Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

Child Care

The Governor's budget proposes a number of significant reforms to California's subsidized child care system. These proposals effectively prioritize limited child care resources. However, the Governor's proposals lack important policy, implementation, and administrative details that would help the Legislature weigh state savings against reducing child care services for a significant number of lower-income families. We evaluate the proposals' effect on children, families, and the state budget, and present some alternative approaches.

Background

California's subsidized child care system is primarily administered through the State Department of Education (SDE) and the Department of Social Services (DSS). A limited amount of child care is also provided through the California Community Colleges. Figure 1 summarizes the funding levels and estimated enrollment for each of the state's various child care programs as proposed by the Governor's 2004-05 budget. 

As the figure shows, the Governor's 2004-05 budget proposes about $3 billion ($1.8 billion General Fund) for the state's child care programs. This is a decrease of about $60 million from the estimated current-year level of funding for these programs. About $1.4 billion (49 percent) of total child care funding is estimated to be spent on child care for current or former California Work Opportunity and Responsibility to Kids (CalWORKs) recipients. The total proposed spending level will fund child care for approximately 684,100 children statewide in the budget year.

CalWORKs Child Care System

State law requires that adequate child care must be available to CalWORKs recipients receiving cash aid in order to meet their program participation requirements (a combination of work and/or training activities). If child care is not available, then the recipient does not have to participate in CalWORKs activities for the required number of hours, until child care becomes available. The CalWORKs child care is delivered in three stages:

• Stage 1. Stage 1 is administered by county welfare departments (CWDs) and begins when a participant enters the CalWORKs program. In this stage, CWDs refer families to resource and referral agencies to assist them with finding child care providers. The CWDs then pay providers directly for child care services.
• Stage 2. The CWDs transfer families to Stage 2 when the county determines that participants' situations become "stable." In some counties, this means that a recipient has a welfare-to-work plan, or employment, and has a child care arrangement that allows them to fulfill their CalWORKs obligations. In other counties, stable means that the recipient is off aid altogether. Stage 2 is administered by SDE through a voucher-based program. Participants can stay in Stage 2 while they are in CalWORKs and for two years after the family stops receiving a CalWORKs grant.
• Stage 3.In order to provide continuing child care for former CalWORKs recipients who reach the end of their two-year time limit, the Legislature created Stage 3 in 1997. Recipients timing out of Stage 2 are eligible for Stage 3 if they have been unable to find other subsidized child care. Assuming funding is available, former CalWORKs recipients may receive Stage 3 child care as long as their income remains below 75 percent of the state median income (SMI) level and their children are below age 13.

Non-CalWORKs Child Care System

As discussed above, CalWORKs recipients are guaranteed child care in certain programs that are reserved for current and former CalWORKs recipients. In contrast, non-CalWORKs child care programs (primarily administered by SDE) are open to all low-income families at little or no cost to the family. Access to these programs is based on space availability and income eligibility. This is because child care for low income non-CalWORKs families is not fully funded and waiting lists are common.

Families receive child care subsidized by SDE in one of two ways, either by (1) receiving vouchers from the Alternative Payment (AP) program providers that offer an array of child care arrangements for parents or (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.)

Current-Year Child Care Reforms

As part of the 2003-04 budget package, the Legislature approved a number of child care reforms that affected both CalWORKs and non-CalWORKs child care. These changes to eligibility and provider reimbursement rates are described below.

Elimination of Child Care Eligibility for 13-Year Olds. Budget trailer bill provisions eliminated child care services for 13-year olds. This age group could previously receive subsidized care if they were in families with incomes below 75 percent of the SMI level.

Elimination of Child Care Eligibility for "Grandfathered" Families. In 1997, the Legislature reduced the family income eligibility requirements for subsidized child care from 100 percent to 75 percent of the SMI, adjusted for family size pursuant to Chapter 270, Statutes of 1997 (AB 1542, Ducheny). However, Chapter 270 specified that children from families with incomes between 75 percent and 100 percent of SMI that were already receiving subsidized care could maintain (be grandfathered in) their right to such care as long as their family income did not exceed 100 percent of SMI. The 2003-04 budget package eliminated this eligibility exception.

Changes in Regional Market Rates. The state reimburses AP child care providers based on the regional market rate (RMR). The RMR is a survey of what child care providers charge in each region. This information is used to determine the maximum reimbursement rate the state will pay providers in any given region. Separate rates are calculated depending on provider type, age of children, and time in care. The Legislature lowered the maximum reimbursement rate from the 93^rd percentile to the 85^th percentile of the RMR. This means that under the new policy, the state will fully reimburse about 85 percent of regional providers, and will not fully reimburse the 15 percent of providers with the highest costs.

Governor's Budget Proposes Additional Reforms

Figure 2 compares the Governor's child care reform proposals to current law. The Governor's budget proposes a number of reforms to the CalWORKs and non-CalWORKs subsidized child care systems including changes in program eligibility, family fees, and provider reimbursement, which we describe below.

Eligibility Restrictions

The Governor's budget proposes several child care eligibility changes. The administration estimates that these changes would result in combined savings of about $84.8 million and approximately 20,000 children losing eligibility for subsidized child care. (The Governor's budget assumes that the 11 and 12 year olds that lose eligibility for subsidized child care would receive after-school care under the proposal.) The proposed eligibility restrictions achieve savings by eliminating the funding associated with the "freed-up" child care slots that are vacated due to eligibility restrictions rather than redirecting the savings to fund child care for children on waiting lists. We summarize the proposals, describe the impact of the proposed eligibility changes on children and families, and offer issues for legislative consideration.

Income Eligibility

The Governor's proposal to create a three-tiered child care eligibility structure reflecting the cost-of-living differences among counties has merit. The proposed eligibility structure would, however, lower the income eligibility threshold for subsidized child care in medium- and lower-cost counties, resulting in an estimated 1,900 children losing eligibility for subsidized child care programs for a state savings of $9.3 million in 2004-05. While the proposal lowers the eligibility threshold, it does maintain eligibility for families with the lowest income.

Proposal Creates a Three-Tiered Income Eligibility Structure. Under current law, income eligibility (last increased in September 2000) for child care is based on the SMI (adjusted for family size). The administration proposes creating a three-tiered income eligibility structure that reflects the differences in cost of living among counties. Current eligibility levels for families in "high-cost" counties would remain the same, while eligibility for families in all other counties would be reduced. Figure 3 shows the proposed income eligibility levels for subsidized child care. As the figure shows, a family of three in a "medium-cost" county with monthly income above $2,729 would no longer be eligible for subsidized child care.

The Governor's budget proposes basing income eligibility thresholds on the fixed dollar amount shown in Figure 3 beginning in October 2004. This amount would be adjusted annually in accordance with changes in the California Necessities Index (CNI). The income eligibility changes would result in an estimated 1,900 children losing eligibility for child care for a total state savings of $9.3 million.

Child Care Costs Vary by Region. Like the cost of living, child care costs vary across the state. A recent study done by the Public Policy Institute of California and the SPHERE Institute showed that both family-based care and center-based care was significantly more expensive in the Bay Area, with the highest statewide costs in Santa Clara, San Francisco, and Marin Counties. Furthermore, the study showed that child care costs varied across the state.

Conclusion. We believe that an income eligibility system that takes regional cost of living into account has merit because a family living in a high cost region of the state will, on average, need to spend more on housing, child care, food, and other necessities.

In considering the administration's proposal, the Legislature should first evaluate the merits of a differential income eligibility system, and then determine the level of savings it would want to achieve with such a policy. The administration has devised a differential income eligibility system by adopting the current income eligibility threshold as the eligibility ceiling in high cost counties and then lowering eligibility thresholds in low and medium cost counties. As a result, the administration's proposal generates General Fund savings. Alternatively, a state income eligibility system that recognizes differences in regional costs of living could be developed in a fiscally neutral way.

Age Eligibility

The administration proposes to eliminate subsidized child care for 11 and 12 year olds, except when after-school programs are not available to serve these children. Under the proposal, 11 and 12 year olds would be given priority in after-school programs. Although we believe that the proposal is reasonable given the state's fiscal constraints, our analysis indicates that the administration has significantly overestimated savings resulting from this proposal. In addition, the proposal lacks key details regarding the definition of "available" as it applies to after-school programs, as well as important implementation details.

Proposal Restricts Eligibility for 11 and 12 Year Olds. Under current law, children age 12 or below from families with incomes below 75 percent of the SMI are eligible for child care. The administration proposes to eliminate child care eligibility for 11 and 12 year olds when after school programs are available for an estimated savings of $75.5 million. The administration estimates that about 18,000 children ages 11 and 12 would lose subsidized child care eligibility and obtain after-school care.

Governor's Proposal Lacks Detail. The proposal lacks key details that are necessary to evaluate both the number of children that might be affected by this proposal as well as projected savings. For example, the administration's policy states that 11 and 12 year olds will lose child care eligibility only if after-school programs are available to the child. However, it is unclear what constitutes "availability." After-school programs typically operate for only a limited time period, often no later than 7:00 p.m., and usually not on the weekends and during the summer. About 70 percent of the working adults receiving CalWORKs are employed in the service or retail trade industries that often require nontraditional work hours. The administration's policy is unclear as to whether or not the definition of available would include a standard that after-school programs be available to CalWORKs participants even on nights and weekends.

Another area needing clarification is how the proximity of after-school programs to the child's residence or a parent's employer would be factored into determining availability. For example, some families may face transportation or other barriers that prevent them from accessing after-school programs.

Availability of Current After-School Programs. The state and federal governments currently fund two major before and after-school programs—the After School Education and Safety Program and the 21^st Century Community Learning Centers—for K-12 students in California. The Governor's budget includes $121.6 million (Proposition 98) for the After School Education and Safety Program to serve about 133,000 students. At some time in the future, Proposition 49 (passed by the voters in November 2002) will require an additional $429 million annually for the program. (Please see the discussion below.) Federal 21^st Century Learning Centers also provide before- and after-school services. In the current year, California received about $76 million in federal funds to serve about 79,000 students.

Although schools currently offer an array of after-school programs, it remains uncertain whether these programs have the capacity to accommodate the 18,000 11 and 12 year olds estimated to lose child care eligibility under the Governor's proposal. In some areas, there may be waiting lists for after-school programs. If the programs have the capacity, these additional students would in effect displace generally younger students currently being served by the program. This is because the 11 and 12 year olds would have priority in publicly supported after-school programs under the Governor's proposal.

Estimated Savings Not Likely to Be Achieved. The administration's stated intention is that either 11 and 12 year olds should receive care in after-school programs, or when after-school programs are not available, through the existing subsidized child care system. Yet, the administration's savings estimate assumes that all 11 and 12 year olds will be eliminated from the child care system. We believe that this expectation is unrealistic given that many CalWORKs recipients work in industries often requiring nontraditional work hours, when traditional after-school programs may not be available.

Conclusion. The Governor's proposal to eliminate subsidized child care eligibility for 11 and 12 year olds when after-school care is available, significantly overestimates savings and lacks important details the Legislature needs to evaluate the proposal.

Stage 3 Eligibility Limits

The Governor's budget proposes to limit Stage 3 CalWORKs child care to one year (in addition to two years in Stage 2) once a family has left cash aid, and allow CalWORKs families to sign up for a slot in the non-CalWORKs child care system as soon as they begin to earn income. Those families currently in Stage 3 child care would have one more year of eligibility. Given limited child care resources, we believe the proposal is reasonable because it addresses the differential treatment of working poor families and families previously in CalWORKs. However, limiting eligibility for Stage 3 child care creates a transition problem for families currently in Stages 2 or 3 of the CalWORKs child care system. We offer two options that would help address this transition problem.

Proposal Would Limit Stage 3 Child Care to One Year. Generally, families are eligible for Stage 3 child care after they have been in Stage 2 child care for two years. Under current budgeting practices, families may remain in Stage 3 until their income exceeds 75 percent of the SMI or until their children are 13 years old or older. The Governor's budget proposes restricting the amount of time that a family can receive Stage 3 child care to no more than one year after they have left cash aid and have exhausted their two-year transitional eligibility in Stage 2. Under the proposal, families who began receiving Stage 3 services on or before June 30, 2004 and meet other eligibility standards will be allowed to continue receiving services until July 1, 2005. As a result, the administration estimates that budgetary savings and Stage 3 caseload reductions will not be realized until 2005-06.

Proposal Allows CalWORKs Families to Apply for Non-CalWORKs Child Care as Soon as They Have Income. Current practice generally prohibits CalWORKs families from signing up on a waiting list for non-CalWORKs child care until they no longer receive CalWORKs aid. The Governor's budget proposes to allow CalWORKs families to apply for such care as soon as they have some income, even while they are still on aid. This change is intended to help ensure that these CalWORKs families would not be disadvantaged in accessing child care once they leave CalWORKs.

Stage 3 Reforms May Disadvantage Certain Current and Former CalWORKs Families. This proposal would disadvantage some current and former CalWORKs families because these families would not have had the benefit of putting their names on a non-CalWORKs child care waiting list at the time they started earning income. Generally, the lowest-income families on a non-CalWORKs child care waiting list are given priority for available child care slots. These current and former CalWORKs families may have higher incomes then other families on a child care waiting list and, therefore, they may be given lower priority for available child care slots. Also, current Stage 3 families may simply have less time to move up the waiting list.

We view the disadvantages for current Stage 2 and 3 families as a transition problem that the Legislature may want to address. If the Legislature decides to accept the administration's proposal to limit Stage 3 to one year, it may want to consider the following options that would help to mitigate some of the barriers to child care that some families might experience as a result of the proposed Stage 3 reforms.

• Allow Families in Stages 2 and 3 Child Care to Remain Eligible. This option would allow current CalWORKs families to sign up for non-CalWORKs child care immediately, but remain eligible for Stage 3 eligibility until they are able to find a slot in the broader subsidized child care system. Under this option the Governor's one year limit on Stage 3 only applies to future Stage 3 families. This option would assist CalWORKs families, but would lower out-year savings.
• Allow Families in Stage 2 and 3 Child Care to Remain Eligible for Up to Three Years. As a variation of the above option, for three years after implementation of the proposed change CalWORKs families would maintain Stage 3 eligibility, after which time they would not be able to extend their time in Stage 3, regardless of whether or not they secured other arrangements. Again, this option would smooth the transition to regular subsidized child care for CalWORKs families, but would lower out-year savings, compared to the Governor's budget.

Although the above alternatives reduce out-year savings, they also reduce the potential that families will return to CalWORKs to obtain needed child care. In addition, these alternatives would reduce future Stage 3 child care costs once the respective transition periods conclude. 

Conclusion. The current child care system provides differential eligibility for CalWORKs and non-CalWORKs families. Specifically, families that leave CalWORKs receive child care until they are no longer income or age eligible, while working poor families receive subsidized child care only if space is available. The Governor's Stage 3 proposal addresses this differential treatment. Accordingly, we believe that the Governor's proposal is reasonable. However, we do recognize that there is a transition issue for families currently in Stage 2 or 3 child care, and provide two options to address that circumstance.

Eligibility Limits for Nonworking Parents

The administration proposes to limit eligibility for families who are eligible for child care based on their participation in education and training activities to two years. All families would receive two additional years of eligibility after the policy is implemented. Given limited child care resources, we believe this proposal is reasonable.

The administration proposes to limit eligibility for families who are eligible for child care based solely on their participation in education or training-related activities to two years. Currently, there is no time limit on eligibility for this group. Upon implementation of the proposed change, families would receive an additional two years of eligibility regardless of how many years they had been receiving child care. The administration does not anticipate out-year savings because it will make the vacated child care slots available to other families.

The administration was unable to provide information on the number of children who are eligible for subsidized child care based solely on parental participation in education and training activities. Similarly, the administration was unable to estimate how many children would be impacted by this change. Given limited child care resources, however, we believe that it is reasonable to limit eligibility for families that are not working, but participating in education and training activities.

Weighing the Costs and Benefits of Restricting Child Care Eligibility

As the Legislature considers whether to adopt the child care eligibility changes contained in the Governor's budget proposal, it should examine the impact on the state budget, families, and children. The state is facing a difficult financial situation that may necessitate limiting the level of service provided through public programs. The proposed child care eligibility restrictions are estimated to save $164.8 million (all funds), which could help address the budget shortfall or be used for other legislative priorities.

On the other hand, research has shown that access to reliable, affordable child care is an important part of employment stability for low-income families. Eliminating eligibility for child care for some low-income families may make them more susceptible to employment disruptions that could increase their likelihood of needing CalWORKs and other income dependent public aid programs. This is especially relevant beginning in 2005-06 under the budget plan, as transition funding would end and Stage 3 families would lose their CalWORKs child care eligibility. The Governor's budget does not propose any additional non-CalWORKs child care spending related to his proposed child care reforms. Under the Governor's proposals, children who had formerly received care through the CalWORKs child care system would begin moving into the non-CalWORKs system in 2005-06. This could result in increased demand for child care in a system that often has waiting lists for eligible families. As a result, additional families may not be able to secure subsidized child care, which could result in additional employment disruptions for some families.

Provider Reimbursement

While we believe the policy objective is sound, we withhold recommendation on the administration's proposal to create a tiered-provider reimbursement rate structure pending additional detail from the administration regarding health, safety, and education standards as well as implementation and administration issues.

Proposal Creates a Tiered Reimbursement Rate Structure. Generally, AP providers are reimbursed under current law up to the 85^th percentile of the rates charged by other providers in the area offering the same type of child care. Figure 4 shows the administration's proposed reimbursement rate structure. The Governor's proposal creates a six-tiered child care reimbursement rate structure that reimburses providers from the 40^th to 85^th percentile of the RMR, depending on licensing and accreditation, health, safety, and childhood development training, and the mix of subsidized or unsubsidized families served. This means that under the proposed new structure, licensed exempt providers without specialized education or training will be reimbursed by the state at a rate no greater than the 40^th percentile of the rate charged by child care providers in the region. At the other end of the proposed reimbursement rate structure, licensed, accredited providers with specialized training will be reimbursed by the state at a rate up to the 85^th percentile of the rate charged by regional child care providers.

We believe that the policy of basing reimbursement rates on a provider's level of training, education, and other factors has merit in that it (1) reflects the reimbursement structure in the nonsubsidized child care market and (2) better reflects the cost of providing care.

Legislature Needs Additional Detail to Evaluate Merits and Impact of Proposal. The administration's proposal does not provide adequate detail that would allow the Legislature to fully evaluate how the proposed changes will affect child care providers, families, and quality of care. The administration includes a provision that SDE and DSS, in consultation with the Department of Finance (DOF) shall establish a standardized process for documenting a provider's early childhood education, health and safety training, and accreditation for purposes of determining a reimbursement limit. However, the true impact of the proposal on families, counties, and state finances cannot be fully evaluated until the Legislature receives more information regarding these and other details such as rate determination and the oversight process.

Analyst's Recommendation. We believe the policy of tying reimbursement rates to the level of training, education, and other factors has merit. However, we withhold recommendation on the administration's proposal to create a tiered child care provider reimbursement structure given uncertainties regarding important definitional, implementation, and administrative details.

Family Fees

The administration proposes to lower the income threshold at which a family must begin paying fees, raise the maximum amount a family would have to pay for child care, and limit fee deferral for certain children at risk for neglect or abuse. The combined policy changes would result in state savings of about $22.3 million and would increase fees for about 77,250 children. In considering this proposal the Legislature may want to examine linking the amount of family fees paid to the provider's cost of providing care, level of training, licensure, and other factors.

Proposal Increases the Number of Families Required to Pay a Fee and Increases Maximum Amount of Fees. Currently, families are required to pay a fee for child care once their income reaches 50 percent of the SMI. The fees are not to exceed 8 percent of their total income. The administration's proposal would instead require families to pay a fee once they exit cash aid—approximately 40 percent of the SMI—in an amount not to exceed 10 percent of family income. For example, under the Governor's proposal a family of three with an annual income of about $25,000 would pay about $56 more for child care each month. Figure 5 shows the proposed new fee schedule.

The Governor's budget further proposes that families pay the family fees directly to providers to achieve administrative simplicity. Currently, counties have some flexibility in the way fees are collected. In most counties fees are collected through an AP Program or county agency which then reimburses providers. In some counties, fees may also be collected directly by providers. In most cases, the administration's proposal will shift the burden of collecting the fees from the counties to child care providers. To the extent that providers are unable to collect these fees, it would effectively result in a provider rate reduction.

Fee Limitation for CWS Referred Kids. Under the Governor's proposal, families receiving a referral for child care services from Child Welfare Services (CWS) because the child is considered to be at risk for neglect or abuse are exempt from family fees for no more than one year. Currently they are exempt indefinitely. Children who are considered at risk and are referred by a non-CWS professional will be exempt from family fees for no more than three months. 

Weighing the Costs and Benefits of Fees. Increasing family fees will allow the state to fund child care for more children at the same level of state funding. Although the Governor's proposal recognizes the ability of families to pay for child care through its sliding scale fee structure, increasing fees puts an additional financial burden on relatively low-income families.

Linking Fees to Cost of Care. When considering this proposal, the Legislature may also wish to consider basing the fee structure on the cost of care, thereby enabling families to make decisions about the type of care they utilize related to the amount they pay. Requiring families in the subsidized child care system to pay a portion of the cost of care more accurately reflects the reimbursement arrangements they will be subject to once they leave the subsidized system.

Conclusion. The administration's child care fee proposals would increase fees for about 77,250 children. As the Legislature considers this proposal, it may want to also consider linking the amount of family fees paid to the provider's level of training, licensure, the cost of providing care, and other factors.

Proposition 49: After School Education and Safety Program

We find that, based on the Governor's proposed budget and our fiscal forecast, Proposition 49 would not trigger an increase in funding for the After School Education and Safety Program until 2007-08. In part, the exact timing of when Proposition 49 will require additional spending depends on (1) how the state solves the structural imbalance between General Fund expenditures and revenues and (2) future growth in General Fund revenues.

As approved by voters in 2002, Proposition 49 requires that the state appropriate additional funding for the After School Education and Safety Program beginning as early as 2004-05. The state must increase funding for the program from the $121.6 million provided in 2003-04 to $550 million (a $428.4 million increase) when certain conditions are met, which we describe below. The funding for Proposition 49 is "continuously appropriated" (that is, there is no need for annual legislative action to appropriate funds). When additional funds are provided for the program, they will be "on top of" the state's minimum guarantee funding requirement for Proposition 98 for that year (referred to as an "overappropriation").

When Will Proposition 49 Trigger?

Proposition 49 requires the state to provide additional funding for the After School Education and Safety Program when specified General Fund spending reaches a required level. The Proposition 49 "trigger" funding level is determined by (1) establishing a base year between 2000-01 and 2003-04 in which the "nonguaranteed General Fund appropriation" level was the highest and (2) adding $1.5 billion to that base year funding level. Our interpretation of the initiative is that nonguaranteed General Fund appropriations are non-Proposition 98 General Fund appropriations plus any over-appropriations of the Proposition 98 minimum guarantee.

Figure 6 shows the calculation of the nonguaranteed General Fund appropriation level that would trigger the additional $428 million in spending on after-school programs. The figure shows that 2001-02 is the base year, and that the base appropriation level is $54.7 billion. This means that the state would not have to spend additional dollars to meet the proposition's requirement until nonguaranteed General Fund appropriations in any year exceeded this amount. At such time, all spending above the base amount would go to after-school programs until the $550 million cap was reached. In 2004-05, the Governor's budget proposes a nonguaranteed appropriation level of $49.3 billion, $5.4 billion less than the trigger level.

Based on our revenue forecast and assuming implementation of the Governor's budget, we estimate that the state would not be required to augment after-school spending until 2007-08. However, when the initiative will actually trigger will depend largely on two factors:

• Solution to the Structural Deficit in 2004-05 and Beyond. The Governor has proposed to solve the 2004-05 structural imbalance between General Fund expenditures and revenues through a combination of expenditure reductions, a property tax shift from local governments, borrowing, and deferrals. To the extent the final budget resolution involves less expenditure reductions, the state would trigger the Proposition 49 appropriations sooner.
• Growth in the Economy. If General Fund revenue grows faster than either the LAO or the Department of Finance have forecasted, the augmentation requirements could trigger earlier than 2007-08.