LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Child Care

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 2005-06 budget.

Figure 1

California Child Care Programs

(Dollars in Millions)


Control a



CalWORKs b




Stage 1c




Stage 2c




Community colleges (Stage 2)




Stage 3d












General child care




Alternative Payment programs
















    Totals—All Programs




a  Department of Social Services, State Department of Education, and California Community Colleges.

b  California Work Opportunity and Responsibility to Kids.

c  Includes holdback of reserve funding which will be allocated during 2005‑06 based on actual need.

d  Significantly reduced due to Governor's reform proposal to move current Stage 3 recipients to
general child care.

e  Does not include after school care, which has a budget of $250 million and is estimated to provide care for 249,500 school-aged children.

As the figure shows, the budget proposes about $2.6 billion ($1.3 billion General Fund) for the state's child care programs. This is an increase of about $33 million from the estimated current-year level of funding for these programs. About $1.2 billion (46 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. Virtually all of the remainder is spent on child care for non-CalWORKs low-income families. The total proposed spending level will fund child care for approximately 488,700 children statewide in the budget year.

Families receive subsidized child care in one of two ways: either by (1) receiving vouchers from county welfare departments or Alternative Payment (AP) program providers, or (2) being assigned space in child care or preschool centers under contract with SDE.

Eligibility Depends Upon Family Income and CalWORKs Participation

CalWORKs and non-CalWORKs families have differential access to child care in the current system. While CalWORKs families are guaranteed access to child care, eligible non-CalWORKs families are not guaranteed access, are often subject to waiting lists, and many never receive subsidized care, depending on their income.

CalWORKs Guarantees Families Child Care. State law requires that adequate child care 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:

Non-CalWORKs Families Receive Child Care If Space Is Available. 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. Because there are more eligible low-income families than available child care slots, waiting lists are common. As a result, many non-CalWORKs families are unable to access child care.

Governor's Child Care Reform Proposals

Figure 2 shows the child care reforms proposed by the Governor and their fiscal impact. The Governor's reforms fall into two broad categories: (1) eligibility for child care services and (2) provider reimbursement rates. The changes to eligibility feature a redistribution of child care slots to promote greater equity in child care access between CalWORKs recipients and the working poor. At the center of the rate reforms is a quality-driven tiered reimbursement rate structure. Most of the reforms would only affect the voucher program, leaving the SDE contracted programs basically unaltered.

Figure 2

Administration's Child Care Proposals

(In Millions)





Moving Stage 3 Child Care

Permanently expand the general Alternative Payment (AP) program by shifting all current CalWORKs Stage 3 child care recipients, and the associated funding, to the AP program, limiting guaranteed child care to a maximum of eight years and limiting Stage 3 to one year.


Creating Centralized Waiting Lists


Require counties to create a two-tiered waiting list for all subsidized child care: the first tier for families below 138 percent of the federal poverty level (FPL) and the second tier for families above that level.


Rebenching Child Care Eligibility

Shift eligibility determination to FPL measures rather than the current State Department of Education state median income calculations.


After School Care for 11- and 12-Year-Olds


Designate after school care as the default placement and require parents to submit a reason in writing that they cannot use the available after school program.


Reimbursement Rates


Tiered Reimbursement Rates


Reduce the amount the state is willing to pay license-exempt providers. Further, create fiscal incentives for all providers to raise the quality of the care they provide and encouraging additional training.


Equitable Provider Rates


Adopt regulations establishing an alternative rate setting mechanism for providers that only serve subsidized families. These regulations have been suspended for the last two years.


Eligibility Reforms

Shifting CalWORKs Families to AP Programs

The Governor proposes to shift Stage 3 California Work Opportunity and Responsibility to Kids (CalWORKs) child care to the State Department of Education's Alternative Payment (AP) program, in addition to creating centralized county waiting lists for subsidized child care. Timing problems under the Governor's proposal may disadvantage current CalWORKs recipients' attempts to receive long-term subsidized child care. To address this issue, we recommend delaying the shift of the Stage 3 program to the AP program until counties have created centralized waiting lists. We also recommend placing current CalWORKs participants on the waiting lists based upon the date that they first had earned income in the program.

Eliminating the Long-Term CalWORKs Child Care Guarantee

Under current law, current and former CalWORKs families are guaranteed child care as long as they meet eligibility requirements and have a need for child care. The Governor proposes shifting all current CalWORKs Stage 3 families (former CalWORKs recipients) into the AP program along with the associated funding and ending the child care guarantee for CalWORKs families. In other words, all families who are receiving Stage 3 child care as of June 30, 2005 would in the future be served by the non-CalWORKs AP voucher program. (Local AP providers assist families in locating child care and distribute vouchers to those families.) This shift would permanently expand the AP program. There would be no impact on families currently receiving service as their child care guarantee would not change. However, any families coming into Stage 3 CalWORKs after this point would be limited to one or two years.

Under this proposal, families who leave CalWORKs after June 30, 2005 would be allowed two years of transitional child care in Stages 1 and 2, and one year in Stage 3. In other words, they would be guaranteed child care for three years after leaving aid. If a family is currently off aid and in Stage 1 or Stage 2, the family would receive two years of Stage 3 child care while they are on the waiting list for a child care slot in the AP child care program. These families' child care guarantee would be for a maximum of four years after leaving aid, depending on the time they have left in Stage 2. Figure 3 shows the guaranteed time in child care for current and former CalWORKs families under current law and under the Governor's proposed reform.

Figure 3

CalWORKs a Child Care
Current Law and Governor's Proposal


CalWORKs Child Care Guarantee


Family Status

Current Lawb

Governor’s Proposal

Waiting List

Aided family
with earnings

Until family's income
exceeds 75 percent of SMI
c or children age out.

Remaining time in CalWORKs plus three years. Same age/income limits.

As soon as list
is created.

Aided family
without earnings

Same as above.

Same as above.

When parents
become employed.

Formerly aided family
in Stage 2

Same as above.

Up to two years in Stage 2 and two years in Stage 3.

As soon as list
is created.

Formerly aided family
in Stage 3

Same as above.

Until family's income

exceeds 75 percent of
c or children age out.

Child care guaranteed. No waiting list.

a  California Work Opportunity and Responsibility to Kids.

Current practice has been to fully fund Stage 3 child care, which allows all former CalWORKs families to be served.
However, Stage 3 is not an entitlement and is therefore subject to the appropriation of adequate funding.

c  State median income.

This proposal allows all CalWORKs families to place their names on the waiting list as soon as they have earned income. Therefore, CalWORKs families would not have to wait until leaving aid before they can compete for SDE's subsidized child care. However, they would need to wait until they have earned income, which would be problematic for the families nearing their CalWORKs time limits who have been participating in welfare-to-work activities other than employment (such as community service or vocational education). Adults in CalWORKs have a five-year time limit.

We note that in contrast to last year, this proposal preserves the child care guarantee for families already in Stage 3 and allows aided families to place their names on centralized waiting lists as soon as they have earned income. These changes address the major concerns we raised in the Analysis of the 2004-05 Budget Bill.

Two-Tiered Waiting Lists

In addition to the changes in Stage 3, the Governor has proposed creating centralized county waiting lists for SDE subsidized child care.

Current Waiting Lists for Subsidized Child Care. There is not enough funding available to serve all of the working poor non-CalWORKs families who qualify for subsidized child care. Therefore, providers create waiting lists for those families seeking subsidized child care. Families place their names on waiting lists in the hopes of receiving assistance with the cost of child care. While there is currently no information on the number of families on waiting lists or the amount of duplication among the lists, it is commonly believed that families place their names on multiple lists in order to increase their chances of receiving subsidized child care. When a provider has a space for a subsidized family, that provider is required to serve the family on their list with the lowest income first, unless the family is referred by child protective services, in which case they receive priority.

Centralized List. The Governor proposes eliminating provider waiting lists and requiring each county to develop a centralized waiting list for all subsidized non-CalWORKs child care. The budget includes $7.9 million (General Fund) for this purpose. County waiting lists would be split into two different tiers, while maintaining the existing priority for families referred by child protective services. Families earning less than $2,168 per month (for a family of four) would be placed in the first tier of the waiting list and would be provided with child care on a first-come, first-served basis. This would include all CalWORKs families with earned income because under current law, a family of four is no longer eligible for CalWORKs once they have an income of $1,951 per month.

The second tier would be for families who have a monthly income above 138 percent of the federal poverty level (FPL), approximately $2,168 per month for a family of four. These families would be served only after all first-tier families have been served. From this list, families would be served based on income, with the lowest-income family served first.

Advantages to Governor's Proposal

Dismantling Stage 3 Helps Create Parity Among All Working Poor Families. Under the current system, families that receive child care through the CalWORKs system have traditionally been guaranteed subsidized child care until their incomes exceed eligibility limits or their children age out of the child care system. Conversely, working poor families that have not participated in the CalWORKs program must compete for the limited subsidized child care slots in their communities. The Governor's proposal permanently expands non-CalWORKs subsidized child care and effectively limits Stage 3 CalWORKs child care to one year. While the total number of child care slots would not change, this would provide greater access to child care for working poor non-CalWORKs families. Some of these working poor families may have family income significantly below many of the Stage 3 CalWORKs families.

Centralized Waiting Lists Would Provide Critical Information for Policymakers. As mentioned previously, there are virtually no centralized waiting lists in counties and those counties with centralized waiting lists cannot require providers to participate. Consequently, the Legislature and the administration have no way of knowing how many families need subsidized child care and are not receiving it, or the length of time families remain on waiting lists without being served. Centralizing the waiting lists would allow counties to establish an accurate count of families in their communities that are eligible and waiting for subsidized child care, and would allow them to clean up waiting lists by removing duplicate names or families that are no longer eligible for child care. They would also be able to determine the average length of time a family remains on the waiting lists. Having data provides the Legislature with the information it needs to determine the adequacy of California's subsidized child care system.

Implementation Concerns

Centralized Waiting Lists Should Be Created First. The Governor's proposal moves all of the current Stage 3 child care cases as of June 30, 2005 to general AP child care upon passage of the budget. This shift would not impact the current families in Stage 3. However, families in Stage 2 that would be moving to Stage 3 within the next year or so could be adversely affected during the transition period. This is because it will take time for counties to collect and merge all of the existing provider waiting lists in each county and then to sort through duplicate entries and determine whether a family should be placed on the first tier or second tier of the waiting list and in what order. Until this process is completed, there will not be a centralized waiting list for CalWORKs families on which to place their names. Moreover, to the extent that families leave the general AP program before the lists are created, those child care slots may remain unused or will only be available to working poor families on current waiting lists. In order to avoid this confusion and the delay in families receiving subsidized child care, the centralized waiting lists should be created before Stage 3 child care is dismantled.

CalWORKs Recipients May Be Located at the Bottom of the Waiting Lists. According to the administration, the centralized waiting lists in each county will be established by merging all of the existing lists that subsidized child care providers now maintain. As these lists are merged, families will be placed in the higher second tier (above 138 percent of the FPL) in lowest-income-first order. The remaining families (at or below 138 percent of the FPL) will be placed in first-come, first-served order based upon the length of time they have been on their existing lists.

For the most part, the existing waiting lists do not contain the names of current and former CalWORKs families because those families have been served under the CalWORKs child care program. This means that all current or former CalWORKs families with earned income who need child care and are not currently in Stage 3 will have to place their names on the centralized county waiting lists. Most of them will be eligible for the lower first tier (below 138 percent of the FPL) of the waiting lists. Because the waiting lists would be created by merging existing lists that do not include these families, virtually all of the CalWORKs families will be placed at the bottom of the lists. Depending on the availability of subsidized child care and the length of the waiting lists in each county, CalWORKs families that have exhausted much of their five-year CalWORKs time limit will be at a disadvantage and are less likely to receive subsidized child care once their time in the CalWORKs child care program comes to an end.

In order to address this problem, during the initial development of the lists, CalWORKs families with earned income could be placed on the waiting list according to the date that they began working. Theoretically, non-CalWORKs working poor families placed their names on waiting lists when they had their first child and/or began working. Placing CalWORKs families in a similar position on the waiting lists by their work dates creates parity between the two groups. There may be some slight CalWORKs administrative costs associated with determining the appropriate dates for families. However, those costs should be minimal.

Funding May Grow Slightly Faster Under Governor's Proposal. We would note that funding for these former Stage 3 child care slots may grow faster under the Governor's proposal than under the current program. This is because the cost-of-living adjustments (COLAs) and growth adjustments used for subsidized child care are projected to increase at a greater rate than the caseload and COLAs used for CalWORKs child care.

LAO Recommendation

We believe there is considerable merit to the Governor's proposed changes to subsidized child care for CalWORKs families. Shifting CalWORKs Stage 3 child care to AP child care and creating centralized two-tiered waiting lists will allow more equitable access to subsidized child care for all families with very low incomes, whether they have participated in the CalWORKs program or not. However, in transitioning to this new system and essentially dismantling Stage 3 child care, it is important that current CalWORKs families not be disadvantaged. Accordingly, we recommend delaying the shift from Stage 3 to AP child care by six months, thereby allowing enough time for counties to develop centralized waiting lists that include CalWORKs families within that six-month period. Once a county has a functioning waiting list, it can then shift its child care program.

In order to avoid placing existing CalWORKs families at the bottom of the waiting lists, we recommend placing CalWORKs families on the waiting list based upon the date they first had earned income in the program. However, CalWORKs families will still be expected to take the initiative of signing up for AP child care. To avoid lingering administrative problems, we recommend that CalWORKs families only be given 120 days once the list is functioning to ask to be placed, based upon their employment date. Once the 120-day period is up, CalWORKs families would be placed on the centralized waiting lists on a first-come, first-served basis.

Making these two adjustments to the Governor's proposal will ensure that existing CalWORKs families will be given a level playing field to compete with other working poor families for subsidized child care.

Governor Proposes Further Reforms for 11- and 12-Year-Olds

The Legislature was concerned about the Governor's 2004-05 budget proposal to shift 11- and 12-year-old children to after school programs. Many working poor families, whether CalWORKs or non-CalWORKs, are employed in nontraditional jobs that require working evenings, nights, and weekends. For these families, after school care usually is not a realistic option for their children. Therefore, the Legislature modified the Governor's proposal to encourage, rather than mandate, after school placement. Specifically, families were not required to shift their children to after school care and the Legislature established a reserve to continue to fund child care for these families.

To further strengthen the after school reform from the prior year while recognizing the difficulties faced by some families, the Governor has proposed making after school care the default placement for 11- and 12-year-olds. However, to the extent that this type of care is not acceptable or practical for families, they may submit their reason in writing and receive an alternate form of child care for their children. The budget assumes that 25 percent of families with 11- and 12-year-olds will shift them from child care to after school care.

Child Care Terminology
Types of Providers

Voucher Providers. Providers who serve the California Work Opportunity and Responsibility to Kids (CalWORKs) and non-CalWORKs families who receive vouchers for child care.

  • License-Exempt. Relatives or friends without a license for providing childcare.
  • Title 22 Family Child Care Homes (FCCHs). Licensed providers caring for a small number of children typically in their own homes.
  • Title 22 Centers. Licensed centers.

State Department of Education (SDE) Contractors/Title 5 Providers. Providers who contract directly with SDE to provide child care and preschool for primarily non-CalWORKs working poor families.

  • Title 5 FCCHs. Licensed providers caring for a small number of children typically in their own homes. These FCCHs have not only obtained a license, but also meet SDE standards.
  • Title 5 Centers, Including Preschool. Licensed centers that also meet SDE standards.
Other Terms
  • Alternative Payment (AP) Program. The SDE-administered voucher program for non-CalWORKS working poor families.
  • Standard Reimbursement Rate (SRR). The per child rate paid to Title 5 providers that contract with SDE.
  • Regional Market Rate (RMR). Regionally-based market rates used to determine reimbursements to voucher providers.
  • Maximum Rate. The rate ceiling for voucher providers. If they serve private pay clients, providers receive reimbursements equal to their private pay rates, up to the maximum rate. If they do not serve private pay clients, providers are reimbursed at the maximum rate.
  • FCCH Maximum Rate. The 85th percentile of the maximum rate paid to Title 22 FCCHs. Serves as the basis for the license-exempt care rates. We believe this modification allows families to continue to have flexibility in their child care decisions and addresses the concerns expressed by the Legislature in the previous budget.

Reimbursement Rate Reforms

The Governor's proposal includes two reforms related to provider rates. The first would create a new system of tiered provider reimbursement. The second would revise regulations for determining rates for providers who do not have private pay clients.

Two Types of Service Models— Vouchers and Direct State Contracts

Currently, the state provides child care through two main mechanisms: vouchers and direct contracts with child care centers.

Most Families Receive Child Care Through a Voucher System. The CalWORKs families in any of the three stages of child care receive a voucher from CWD or AP. In addition, the state provides vouchers to working poor families through APs. The combined programs provide about 272,900 children with child care vouchers. The AP or CWD assists families in finding available child care in the family's community, typically placing families in one of three settings—licensed centers, licensed family child care homes (FCCHs), and license-exempt care. The licensed programs must adhere to requirements of Title 22 of the California Code of Regulations, which are developed by DSS' Community Care Licensing Division. These programs are often referred to as Title 22 programs. Currently, Title 22 centers and FCCH providers are reimbursed up to a maximum rate or ceiling of the 85th percentile of the rates charged by private market providers in the area offering the same type of child care. The 85th percentile is determined by the Regional Market Rate's (RMR) survey of public and private child care providers that determines the cost of child care in specific regions of the state. License-exempt care providers are reimbursed up to 90 percent of the FCCHs maximum rate (85th percentile). The relatively high reimbursement level of the vouchers for subsidized care reflects an attempt to ensure that low-income families can receive similar levels of child care service as wealthier families in the same region.

SDE Contracts Directly With Child Care and Preschool Centers. For child care and preschool, SDE contracts directly with 850 different agencies through approximately 2,100 different contracts. These providers are reimbursed with the Standard Reimbursement Rate, $28.82 per full day of enrollment. These providers must adhere to the requirements of Title 5 of the California Code of Regulations and are generally referred to as Title 5 providers.

In the nearby box, we provide a list of the child care terms and corresponding definitions used throughout the remainder of this section.

Figure 4 shows the major care types and associated regulations offered through voucher providers and SDE contractors for preschool-aged children. Moving from the left-hand side of Figure 4 to the right, the requirements to provide the specific type of child care become more difficult to meet and suggest a higher level of quality.

Figure 4

Subsidized Child Care Providers
Safety and Educational Requirements

Current Law for Preschool-Aged Children


Voucher Providers

SDE Contractors

License-Exempt Providers

Title 22 FCCHs

Title 22 Centers

Title 5 Providers
Including Preschool

Provider/teacher education and training



Child Development Associate Credential or 12 units in ECE/CD.

Child Development Teacher Permit
(24 units of ECE/CD plus 16 general
education units).

Provider health
and safety

Criminal background check
required (except relatives).
of health and safety standards.

15 hours of
health and safety training. Staff and volunteers are fingerprinted.

Staff and volunteers fingerprinted and
subject to health and safety standards.

Staff and volunteers fingerprinted and subject to health and safety standards.

Required ratios


1:6 adult-child ratio.

1:12 teacher-child
ratio or 1 teacher and 1 aide for 15 children.

1:24 teacher child ratio and 1:8 adult-child ratio.

and oversight


Unannounced visits every five years or more frequently under special circumstances.

Unannounced visits every five years or more frequently under special circumstances.

Onsite reviews every three years. Annual outcome reports,
audits, and program information.

FCCHs = family child care homes; SDE = State Department of Education; and ECE/CD = Early Childhood Education/Child Development.

The minimum standards for child care offered through the voucher, especially those for license-exempt providers, are generally lower than the standards for Title 5 providers contracted with SDE. For example, license-exempt providers, who are typically relatives, friends, or neighbors of the family needing child care, are not required to have any training or to adhere to adult-to-child ratios. The Title 22 FCCH providers are required to meet minimal health and safety standards, adhere to an adult-to-child ratio, and require a site visit every five years for licensure. Title 22 centers require providers to have some college-level education. The Title 5 providers require a Child Development Teacher Permit, which is issued by the California Commission on Teacher Credentialing. In addition, they have annual program outcome reports and are required to have onsite reviews every three years.

Proposal Creates a Tiered Reimbursement Rate Structure for AP Providers

The Governor proposes to implement a tiered reimbursement rate structure for the voucher child care programs. Tiered reimbursement for child care provides differential reimbursement rates that encourage providers to improve program quality by obtaining additional training and education and improving outcomes as measured by independent standards of quality. We believe that the Legislature should first consider whether tiered reimbursement is desirable, and then decide upon specific levels of reimbursement.

Below, we (1) describe the Governor's proposal, (2) examine the merits of tiered reimbursement, and (3) discuss the appropriate levels for the rates in tiered reimbursement.

Governor's Tiered Reimbursement Proposal

The Governor's proposal creates a five-tiered child care reimbursement rate structure that reimburses voucher providers from 55 percent to 100 percent of the current maximum rates, depending on independent quality ratings, licensing, accreditation, education, and health and safety training. The proposal is summarized in Figures 5 and 6. The intent of the proposal is to provide higher reimbursement rates to providers that exhibit higher quality. Figures 5 and 6 show the reimbursement rates for three categories of care—license-exempt, family home care, and center-based care. The figures also show the education and training requirements for the various levels of rates under the Governor's proposal. For license-exempt care, there are two levels: license-exempt and license-exempt plus. The FCCHs and centers are rated according to a three-star system whereby the highest quality providers receive three stars and the lowest one star. Please note that Figure 6 uses the term "environmental rating scale," which is explained below.

Figure 5

Governor’s Tiered Reimbursement Proposal
For License-Exempt Providers


Percent of FCCH a



55 percent


License-exempt plus

60 percent

License-exempt training, assistant teacher permit, or heath and safety training.

a  Family child care homes.


Figure 6

Governor’s Tiered Reimbursement Proposal
For Licensed Providers



Additional Requirements




75 percent of the
85th percentile RMR.




85 percent of the
85th percentile RMR.

Environmental rating scale average of 4 or
associate teacher permit.

Environmental rating scale average of 4 or all teachers have teacher permit.


85th percentile RMR.b

Environmental rating scale average of 5.5, teacher permit, associates degree, or accreditation.

Environmental rating scale average of 5.5, all teachers have bachelor’s degree, or accreditation.

a  Family child care homes.

b  Regional Market Rate (RMR) survey of providers in the area offering the same type of child care.
The RMR will vary by care type.

License-Exempt Rate Reduction of $140 Million. The Governor's entire 2005-06 savings estimate for the tiered reimbursement proposal is based on reductions to license-exempt care rates for the voucher program (CalWORKs Stages 1, 2, and 3 and AP). Under the proposal, the rates of license-exempt care providers with no training would be cut to 60 percent of the 85th percentile. This reduction would take effect on July 1, 2005. These providers would then have 90 days to obtain the specified training for the second reimbursement tier, license-exempt plus, or their rates will be further cut to 55 percent of the 85th percentile. Figure 7 shows how the changes would affect license-exempt provider rates in a sample of counties in various geographic regions throughout the state. In these counties, license-exempt providers' rates would be reduced by between $182 and $303 per child per month.

Environmental Rating Scales

Environmental rating scales are used to assess the quality of child care programs. There are numerous such assessments specific to the different ages of children served and the type of care provided. The Early Childhood Environmental Rating Scale (ECERS) has been designed for use in preschool, kindergarten, and child care classrooms which serve children ages two and one-half through five. The ECERS evaluates 43 specific items in seven main categories related to the quality of care: physical environment, basic care, schedule structure, program structure, curriculum, interaction, parenting classes, and staff education. For each of the 43 items, centers are rated on a 7-point scale ranging from inadequate (1) to excellent (7).

Assessment of a single classroom by an experienced rater requires approximately three hours. Generally, anyone can receive training to become a rater. Raters typically are evaluated on a regular basis to calibrate their scoring against standard benchmarks and against scores given by other raters.


Figure 7

Monthly Child Care Maximum Reimbursement Rates

License-Exempt Providers

Percent of
a Maximum







90 percent b







60 percent c







55 percent d














a  Family child care homes.

b  Current license-exempt rate limits are based on 90 percent of the FCCH rate maximum (85th percentile) for full-time monthly care for a child age two through five.

c  Reflects the maximum reimbursement rates if exempts are limited to 60 percent of the 85th percentile of the FCCH rate maximum.

d  Reflects the maximum reimbursement rates if exempts are limited to 55 percent of the 85th percentile of the FCCH rate maximum.

License-exempt providers also would have the option to become licensed as FCCHs. If current license-exempt providers obtain the 15-hour health and safety training in order to meet the license-exempt plus rating, they will have completed the educational and training component of the FCCH licensing requirements. If licensed, providers would have their rates increased significantly, as shown in Figure 6.

Reimbursement Reforms for FCCH and Center-Based Providers Would Not Affect Rates for Two Years. Currently, FCCHs and centers are reimbursed up to the 85th percentile of the RMR. Under the Governor's proposal, providers' rates would be reduced starting in 2007-08 unless the providers demonstrated high program quality through (1) educational attainment, (2) program quality review, or (3) accreditation. Available data suggest that most providers would need to make significant investments to attain either a two-star or three-star rating.

Educational Attainment Options for Providers. The FCCH providers could achieve a three-star rating (highest rating) by completing 24 units in Early Childhood Education or Child Development, or obtaining a child care teacher permit (which requires 24 units). A two-star rating would require an associate teacher permit. For centers, the education requirements are more stringent. Teachers must have permits (24 units) for a two-star rating center or bachelor's degrees for a three-star rating.

Program Quality Review Options. The FCCH and center providers could agree to an independent assessment of their program through an environmental rating scale system. (See nearby box for a description of environmental rating scales.) Providers would need to score an average of 4 out of 7 on all the subscales for two stars or an average of 5.5 for three stars. The feasibility of meeting rating scale standards is difficult to assess since currently there is no system for independent assessments using environmental rating scales in California.

Program Accreditation. To receive three stars, the FCCHs also could become accredited through the National Association for Family Child Care, and centers could become accredited through either the National Association for the Education of Young Children or the National After School Association. Accreditation can be an arduous and costly process. Currently, less than 1 percent of the FCCH and less than 5 percent of the center-based programs in California are accredited.

The Governor's proposal does not include any savings estimates for the proposed changes to FCCH and center reimbursement maximum rates because they will not take effect for two years. At that point, savings could reach tens of millions of dollars annually.

Proposal to Create Incentives for Quality Makes Sense

We recommend the Legislature consider the Governor's tiered reimbursement proposal in two parts. First, the Legislature should determine if a tiered reimbursement rate structure that provides incentives for quality makes sense. Then the Legislature should determine the appropriate rates for the tiers.

The policy of tying reimbursement rates to a provider's level of training, education, and other factors has merit in that it (1) attempts to promote what research suggests are the characteristics of high quality care; (2) better reflects the cost of providing care; and (3) creates a rating system that is transparent, allowing parents and other stakeholders to easily identify quality options.

Reform Could Promote Child Development

The number of families utilizing nonparental child care has increased significantly in part due to enactment of the 1996 federal welfare reforms and the expansion of federal child care vouchers for low-income families. One federal study in 2000 suggested that the number of families receiving public child care support has increased by over one million nationwide since the 1996 reforms. The voucher system that has emerged in this context reflects an attempt to respond to increasing demand by offering parents choice and flexibility so that they can transition off cash aid and/or maintain employment.

The effort to provide parents with a variety of child care options, however, can result in tension with efforts to provide age-appropriate development and early learning to children served through child care. For example, some families may choose license-exempt care for reasons of convenience and availability. (Many centers and FCCHs have shortages of infant care slots and/or do not operate during nontraditional work hours.) Also, certain regions, especially rural areas, tend to have limited center-based and FCCH providers. At the same time, as we discuss below, placing children in exempt care may result in the children not receiving the learning and development opportunities to which their peers in center-based care and, to some extent, FCCHs have access. While the child care system should strive to meet the needs of poor and working parents, it should also take into consideration the important early learning and development needs of their children.

Research Suggests Quality Differences by Care Type. Several small demonstration programs, such as the Perry Preschool Project and the Chicago Parent-Child Centers, have established a positive relationship between enrollment in the center-based preschool programs and children's cognitive development. While these studies provide preliminary evidence of the benefits of high quality preschool programs, it is difficult to generalize their findings to the larger child care and preschool market because of their unique qualities as demonstration programs. However, recent academic studies investigating the relative benefits of different child care types in existing settings have provided evidence that center-based programs offer a higher quality of care relative to FCCHs and license-exempt care. Exposure to the higher quality care appears to have significant positive cognitive effects on young children. Particularly important factors in the quality of care are (1) provider education and training, and (2) the stability of the environment (including provider turnover). Stability of care is often problematic when parents must rely on license-exempt providers. Data from Alameda County showing a two-thirds turnover rate among exempt providers in the span of one year suggest that lack of stability may be a significant problem in license-exempt care.

One-Half of Children in Lowest Quality Care. As shown in Figure 8, in California's voucher programs, close to one-half (48 percent) of the children are cared for by license-exempt providers. While the percentage of children enrolled in license-exempt care is highest in Stage 1 (60 per cent), the percentage in license-exempt care remains close to 50 percent through Stages 2 and 3. Data from SDE for Stages 2 and 3 and AP show that among the children cared for by licensed providers, less than one-third are enrolled in center-based care. (Data showing the Stage 1 distribution by care type of children in licensed care were not available from DSS.)

Figure 8

Proportion of Children Served in
Each Care Type by Program

Care Type

CalWORKs a
Stage 1

Stage 2

Stage 3

Alternative Payment
























a  California Work Opportunity and Responsibility to Kids.

b  Family child care homes. The Stage 1 distribution between centers and FCCHs was not available from the Department of Social Services.

Incentives Weighted Toward Lowest Quality Care. As discussed above, Title 5 providers have the highest standards. Yet, in some counties, providers with the lowest standards (license-exempt) are paid at a higher reimbursement rate than the Title 5 providers. Figure 9 compares child care reimbursement rates for the voucher system with the state contracted system. While statewide average rates are similar across care types, in some high-cost counties voucher providers can receive significantly higher reimbursements than the Title 5 contract providers.

Figure 9

Regional Reimbursement Rates for
Voucher and Title 5 Providers

Dollars Per Month for Full Day Care






Family Care
Maximum Rate

Maximum Rate

Title 5

High-cost county





Low-cost county





Average statewide





In fact, in eight Bay Area counties, the current reimbursement rate for license-exempt care providers is greater than the rate for the Title 5 providers. In 21 counties, the rate maximum for Title 22 centers is higher than the rate for Title 5 providers.

These rate differentials are particularly prevalent in some of the most populous regions in the state, thus affecting a disproportionately large number of children. Fifteen percent of children in license-exempt care are cared for by providers who are reimbursed at rates higher than Title 5 providers. Similarly, more than one-half of the children cared for in Title 22 centers and FCCHs have rate maximums that are higher than the Title 5 reimbursement rate. Under current law, most FCCHs only serve subsidized children, and are thus reimbursed at the maximum rate (please see discussion on the "Pick-Five" regulations below). Data are not available showing the actual rates that Title 22 centers receive, only that the rate maximum exceeds the Title 5 rate for two-thirds of the kids. Given the higher program requirements of Title 5 providers (as discussed in Figure 4), it seems counterintuitive that their reimbursement rates would be lower than the voucher programs.

Tiered System Would Reflect Real Cost of Service Differences

Tiered reimbursement would reflect the differences in the costs associated with providing care and the providers' differential investments of time and money for required training and education. As noted, license-exempt providers' investments and costs, particularly in terms of education and training, are minimal. In contrast, Title 22 centers have to maintain a facility and materials as well as a qualified staff. Title 5 providers not only have significant overhead and operating costs but also have the additional responsibility for student learning and development outcomes through SDE's Desired Results System. The Desired Results System is an evaluation and accountability system to measure the achievement of identified results for children and families.

A Star Rating System Would Make Quality Differences Transparent

The APs and Resource and Referral Networks (R&Rs)—local agencies that help parents place their children in child care settings—currently do not have the authority to recommend one provider over another because of the subjective assessment that such recommendations would involve. A rating system similar to that proposed by the Governor would create a set of transparent and objective criteria that APs and R&Rs could provide to parents attempting to find the best settings for their children. The simplicity of the star-rating system would enhance parents' ability to distinguish between different child care options and give the public at large access to information about the quality of child care offerings.

A Tiered Reimbursement Could Address Significant Problems in the Current System

The current system of reimbursements creates the wrong incentives for providers. Not only is lower quality care often reimbursed at higher rates than higher quality care, these rate differentials can reach in excess of $200 per child per month. Moreover, the current system only creates a limited impetus for child care providers to seek the higher levels of training and education that research suggests can promote cognitive development in young children. Also, the state does not differentiate the reimbursement rate provided to those with higher educational/quality attainment, and therefore the nonsubsidized public may have a difficult time measuring the quality of a program.

Rate tiers would create a way to address these problems by providing reimbursements that better reflect differences in the cost of care and provide incentives for providers to seek higher levels of education and training. In doing so, tiered reimbursement would also create transparency in the child care system by giving stakeholders an objective basis for making child care placements and holding providers accountable for the quality of the care they offer. Finally, if California adopts a tiered system, it would be following in the footsteps of many other states that have adopted such reforms. According to a national clearinghouse for child care information, 34 states had implemented a tiered rating system for improving child care quality as of 2002. Almost all of them provide financial incentives for higher levels of quality. For these reasons, we recommend that the Legislature transform the current reimbursement rate structure into a tiered reimbursement structure.

Transition Title 5 Provider Reimbursement to RMRs

We recommend the Legislature transition reimbursement rates for Title 5 providers to be based on the rate provided to voucher providers.

As discussed above, Title 5 providers have the highest expectations of the state's subsidized child care programs. However, in some counties the Title 5 reimbursement rates are substantially lower than the market rates. This makes it difficult for Title 5 providers in these areas to compete for qualified teachers and to maintain the quality care that is expected of them. In many counties, these centers would be better off if they became Title 22 centers with lower quality expectations and potentially higher reimbursement rates. In other counties (primarily rural ones), Title 5 providers are reimbursed at rates that are substantially above local market rates. To address this differential treatment of Title 5 providers, we recommend the Legislature transition Title 5 providers to the RMR structure and that they receive the maximum RMR for their region. These changes to the Title 5 provider rates would promote parity with the voucher providers' rates and would help ensure that Title 5 provider rates better reflect regional cost variations. Under this system, many Title 5 providers' rates would increase, while some may decrease.

Reimbursement Rates Should Reflect a Systematic Approach to Improving Quality in Child Care

We recommend the Legislature consider an approach to reimbursement rates that promotes quality and child development while preserving family choice.

As the Legislature considers child care reimbursement rate options, we recommend weighing the Governor's rate reductions and corresponding savings against the potential benefits of alternative approaches to reimbursement rates. We suggest a structure that adheres to the following guiding principles:

The first principle appears to generally under gird the Governor's proposal. However, as noted above, the proposal does not address inequities between the Title 5 and the voucher providers.

With regard to the second guiding principle, it is unclear how the Governor's proposal would affect families' choices. Specifically, we are unable to predict how the Governor's proposal would influence child care supply because we do not know how the proposed license-exempt rate reductions would affect license-exempt providers' decisions to leave the child care market, continue providing care at lower rates, or seek licensure as a means to access higher rates. However, we suggest that the Legislature devote attention to these issues as it balances any reductions in child care spending against other K-12 priorities.

There are many different possibilities for rate reforms that could incorporate these guiding principles and also meet other objectives—such as generating savings or maintaining current child care funding levels. If the Legislature wants to implement a reform that is cost neutral, it could pursue a strategy that would implement the proposed five-tiered system while modifying the proposed rates. Such an approach could preserve current reimbursement rates for FCCH and center-based providers who meet two-star standards and enhance funding for those that attain three-star quality. Reductions in the current license-exempt care rates and one-star providers could offset the increased costs of funding enhancements for the three-star providers. This approach would ensure that centers and FCCHs are able to maintain current levels of service and at the same time offer incentives for improving quality. Under this rate structure, license-exempt care providers could choose to pursue advanced training to enhance their rates as exempt providers or obtain FCCH licensure.

The practices of other states suggest that lowering the license-exempt care reimbursement maximum rate is a reasonable mechanism for generating savings to offset increased rates for higher quality providers. Several other large states reimburse license-exempt care providers at lower rates than California does currently. Most reimburse license-exempt providers between 50 percent and 80 percent of the licensed FCCH rate.

"Pick-Five" Regulations Would Enhance Rate Equity

We recommend the Legislature adopt the Governor's proposal to implement regulations for an alternative rate setting methodology for subsidized child care provider reimbursements when they serve no private pay customers.

Statute requires the state to provide reimbursement rates for voucher programs that do not exceed the local market rates for a provider's community. Also, providers cannot charge the state more than they charge a private paying customer. For providers that serve no private pay customers, it is difficult for the state to determine an appropriate reimbursement rate level. Under current practice, the state reimburses providers without private pay customers at the RMR's maximum rate. This approach likely overpays many providers, especially FCCH providers, and creates negative incentives to serve private pay customers.

Because of these factors, statute directed SDE to develop regulations to determine an alternative reimbursement approach. The State Board of Education adopted regulations for the 2003-04 fiscal year. These regulations, commonly referred to as the Pick-Five regulations, determine the rate for a provider with no private pay customers based on the rates charged by five randomly selected providers in the same or comparable zip codes that have private pay customers. Nevertheless, the Legislature enacted legislation to suspend implementation of these regulations. We believe, however, that the regulations have merit in creating rates for providers without private pay clients. Below, we explain the rationale for the regulations.

There are some communities where it would be difficult for providers to find private paying customers. At the same time, there are many communities where providers could enroll private pay customers, but choose not to because the state will reimburse them at higher-than-market rates if they do not serve private pay customers. This practice appears common in the FCCH environment. Under these circumstances, the state is providing a reimbursement rate that exceeds local market rates. While the Pick-Five regulations do not provide a perfect estimate of the local market costs, they do provide a reasonable proxy. We believe that the Pick-Five system is an improvement on current practice because it does not overpay providers and eliminates the incentive to discourage private pay customers. Accordingly, we recommend that the Legislature permit the existing suspension to expire on June 30, 2005, thus allowing the Pick-Five regulations to be implemented in the budget year. The Department of Finance (DOF) estimates that these regulations would save $8.2 million annually.

New RMR Survey Methodology Shows Promise

We recommend the Legislature require the State Department of Education to report at hearings on the new Regional Market Rate methodology, including how the new survey may improve the accuracy of the Pick-Five regulations.

The SDE has contracted with an independent research firm for a new RMR survey methodology. The new methodology would address problems in the current RMR survey. By reducing nonresponse rates and using a sophisticated new method of grouping providers based on demographic variables, the approach is expected to increase the accuracy of the estimates of market costs of child care in particular communities. The SDE is currently in the process of final reviews and adjustments to the methodology and aims to secure the required approval for adoption from DSS and DOF during the current tear. The SDE is planning to implement the new RMR survey in 2005-06.

In setting reimbursement rates for child care, the Legislature should strive to use the most accurate data possible. It appears that the new methodology may offer some distinct advantages over the previous survey approach. We recommend that the Legislature request a complete report on the new RMR survey methodology at hearings. While we support the new methodology in concept, we believe it requires substantial review because it is likely to significantly affect reimbursement rates providers receive in the budget year. We also think that this new methodology may improve the quality of the information used to meet the Pick-Five regulations, especially in communities with limited numbers of providers serving private pay customers. For these communities, the new methodology may be able to use information on provider rates in demographically similar communities in other parts of the state.

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