Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

Child Care

California’s subsidized child care system is primarily administered through the California Department of Education (CDE) 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 2006-07 Governor’s Budget. As the figure shows, the budget proposes about $2.9 billion ($1.5 billion General Fund) for the state’s child care programs. (This does not include about $712 million for after school programs.) This is a decrease of about $56 million from the estimated current-year level of funding for these programs, primarily due to caseload reduction in the California Work Opportunity and Responsibility to Kids (CalWORKs) program.

About $1.4 billion (48 percent) of total child care funding is estimated to be spent on child care for current or former 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 448,500 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 CDE.

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:

• Stage 1. Stage 1 is administered by county welfare departments (CWDs) and begins when a participant enters the CalWORKs program. While some CWDs oversee Stage 1 themselves, 32 contract with AP providers to administer Stage 1. In this stage, CWDs or APs refer families to resource and referral agencies to assist them with finding child care providers. The CWDs or APs 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 the recipient to fulfill his or her CalWORKs obligations. In other counties, stable means that the recipient is off aid altogether. Stage 2 is administered by CDE 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 in Stage 2, 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 level and their children are below age 13.

Non-CalWORKs Families Receive Child Care If Space Is Available. Non-CalWORKs child care programs (primarily administered by CDE) 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.

Steps Toward Linking Reimbursement to Quality

In the 2005-06 Analysis, we recommended the Legislature reform the state’s reimbursement system in child care to move toward a system that provides higher reimbursement rates for higher quality care. Specifically, we recommend that the state move toward a policy of tying reimbursement rates to a provider’s level of training, education, and other factors. This strategy (1) attempts to promote what research suggests are the characteristics of high quality care and (2) better reflects the cost of providing care. Below, we describe the current reimbursement system, and problems with that system. Then we make a series of recommendations which would begin to address some of the more disconcerting issues with the current system.

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

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 usually receive a voucher from CWD or AP. In addition, the state provides vouchers to working poor families through APs. The combined programs provide about 250,000 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.

CDE Contracts Directly With Child Care and Preschool Centers. For child care and preschool, CDE contracts directly with 850 different agencies through approximately 2,100 different contracts. These providers are reimbursed with the Standard Reimbursement Rate, $31.59 per full day of enrollment (proposed 2006-07 rate). 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.

Figure 2 shows the major care types (and associated regulations) offered through voucher providers and CDE contractors for preschool-aged children. Moving from the left-hand side of Figure 2 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.

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 CDE. 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 adhere to adult-to-child ratios (though they may only care for children from one other family besides their own). 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.

The effort to provide parents with a variety of child care options that make it easier for low income parents to work, 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.

Problems with the Current Reimbursement System

Research Suggests Quality Differences by Care Type. Recent academic studies investigating the relative benefits of different child care types in existing settings provide 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 (such as staff turnover).

A look at our current child care system suggests that many children are served in a child care environment associated with lower quality as discussed below.

One-Half of Children in Lowest Quality Care. In the state’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 percent), the percentage in license-exempt care remains close to 50 percent through Stages 2 and 3. Data from CDE 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.

Centers May Provide More Stability. 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.

Fiscal Incentives Weighted Toward Lowest Quality Care. As discussed above, Title 5 providers have the highest standards. Yet, in some counties, providers with lower standards are paid at higher reimbursement rates than Title 5 providers. Figure 3 compares 2005-06 child care reimbursement rates for Title 22 centers with the Title 5 centers in the 15 largest counties. In all of these counties, the Title 22 center rate ceiling exceeds the Title 5 provider rate between $2 and $344 per child per month (0.3 percent to 52 percent higher). This occurs because the market rates-which drive voucher payments-are much higher in many parts of the state than the state’s standardized reimbursement rate. Given the higher program requirements of Title 5 providers (as summarized in Figure 2), it seems counterintuitive that their reimbursement rates would be lower than the Title 22 programs.

Increase Funding for Higher Quality Programs

We recommend the Legislature increase the reimbursement rates for Title 5 providers in “high-cost” counties by redirecting savings from several policy changes recommended below.

In the 2005-06 Analysis, we recommended moving to a tiered reimbursement system providing higher reimbursement for higher quality and integrating Title 5 providers into the new system. While we still think that is the right way to go in the long run, below we provide a set of recommendations that will move the state in that direction. A first step in that transition is to begin to increase the reimbursement rate for Title 5 providers in “high-cost” counties. (We define high cost counties as those whose RMR for Title 22 centers is above the state Title 5 reimbursement rate. There are currently 36 such counties including those listed in Figure 3.) As discussed above, Title 22-and some license exempt-providers are earning more than the Title 5 centers that face higher quality standards and a higher cost structure (resulting from the higher teacher educational requirements). In order to stay within the funding level for child care provided by the Governor’s budget, we make several recommendation shown in Figure 4 redirecting savings from several policy changes to increase the Title 5 reimbursement rate.

Redirect Child Care Growth Funding

We recommend the Legislature redirect $14.8 million in child care growth funding to provide for a higher reimbursement rate for Title 5 providers in high-cost counties.

The Governor’s budget provides $14.8 million for 1.1 percent growth in child care. These funds would provide around 4,500 new child care slots in the budget year depending on the results of the new RMR Survey (discussed below). While expanding the number of child care slots is important to maintain access for the working poor, continuing access to high quality child care is a competing policy goal. Given other initiatives to expand the offering of child care, after school and preschool in the coming year, we believe that these growth funds could be used more effectively to address the Title 5 provider rate issue. This investment would help correct incentive problems with the current reimbursement system.

Limit License Exempt Reimbursement Rate

We recommend limiting the license-exempt reimbursement rate to the lesser of 90 percent of the regional market rate or 90 percent of the Title 5 reimbursement rate.

Under current law, license-exempt providers are reimbursed 90 percent of the FCCH rate maximums. In some higher-cost counties, the license-exempt reimbursement rate is higher than the Title 5 center reimbursement rate. Since the Title 5 providers must meet the highest quality standards, and the license-exempt providers are subject to the lowest quality standards, the current rates provide a fiscal incentive for lower quality. To begin to correct this inequity, we recommend adding an additional restriction to the license-exempt rate to ensure that the exempt rate can not exceed 90 percent of the Title 5 reimbursement rate. We will work with the Department of Social Services to estimate the level of savings that this recommendation would generate and report to the Legislature at budget subcommittee hearings.

Create a State Level Sibling Discount

We recommend the Legislature require child care centers offering private pay customers a sibling discount to provide the state a similar discount for any family with more than one child in the same care center.

In the child care field, it is an industry standard that child care centers offer families a sibling discount if that family has more than one child in the center. However, the state does not receive such a discount for the slots it purchases either through the voucher program or the Title 5 centers. It does not seem appropriate that centers effectively charge the state a higher rate than nonsubsidized families. These subsidies are often as high as 10 percent. We recommend the Legislature enact legislation to require child care providers to provide the state with a similar sibling discount as the center provides to private pay customers. Through this recommendation, state child care costs would mirror the cost of child care for nonsubsidized families. Savings from this recommendation could be redirected to increasing the Title 5 provider reimbursement rate in high cost counties. We will work with DSS to estimate the savings this recommendation would generate, and report at budget hearings.

Adopt a Sliding Scale COLA for General Child Care and State Preschool

We recommend providing an above average cost-of-living adjustment (COLA) to Title 5 providers in high-cost counties and a below average COLA in lower-cost counties.

The Governor’s budget provides roughly $51.8 million for a 5.2 percent cost-of-living adjustment (COLA) for Title 5 providers through the General Child Care and State Preschool programs. This amount provides all centers with an equal COLA of roughly $32 per child per month. However, child care centers face differential costs depending upon location. Since Title 5 centers are competing for quality staff with private and Title 22 child care centers in their area, the costs structure of a Title 5 center in a low-cost county is likely to be less than in a high cost county. The Legislature could provide a differential COLA (higher COLA in a high cost county and lower COLA in a low cost county) to move the reimbursement rate for Title 5 centers to more closely reflect local costs. Since the state has data on the cost of child care for each county in the state, such an adjustment could be easily made. For example, if the Legislature provided a 3 percent COLA in lower-cost counties, the Legislature could provide a 6 percent COLA in the higher-cost counties. We have proposed a similar approach to help equalize general purpose funding for school districts. Depending on the difference between COLAs, the state could make a little or a lot of progress toward transitioning the Title 5 funding rates to mirror the local RMRs. We recommend the Legislature provide Title 5 providers a differential COLA, providing a higher COLA in high-cost areas, and a lower COLA in low-cost areas.

If Proposition 49 Implemented in 2006-07 Child Care Savings Likely

We find that the state will likely have child care savings if the state implements Proposition 49’s after school program expansion in 2006-07. These savings will result in child care program savings, Proposition 98 savings, or could be redirected to serve additional students.

In the previous section, we recommend repealing Proposition 49-the after school program expansion. However, if Proposition 49 is implemented starting in the 2006-07, DOF estimates that an additional 230,000 students will be provided after school programs between the hours of 3 p.m. and 6 p.m. We would expect that some of the 230,000 students would be in families currently receiving subsidized child care. This is because statute gives children currently in state subsidized child care preferential access in the after school program. To the extent that some children currently receiving subsidized care may either no longer need that care, or may need less hours of care, there would be child care savings. It will be difficult to determine the level of child care savings that may occur as a result of Proposition 49 implementation. The state’s child care programs will treat these savings differently, absent legislative direction. For Stage 1 child care, savings would be available for future social services costs. For Stage 2 and Stage 3 child care, savings would result in Proposition 98 carry-over funds, which are typically used to fund child care in the subsequent fiscal year. For State Preschool, General Child Care and AP programs, the savings would be redirected to serving other children from working poor families in the budget year.

New RMR Survey Awaits Administration Approval

We recommend the Legislature direct the California Department of Education to use the new Regional Market Rate survey results to develop a set of sub-regions within counties to balance the efficiency benefits of having multiple reimbursement rates in counties with the administrative burden that multiple rates create.

Federal law requires states to establish a child care funding system that reimburses child care costs at a rate that reflects the cost of child care in that community. To meet this requirement, the CDE contracts every couple of years to conduct a survey of the costs of child care across the state. The intent of this process is to ensure the reimbursement rate reflects the cost of child care in that community. Specifically, it ensures that low-income families can access most child care provided in their community, while at the same time not providing too high of a reimbursement rate, which could crowd out nonsubsidized working poor families. Federal regulations suggest that states provide a reimbursement rate that allows subsidized families to access at least 70 percent of child care services in a community. California, however, has decided to set its maximum reimbursement rate high enough that families can access 85 percent of child care services provided in a community. The federal government also tasks the state to determine boundaries for what area defines a community. Since costs of child care vary dramatically across the state, how the lines separating communities are drawn can be important in determining the reimbursement rates for a community. This issue of how to define a community has lead to a delay in the process of updating 2005-06 rates. Below, we describe the historic approach to setting the regional market rates, the new methodology, problems with the new methodology, and the current CDE proposal. Finally we suggest a middle ground approach to establishing new rates.

Historically, Reimbursement Rates Set for Each County. Historically, the state has relied mainly on county boundaries to define a community, resulting in one reimbursement rate for each county. The state has made exceptions in a couple of counties, dividing them into sub-regions to address dramatic cost differences. For example, in Yolo County the cost of care in the university town of Davis was significantly higher than the cost in the remainder of the county. Aggregating to the county level in Yolo County would mean that reimbursement rates would not be high enough to access child care in Davis, and would likely be higher than necessary to access quality care in rest of the county. So, on an exception basis for two counties-Yolo and Ventura-sub-county reimbursement rates were established.

There have been technical problems with the historic approach. First, the studies in the past have had relatively low response rates. The lower the response rate, the less accurate the rate will be. In addition, for some counties the sample size was too small because not enough providers were available to ensure that the reimbursement rates accurately reflected the costs in that county.

New Methodology Provides Zip Code Level Rates. The CDE contracted with an independent research firm for a new RMR survey methodology. The new methodology addressed problems in the historic RMR survey approach. By reducing nonresponse rates and using a sophisticated new method of grouping providers based on demographic variables, the approach can provide a more accurate estimate of market costs of child care in particular communities. The new survey provides cost information for the cost of child care for each zip code in the state based on the underlying demographics of the communities.

The New Methodology Has Some Technical and Administrative Issues. After looking at the reimbursement rates that the new methodology generated, there were some zip codes for which the new methodology is problematic. For example, the new approach is problematic for centers in the downtown San Francisco area. This is because the new method is based largely on demographics of the residents in a zip code, and downtown San Francisco does not have many residents. Thus, the reimbursement rate does not accurately reflect the child care costs that families working in this area would face. We think that rates for areas like these would need to be addressed on an ad hoc basis.

The new methodology may also create too many reimbursement rates for a region or county, leading to excess administrative burden. For example, in Los Angeles County there would be 13 different rates for preschool aged children in child care centers and 22 different rate for FCCHs. Even for a small county like Yolo County, there would be four different rates for child care centers and ten different rates for FCCHs. There may be some administrative burden to ensure that the centers and FCCHs are each reimbursed at the correct rates.

Upward and Downward Rate Adjustments. Under the new methodology some low-cost neighborhoods would experience reductions in child care reimbursement rates while some higher-cost neighborhoods would experience rate increases. For example, in Alameda County, the lowland neighborhoods around Oakland would have lower rates under the new methodology than the county average rate under the existing system. Conversely, hillside neighborhoods above Oakland would tend to have higher reimbursement rates.

The RMR Survey Remains in Limbo. Because of concerns about sub-county rate changes, the CDE has sought approval from the Department of Finance (DOF) to aggregate the new methodology to the county level. The DOF has reviewed the CDE proposal and has requested additional information on statistical issues and the impact that the CDE proposed rates would have in counties that face differential costs across the county. Because the survey has not been conducted in several years, some providers operating at their regional market rate ceiling have not had a rate adjustment during this time period.

Finding Common Ground with Multiple Rates in Counties. While the new methodology may have generated too many reimbursement rates in a county, the CDE proposal (one rate per county) would continue to result in access problems in high cost communities, while providing too high rates in other counties. There may be a compromise between these two approaches. For example, if CDE limited the number of reimbursement rates in a county to no more than three to five different rates for Title 22 centers, and six to ten different rates for FCCH homes, it would reduce the administrative burden while still providing a more accurate reimbursement system that reflected the cost of care in specific communities. We recommend the Legislature direct the CDE to use the new RMR survey results to develop and implement a set of sub-regions within counties to balance the efficiency benefits of having multiple reimbursement rates in a county with the administrative burden that multiple rates create.