbered only $2.1 million of the original $22 million appropriation. The department has used the $2.1 million to meet new federal data reporting requirements, begin the development of an interim data collection system, and collect data for the administration's child care review. As of this writing, SDE had yet to contract for the feasibility study, even though it is an essential first step in developing a statewide comprehensive child care data collection system.

We understand that SDE has been focusing on meeting federal data reporting requirements, which are part of the overall data system. The department also has had difficulty retaining and recruiting staff with the expertise to develop the system because of the demand in the job market for such expertise. (The Legislature authorized six positions in the 2000-01 Budget Act to perform child care data collection and analysis. As of this writing, two of the six new positions were still unfilled.) Despite SDE's efforts to collect data for the federal government, the state has failed to provide reports required for the past two years. This could jeopardize up to $12 million in federal funds for child care in California because the federal Department of Health and Human Services can withhold 4 percent of California's federal Child Care and Development Fund monies if all reporting requirements are not met. According to SDE, the federal government has waived this withholding of state funds for the time being, but it is unclear how long that waiver may last.

Given the importance of acquiring adequate data upon which to base policy and budgeting decisions for the $2.1 billion annual child care program, and the years that have passed since the Legislature first appropriated funds for the data system, we recommend that the department report prior to budget hearings on its progress in developing the system. This report should include the department's time line for completing the feasibility study report. We further recommend that the department explain why the state is not in compliance with federal reporting requirements and what steps the department is taking to come into compliance soon.

Kindergarten Readiness Pilot Program

We recommend that the Legislature modify budget bill language relating to the evaluation of the Kindergarten Readiness Program, in order to conform to current law requiring the State Superintendent of Public Instruction to contract for the evaluation.

The 2001-02 Governor's Budget includes $13.4 million under Item 6110-189-0001 for the first-year implementation of the Kindergarten Readiness Pilot Program established by Chapter 1022, Statutes of 2000 (AB 25, Mazzoni). The program is a voluntary project intended to test the effectiveness of raising the kindergarten admission age and expanding resources for kindergarten readiness programs.

Chapter 1022 specifies that the State Superintendent of Public Instruction (SPI) shall, by June 1, 2002, contract for an independent longitudinal evaluation regarding the effects of the change in the entry age for kindergarten. In the process of the evaluation, the SPI is required to consult with a state advisory group comprised of representatives from the administration and the Legislature, including the LAO. However, the Governor's budget proposes $500,000 for the LAO, not the SPI, to contract for the evaluation. Since the legislation clearly directs the SPI to contract for the evaluation, we recommend that the Legislature modify the first sentence of Provision 24 of Item 6110-001-0001, to read:

Of the funds appropriated in this item, $500,000 shall be available for the State Superintendent of Public Instruction to contract for an independent evaluation of the Kindergarten Readiness Pilot Program pursuant to Education Code Section 48005.45.