Introduction and summary
The American Rescue Plan Act (ARPA) of March 2021 provided historic investments in early care and education, delivering nearly $40 billion for the sector in the form of child care stabilization grants and supplemental funds for the Child Care and Development Block Grant (CCDBG) under the Child Care and Development Fund (CCDF).1 While this funding represents the largest one-time investment the sector has ever seen, it comes at a time when the U.S. child care system is creaking under multiple pressures.2 The COVID-19 pandemic has highlighted the deficiencies in how child care is funded in the United States, with programs continuing to struggle to recover from the ongoing impacts of the pandemic and the tightening labor market.3
The Biden administration, recognizing the long-term needs of this sector, has proposed a $400 billion investment in early care and education as part of its Build Back Better plan.4 This level of funding would support greater access to high-quality child care and expand preschool options for all families who want them, reducing families’ out-of-pocket costs and supporting increased educator compensation. This unprecedented public funding has the potential to transform early care and education in the United States after decades of underinvestment.5
For this proposed investment to have maximum impact, it is critical that funds are distributed in a way that promotes a more equitable system. The current funding landscape leaves too many families behind, disproportionately affecting families with infants and toddlers, families living in rural communities, families and children with disabilities, and families of color.6
It is critical that policymakers, advocates, and all stakeholders are ready to seize the opportunity that new federal investments offer to design a better child care system.
This report highlights the shortcomings in how quality child care is currently funded and provides examples of how states can chart a different path forward to ensure that increased investments positively affect all children and families.
How current child care funding creates a disincentive to invest in quality
The primary source of public funding for child care is the CCDF, a state-federal program that supports access to child care for working families.7 Under the CCDF, states provide eligible families with subsidy vouchers to help pay for child care. The state determines the value of this subsidy voucher, usually based on a review of current tuition prices. States can differentiate rates based on quality, with most states using their Quality Rating and Improvement System (QRIS) as their definition of quality. A review of subsidy reimbursement policies found that 80 percent of states with a QRIS pay higher rates based on the assessed quality level of the program, with some states adding a percentage increase to the base subsidy rate and others adding a flat dollar amount onto each subsidy voucher.8
Paying higher subsidy rates to programs with a higher QRIS rating is intended to incentivize providers to improve quality, as higher rates cover the increased costs of operating high-quality programs.9 However, because the rate increases are based on a flawed market-based approach to setting subsidy rates, they rarely cover the higher costs.10 In addition, the subsidy system’s limited reach means that it has little ability to drive the child care market and affect quality. To qualify, family income cannot exceed 85 parent of state median income, although most states set eligibility much lower than this target; even then, public subsidies only reach about 1 in 9 eligible children under age 6.11
States have attempted to address the insufficiency of subsidy funding by providing quality bonuses to providers who reach higher levels within a QRIS, untethered from subsidy rates. More than 90 percent of states offer some form of financial incentive through their QRIS, including quality awards or bonuses, staff wage supplements or scholarships, or quality improvement grants.12 However, limited funding has also hampered this strategy, with state systems unable to provide financial incentives at the level necessary to cover the higher cost of meeting quality standards, leaving providers still struggling to balance their budgets at higher quality levels.13
Figure 1 demonstrates the impact of financial bonuses and tiered reimbursements on a hypothetical provider. Without these strategies, the provider’s net revenue drops significantly at higher quality levels. Tiered rates and financial incentives help offset these losses but fail to fully cover the higher cost of quality.
Beyond the subsidy system, most working families cannot afford to pay the true cost of a high-quality child care program.14 QRIS ratings were intended to drive consumer demand for quality,15 but families are price-sensitive consumers, and while they do value quality when choosing a child care program, they must also face the reality of their monthly budgets. With child care costs already taking up an average of 10 percent of income—and much more for low-income working families—most families cannot afford the higher tuition necessary to cover the cost of quality.16 Analysis from the Center for American Progress estimates that high-quality center-based infant care for which educators are compensated adequately would cost more than $25,000 per year on average, which is almost one-third of the median income for a family of three.17
As a result, the way child care is currently financed acts as a disincentive to invest in quality: Neither child care subsidies nor private tuition fees cover the true cost of quality, leaving only a small percentage of programs able to operate at the highest levels of a QRIS.18 But the impact of this broken system is not felt equally by all communities and has created an inequitable child care system. Providers who can generate sufficient revenue from private-pay families can invest in their program, achieve higher ratings, and generate more income through QRIS financial incentives. In contrast, providers who rely on child care subsidy revenue, or who serve a community that cannot afford high tuition fees, struggle to pay competitive wages and have no reserves to invest in improving their program’s quality rating—something that would allow them to unlock additional quality-related revenue.
Toward an equitable approach to funding quality child care
Several states have begun to address this issue, convening task forces and commissions, conducting studies, and piloting new approaches. With the increased public investment provided by ARPA and the proposed Build Back Better Act, there is a unique opportunity to reimagine how quality child care is funded. Fundamentally, this policy would shift much of the financing of child care away from families and toward public investment, better reflecting child care as a public good.19
Under the Build Back Better Act, no family would pay more than 7 percent of their income toward child care, with lower-income families paying nothing or a smaller share of their income. Figure 2 illustrates the share of the total cost of child care that families pay under the current system compared with a system where no family pays more than 7 percent of their income. As shown, capping family fees at 7 percent of income would dramatically shift the burden of paying for child care away from families and toward public funding.
Under the system that the Build Back Better Act envisions, public funding would cover most of the cost of high-quality care, with families paying a percentage of their income unrelated to the cost of operating the program. How much public investment is required to cover the gap between family fees and the cost of child care would be determined based on a cost analysis rather than market prices. A cost analysis or cost-of-quality study would analyze the cost drivers related to different quality standards and estimate the expenses incurred to meet them.20
Since the 2014 reauthorization of the CCDF, states have had the option to set rates based on a cost estimation study, rather than a market rate study. However, to date, only Washington, D.C., and New Mexico have used this approach, due in part to lack of public funding to cover the higher cost of setting subsidy rates based on cost rather than price. A key benefit of moving to this approach is that a cost study can better capture the additional resources needed to support special populations, such as infants and toddlers, children with disabilities, dual language learners, and others whom the current system fails to serve adequately. Market prices often fail to fully reflect the higher cost of serving these populations because parents simply cannot afford the true cost of high-quality care that meets the needs of these children. A cost estimation model can better capture the resources needed to provide responsive and developmentally appropriate care for infants and toddlers, as well as the staffing needed to support dual language learners and children with disabilities, allowing states to set subsidy rates that do not disincentivize providers from serving these children.
Importantly, this approach can also include increased compensation for early childhood educators. Current market prices embed the low wages of the early childhood workforce, so any subsidy rate based on market prices will reflect this inadequate level of compensation. Yet by using a cost estimation model, it is possible to ensure that the rates are based on a program model with compensation that adequately reflects the salaries and benefits needed to recruit and retain a stable professional workforce—which, when combined with increased eligibility, can provide sufficient funds to help providers cover the cost of paying higher compensation.21
Moving away from a scarcity mindset where providers are barely scraping by, families are struggling to access care, and the system is working for hardly anyone requires not only a reimaging of how child care is funded but also a better understanding of what is funded and how public dollars should be invested for an equitable and the most efficient impact. Policymakers must ensure funding is distributed in a way that promotes equal access and does not include requirements that exclude certain populations. For example, when new funding is made available only through competitive grant processes, providers with resources to employ a financial manager on staff or to hire grant writers are at an advantage.
Authentic engagement of stakeholders in the design of policies and procedures can ensure that they are culturally responsive and promote equitable access to quality child care for all children and families.
Ensure culturally competent definitions of quality
An equitable approach to increasing access to quality requires a culturally competent definition of quality, one in which all families can see their values reflected. The QRIS model has faced criticism for being too focused on one definition of quality, being designed without input from the diversity of the field in which it operates, and for codifying requirements that are ineffective for certain types of providers.22
In 2015, the U.S. Commission on Civil Rights reviewed Mississippi’s distribution of CCDF funds, hearing testimony that the state’s QRIS “may have a disparate, negative impact on African American owned and operated child care facilities.”23 In its report, the commission recommended that state agencies spend CCDF funds to help providers meet QRIS standards and to evaluate the validity of the QRIS as a predictive measure of improved outcomes for children, with a focus on ensuring that “criteria are culturally relevant to diverse populations.” In addition, a recent national study of QRIS participation data found that while participation was more likely in communities with high poverty rates, child care centers in communities with higher proportions of Black residents were less likely to participate in states’ QRIS.24
In 2020, the Children’s Equity Project, in collaboration with several partners, developed a set of recommendations to dismantle racism in early care and education.25 The report cited the need for states to explicitly include equity in their QRIS definition, noting:
A program simply cannot be deemed “quality” if its programming, experiences, and outcomes are inequitable. Just as important is ensuring publicly funded programs and their workforce—particularly programs serving children from historically marginalized communities—have the support they need to move up through QRIS. Too often, these rating systems ignore equity content in their indicators, are inaccessible to the providers who serve the most marginalized children, and penalize programs who are experiencing systemic barriers.
The report recommends that curricula and teaching be available in multiple languages and that systems put emphasis on parent-teacher partnerships and relationship building to support children’s growth and learning. An equitable approach also requires that standards, coaching, and assessments are available in multiple languages and that coaches and raters represent the field in which they are working. An equitable definition of quality requires authentic stakeholder engagement to gather input on quality measures and ensure their cultural relevance. As states consider revising QRIS standards, they must do so with this equity lens.
Policymakers must ensure funding is distributed in a way that promotes equal access and does not include requirements that, even unintentionally, exclude certain populations.
Support providers to achieve quality
Beyond redefining quality, an equitable child care system also needs equitable access to resources that support providers in achieving and maintaining their level of quality. As discussed above, most states currently incentivize providers to increase quality through the promise of future resources once they achieve a higher level of quality. However, the low margins under which most child care providers operate leave them with scarce resources to invest upfront in quality improvement initiatives such as providing paid planning time for educators, purchasing additional materials, or upgrading their indoor and outdoor spaces.26
These systems should move beyond rewarding programs when they achieve quality and focus on continuous quality improvement, helping programs wherever they are starting from and tailoring financial and nonfinancial supports to lift programs up. States should target these supports to communities that currently lack highly rated programs to ensure that resources are reaching those who have been left behind by the current incentive structure.
For instance, Illinois is piloting such a strategy through its Preschool Development Grant Birth through Five (PDG B-5) program. Seven years after the development of the state’s QRIS, ExceleRate, 70 percent of child care centers in Illinois remained at the first level of the QRIS, meeting minimum state licensing requirements. State leaders recognized that funding was a major barrier to increasing ratings, with providers needing additional staff to cover the activities required at higher-quality levels, such as reflective supervision and job-embedded professional development.27 In response, Illinois is piloting an approach in a rural community in which providers who serve at least 40 percent subsidy-eligible children can receive increased funding to support meeting higher standards, in advance of achieving those standards.28 Participating providers continue to receive their current child care subsidy funding but now also receive a contract to cover the additional costs of meeting the next standard in ExceleRate. This contract is based on the number of classrooms, rather than the number of enrolled children who qualify for child care subsidy assistance, and is intended to cover the cost of sufficient staff to operate at the next level of the QRIS and to pay salaries aligned with a pilot wage scale. In this way, Illinois hopes to remove a barrier faced by many programs that were unable to cover the upfront costs they would incur as they moved to the next quality level.
Arkansas is also using federal funds to support programs to achieve higher quality ratings, developing a quality improvement subgrant using federal child care COVID-19 relief funds.29 Recognizing the financial burden the pandemic placed on providers and the limits on their ability to achieve higher quality standards during this time, these subgrants are designed to help programs increase one level in the state’s QRIS, Better Beginnings. Grant amounts vary depending on the number of children served and are determined based on an analysis of the resources needed to increase quality. As a result, this program provides financial supports at an amount that is sufficient to cover the higher cost of reaching the next quality rating.
Support providers to maintain quality
Access to a sustainable and sufficient funding stream is necessary to ensure that providers can operate a stable, quality program. Current funding streams—both public and private—are rarely sufficient to cover the true cost of quality.30 Families are burdened by the current price of child care, even though it fails to align with the true cost, and most states set their public subsidy rates based on these market prices. States need to both increase subsidy rates to match the true cost of providing high-quality care and expand eligibility to ensure that families who cannot afford the cost of care are able to access public assistance. Several states are piloting one or both strategies using ARPA funds to extend eligibility, reduce copays, and increase public funding for providers who serve subsidy-eligible children.
In New Mexico, for example, the new Early Childhood Education and Care Department (ECECD) is using the flexibility offered by pandemic-related emergency regulations to direct federal and state funds to address the long-term stability of the early childhood sector. In 2021, New Mexico became the first state in the nation to set subsidy rates based on a cost estimation model rather than the market price.31 As a result, the state implemented significant rate increases, with center-based infant rates and family child care rates seeing the largest increases. (see Figure 3)
New Mexico’s revised rate structure also reflects higher payments for programs that achieve higher ratings on the state’s QRIS, NM FOCUS. While New Mexico has long paid tiered rates based on FOCUS level, the cost estimation model provided the ECECD with data on the sufficiency of these quality differentials, allowing new tiered rates to be set in addition to new base rates, which helps ensure that providers are not at a financial disadvantage when operating at the higher quality levels of FOCUS. The state also expanded subsidy eligibility from 200 percent to 350 percent of the federal poverty level so that middle-income families who cannot afford private tuition rates at the new subsidy levels are not priced out of the market.32
Several other states are considering or piloting similar approaches with ARPA funds:
- Connecticut is paying higher subsidy rates to programs with national accreditations and is providing an additional $6 million to help programs that are working to secure accredited status, in addition to waiving family copayments.33
- Massachusetts developed a new formula to set stabilization grant amounts based on provider capacity and staffing costs, including “an equity adjustment for programs located in historically marginalized communities or providing services to significant numbers of low-income children.”34
- Michigan is increasing income eligibility to 200 percent of the poverty level and raising subsidy rates by 20 percent.35
- Oregon is providing additional add-ons to stabilization grants for programs that serve infants or toddlers, programs that serve families receiving subsidies, programs that offer care on evenings or weekends, and programs that provide culturally responsive care.36
Conclusion: Seize the opportunity to build an equitable system
The early childhood education field is at a pivotal moment. A system that has been struggling for so long is now creaking under the pressure of the pandemic, but significant public investment may be on the horizon, offering an opportunity to rebuild a better system.
It is critical that policymakers, advocates, and all stakeholders are ready to seize the opportunity to design a better system, one that values and compensates educators for the important work they do, supports child care providers with continuous quality improvement, and provides all families and children access to quality child care that meets their needs.
The author benefited from the insights and experience of several systems leaders across the country, including Tom Layman and Anita Rumage from the Illinois Governor’s Office of Early Childhood Development, Tonya Williams from the Arkansas Division of Child Care and Early Childhood Education, Jocelyn Browne from the Massachusetts Department of Early Education and Care, Elizabeth Groginsky from the New Mexico Early Childhood Education and Care Department, Susan Hibbard and Debi Mathias from the BUILD Initiative, and Jeanna Capito from Prenatal to Five Fiscal Strategies. The author also expresses appreciation to Laura Dallas McSorley and Rasheed Malik for their review of and feedback on this report.