The Cost of High Quality Childcare

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Marnetta: Hello, and welcome back to Impacting the Classroom. I'm your host, Marnetta Larrimer. We've been off for a few weeks and yes, I've missed you too. We've been working hard at some exciting things here at Teachstone. I am so happy that I get to announce that registration is now open for our annual conference called the InterAct Class Summit. At InterAct, education leaders from all over gather together to talk about educator-child interactions.

You'll also hear about implementing class, how to mentor and help teachers improve interactions, and hear inspiring stories about the impact that interactions have had throughout the nation. The conference will take place in sunny San Diego, California, and it'll be April 3rd through the 4th. If you have a story to share, we are now accepting proposals until December 1st. Visit teachstone.com/interact to register or submit a proposal.

All right. Now that that's out of the way, let's jump into today's discussion. I'm joined by Anna Kresse and Jen Huffman. Ladies, welcome to the podcast. If you could, please introduce yourselves to our audience.

Jen: Thank you so much. We're so excited to be here. I am Jen Huffman. I'm the Director of Research and Evaluation at the Prenatal-to-3 Policy Impact Center at Vanderbilt University. We conduct program and policy evaluations. We work in a lot of different policy spaces, but everybody recently has been wanting us to evaluate their childcare efforts.

My team conducts a cost benefit analysis from everything from paid family leave to earned income tax credit programs. States increasingly are interested in having us evaluate their childcare investments as well at the state level. We also conduct program evaluations of state and nonprofit led programs and interventions, as well as some data analysis and data dashboard work for state agencies and nonprofits as well.

Marnetta: Wonderful. Thank you, Jen. Anna?

Anna: Yes, thank you so much for having us. I'm excited to be here. My name's Anna. I'm a Senior Research Associate with the Prenatal-to-3 Policy Impact Center. I work as part of Jen's team. As she said, we've had a lot of childcare work going on at the center.

I've been pretty involved thinking about childcare. What are the problems facing childcare? What can states do to support the childcare industry? And what good comes out of it when states invest in childcare? I'm excited to talk today.

Marnetta: Yes, this is going to be a great discussion. Welcome, welcome, welcome. Anna and Jen, I like to ask all of our guests what's impacting the classroom. Recently, Prenatal-to-3 Policy Impact Center released an insightful report articulating the value of early childhood investments in Virginia that highlighted the impact that investments have had on the quality of education. Can you tell us a little bit more about that? Whatever you’d like to talk about, about it.

Anna: Of course, thanks for asking. There's a lot happening in the childcare world right now. The Covid-19 pandemic set off a pretty big childcare crisis all over the country, one that had been building for a long time. In response to that, the federal government provided billions of dollars in emergency pandemic funds to help stabilize the childcare industry. Every state used that money in different ways. Some are approaching single parts of the problem and others are taking a big systemic approach.

Virginia did some really creative things with their money, really thinking about the childcare crisis from a holistic perspective and intervening in a lot of different ways. They used some state money and also some of this federal emergency money to invest a bunch of money in childcare.

We basically looked at a single year's investment, which was about an additional $309 million that Virginia used to increase the availability of affordable, high-quality childcare for Virginia families. We looked at that investment, which is now at risk of going away like the rest of the money, because the federal investments in childcare are beginning to be phased out. We looked at what they did with that money to understand both what they've gotten so far and what will go away when the federal government's emergency funds go away in the absence of additional state dollars. We find that the impact is pretty big.

Childcare is pretty incredible, especially if it's affordable and high quality, because it helps families and kids in a lot of different ways. When childcare is affordable, our parents can go back to work, they can earn money for their families, and they also spend less money on childcare if the childcare is affordable to them. That leaves more money for taking care of their kids, for buying stable housing, for buying food, for buying books, things like that.

If the childcare that kids spend their time in when their parents are at work is also high quality, those kids also have access to high quality learning opportunities, safe, stable, nurturing environments while they're at school as well. In that way, Virginia's investments support stable, nurturing environments, both at home and at school.

The impact of that $309 million, again, invested in one year, is huge. We estimate that it sends almost 11,000 mothers back to work. It lifts more than 5000 kids out of poverty and returns, within a year, almost $400 million in terms of money spent in the economy. In terms of increased family earnings, increased disposable income, that money goes back into the economy.

Also those kids have better outcomes for the rest of their life, do better at school, start school, ready to learn, less likely to be retained a grade, more likely to graduate high school. Those things save money as well. The long and short of it is, investing in childcare is good.

Marnetta: Yeah, most definitely. You were mentioning so much, and the report was really a great read. I hope the listeners take some time to look it over. That affordable care is one of the key things that I heard in there, which really is a challenge for families. When you think about the cost of care, how did you lean into that and make this a reality for your families?

Anna: What they did in Virginia was most of their investments were focused in their childcare subsidy system and an associated program called the Mixed Delivery Program. These are programs that offer affordable childcare to families by helping families pay for childcare. Every state has a childcare subsidy system.

Childcare subsidy systems are typically a partnership between the federal government and state governments, funded by both of them. The federal government provides a lot of guidance and suggestions and very few rules. States can have a lot of flexibility in how they implement those programs. I'm explaining all of this, because it comes down to what families pay for care and why that matters.

Basically, when states have these subsidy programs, if you are eligible for a subsidy, you can apply. If there are subsidies available, you can receive a subsidy. How likely you are to receive a subsidy depends on how many subsidies your state funds, how much money they put into that program.

In Virginia, they decided to eliminate the wait list. That basically meant everyone who's eligible would receive a subsidy, and they raised eligibility up to 85% of the state median income, which is a little over 300% of the federal poverty level in Virginia, which is pretty inclusive, a pretty wide eligibility range relative to other states. They did both of those things.

When you are eligible and receive a subsidy, the state then pays for your childcare. You usually pay for a portion of your care called the copay, but the state pays for the most of it through what's called the reimbursement rate.

The difficulty in most states is that the reimbursement rate is often not enough. It's not enough for a couple of different reasons. One is that the federal government recommends that states reimburse childcare programs at what we call the equal access benchmark, which is the 75th percentile of the market rate. In other words, if there are 100 childcare programs, you line them up from least to most expensive.

The 75th most expensive program, that's the 75th percentile of the market rate. It's suggested that states set their reimbursement rates there. I think 26 states currently do that, so a lot of states are below the market rate.

The second problem with the market rate is that it doesn't reflect what it actually costs to provide childcare. I can explain that in a little bit more detail. This is such a complicated tangle of a story.

When reimbursement rates are too low, it makes childcare programs not want to accept subsidies, so it limits the power of subsidy reform. What Virginia did was it raised their reimbursement rates as well, raised eligibility and funding for childcare subsidies, which basically increases the number of kids in a childcare program who are using subsidies, which can then sort of raise the revenue at a program.

Marnetta: I think I want to piggyback on what you just said. I love that you elevated that. There is a high cost to providing care. Oftentimes we think that childcare providers are making money hands over fist. Let's talk about why is childcare so expensive so that the audience really understands what goes behind those dollars.

Jen: I can talk about this a little bit. Childcare is extremely expensive. Everybody who is a parent and has a kid knows this firsthand. It is very expensive. There's a number of reasons for that, but I think the biggest one is because of staff costs. Especially for the youngest kids, infants, and even toddlers, staff to child ratios are low because it's a lot to take care of a young child or an infant.

Ratios for infants are as low as two infants to one teacher. Four to one is also a common ratio to have for infant care, meaning four infants to one teacher, because it's really intensive to care for babies. That just means that staff time is really costly. It is hard to come up with the resources needed to pay for that ratio, so the resulting price to parents is really high.

There are also of course other factors that go into that. It is costly to get a facility ready to take care of babies and young children, whether that is a center or a family home. You have to have everything from outlet covers, to safety gates, to doors and latches, and all kinds of things to meet state regulations, as well as just basic safety features.

There's also the cost of the facility itself, playground equipment, toys. All of that stuff is extremely expensive to obtain and to upkeep. But the really primary driver of those high costs is staff time, especially like I said, the younger the children, the lower the ratio between teacher and child. Therefore, the higher the cost and the more difficulty that there is in creating a system in which you can afford to pay for that care.

Marnetta: Thank you for that. Anna, did you want to add anything to that?

Anna: I think what Jen said is exactly right. I think the struggle in the childcare industry is that the actual cost of providing childcare is so high that the majority of families can't afford to pay it. Most families that you know who access childcare, at least in my experience, will tell you how expensive childcare is. Like, oh gosh, it's so much money every month. It's true in most states, it's more than in-state college tuition. But the reality is the prices that the market is charging right now are maxed out at what parents can currently afford to pay and don't reflect what it would actually cost to provide high-quality childcare.

In a lot of the pieces that Jen mentioned in terms of the costs of providing childcare, those are static. They can't be flexed. You have to pay what you pay for rent every month. You have to pay what you pay for the snacks that you provide kids for your internet and your insurance. Those are costs that you will pay every month no matter what.

The only place, if there's any wiggle room, is in what you pay your staff. That's educator benefits, educator wages, paid time off for educators, it's having someone who can cover the classroom during breaks for paid professional development. All those kinds of things, those are the places where there's any wiggle room. The only place is they have the option to squeeze.

The result is childcare program margins are so thin, usually less than 1% margin. Any loss in revenue month over month is not sustainable. Childcare programs are often right on the edge of going out of business essentially. Despite these low wages for educators that makes it really hard to hire and retain them, they can't increase the wages, because they don't have the money to do it. We're in this really difficult situation in childcare in every state really, almost every state.

Marnetta: Which makes that reimbursement program a challenge. If I'm already having the struggle, the limitations on this reimbursement only add to that. We have more children who aren't able to get the quality care, because I have to feed my staff, keep my building open, or whatever. Let's talk about the impact of raising that and making it more inclusive.

Jen: Yeah, absolutely. Raising the eligibility for childcare subsidies to 85% of state median income is a really important tool that states can use. What that does is it increases access. More families will be eligible based on their income for childcare subsidies. In an ideal world, that means that more families can access childcare subsidies, more families can get high quality care for their kids, more families can go to work. For the providers, that means more revenue for them if they are getting additional customers who can afford their services with support from states.

However, there are some very key barriers to this system truly transforming childcare. The single biggest barrier is that very few families actually get childcare subsidies compared to the proportion who are eligible based on that income. The range across states is really big, but I think the most common percentage of families who are eligible through their income who actually get a subsidy is between 5% and 15% of families.

The impact it has on the childcare market is actually pretty limited. Childcare subsidies are an extremely important tool. However, the way that the system works right now aren't transforming the way that we pay for childcare, and they aren't transforming either families' access or providers' revenue streams because so few families get them relative to the number of families that could use them and benefit from them.

This is also where state choices to invest in childcare using state funding, so taking the resources that they're provided through the federal government and the resources that they already put up to maximize the amount that they get from the federal government. Some states are choosing to invest more to expand their subsidy system, both through increasing the eligibility to even higher income families, which again, 85% of the state median income roughly half of families will make more and less than that. There's still a lot of room to go up in terms of really benefiting the majority of the state's families with subsidies.

Some states are making more. Families of higher income are eligible for the subsidies, and states are also choosing to fund more subsidy slots. Those are two additional levers going above and beyond this initial eligibility threshold that can really make childcare subsidies more impactful. I know you brought up another piece of this, which is the childcare funding cliff and how this weighs into all of that. Anna, do you want to talk about that, or do you want me to keep going?

Anna: Everything that Jen said is exactly right. I think we could talk a lot about what it takes to transform the system. It's not simple, it's not just one piece. A lot of states, with the emergency pandemic funding from the federal government, have tried to do some amount of work in the childcare systems. What states have done has varied wildly.

Almost all states did some form of wage supplementation for early childhood educators to help keep them in their jobs. Early childhood educators earn less than almost all other occupations. They're in the second percentile of wages.

We did a study in Texas and found that the median wage for early childhood educators is $12 an hour. It's less than you earn at Target, it's less than you earn in almost any other job, and you do it without health insurance, without paid time off for the most part. And you have to change diapers. It's a tough task relative to other gigs.

Understandably, there is a childcare educator shortage, and a lot of states tried to solve that with these temporary wage supplements. A lot of states tried to stop childcare programs from closing by offering direct grants to providers to help cover some of their expenses. Some states used that money to raise their reimbursement rates for subsidies. Some expanded their eligibility for subsidies, like Jen said.

A few states did multiple things. Virginia did touch across a lot of levers. No matter what states did, no matter how one piece at a time or thinking about the whole puzzle, everything states did with federal money was important. It helped kids continue to have access to care.

Right now we're talking about all kids, not kids who just use the subsidy system, but these kept childcare programs open for every parent. They helped raise equality for childcare, they helped families with low incomes access care, which helped parents get back to work. This work was super important, kept the childcare industry from collapsing. That money is starting to go away this year with more money expiring next year.

The problem is none of the problems that we're facing in the industry that were targeted with this federal emergency funding, those problems haven't been solved. We still have low wages, we still have thin margins for educators. When that money goes away from the federal government, if states don't replace it, and if the federal government doesn't replace it, then we're going to have all the same problems that we had back during the pandemic again.

If states raised reimbursement rates, but they aren't going to replace the money with new money, without doing that, either they'll have to lower their reimbursement rates back down, or they'll have to serve fewer kids, because they won't have the money to pay for those higher reimbursement rates for all those kids in the subsidy system. We're talking about a pretty stark problem coming up. It's going to affect childcare access and quality for a lot of families across almost every state.

Marnetta: I appreciate that. It's just scary. I could visualize all those things. When you've lived in that space, you're just like, ugh. It's a very big challenge. Like you said, before the pandemic, it was already a problem. The pandemic just highlighted, shed a light on, and made very obvious how big the problem actually is. When those funds do run out, what are some opportunities to leverage more funding? What thoughts do you have around that?

Jen: Honestly, the big thing is this is an opportunity and a necessity for states to step up and close the gap to identify new sources of funding to invest in childcare. It does not appear as though any additional funding, at least in a substantial way, is coming from the federal government, which really leaves states responsible for closing the gap. As we've talked about, we see some states doing some really exciting and innovative things too to fund childcare, some for the first time.

For example, New Mexico has created an entire department for their early childhood services, and identified sustainable sources of funding to perpetually fund their early care and education, including their childcare subsidies, which they, at the same time, have also vastly expanded in a number of the ways that we've talked about earlier. They've made more families eligible, they've funded more slots, they've made huge enhancements to their programs and services while at the same time identifying funding so that they can make sure that continues in perpetuity without, of course, taking away from other programs and services that they offer. They identify new funding.

In New Mexico, this is primarily through a land grant fund, where they get revenue from their natural resources. Other states are doing different things with the same end goal of funding childcare sustainably.

Marnetta: Anna, did you want to add anything?

Anna: I think that's exactly right. I think that if states want to support their childcare industries, systems, and keep making sure that affordable, high quality childcare is available for families, there is no choice except to step in. We're talking about a market failure that can't correct itself.

Some states have found sustainable funding. Jen talked about New Mexico. Louisiana has put some tax revenue from sports spending towards their childcare system. Vermont implemented a payroll tax to transform their childcare subsidy system. The state of Washington just passed a capital gains tax, part of which goes towards childcare. So it is possible.

There has to be the will, of course. I know there are always a million things that states need to decide where to spend their money on, but I think the really exciting thing about childcare is that it touches everybody. It impacts the economy, it impacts children, it impacts families. Whether you have kids or not, the availability of childcare matters. It matters for businesses to have employers, it matters for the wellbeing of children and families.

Even though it's a big upfront cost, we know and the Virginia report says this again, the money pays for itself. It pays for itself in human cost in terms of families, kids lifted out of poverty, children who do better in school, children who have better life outcomes, and it pays for itself in real cash dollars. $309 million in Virginia gets back almost $400 million within one year back into the economy while also helping families go back to work and strengthening things. If states can figure out how to do it, it's worthwhile.

Marnetta: Yeah, most definitely. I love that you highlighted how to create some funding outside of just federal funding. Every time I go to Texas and I buy a lottery ticket, I said, I'm doing it for the kids, my little contribution. A terrible example. We were talking about monies and stuff. I would like to know, regardless of the funding that is available to them, what is your guidance on how states can make the most of the budget that they have?

Jen: That's a big question.

Marnetta: Yes.

Anna: That's a really tough question, Jen. I really want to hear what you have to say on this also. I think the biggest thing that we would say generally is that you really do have to think about childcare as a system. If you don't, there are a lot of unintended consequences that might happen. We just can't predict. Everything works together as a system. It's hard to intervene on single pieces.

To have the biggest impact, you really do want structural change. It's our belief and hypothesis. That said, we did a lot of work in Texas. We talked to a work group of educators, directors, owners, and advocates in Texas who work in the childcare industry. What we heard over and over again is that nothing can change if we don't raise educator wages.

To have the biggest impact, you really do want structural change.

Educator wages are at the center of everything, because if you can't get educators in classrooms, forget high quality education, forget experienced educators. If you don't have bodies in the room, you can't have childcare. You just can't. Childcare programs can't open. They can't provide care. I don’t want to say if you have to choose only one thing. I do think one of the most urgent pieces is probably educator wages.

Marnetta: Thank you, Anna. Jen?

Jen: I absolutely agree with that. I think we have heard that time and time again that in wages first and educators first approach. An approach that is led by increasing wages and support for early childhood educators must be front and center, or your efforts will not be successful. We've heard that at different levels. We've heard that from educators directly, we've heard it from center directors and folks who work in leadership, and we've heard it from business owners. That is just what we hear time and time again. It has to be central to all efforts.

I think that is a really important perspective. I also think in the short term, the answer to this question could be really different for different states, but it really is to think about where your emergency funding went, where did ARPA funding go, and close those gaps. What funding is going away?

A lot of national studies and things we've heard from talking directly to providers as well is that, they're just really worried about having to lower wages, for example. Almost all states and almost all providers used emergency stabilization funding to raise wages. They did so in different ways. Some states provided grants directly to providers, and then providers supplemented wages themselves. Other states created wage supplementation programs, so they directly supplemented educator wages.

That is a big one circling back to the wages. As emergency funding goes away, providers are faced with a very real risk of having to lower their individual staff wages. Put yourself in those shoes and imagine yourself getting a very substantial pay cut because funding dried up. That is a close to a worst case scenario for providers. It affected how they use their funding in the beginning, and it's something that they're very worried about now.

Wages first approach is very important, and also I think in the short term, it's really important for individual states to think about where their gaps will be from emergency funding, running out, and targeting resources to that area. Longer term, like Anna said, we really see that childcare is a system where you do have to take a multifaceted approach and a systems level approach to changing childcare in your state, or you run the risk of things getting out of balance, and there can be unintended consequences in other areas. Longer term, we really would encourage states to think about all of the different pieces of that puzzle that make up the childcare system and doing targeted intervention in each of those areas.

Marnetta: Yeah. There are a lot of pieces to that. With all so many moving puzzle pieces, it almost becomes like, where do you start? We're starting, yes, let's pay the staff, because we need those bodies. They deserve the money for the work that they're doing. What are your ideas on how we could streamline the system to make this far less complicated?

Anna: What do you mean by less complicated?

Marnetta: Is there any way to where we don't have so many moving pieces to where it's not a big old puzzle that is complicated, that I need to reach out to so-and-so to unravel this thread so I can really understand and be more impactful? How do we make it an easier system to get the work done that we need to get done?

Anna: We have this problem right now in part, because we are charging for childcare. Childcare programs are charging for childcare less than it costs to provide childcare. They do that because it's what families can afford. If you raise the childcare costs above what families can afford, then families don't go to work. They say, actually, I guess I just will not join the workforce. I'll care for my child, I don't have an alternative. It's set at this artificially low place, which keeps wages low, makes everything hard to work.

Thinking about childcare system, I think like in a lot of other industries, the most reasonable thing to happen is for childcare programs to charge what it costs to provide childcare to families. But the problem is if that happens, most families can't afford it. It's no longer this theoretically expensive thing that's a really big line item in your budget. Now we're talking 50%-60% of your monthly income or your annual income. If you have kids, even more than that. That becomes totally untenable.

I think in order to fix the market failure let’s think about it in a way states like New Mexico have thought about it in raising the cost. Basically, if we let more families into the subsidy system, we redefine what we think affordable is for families. If childcare programs can charge what childcare costs to provide, and then we help everyone who can't afford that cost, afford childcare, the system becomes a little bit more sensible.

Right now, we're trying to work within all of these broken parameters and trying to figure out like, okay, well, how do we keep costs down for these families? How do we help these other families pay? That's why we say this systemic approach, even though it sounds complicated, it's actually the simplest, in theory, solution.

I'll caveat this and say, it hasn't been evaluated yet. It's been economically modeled, but we'll be keeping an eye on states like New Mexico who have done this systematic change to see if we get the equilibrium that we expect if it fixes this broken market and lets equilibrium come into the system. Jen, does that make sense to you?

Jen: Yes, it does. I want to acknowledge that what Anna is talking about is a huge transformative change. We are seeing states undertake that kind of change. New Mexico, Virginia is following suit. They've also made substantial changes to childcare. It is possible, and states are doing it.

Like Anna said, we don't know the full results yet, because they haven't been completely studied, but we see early benefits to this kind of investment. It is a transformative change, and it could have the effect of simplifying things and making them more straightforward. I know that not all states are ready to undertake that kind of a transformation. I can also mention just a couple of other types of changes that states can make that will make things simpler either for families or providers.

Again, this example is from New Mexico. Other states are trying this too but moving different early childhood programs and services into one department so that there are fewer different entities to contact if you need something. Something that we hear from providers is that, especially for new providers entering the market, for new program directors, or leadership staff coming in, it's really hard to figure out where to go for your different needs.

Childcare subsidies are in one place, but the wage supplementation program is somewhere else, each system has a different login, and it just gets really complicated and can become burdensome to figure out how to get your needs met or things like that. Combining services into one place is something that specifically states can do that is much smaller scale, but can really simplify things for providers and for families who might be applying for subsidies. That is one thing.

Relatedly, states are providing shared services support or "back offices support" to help decrease the administrative burden for these types of functions by sharing functions among different centers. That's something else that states can fund to support things, to just be less complicated for providers on a smaller scale. It doesn't require reworking the entire early childhood system. I would say those are two more lower hanging fruit options as well.

Marnetta: This has been so interesting and fun. You guys are amazing. I love it. All right. Before we go, we're coming to the end of our time, what is one key takeaway that you'd like to share with our audience that you want to leave them with?

Anna: What a great question. I think for me, the biggest takeaway that I want people to know is that investing in childcare is worthwhile. It's worthwhile for children, it's worthwhile for families, it's worthwhile for the educators that care for children, it's worthwhile for the economy and businesses that need workers. It's worthwhile for everyone.

Even though it is expensive, childcare is a good investment for states. It's good for kids and families. It helps kids and families thrive, not just in childcare, but across the life course. Investing in childcare can be expensive. States will have to get creative, but it's worth it. The risk of losing childcare, which is what we face with this fiscal childcare cliff coming up, is something that we all should be worried about.

Marnetta: Thank you, Anna.

Jen: I totally agree with what Anna had to say. I think I will echo that by just saying, the takeaway that I keep coming back to personally is just that state efforts really matter in the area of childcare.

State efforts really matter in the area of childcare.

We see prime examples of states that are choosing to invest in childcare and the benefits that are going to result from those investments for the state, for the economy, for providers, for childcare, business owners, and of course, for families and for children who are better off for having childcare that is both affordable and high quality. I think that's what I want to leave folks with, that state investments in this area really matter. We are seeing states taking action, and your state can too.

Marnetta: That is wonderful. Thank you both so much for joining today. We loved having you on the podcast. If I could share some of the quotes, "State efforts matter in childcare." "When states invest in childcare, everyone benefits." That's the message of this podcast. I appreciate you sharing that with the listeners.

Listeners, you can find today's episode and transcript on our website, teachstone.com/podcasts. As always, behind great leading and teaching are powerful interactions. Let's build that culture together.