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Stability for the Child Care Market is Within Reach

As COVID-19 exposed the fragility of the child care market, with thousands of child care programs being permanently closed and driving many more to the brink of financial collapse, the pandemic also put a spotlight on policies necessary to stabilize child care businesses. Targeting child care subsidy payment rates and practices for the hours of care provided to children whose families receive subsidies can have an immediate and positive impact on the overall child care market. BPC offers two briefs that look at child care subsidy payment policies implemented by states that support stabilization of child care—increasing the rates paid for child care subsidy, and the use of grants and contracts as a method to provide payment for child care slots.

Although COVID-19 brought awareness of the child care market’s volatility, the child care business model in this country was broken long before the pandemic. Simply put, the cost to deliver a quality child care setting is more than most parents can afford to pay. The stability of the child care market is further weakened by limited public investments, insufficient child care market rates, and state payment practices that reduce child care programs’ financial security. These practices compound to produce meager profit margins, low wages for child care workers, and a lack of child care access for parents.

One of the goals of the Child Care and Development Block Grant Act of 2014 (CCDBG) is to increase the number and percentage of low-income children in high-quality child care. In order to achieve this goal, government recommended in the final rule for the Child Care and Development Fund (CCDF) that states both increase child care subsidy rates and use grants and contracts to pay providers. Congress allocated about $8.7 billion in fiscal year 2020 to states through CCDF to support child care subsidies for low-income families. This investment makes the government the single largest purchaser of child care services, paying for the care of more than 1.3 million children each month.

Child care subsidy payments are made directly to child care providers through child care subsidies that are distributed through certificates or vouchers. Federal regulations do not require states to pay specific payment rates. Instead, states are required to conduct a market rate survey at least every three years and use the results to set subsidy rates. Subject to approval, states also have an option to conduct an alternative methodology, such as cost modeling. As our prior brief The Limitations of Using Market Rates for Setting Child Care Subsidy Rates laid out, market rate surveys are a flawed methodology that fail to capture the true cost of providing child care and drive down child care subsidy rates.

States have been gradually increasing their child care subsidy rates since the 2018 increase of the CCDBG by $2.37 billion, the largest single increase to CCDBG outside of emergency appropriations related to COVID-19. With the 2018 increase, 43 states and Washington, DC have increased rates, yet child care subsidy rates across the board are still far below the true cost of care to provide a high-quality child care setting.

As significant as the rate paid to child care providers is the method by which child care providers are paid for child care subsidy. Across all states and territories, 92% of child care subsidy is provided as a portable certificate. Qualifying parents can use a certificate to access a child care slot at the program of their choosing. As a certificate follows a family, when a child exists a program for any reason, the payment for the certificate follows. The fluctuating nature of certificates can create uncertainty and unpredictability for child care revenues. In some states—such as Massachusetts, California, and Illinois—grants and contracts are used to purchase child care slots for subsidized families upfront. Grants and contracts provide a predictable source of revenue, as they are awarded for a year or longer and can increase access to high-quality child care for low-income families in communities where access is constrained.

As the pandemic continues, and COVID-19 vaccines are gradually administered, child care will be increasingly relied upon to return communities to more typical social and professional environments. States looking for solutions to bolster the embattled child care market should can look to increasing child care subsidy rates and the use of grants and contracts for a portion of their child care subsidy programs to increase the stability and availability of child care.

Read BPC’s latest policy papers: Increased Payment Rates to Support Child Care, and Payment Practices to Stabilize Child Care.

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