5

The Structure and Consequences of Child Care Subsidies

THE ISSUE IN BRIEF

The reduction of poverty has provided the most long-standing rationale for child care policies in the United States. Nevertheless, federal child care subsidies are channeled disproportionately to the nonpoor. Over $2.5 billion in federal child care support was channeled to the nonpoor through the Child and Dependent Care Tax Credit in 1993. This credit is not refundable and therefore does not benefit the very poor. In contrast, an estimated $1.7 billion was spent in 1993 through the four largest federal child care programs that predominately serve the lowest-income families: child care for AFDC recipients, Transitional Child Care, At-Risk Child Care, and the Child Care and Development Block Grant (U.S. Department of Health and Human Services, 1995).

The current array of federal child care policies represents an accumulation of responses to the specific needs of targeted populations. Although every poor and low-income family is technically eligible for some subsidy, and the Child Care and Development Block Grant could provide subsidies across the spectrum from families on AFDC to those who live just above the poverty line and are therefore at risk of becoming poor, in practice different funding streams have been targeted on different subgroups within the low-income population. For example, among the four low-



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Child Care for Low-Income Families: Summary of Two Workshops 5 The Structure and Consequences of Child Care Subsidies THE ISSUE IN BRIEF The reduction of poverty has provided the most long-standing rationale for child care policies in the United States. Nevertheless, federal child care subsidies are channeled disproportionately to the nonpoor. Over $2.5 billion in federal child care support was channeled to the nonpoor through the Child and Dependent Care Tax Credit in 1993. This credit is not refundable and therefore does not benefit the very poor. In contrast, an estimated $1.7 billion was spent in 1993 through the four largest federal child care programs that predominately serve the lowest-income families: child care for AFDC recipients, Transitional Child Care, At-Risk Child Care, and the Child Care and Development Block Grant (U.S. Department of Health and Human Services, 1995). The current array of federal child care policies represents an accumulation of responses to the specific needs of targeted populations. Although every poor and low-income family is technically eligible for some subsidy, and the Child Care and Development Block Grant could provide subsidies across the spectrum from families on AFDC to those who live just above the poverty line and are therefore at risk of becoming poor, in practice different funding streams have been targeted on different subgroups within the low-income population. For example, among the four low-

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Child Care for Low-Income Families: Summary of Two Workshops income programs, one provides subsidies to the AFDC population, another provides temporary support to working AFDC recipients who lose AFDC eligibility due to increased hours or earnings from employment, and another supports the child care costs of low-income working families to prevent AFDC dependence. Even if the fragmentation of federal child care subsidies was addressed, as has been done in many states that have established integrated child care subsidy programs, the sheer amount of public resources dedicated to providing child care assistance to low-income families would remain a major problem. Although federal subsidies for child care have expanded greatly in recent years, they remain inadequate to serving the large number of families who are nominally eligible for support. Only the Child Care and Development Block Grant provides support for quality initiatives and for efforts to increase the availability of early childhood development and before- and after-school care services for low-income families through a small set-aside of funds for these purposes. However, the vast majority of these funds (78 percent) goes to help low-income families pay for child care (only 9 percent was used to improve the quality of care). In 1993, about 750,000 families received subsidies through this program, two-thirds of whom were living at or below the poverty line (U.S. Department of Health and Human Services, 1995). Over 90 percent of the children served by this program needed care because their parents were working, in school, or in job training. (Table 3 summarizes basic information about these subsidies.) The consequences of this current structure of federal support for child care for low-income families were a lively topic of discussion at the workshops. In particular, the consequences of funding scarcity and of the fragmentation that characterizes federal child care subsidies for low-income families were examined regarding: (1) access to and affordability of child care and (2) the quality and continuity of care. Among the questions that were examined were: ( 1 ) What trade-offs do state agencies face when deciding how to allocate funds across nonworking and working-poor families, and between helping families pay for care and improving the quality of care? (2) What is known about how families rearrange their child care arrangements as they move from one funding stream to another? (3) How might the current child care system at the state level be affected if the federal government consolidates the direct child care funding programs and assigns greater responsibility for allocating these funds to the states?

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Child Care for Low-Income Families: Summary of Two Workshops TABLE 3 Federal Child Care Program Features   Program         AFDC Child Care Transitional Child Care At-Risk Child Care Child and Development Block Grant Purpose To assist AFDC families with child care to the extent that it is necessary for employment or state-approved education and training To provide up to 12 months of child care to working AFDC recipients upon loss of eligibility for AFDC due to an increase in hours of or earnings from employment To provide child care to non-AFDC working families who would be at risk of AFDC dependence if child care were not provided To increase availability and affordability of child care for low-income families as well as to help states provide, expand, and improve the quality of child care for all families Target population AFDC recipients who accept or retain employment or are in state-approved education or training activity Families that received AFDC in 3 of last 6 months and are no longer eligible forAFDC due to increasedhours of or earnings from employment An optional state program for low-income families at risk of AFDC dependence and needing child care to continue working Families at or below 75% of state median income, to enable them to work or participate in approved education and training, or to provide child care for protective service casesa Funding Open-ended federal entitlement to recipients; requires state matching funds Open-ended federal entitlemet to families; requires state matching funds Capped entitlement to states; requires state matching funds Block grant to states; no match required Fiscal 1992 $621,727, 109b $133,594,923b $599,050,901b $798,249,375c aChildren in state custody due to abuse or neglect. bCombined federal and state expenditures. cThe “lead agency” is designated by the governor and responsibility can be assigned to a non-IV-A Agency. Source: U.S. General Accounting Office, 1994b.

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Child Care for Low-Income Families: Summary of Two Workshops SUMMARY OF RESEARCH PRESENTED Access and Affordability of Child Care Public subsidies for child care are fundamentally designed to increase access to and affordability of child care for families who would otherwise be unable to avail themselves of this service. That these aims are being served by the current array of subsidies went largely unquestioned at the workshops. National data indicate that direct federal subsidies are being channeled to those most in need of support, namely single-parent families and poor families (U.S. Department of Health and Human Services, 1995; Hofferth, 1995). As of 1990, employed mothers on AFDC with a child under age 5 were most likely, among low-income families, to report receiving financial assistance with child care (67 percent); the vast majority of that aid comes from the government (Brayfield et al., 1993). The degree to which low-income parents cite child care costs as a major problem varies with their access to subsidies (Siegel and Loman, 1991 ). And families who receive subsidies appear to be in a better position to select from a broader array of providers than equally poor, unsubsidized families. Questions of the adequacy with which these aims are being served, however, and for whom, were actively discussed at the workshops. Public funds fall far short of meeting the needs of all eligible low-income and poor families. Furthermore, the fragmentation of federal subsidies for child care poses burdens on state agencies in their efforts to establish “seamless” child care subsidies for low-income families. Workshop participants identified a series of detrimental consequences that flow from this confusing mix of policies and from shortages of funds relative to the eligible population. Foremost among the concerns noted by state and local child care administrators was the zero-sum decision making that necessarily characterizes the allocation of limited funds between the working and nonworking poor. Although federal child care subsidies have been greatly expanded in the past five years, overall levels of public assistance at the state level still leave a sizable proportion of the eligible population unserved. For example, Bruce Liggett from Arizona stated that he is serving 30 percent of the families eligible for Transitional Child Care assistance. A recent report from the U.S. Advisory Commission on Intergovernmental Relations notes that “utilization of the Transitional Care Program is apparently low in many states, probably due to limited awareness and confusion about eligibility requirements” (1994:39).

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Child Care for Low-Income Families: Summary of Two Workshops Trade-offs are particularly acute between serving AFDC families who are making efforts to obtain job skills or enroll in school and serving families with employed parents who are living in or near poverty. Current incentives appear to favor getting families off welfare, rather than providing assistance to the even larger number of very low-income families with working parents. States, for example, are mandated to provide job training accompanied by child care for those families who require this service, in conjunction with federal welfare reform legislation enacted in 1988. There are no comparable pressures to prevent welfare dependency and, hence, to serve working poor and very low-income families. In addition, tight state budgets create disincentives for states to provide the matching funds that are required to draw down federal child care dollars in several of the subsidy programs (see Table 3). Meyers summarized her work with the GAIN program in California by noting that inadequate federal funding and inconsistent financing mechanisms create incentives for states to ration assistance and underutilize funds that are available. This is particularly true for those subsidies that require a state match and/or are targeted on the working poor (e.g., Transitional Child Care and At-Risk Programs) (Meyers, in press). Empirical data from parent interviews indicate that, in fact, large majorities of potential recipients are unaware of the targeted child care subsidies for which they might be eligible. Pressures to keep state costs down and the difficulty of adding outreach activities to already beleaguered state agencies were noted by the workshop participants as contributing to this problem. Among Meyers's random sample of AFDC recipients in California in 1994, for example, 61 percent were unaware of the AFDC Disregard—a benefit that allows AFDC recipients to deduct their child care expenses if they go to work; 85 percent were not familiar with Transitional Child Care subsidies. “WITHOUT CHILD CARE ASSISTANCE, ONE QUARTER OF THE FAMILIES ON THE WAITING LIST HAVE TURNED TO AFDC FOR ECONOMIC SURVIVAL.” Greater Minneapolis Day Care Association, pg. 1 The agency administrators expressed grave concerns that they are penalizing precisely those families who have achieved the goals of welfare

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Child Care for Low-Income Families: Summary of Two Workshops reform, often at just the moment that they have “made it.” Some, in turn, felt that this was contributing to churning—the term that was used to describe families' cycling back through AFDC in order to quality for subsidies. As noted by Rebecca Maynard, however, as AFDC becomes a time-limited program in many states, many families will no longer have the choice of moving between low-income jobs and AFDC. Among families who learn about and apply for subsidies, many spend some time on waiting lists. Virtually each of the state administrators expressed concerns about what happens to families on waiting lists and also about the validity of the counts that derive from these lists. Stephanie Fanjul from the North Carolina Department of Human Resources shared her experience that, as subsidies became available, her waiting lists grew. This occurred, she speculated, because more families had hope of getting assistance. The administrators noted that they know quite a bit about the families and children they are serving, but nothing about those they are not serving. Most states attempt to regularly recontact families on the waiting lists and typically find that, after just a few months, many of the families could not be found. Karen Tvedt from Washington state reported that her surveys of families on waiting lists show that they have more difficulties with child care, are working fewer hours, and are three times more likely to be using illegal child care compared with similar families who are receiving subsidies. Even families who are successful in receiving benefits can have a difficult time maneuvering through the current array of programs. Although, according to Christine Ross, many states and cities have achieved a high degree of coordination among the various child care programs, with a single place to apply for all child care assistance and relatively good linkages between AFDC and other child care subsidies, families in states that have not coordinated the subsidy programs face a confusing mix of eligibility rules, reimbursement rates, and even time-limited benefits (Ross and Kerachsky, 1995). Few states can afford the case managers and child care staff that can assist families as they make the transition from one source of subsidy to another. Access to care also appears to be especially affected by the relationship between reimbursement rates and local child care prices, and also by delays in payments to providers. An Urban Institute survey of resource and referral staff in six communities (Long and Clark, 1995), presented by Sharon Long, found wide variation in child care prices within and across the six communities, as well as variation in local reimbursement rates. Some variation in reimbursement rates is a result of genuine differences in

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Child Care for Low-Income Families: Summary of Two Workshops the cost of care. In other cases, states establish reimbursement rates that are lower than the market costs in certain localities. In some communities, Long and her colleagues found that the reimbursement rate was consistently lower than the providers' standard rates; in others, it was generally commensurate with the providers' rates. In each community, some providers were unwilling to accept children with subsidies, primarily because the reimbursement rate was lower than their prices and they were unable to absorb the difference. Siegel and Loman reported that delays in receiving payments were a major barrier to providers' willingness to accept subsidized children in their Illinois sample. They also found that difficulties finding nonrelatives willing to accept state rates, particularly from other AFDC recipients whose benefits would be reduced because of this income, restricted access to care. The state and local child care administrators provided additional insights into the role of reimbursement rates in low-income families ' access to care. Bruce Liggett from the Arizona Department of Economic Security, for example, noted that the cost of center-based infant care has increased 31 percent and the cost of school-age care has increased 21 percent over the past four years. The reimbursement rates have not been adjusted to reflect these increases, however, further exacerbating shortages of subsidized care for these two age groups. Karen Tvedt reported that Washington was able to raise reimbursement rates to the 75th percentile allowed in federal law. The number of licensed family day care homes in her state has grown from 6,000 to over 8,700 and the number of centers grew from 1,000 to 1,600 since 1990. In sum, although it is clear that more low-income families are now receiving child care assistance than has been true in the recent past, the structure of federal subsidy programs is often confusing to families and aggravating to the agencies that are responsible for helping them. Furthermore, scarce funds relative to the population eligible for subsidies, pressures on state budgets that affect their willingness to match federal dollars, and fragmentation militate against providing consistent support to families as they shift from nonworking to working-poor status, make it difficult for families to act as informed consumers of care for their children, and also appear to create perverse incentives to states to underutilize some sources of child care support. Some states have done a better job of reducing the negative consequences of fragmented federal subsidies than others. Each of those represented at the workshop, however, voiced a remarkably similar set of concerns.

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Child Care for Low-Income Families: Summary of Two Workshops Quality and Continuity of Care Apart from helping families obtain child care, efforts to improve the quality of available care options have not figured prominently in federal child care policies for low-income families. Concern about the quality of care that children receive has historically been the special reserve of early intervention programs, such as Head Start and the Chapter I pre-kindergarten programs, that are explicitly designed to “compensate for” disadvantageous home and community environments. There is, however, growing dissatisfaction with this bifurcated system of early childhood services. As a result, efforts to understand the impacts on child care quality of AFDC and welfare-to-work-based child care subsidies have grown. Two aspects of this work were examined at the workshops. The first focused on the impact of a small set-aside for quality improvement initiatives at the state level in the Child Care and Development Block Grant. The second examined broader issues about how funding levels and the structure of federal child care subsidies affect families ' access to higher-quality child care arrangements and the continuity of their child care. Data from the U.S. Department of Health and Human Services (1995) indicate that, of the $66 million spent on quality improvement efforts through the Child Care and Development Block Grant, three types of initiatives consumed over 80 percent of the funds: resource and referral, monitoring, and training and technical assistance. Efforts to improve staff compensation, which many view as an important accompaniment of efforts to improve staff qualifications via training, received 1 percent of the quality funds. State administrators who attended the workshops were unanimous in their praise of the quality set-aside. In practice, these funds appear to have enabled states to engage in more systematic efforts to provide training to providers who received Child Care and Developmental Block Grant subsidies, to provide child care referral services to low-income families, and to expand state-initiated quality efforts. For example, in Arizona, every type of provider can now receive training, whereas training had previously been very limited and available primarily to center-based providers. In Washington, the enforcement of state child care regulations was substantially improved, and resource and referral agencies now cover 90 percent of the state's population. In North Carolina, federal, state, and community funds have been merged to establish the Smart Start initiative (see inset). Smart Start is designed to encourage local innovation in early childhood services with the aim of helping every child arrive at school healthy and prepared

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Child Care for Low-Income Families: Summary of Two Workshops North Carolina's Smart Start (Remarks by Stephanie D. Fanjul) Smart Start is designed to provide quality child care, health care, and other critical services to every child under the age of 6 in North Carolina. Initiated in August 1993, it's a new approach bringing together public and private sectors and galvanizing communities around their children so all North Carolina children can come to school ready to learn and can develop into productive workers and good citizens. It helps communities identify already-existing resources, learn how to better coordinate services, and then expand services using seed money from the state. Smart Start is not the usual “big government” approach. Rather than designating a “lead” agency to run the program, counties come together and form nonprofit corporations. Low-income families, a key target for services, participate in decision-making, along with community leaders, ministers, business people, and others. The three major goals of Smart Start are: Every child in North Carolina will enter school healthy and prepared to succeed. High-quality, affordable early childhood education and other critical services will be available to every child who needs them. Parents and families will be involved in early childhood programs, providing a healthy, nurturing foundation for positive child development and growth. It is estimated that 50 percent of the children in the 32 participating counties (over 70,000 children) are now receiving Smart Start services. Among the outcomes achieved: 77 percent of all children removed from child care waiting lists were provided services through Smart Start, 56 new child care programs that volunteered to meet higher-quality standards were added in the Smart Start counties, and Although Smart Start counties represent 18 percent of the total number of counties, they represented 30 percent of statewide growth in new child care arrangements. We know now that no singular approach will offer adequate protection and support for all the different kinds of families in North Carolina. We also know that the progress we have experienced in the Smart Start counties can be achieved only if lots of people are committed to our children.

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Child Care for Low-Income Families: Summary of Two Workshops to learn. The provision of high-quality child care with trained providers is the centerpiece of the initiative. In general, the set-aside appears to have shored up relatively fragile state and local efforts to improve child care quality and protected a pool of funds that would otherwise have been channeled directly into subsidies. This zero-sum relation between the amount of money available for direct subsidies to the poor and the amount of money directed to quality improvements was a prominent theme in the workshop discussions. An additional manifestation of this tension is the concern of some that quality improvements that increase costs may make child care less accessible to low-income families. Indeed, the state administrators at the workshops expressed considerable anxiety about the possible loss of the federal quality set-aside, given the pressures they operate under to provide subsidies to more families. It is not possible to know, of course, which states would and would not be able to sustain their quality initiatives and what factors would distinguish between these two sets of states. The workshop participants were, however, favorably disposed toward retaining some funding for quality improvements in the context of a subsidy program, due in part to their recognition of the interrelationships among quality, cost, and access to care. “IF WE LOSE THE QUALITY SET-ASIDE, PROGRAMS LIKE RESOURCE AND REFERRAL WILL NOT COMPETE WITH MANDATES TO GET FAMILIES OFF WELFARE.” Bruce Liggett (comments at workshop) Beyond the set-aside, the workshop participants examined whether and how the low-income subsidy programs have affected the access of families with low incomes not to just any child care, but to care that corresponds more closely to their preferences. Findings reported at the workshops indicate that participation in federal subsidy programs does affect the type of care that families use in ways that would appear to reflect what we now know about their child care preferences. Furthermore, the relationship between the reimbursement rates reflected in subsidy levels and the local price of child care appears to affect families' access to quality care. Data aggregated from state agencies indicate that the child care ar-

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Child Care for Low-Income Families: Summary of Two Workshops rangement most frequently chosen by parents receiving direct federal subsidies was center-based care (U.S. Department of Health and Human Services, 1995). The profile of arrangements used by these low-income parents is strikingly different from that used by all low-income families (Figure 2). Siegel and Loman found, as well, that AFDC families in Illinois showed different distributions of child care use based on whether they received a child care subsidy and which subsidy they received. Families that received a child care benefit that reimbursed them for their child care costs 30 to 60 days after they had been incurred, and thus discouraged the use of child care options that the families could not afford with their disposable income, showed patterns of use that were similar to those of unsubsidized, low-income families. In contrast, families who received subsidies through programs that either subsidized providers directly or enabled the families to pay providers when fees were due showed substantially higher rates of reliance on center-based and family day care arrangements. Other evidence reported at the workshops also indicates that subsidies, per se, can help low-income families gain access to the same range of quality options that are available to higher-income families. The Urban Institute's survey of resource and referral agencies in six communities, reported by Long, indicated that the quality of care received by subsidized children was as high as that for higher-income, fee-paying children, as perceived by resource and referral staff. Staff in two of the communities, however, expressed concerns about quality. Long traced these concerns to relatively low reimbursement rates and inconsistent payments to providers. Suzanne Helburn, speaking of the Cost, Quality, and Outcomes Study, also reported that cash payments from government and philanthropies provide about 28 percent of center revenue, enabling centers to serve children whose parents could not afford the full tuition. Whereas subsidies may promote access to a broader range of arrangements on behalf of low-income families by making them more affordable, the structure of these subsidies and the problems associated with scarce funds for the subsidies that are targeted to non-AFDC families appear to render reliance on these arrangements quite unpredictable. A topic of great concern at the workshops was the disruptions in continuity of care that are caused largely by the fact that states have few funds available for anyone other than AFDC families participating in self-sufficiency programs, as well as by the fact that families are forced to switch from one subsidy program to another as they move from public assistance to job training to work.

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Child Care for Low-Income Families: Summary of Two Workshops FIGURE 2 Children served, by federal program and type of provider. Source: U.S. Department of Health and Human Services (1995). October 1, 1992 through September 30, 1993. Long's survey of six communities found that some communities have managed to construct relatively seamless child care systems, but others have highly fragmented systems that are extremely difficult for families to negotiate. In some cases, families need to switch agencies to obtain subsidies as their work status or income changes. The transition from subsidies that are tied to work preparation to the transitional subsidies that provide support for 12 months when parents first obtain a job appears to be an especially difficult one in many communities. “FAMILIES DO NOT LIVE IN CATEGORIES; THEYPASS THROUGH THE CATEGORIES.” Jim Nicholie(comments at workshop) Christine Ross presented data from the Urban Child Care Assistance Study, which includes information from both a telephone survey and in-

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Child Care for Low-Income Families: Summary of Two Workshops depth interviews with child care administrators and resource and referral agency staff in 23 cities and 15 states (Ross and Kerachsky, 1995). This paper examined the strengths and weaknesses of more centralized, consolidated child care systems (“integrated”) and systems that have maintained a role for multiple agencies, operating relatively independently (“mixed”). Their results indicate that, although each approach offers benefits and drawbacks, integrated systems facilitate parents' efforts to apply for assistance (they often need apply only once), support families ' transitions across the various subsidy programs more effectively, and appear to broaden parental choice of care arrangements. She also found, however, that effective integrated systems may require smaller caseloads than exist with mixed systems, to enable child care staff to inform parents about their choices and to keep track of parents as eligibility status changes, so they are linked effectively with the programs for which they are eligible. These findings were reiterated many times as state and local child care administrators recounted their experiences. Among the challenges they face as administrators of federal child care subsidy programs, that of “not losing families” as their work status or income changes was extremely salient. Bruce Liggett noted that he administers an array of funding streams that comprise 18 different eligibility codes. His experience has sensitized him to the distinction between a parent-driven eligibility structure, in which access to subsidies depends on (and varies by) parent activity, and a hypothetical child-driven eligibility structure, in which funds follow children as their parents move from AFDC to stable employment and, as such, promote continuity of care. Jim Nicholie from Minneapolis expressed serious concerns about the number of changes in providers that children experience, noting that it is not just a matter of turnover, but of how much loss a child can handle. In sum, the fragmentation of current child care subsidies and efforts to increase their target efficiency by, for example, narrowly restricting eligibility, appear to exacerbate other difficulties that low-income parents face in arranging predictable, continuous care arrangements for their children. The detrimental effects of discontinuities in care for young children were a prominent concern of the workshop participants, particularly when compounded by other sources of instability in these children's lives. And yet, when these parents have access to subsidies that allow for timely and adequate payments to providers, these subsidies appear to facilitate parents' ability to bring their child care arrangements more in line with the care they want. Workshop participants raised as a major challenge the need to en-

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Child Care for Low-Income Families: Summary of Two Workshops courage seamless subsidies that do not disrupt families' movement from AFDC to dependable work while also maintaining the levels of funding and the attention to quality improvement that appear to offer these low-income families the same degree of parent choice in child care that is available to those who have greater resources. The research of Ross and her colleagues indicates that many states have managed to create relatively seamless systems despite fragmentation at the federal level. The scarcity of funds relative to the number of eligible families is, however, a more difficult problem for states to solve and one that consolidation is unlikely to address. In addition, the participants were keenly aware that overall levels of public assistance for child care relative to demand create major tensions at the state and local levels between funding direct services (basic maintenance of effort) and supporting efforts to improve quality and continuity of care.