2

Landscape of Early Care and Education Financing

Early care and education—and the policies, programs, and funding that support it—have a long and complicated history in the United States. Unlike kindergarten through 12th grade (K–12) education, the early care and education (ECE) “system” is a hodgepodge of different programs with different goals, constituencies, and requirements, implemented with great variation across states and localities. Today’s landscape reflects the various goals of ECE policy that were prioritized at different times. These goals were sometimes based on the role of adults in children’s lives and at other times were directed toward specific groups of children (e.g., Head Start for low-income children), but they were not always based on, nor consistent with, the developmental needs of all children as we understand them today.

This chapter has two parts. It begins with an overview of the history and evolution of early care and education in the United States, with an emphasis on federal policies and funding of early care and education. The second section of the chapter presents an overview of the current financing structure for early care and education. That section covers the major sources that cover ECE costs—primarily families and the federal and state governments—and describes the financing mechanisms that are used to fund ECE programs. This discussion lays the foundation for the committee’s assessment in Chapters 3, 4, and 5 of how the current financing structure compares to the six principles set forth in Chapter 1 (see Box 1-4 and accompanying discussion).

HISTORY AND EVOLUTION OF EARLY CARE AND EDUCATION POLICY IN THE UNITED STATES

Historically, early care and education in the United States has been delivered through multiple systems with multiple goals, with the most marked bifurcation being between programs for middle- to upper-class children and programs for poor children. The history of early care and education in the United States also demonstrates that approaches to financing have varied by child age, as exemplified by the gradual incorporation into the K-12 system of education and care for older children in the birth to age 8 range.

Early Care and Education before 1960

The first formal ECE programs (for children from birth to school-entry), which were modeled after German kindergartens, were founded in the mid-1800s. These programs served children from toddler age to six or seven, and took a variety of forms. Some were kindergartens that were funded with parental fees and had the goal of enriching and educating the middle- and upper-class children who participated (Cahan, 1989). There were also free kindergartens designed for immigrant and poor children, as well as day nurseries, both of which were generally run and funded by charitable organizations. These nurseries gave poor mothers a safe place to leave their children while the mothers worked, but they also focused on teaching “moral habits” to poor and immigrant children, based on the view that these families “were incapable of properly socializing their children” (Cahan, 1989, p. 10). These early ECE programs often had an educational component into the programs, though many were primarily custodial in nature.

However, around the turn of the century, critics began more vocally speaking out against day nurseries, arguing that the “physical and moral well-being of the mother and the children is seriously menaced” when the mother works long hours and has little time or energy left to nurture her children (Cahan, 1989, p. 18). The idea that “home was the only proper place for children and that the mother was the best caretaker” chipped away at support for day nurseries, and attention turned toward policies that would support mothers while they stayed home (Cahan, 1989, p. 19). A 1909 White House Conference on Children reflected this view, with speakers stating that “home life is the highest and finest product of civilizations,” and that children should be kept with their parents with “aid being given as necessary” to families “suffering from temporary misfortune” and “mothers who are without the support of the normal breadwinners” (Lombardi, 2003, p. 32). Efforts at the state level—often led by critics of the day nurseries—resulted in the passage of mothers’ pensions legislation in 39 states,

plus Alaska and Hawaii (not yet states), by 1919 (Cahan, 1989). These programs provided direct financial assistance to poor mothers, enabling them to stay home with their children rather than work. However, restrictive rules about who was eligible for such assistance meant that many mothers, particularly minority women, could not receive aid (Lombardi, 2003). To be eligible, mothers had to be judged “physically, morally, and mentally fit to have custody of their children” and had to be widowed, divorced, or married to men who were incapable of breadwinning (Cahan, 1989, p. 20). Mothers who were deemed ineligible for aid remained in the workforce, and their children remained at day nurseries—which had by then become stigmatized as places for the “unworthy” poor (Cahan, 1989, p. 21).

Up until the 1930s, the federal government had largely stayed out of funding ECE programs. However, two national emergencies spurred the federal government to begin funding them: the Great Depression and World War II.

As part of New Deal policies to address the effects of the Great Depression, the federal government began to provide direct financial assistance to mothers in 1935 with the Aid to Dependent Children provision of the Social Security Act. This program, later renamed Aid to Families with Dependent Children (AFDC), provided cash assistance to mothers in need, but like the state programs before it, AFDC was made unavailable to or difficult to obtain by minority mothers or mothers of “illegitimate” children (Gordon and Batlan, 2011).

In addition, in an effort to boost the economy and support struggling workers during the Depression, President Roosevelt committed public funds to establish nursery schools around the country. The primary purpose of these schools was to provide work for unemployed teachers and other school staff, with the secondary purpose being to safeguard the “physical and mental well-being of preschool children from needy, under-privileged families” (Cahan, 1989, p. 26; University Libraries, n.d.). The public nursery school program was a temporary measure meant to alleviate some of the pressures of the economic downturn and to ensure that children of struggling families would get proper nutrition and health services. Middle-class enrollment in private nursery schools that emphasized education and play-based programs also grew during this period. Educators in both public and private nursery schools were required to undertake ECE-specific training.

As World War II began and the U.S. economy began to recover, the federal government’s role in funding early care and education turned from economic recovery to supporting the war effort. The Lanham Act of 1940 provided grants to communities, which also had to contribute funds, to provide care for the children of mothers who worked in the defense industry, marking the first time that the federal government funded early care and

education for nonpoor families (Herbst, 2017). However, the government made it clear that this program was funded “solely as a war emergency measure,” and was to be seen neither as an educational program nor as an expansion of the welfare state (Cahan, 1989, p. 29; Herbst, 2017). The quality of these programs and the training required for staff varied substantially from community to community; the federal government recommended a training course for staff and volunteers and a child-to-educator ratio of 10:1, but a lack of resources and staff impeded efforts toward quality (Herbst, 2017).

As the war came to an end, so did the federal funding for ECE programs (although in some instances, local communities took over financial responsibility for their ECE programs and centers). However, the need and demand for early care and education did not subside. Many women who had entered the workforce as a result of the war remained in the workforce after the war, while women—particularly poor women and women of color—who had been members of the workforce long before the war continued to work outside the home. By 1950, there were three times as many working mothers as there had been before World War II, amounting to 33.9 percent of women in the paid workforce, but public opinion still leaned heavily against this trend (Lombardi, 2003; U.S. Department of Labor, 2016):

Due in part to this attitude toward working mothers, public funding for early care and education was sparse, and most families relied on private or informal home care (Cahan, 1989). A federal tax deduction for childcare expenses was enacted in 1954, but limits on marital status, income level, and eligible expenses reflected the societal opinion that mothers should only work outside the home due to financial necessity (Wolfman, 1984). Private nursery schools and kindergartens continued to operate as a part-day supplement for the education and socialization of middle-class children (Cahan, 1989).

ECE Evolution since 1960

A confluence of factors in the 1960s brought early care and education into the spotlight. First, there was an increasing awareness of the importance of early childhood development, based on emerging research that suggested that the first few years of life could have an enormous effect on future success. Second, women continued to enter the workforce, including women with young children. In 1950, 33.9 percent of women worked outside the home, rising to 37.7 percent in 1960 and 43.3 percent in 1970. Among women whose youngest child was under 6 years old, 39 percent were in the workforce by 1975 (U.S. Department of Labor, 2016). Third, President Lyndon Johnson declared a “War on Poverty” in 1964, setting in motion an expansion of federal funding directed at relieving and ending poverty. The combination of the first two factors—new evidence about childhood development and more women in the workplace—contributed to a dramatic expansion of private ECE programs for middle-class families, particularly an expansion into full-day care (Institute of Medicine and National Research Council, 2015). The 1960s and 1970s also saw a growing interest in states funding kindergarten as part of the public school system: by the mid-1960s, about half of states provided funding for public kindergarten and many more began to do so over the next decade.¹

The combination of the first and third factors—new evidence about childhood development and the War on Poverty—resulted in the establishment of Head Start in 1964. In acknowledgment of the importance of the first few years of life, Head Start was intended to break the cycle of poverty by providing children with early education while giving parents information about improving the home environment (Johnson, 1965). Head Start began initially as a summer school program to help low-income children catch up to their peers before starting elementary school. In 1966, Congress expanded the scope of Head Start to a 9-month program, and in 1967 a demonstration project began that offered services to parents with children from birth to 3 years old. Up to this point, public expenditures for early

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¹ As noted above, kindergartens in the United States had begun as privately funded programs in the mid-1800s but had moved into the school systems over the first half of the 20th century. When kindergartens became part of the public schools, they were restricted to children age 5 and older, leaving the remainder of the birth to 8 age span outside the school system. Many of these programs were funded primarily with local funds: as of the mid-1960s, nearly one-half of states did not provide state funding for kindergarten programs. Over the next decade, 19 states began funding kindergarten, and by 1980 only two states did not fund kindergarten (Cascio, 2010). These state-funding initiatives resulted in a significant increase in the number of children enrolled in kindergarten; the average state saw a 30 percent increase in enrollment within 2 years (Cascio, 2010). Cascio (2010) suggested that the motivations behind this movement were twofold: first, to provide working mothers with subsidized care, and second, to improve children’s educational outcomes.

care had been seen as temporary measures, either to help low-income mothers who had fallen on hard times or to support the country during national crises. Head Start retained this focus on low-income families and the good of the nation, but took a longer view. Instead of funding short-term assistance to poor families, the early investment in children through Head Start was designed to “strike at the basic cause of poverty” and to “rescue these children from the poverty which otherwise could pursue them all their lives” (Johnson, 1965). In 1969, in a statement to Congress regarding the nation’s antipoverty programs, President Richard Nixon stated, “So crucial is the matter of early growth that we must make a national commitment to providing all American children an opportunity for healthful and stimulating development during the first five years of life” (Nixon, 1969). The 1971 White House Conference on Children (the seventh conference of a series that began with the 1909 conference discussed above) echoed this call, with the recommendation that “the Federal government fund comprehensive child care programs, which will be family-centered, locally controlled, and universally available” (White House Conference on Children, 1971, p. 244). The conference report noted that “most experts agree that a large share of a child’s mental growth takes place long before he enters school, and that society should help to enrich these early years” and called upon the government to commit to funding “quality child services for all” (White House Conference on Children, 1971, p. 11).

Lawmakers in Congress took these messages to heart, and in 1971 Congress passed the Comprehensive Child Development Act (CCDA). The CCDA, a bipartisan effort that passed the Senate 63-17 and the House 211-187, created a system “to meet the developmental needs of all children, regardless of family income, by investing major new federal funds to establish high quality comprehensive programs with federal standards under a coordinated delivery system” (Edelman, 2016). The system created under the CCDA allowed significant control at the state and local level, with unified federal standards, and provided financial support for childcare on a sliding income scale. A broad-based coalition supported the CCDA, including educators, faith leaders, child advocates, poverty and civil rights organizations, labor unions, and women’s groups (Edelman, 2016). The CCDA attempted to blend multiple purposes of early care and education into one program: support for low-income families, support for working parents, and attention to child development and education. Senator Walter Mondale, a cosponsor of the bill, noted that he did not want it to be a “poor person’s program”; everyone would be eligible to participate, and most middle-income families would receive some subsidy (Collins, 2009).

However, in 1972 President Nixon vetoed the bill, calling the legislation “radical” and citing ballooning costs, the unproven need for such a program, and his view that the program would “lead toward altering the

family relationship” and instead foster “communal approaches to child rearing” (Nixon, 1972). Nixon’s veto came as a surprise to many, as the bill had enjoyed broad bipartisan support. The CCDA would have represented a new era for early care and education: child development and custodial care of children were addressed together in a comprehensive way, rather than in separate and unrelated programs. When the CCDA was vetoed, child development programs such as Head Start and custodial care programs “continued to move along separate tracks” (Lombardi, 2003, p. 38).

In the two decades following the failure to enact the CCDA, there were only minor federal policy advances in support of early care and education, even as women’s level of participation in the workforce continued to rise. Starting in 1974, Title XX of the Social Services Amendments allocated funds for states to subsidize early care and education for the working poor as well as welfare recipients. However, in 1981, the Social Services Block Grant replaced Title XX, with an overall funding cut and elimination of funds earmarked for childcare (Cohen, 1996). In 1988, the Family Support Act was enacted, which required that most welfare recipients, including parents of young children, either work, go to school, or participate in job training. This law included childcare assistance for families receiving welfare, as well as for families who had left the welfare rolls in the past year (Lombardi, 2003). While this change represented progress in the fight to expand assistance to families, there was still only “minimal support” for low-income families who had never been on welfare or had been off welfare for more than a year (Lombardi, 2003, p. 39). In addition, during this period changes were made to the dependent care tax benefit that had first been enacted in 1954: the income cap on eligibility for the benefit was raised and eventually removed (a sliding scale remained that phased out the benefit as income increased), the deduction became a nonrefundable credit,² the amount a taxpayer could claim was raised, and the credit became available to families in which parents worked part time or attended school (Cohen, 1996).

In the latter half of the 20th century, families increasingly relied on ECE programs, particularly center-based care. In 1977, 13 percent of children were cared for in center-based programs; by 1993 this had increased to 30 percent (Child Trends, 2016). Attention turned toward the quality of these programs and the workforce who staffed them. Since the advent of the day nurseries, many ECE programs had not required much, if any, formal

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² A nonrefundable tax credit is one that is paid only up to the amount of taxes otherwise due, meaning a nonrefundable credit cannot reduce a taxpayer’s tax liability beyond zero. If the amount of the credit exceeds the amount of taxes due before applying the credit, the remainder of the credit is not refunded to the taxpayer. See https://www.irs.com/articles/refundable-vs-non-refundable-tax-credits [December 2017].

education or training for staff members (Institute of Medicine and National Research Council, 2015, Appendix D). Private nursery school educators were trained in private colleges or home economics departments; there were few state teachers’ colleges that addressed the early years of childhood. The federal funding for ECE centers during World War II was not accompanied by any educator training requirements. When Head Start began, there was no requirement that staff members be formally trained in early education.

Related to this lack of qualification requirements, the ECE workforce was also inadequately compensated for their work. Whitebook, Howes, and Phillips (1989) suggested that the lack of professional preparation and the inadequate compensation were due to a view that working in early care and education is an “extension of women’s familial role of rearing children” (Whitebook, Howes, and Phillips, 1989, p. 2). In 1989 the first National Child Care Staffing Study (NCCSS) revealed that ECE educators were underpaid, undersupported, and leaving their jobs at an alarmingly high rate—turnover in the field was greater than 40 percent (Whitebook, Howes, and Phillips, 1989). The study found that these workforce issues not only affected the staff but also had an enormous impact on the quality of the care and education that children received: “The education and work environments of child care teachers are essential determinants of the quality of care. Teaching staff provided more sensitive and appropriate caregiving if they completed more years of formal education, received early childhood training at the college level, and earned higher wages and better benefits” (Whitebook, Howes, and Phillips, 1989, p. 112).

The release of the first NCCSS coincided with several major federal policy developments in early care and education. While much of the federal attention was on improving access to early care and education, particularly for low-income parents, there was a small but persistent trend toward looking at workforce issues and quality, including the relationship between the two. The Military Child Care Act of 1989 (MCCA) established a system of high-quality ECE programs for military families. Family contributions to an ECE program were determined on a sliding scale, with the family contribution increasing as income increased. The MCCA directed the Secretary of Defense to implement a training program for ECE employees and to ensure that at least one employee at each center was a “specialist in training and curriculum development” (MCCA, Section 1792). Further, this law required that employees be paid a competitive rate, equivalent to the pay of other employees with similar training, seniority, and experience (see Box 2-1 for further discussion of the MCCA).

In 1990, Congress passed the Child Care and Development Block Grant (CCDBG) Act, which authorized the Child Care and Development Fund (CCDF). This legislation marked the first time that the federal government provided ECE resources for low-income families who had never been

on welfare (Lombardi, 2003). The funding was primarily in the form of vouchers, which ensured payment to the providers that parents chose for their children. States were required to develop an ECE plan and had the flexibility to set eligibility criteria and quality standards. Funding through CCDF focused primarily on access, but it did specify that 5 percent of state funding was to be used for quality improvements, which could include staff compensation. Though the CCDBG Act was a major step in ECE policy, serious limitations remained: low funding levels meant that states could only reach a limited number of qualifying families, quality standards varied considerably by state, and little of the federal funding could be used for quality improvements. Also in 1990, the Head Start Expansion and Quality Improvement Act was passed, which reauthorized funding for Head Start and required that 10 percent of funds be used for quality improvement activities, including staff compensation and training.

In 1996, President Clinton signed the Personal Responsibility and Work Opportunity Act of 1996, which replaced AFDC with Temporary Assistance to Needy Families (TANF) and was a major shift in welfare policy. This law eliminated the previous guarantee of subsidized early care and education for recipients and added work requirements. But it also increased federal ECE funding by $4 billion and set aside 4 percent of federal CCDF funding for use in quality improvement (Whitebook, Phillips, and Howes, 2014).

The 1990s also saw an increased interest in prekindergarten programs at the state level, fueled by long-term research that suggested that prekindergarten programs could improve educational attainment, career prospects, and lifelong earnings, while decreasing the need for special education or other services (O’Brien and Dervarics, 2007). States began investing in prekindergarten programs, in the hope of seeing both short-term benefits for children and long-term benefits to their states in the form of cost savings and a better prepared workforce. Prior to 1980, only seven states had appropriated state money for prekindergarten programs, but by 2016 43 states and the District of Columbia had state-funded prekindergarten programs (Barnett et al., 2003, 2017). These programs drew on the established goals of early care and education, such as child development, work support for parents, and preparation for K–12, while also considering the impact that early care and education could have on the financial health of the state itself (Lynch and Vaghul, 2015). However, despite the research supporting these programs and the interest at the state level, there has not been broad support to fund these programs at a level adequate to benefit all children and to support a skilled and stable workforce. For further discussion of equitable access to high-quality ECE services, see the section “Equitable Access” in Chapter 4.

The 2000s did not bring any major restructuring to ECE public policies or programs; the main federal programs remained Head Start and CCDF,

while state prekindergarten programs continued to grow. However, emphasis on quality and workforce issues continued to increase. In 2007, the Head Start reauthorization act set ambitious goals for educator qualifications. It required that by 2013, at least half of Head Start educators nationwide have a bachelor’s degree or higher in early education or a related field. However, these requirements were not accompanied by funding for commensurate compensation for the ECE workforce. The reauthorization of the CCDBG Act in 2014 further emphasized quality of care, with an increase in the portion of funds that had to be spent on quality improvement activities. A new provision required improving infant and toddler early care and education. The reauthorization also required states to establish professional development and training requirements, but like Head Start, did not contain any provision for commensurate compensation of the ECE workforce (Office of Child Care, 2014). Despite these efforts to improve quality and some funding increases, funding levels for Head Start remained

below the level necessary to serve all eligible children (National Head Start Association, 2017; see also Chapter 4).

Although there were no major policy changes during this time, there was an undercurrent of ongoing research that influenced public opinion and the tenor of policy discussions. The advisability of any early care and education was questioned when Belsky published an article in 1986 that concluded that early care and education for infants was a risk factor for insecure attachment, aggression, and disobedience (Belsky, 1986). Others in the field disagreed with this conclusion, arguing that confounding factors were to blame, rather than early care and education itself (e.g., Scarr et al., 1990). This tension in the field prompted the National Institute of Child Health and Human Development to launch its Study of Early Child Care and Youth Development survey in 1991, which collected information from children and their families from birth to age 15 and made the survey data available to researchers. New research was also conducted on the quality

of early care and education. The Cost, Quality, and Child Outcomes study, which was published in 1995 (Helburn, 1995), examined how the quality of care affected children’s outcomes and which children were more sensitive to the effects of quality. These studies—and the debates over their findings—continue to affect the ongoing discussions surrounding early care and education and the issues related to how best to use public funds to ensure positive outcomes for children and families.

Summary

By design, early care and education has multiple purposes, each of which has been reflected in the evolution of ECE policies over the past century. For parents, early care and education provides care and supervision of children so that parents can work, go to school, get a respite from parenting, or complete a myriad other tasks. For children, it provides learning, positive development, socialization, nurturing, play, and—particularly as they near kindergarten—a bridge to formal education. For society at large, high-quality early care and education can play an important role in preparing the next generation to be productive and educated citizens. These purposes, as well as others, have variously received priority through different ECE policies throughout U.S. history. In addition, varying and conflicting cultural beliefs and assumptions surrounding early care and education, including society’s responsibility for helping the poor, the appropriateness of nonparental care of young children, the government’s role in supporting working parents, whether mothers should work outside the home, and the developmental needs of children during their early years, have also shaped ECE policies. As a result, the ECE “system” in the United States is a layering of separate programs upon one another, with little cohesion or alignment between programs, inconsistent quality and attention to supporting the workforce, and a bifurcated system between ECE for low-income children and ECE for middle- and upper-class children.

CURRENT EARLY CARE AND EDUCATION FINANCING LANDSCAPE

The use of early care and education in the United States is largely paid for by families and the public sector. Whereas public K–12 education, which is available to all children, is financed almost entirely by the public sector (local, state, and federal funding sources), early care and education typically involves substantial family funding and may include a range of public as well as other private funding streams (e.g., employers of the parents, church-related funding, foundations). According to a 2017 estimate developed by the BUILD Initiative, families pay approximately 52 percent of the

total cost of early care and education, the public sector (including federal, state, and local governments) pays about 46 percent, and the private sector (including employers and philanthropic entities) covers approximately 2 percent (BUILD Initiative, 2017).

The myriad funding streams for early care and education reflect the myriad priorities and goals—ranging from helping poor mothers work outside the home to boosting the national economy, fighting generational poverty, and narrowing the adult-life achievement gap for lower-income and racial/ethnic minority children—that have historically shaped ECE public policy in the United States. As a result, some ECE programs (and the financing that structures them) emphasize child development and education, while others focus on the role that early care and education plays in enabling parents (especially mothers) to participate more fully in the paid workforce. This section reviews the current range of sources for ECE funding: families, the public sector, and private sector stakeholders in early care and education.

Families

In the United States, the care and education of children younger than kindergarten age is primarily the responsibility of their families. As noted earlier, families bear the majority of ECE expenses, covering an estimated 52 percent of the costs of early care and education (BUILD Initiative, 2017). In contrast, public K–12 education is provided on a no-fee basis to all children, with about 90 percent of school-age children in the United States enrolled in the public system (Institute of Education Sciences, 2015).

The variation in types and weekly hours of early care and education used lead to wide differences in ECE expenditures across families. Nearly 70 percent of families with children ages 0 to 5 years (families who may also have children in K–12 schools and higher education) have at least one regular ECE arrangement, and three-quarters of these families incur out-of-pocket ECE costs. Average weekly expenditures for all children ages 0 to 5 years among households that pay for ECE services were slightly more than $130 per week per child, whether the family primarily used paid home-based or center-based care. However, wide variation exists in the amount families spend on early care and education. Some families pay more because they have more children in care; other cost variations reflect the age of the child(ren), the type(s) of ECE services used, ECE prices in the family’s location, and the availability (or lack) of no-fee or partially subsidized ECE options. One-quarter of families using either paid home-based care or center-based care paid more than $180 per week per child in total ECE costs (Latham, 2017, Table 2.1). Expenditures generally rise with family income; low-income families pay, on average, under $100 per

week, whereas those with incomes five times the federal poverty level average $164 per week. However, while the payment amount rises gradually as income rises, the difference between payment amount and household income increases dramatically as income rises. That is, families with higher incomes have significantly more discretionary income available after paying ECE costs (see Figure 2-1).

While lower-income families may spend less on early care and education, these expenditures require a much greater fraction of the family’s budget, on average, than do the ECE costs of higher-income families. As shown in Table 2-1, those with incomes below the federal poverty level spend

TABLE 2-1 Expenditures and Share of Income Spent on Early Care and Education (ECE), by Federal Poverty Level (FPL), Median Household Expenditure for All Children Ages 0 to 5 Years Not in Kindergarten

NOTE: Because a small number of families spend considerably more than average on early care and education, the median weekly expenditures and share of income are presented, rather than the mean (average) expenditures.

SOURCE: Data from Latham (2017) using data from the 2012 National Survey of Early Care and Education Public Data Set.

about 20 percent of their income on early care and education, whereas those with incomes at one to two times the federal poverty level spend about 14 percent. The income share spent on early care and education declines with income, falling to 6 percent for the median-expense family with income above five times the federal poverty level. Many families, particularly those with low incomes, do not pay out-of-pocket for early care and education because they are able to access no-fee options (such as Head Start). Looking at all households that use early care and education, the median family with income below the federal poverty level does not pay for early care and education (that is, median ECE expenditures equal zero). The median family with income just above the federal poverty level, including those using no-fee care, pays 4 percent of income for ECE expenditures. For further discussion of affordability of early care and education for families, see Chapter 4.

ECE use also depends on the number of children in the family. Approximately 30 percent of children ages 0 to 5 years have a sibling who is also ages 0 to 5 years, and use of nonparental care drops off substantially for families with more than two children under the age of 5 (Latham, 2017). While some ECE providers offer a small discount for serving multiple children from the same family, ECE costs typically increase substantially for each additional child. Given the out-of-pocket cost to the family with multiple children ages 0 to 5 years, a parent may choose not to work outside the home in order to care for these children.

In sum, these patterns of ECE use and expenditures by households reflect decisions parents face in the current ECE system, with its patchwork of programs and multiple purposes. While the decision to not use nonparental care reflects parents’ preferences and what is available in their local area, ECE expenditures are a sizable portion of many families’ budgets; as a result, many families find ECE costs to be too high, relative to their budget (see Chapter 4).

Federal Funding for Early Care and Education

While families bear the largest fraction of total costs for early care and education, public sector funding—from federal, state, and local sources—is estimated to contribute a nearly equivalent share. We begin with a focus on the major federal ECE funding mechanisms before turning to state and local funding.

In its most recent assessment of federal funding for early care and education, the U.S. Government Accountability Office identified 44 separate programs that, as of fiscal 2015, “(1) funded or supported early learning or child care services, (2) were provided to children ages 5 and under, and (3) delivered services in an educational or child care setting” (U.S. Government Accountability Office, 2017, p. 1). Of those 44 programs, 9 had an explicit

focus on early care and education, while the other 35 programs could be used to, but were not required to, provide various types of support for ECE programs. Another three funding mechanisms subsidized early care and education through the tax code. These federal programs, which spanned multiple federal agencies including the U.S. Departments of Agriculture, Education, Health and Human Services, Housing and Urban Development, Interior, and Justice, illustrate the complexity of public sector ECE funding at the federal level. This range of programs, with their varying purposes, eligibility criteria, and quality standards, illustrate the challenge of estimating the contribution of federal sources to early care and education.

Among the nine programs providing direct support for early care and education, 90 percent of the $15 billion in funding as of fiscal 2015 came through two programs: Head Start (including Early Head Start) and CCDF (U.S. Government Accountability Office, 2017). Subsidized childcare through TANF is closely related to CCDF, but smaller in size. As shown in Table 2-2, ECE funding as of fiscal 2016 for the two major programs totaled $9.2 billion for Head Start and $4.2 billion for CCDF, while TANF added another 0.8 billion.³Table 2-2 also shows the federal tax-based expenditure programs, which together account for as much as $5.6 billion in additional federal investment. (This figure overstates ECE support because it includes subsidies for school-age children and adults that cannot be readily separated from those for early care and education.) For each program, the table also records the target population and the financing mechanism. In the case of CCDF and TANF, while the programs in Table 2-2 originate at the federal level and are governed by federal regulations, they require or allow state contributions and allow states to establish their own eligibility or quality criteria. In general, total public funding for early care and education for children from birth to 3 years is limited, compared to funding for children of ages 4 and 5 years, even though the costs per child of high-quality ECE services are greater in the younger years (see Chapter 6). The disparity largely arises from a combination of the lack of settings serving infants, parents’ desire to have younger children stay with relatives, and the fact that the bulk of funding for early care and education is allocated to programs serving only 4- and 5-year-olds.

In addition to the programs discussed in detail in this section, there are a number of other federal funding sources that are used to fund aspects of early care and education. While the total amount available for early care and education from these sources is less than the other sources described in this section, these programs provide important services and funding and are described briefly in Box 2-2.

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³ CCDF provides subsidies for children up to age 13 years. We have estimated the share of funding for children from birth to age 5 years, as indicated in the NOTES to Table 2-2.

TABLE 2-2 Major Sources of Federal and State ECE Funding in Fiscal 2016

the appropriation for Head Start programs was just over $9 billion, or about $9,000 per child served. Grantees must “match” the federal money with a 20 percent share of nonfederal funds, which may include cash and in-kind contributions such as space or volunteer hours.

To be eligible for Head Start programs, families must earn no more than 100 percent of the federal poverty level,⁴ be homeless, or receive

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⁴ Programs may enroll up to 10 percent of children from families with incomes above the federal poverty level and up to 35 percent of children from families with incomes between 100 percent and 130 percent of the federal poverty level, if certain conditions are met.

public assistance.⁵ Children in the foster care system are eligible regardless of income level. The federal poverty level is determined each year and is adjusted for families of different sizes; in 2017, the income level for a family of four in the contiguous United States to qualify for Head Start services was $24,600 (Office of Assistant Secretary for Planning and Evaluation, n.d.). No fees for Head Start are charged to families who meet the eligibility criteria. Nevertheless, in fiscal 2016, only 31 percent of eligible children ages 3 to 5 years were served by Head Start and only 6 percent of children under 3 years were served by Early Head Start, due to inadequate funding levels (National Head Start Association, 2017). Figure 2-2 shows the age and race of Head Start beneficiaries in fiscal 2016, as well as the proportion of Head Start and Early Head Start services that were center based or home based in that year.

In 2016, the Head Start Program Performance Standards were revised in order to improve the quality of Head Start programs—the first major overhaul of these standards since 1975. The new standards have a number of provisions aimed at quality, which include

• expanding full school-day and full school-year program offerings;
• requiring professional development activities, including mentoring and coaching;
• requiring systematic use of assessment data in order to improve services; and
• aligning teaching practices, program curricula, and assessments with the Head Start Early Learning Outcomes Framework (Administration for Children and Families, n.d.).

In addition to these new standards, Head Start rules require certain qualifications of Head Start staff. The requirements include both specific competencies and formal education (commensurate compensation is not addressed; see Chapter 3). The competency requirements require that each Head Start center-based classroom must include one educator with demonstrated abilities including:

1. planning and implementing learning experiences that advance the intellectual and physical development of children, including improving the readiness of children for school by developing their literacy, phonemic, and print awareness, their understanding and use of language, their understanding and use of increasingly complex and varied vocabulary, their appreciation of books, their

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⁵ 42 U.S.C. 9840 Sec. 645.

2. understanding of early math and early science, their problem-solving abilities, and their approaches to learning;

3. establishing and maintaining a safe, healthy learning environment;
4. supporting the social and emotional development of children; and
5. encouraging the involvement of the families of the children in a Head Start program and supporting the development of relationships between children and their families.

   (Head Start Early Childhood Learning & Knowledge Center, n.d.).

Regarding formal education, Head Start regulations require that 50 percent of Head Start educators nationwide must have either at least a bachelor’s degree in early childhood education or at least a bachelor’s degree and coursework equivalent to an ECE major, with experience teaching prekindergarten-age children (Head Start Early Childhood Learning & Knowledge Center, n.d.). In 2016, 60 percent of center-based Head Start prekindergarten educators held bachelor’s degrees in early care and education or a related field, with 13 percent holding more-advanced degrees (Office of Head Start, 2016a). At minimum, Head Start assistant teachers must obtain either a Child Development Associate credential or enroll in a program that leads to such a credential or to an associate’s or bachelor’s degree.

The CCDBG Act and CCDF

The CCDBG Act, first enacted in 1990 and reauthorized in 2014, provides funding through CCDF to states, territories, and tribes to help families access ECE programs. The reauthorization act lists the purposes of the CCDBG Act as:

• to allow states flexibility in developing ECE programs;
• to empower working parents to make decisions regarding ECE services;
• to help parents make informed choices about ECE services;
• to assist states in delivering high-quality early care and education in order to “maximize parents’ options and support parents trying to achieve independence from public assistance”;
• to improve the quality of ECE programs;
• to improve the care and development of the children who participate; and
• to “increase the number and percentage of low-income children in high-quality” ECE programs.⁶

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⁶S. 1086 Child Care and Development Block Grant Act of 2014, 113th Cong., 2nd Sess. Available: https://www.congress.gov/113/bills/s1086/BILLS-113s1086enr.pdf [September 2017].

The CCDBG Act requires that states contribute funds to the program (Administration for Children and Families, 2016a). CCDF is primarily used for Child Care Assistance Programs (CCAP) to help families pay for ECE programs. In addition to CCDF, states may also spend federal TANF funds directly to subsidize the cost of early care and education, or they may transfer money from TANF to CCDF.

CCAP are sometimes called “voucher programs” because the family chooses the provider from which to obtain care (subject to minimum health and safety guidelines) and the state ensures that the provider is paid for the subsidized child. Some states’ CCAP use contracted slots, whereby the provider receives funds to create slots for children who are eligible for CCAP assistance.⁷ States must “set aside” a portion of CCDBG funds to be used to improve the ECE quality generally and specifically to improve the quality of early care and education for infants and toddlers (in fiscal 2017, these set-aside portions were 7 percent and 3 percent of funding, respectively).⁸ Whereas federal law sets a minimum for these quality-improvement expenditures, states may choose to spend more. States are required to report on their progress in improving the quality of ECE programs and are required to establish a system for professional development and training of educators and staff (Office of Child Care, n.d.). Because states set their own standards for teacher qualifications—unlike Head Start where there are national standards—there is inconsistency among states.

CCDF subsidizes care of children under the age of 13. To receive assistance, parents must be either working or participating in educational or training activities as defined by the state of residence. To be eligible, family income must not exceed 85 percent of the state median income (for a family of the same size), but states may set their eligibility criteria lower than

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⁷ The Administration for Children and Families, in its “Frequently Asked Questions” regarding CCDF reauthorization states, “States can award grants and contracts to providers in order to provide financial incentives to offer care for special populations, require higher quality standards, and guarantee certain numbers of slots to be available for low-income children eligible for CCDF financial assistance. Grants and contracts can provide financial stability for childcare providers by paying in regular installments, paying based on maintenance of enrollment, or paying prospectively rather than on a reimbursement basis. Without stable funding, it can be difficult for providers to pay for the higher costs associated with providing high-quality child care, particularly those in low-income or rural communities. ACF [Administration for Children and Families] encourages States to explore how grants and contracts can be used as part of a strategy to increase the supply of high-quality care and anticipates providing further guidance on the use of grants and contracts” (see https://www.acf.hhs.gov/occ/resource/ccdf-reauthorization-faq-archived).

⁸ The portion of CCDBG funds that are set aside for quality (7% in fiscal 2017) must be used for 1 or more of 10 federally specified activities, which include training and professional development of the ECE workforce, a tiered quality-rating system for early care and education, improving supply and quality of ECE services for infants and toddlers, and supporting ECE providers in their pursuit of accreditation.

this federally mandated threshold. States are also responsible for setting the structure of family copayments; approximately 78 percent of families with any reported income pay some copayment for the ECE subsidy from CCDF.

Nearly 1.5 million children receive ECE subsidies from CCDF every month; 27 percent of these children are under age 3 and 28 percent are ages 3–4. In fiscal 2015, most families (49%) were below the federal poverty level, with another 27 percent of families between 100 percent and 150 percent of that threshold and 13 percent with still higher incomes. Children receiving the subsidies were cared for in a variety of settings: 73 percent in center-based care, 23 percent in paid home-based care, and 3 percent were cared for in their own homes. As noted above, 78 percent of families with reported income payed a copayment, and these copayments averaged 6 percent of family income (Office of Child Care, 2015). However, CCDBG funding levels only support a fraction of the children who qualify for the subsidies. For example, in 2012 only 15 percent of eligible children received CCDF subsidies (Chien, 2015). For further discussion of adequacy of funding and equitable access to ECE services, see the section in Chapter 4 titled “Equitable Access.”

Federal Tax-Based Expenditures

Two major federal income tax benefits are designed to help lessen the burden of family ECE costs: the Child and Dependent Care Tax Credit (CDCTC) and the Dependent Care Assistance Program (DCAP). The CDCTC is a tax provision that can reduce the cost of early care and education by allowing families to claim a federal tax credit of up to 35 percent of the first $3,000 spent on qualifying care for one qualifying child⁹ or up to 35 percent of $6,000 for two or more qualifying children.¹⁰ The credit for a given household is determined on a sliding scale based on household adjusted gross income, with the percentage credit declining from 35 percent for lower-income families to 20 percent for higher-income families.¹¹ Thus, the value of the credit ranges from $600 to $1,050 for one child and from

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⁹ A qualifying child is the taxpayer’s “dependent and who was under age 13 when the care was provided” (Internal Revenue Service, 2017c, p. 3).

¹⁰ The taxpayer (and the taxpayer’s spouse if filing jointly) must have earned income during the year to qualify for the credit. If an individual or spouse’s earned income is less than the amount spent on qualifying expenses, the family can claim a federal tax credit of up to 35 percent of the earned income amount. An exception to the earned income test is if the taxpayer’s spouse is a student or not able to care for themselves (Internal Revenue Service, 2017a, 2017b, 2017c).

¹¹ For tax year 2017, households earning more than $0 but not more than $15,000 qualified to claim 35 percent of qualifying expenses, while households earning more than $43,000 could claim 20 percent of qualifying expenses (Internal Revenue Service, 2016, 2017b).

$1,200 to $2,150 for two or more children. Figure 2-3 shows the requirements a taxpayer must meet to claim a credit for child and dependent care expenses.

The CDCTC is nonrefundable; that is, families who owe less federal income tax, before the credit is applied, than the calculated amount of their potential credit receive no refund for the portion of their CDCTC that exceeds the tax owed. In cases where no federal income tax is owed, the CDCTC credit, therefore, cannot reduce a taxpayer’s tax liability beyond zero, meaning it will have no value for families with no federal income tax liability. To be eligible to claim the CDCTC, ECE services must be used in order to allow a parent or guardian to work, look for work, or participate in a qualifying education or training program. Because the CDCTC is a tax credit, families must pay upfront for the ECE services and then recoup any benefit from the credit when filing their federal income tax return. Benefits apply for childcare expenses for children up to age 13, as well as care for qualifying dependent adults.

The DCAP allows parents to set aside pretax funds in a flexible spending account to pay for child or dependent care, again for children up to age 13 and for qualifying dependent adults. Households may set aside up to $5,000 per year; the amount does not vary based on number of children.¹² The family benefits through a reduction in their taxable income in the amount of their contribution to a DCAP plan. Thus, if they are in a 25 percent tax bracket, and they contribute $5,000 a year, their tax liability is reduced by $1,250. Only parents whose employers offer a DCAP plan are eligible to participate, and set-aside funds that are unused at the end of the year are forfeited.

As of fiscal 2016, the CDCTC and DCAP were estimated by the Internal Revenue Service (IRS) to account for around $4.6 billion and $1.0 billion, respectively, in foregone tax revenue (Internal Revenue Service, 2016). However, these estimated totals apply to all eligible types of care, including school-age children and dependent adults; the share specific to children from birth to age 5 years is not reported, nor is it readily estimated. What is known is that the majority of the families that receive these benefits are middle-income or higher; families with adjusted gross incomes over $100,000 receive 52 percent of the benefits, while families with incomes under $40,000 receive less than 15 percent of the benefits (Magg, 2015).

Beyond the ECE subsidies available to families through the tax code, the IRS also encourages employers to contribute to the costs of early care and education through the federal Employer-Provided Child Care Credit (26 USC § 45F).¹³ This credit allows businesses to deduct 25 percent of

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¹² Taxpayers filing as “married filing separately” may only set aside $2,500 per year (26 U.S.C. § 129).

¹³ Available: https://www.law.cornell.edu/uscode/text/26/45F [April 2017].

qualified childcare expenditures, as well as 10 percent of resource and referral expenditures, not to exceed $150,000 annually. As of fiscal 2016, the foregone federal tax revenue associated with this credit was estimated at $10 million (Internal Revenue Service, 2016).

State and Local Funding for Early Care and Education

States and local communities have long been at the forefront of supporting early care and education, dating back to the earliest preschools and kindergartens started in cities at the turn of the 20th century. Currently, states and localities invest a considerable amount of money in early care and education, contributing significantly to total funding under the CCDBG Act and paying for virtually all of publicly state-funded prekindergarten programs.¹⁴ Importantly, through their financing of these programs, states and localities have been responsible for setting and implementing most of the policies determining quality of and access to ECE services and coordination across the array of different ECE programs in the United States. At the same time, the ability to quantify the resources invested below the federal level is largely limited to the contributions from state governments. The resources invested by a growing number of counties and cities in prekindergarten programs are not yet routinely tracked.

Cost Sharing with Federal Early Care and Education Subsidy Programs

As shown in Table 2-2 (above), states contribute significant funding to CCDF, and they are responsible for setting policies on key issues including eligibility, copayments, and quality. The 2014 reauthorization of the CCDBG Act sets specific parameters for these policies. For example, to promote continuity of care and desired child outcomes for children whose parents may change employment status, states must now use a 12-month window for redetermination of eligibility, rather than shorter time frames allowed previously. In addition, though a portion of CCDF funds must be “set aside” for activities that improve the quality of childcare, states have a great deal of flexibility in how they spend those funds and can choose to focus their attentions on specific areas of interest or need. States are required, however, to submit ECE plans to the federal government, and these plans must address an array of systems issues including quality assurances, workforce development, and eligibility requirements.

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¹⁴Barnett and Kasmin (2016, p. 17) reported that in 2015 states contributed $6.1 billion to state prekindergarten programs, while the federal government contributed $0.7 billion with $0.7 billion from local governments. State contributions to public prekindergarten increased to almost $7.4 billion in 2016, with more than $634 million in local funds and $434 million in non-TANF federal funds (including preschool development grants) (Barnett et al., 2017, p. 8).

State Funding for Prekindergarten Programs

States invested about $7.4 billion in prekindergarten programs during the 2015–2016 school year. These programs, which served almost 1.5 million children nationwide (Barnett et al., 2017), are heavily skewed toward older children, serving 32 percent of 4-year-olds and 5 percent of 3-year-olds in the United States. A majority of states invest some funds, with only seven states not allocating any state funds to prekindergarten programs. Both funding for and enrollment in state-supported prekindergarten programs have increased in recent years. In 2002, only 3 states served more than 30 percent of 4-year-olds in the state, but by 2016, 18 states plus the District of Columbia served more than 30 percent of their 4-year-olds. However, not all states are making significant progress; 15 states—including those that have no prekindergarten program—served less than 5 percent of their 4-year-olds in the 2015–2016 school year. While most state prekindergarten funding goes toward direct provision of early care and education, there are some funds that target specific needs of ECE programs. For example, California allocated a one-time $10 million fund for state prekindergarten facilities in fiscal 2015 (Taylor, 2014).

State programs vary widely, both in the target population of their programs and in the specifics and standards of the program. Thirty-five of 59 state-funded prekindergarten programs require lead educators to have a bachelor’s degree (Barnett et al., 2017). Thirty-four states target their programs to lower-income children, using an income requirement for eligibility. Thirty-seven programs operate only during the academic year, with two states operating year-round and the remainder determining duration of the service year at the local level. The number and percentage of children enrolled in state programs varies enormously by state. In the District of Columbia, 81.2 percent of 4-year-olds and 70 percent of 3-year-olds are enrolled. Minnesota, in contrast, enrolls only 1.2 percent of 4-year-olds and 1.1 percent of 3-year-olds. Many states focus almost entirely on 4-year-olds: Florida enrolls 76 percent of 4-year-olds and zero percent of 3-year-olds, and Oklahoma enrolls 73.8 percent of 4-year-olds and 3.1 percent of 3-year-olds in state-funded prekindergarten programs. The District of Columbia has by far the highest enrollment percentage, at 75.7 percent of 3- and 4-year-olds; Vermont follows with 55.2 percent of 3- and 4-year-olds. Per-enrolled student spending also varies, from a high of $17,875 in the District of Columbia¹⁵ to a low of $2,328 in Kansas,¹⁶ with a national average of $5,696 per child (Barnett et al., 2017).

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¹⁵ The District of Columbia offers free prekindergarten to all children 3 and 4 years of age (District of Columbia Public Schools, 2017).

¹⁶ To enroll in state-funded prekindergarten in Kansas, children must meet one of eight risk factors, including being eligible for a free or reduced-price lunch or having household income not greater than 185 percent of the federal poverty level (Barnett et al., 2017).

The National Institute for Early Education Research began tracking the quality of these state prekindergarten programs in 2003, using a checklist of 10 quality-standard benchmarks. These benchmarks were selected to represent “the minimum resources necessary to support high quality.” In 2016, the institute reported that most programs met at least 7 of the benchmarks, with 6 states meeting all 10 benchmarks and 13 state programs meeting 9 out of 10. However, 9 programs met fewer than half of the benchmarks (Barnett et al., 2017).

State Tax-Based Expenditures

In addition to the three ECE-related federal tax expenditures, states also offer tax incentives, including tax credits, to offset the direct costs of early care and education incurred by families, as well as tax credits for employers, and business more generally, that contribute to the cost of early care and education (Save the Children, 2017; Stoney and Mitchell, 2007). Notably, 23 states have a state-level child and dependent care tax credit, similar to the credit available at the federal level (Tax Credits for Workers and Their Families, 2016). These credits allow parents to recoup some of the costs of early care and education by subtracting the credit amount from the amount of state tax owed. The credit amount is determined by the state but is often based on the amount claimed on the federal tax return for the CDCTC (e.g., usually a percentage of the amount spent on childcare, up to a maximum amount, and sometimes on a sliding scale that decreases with increasing income). Unlike the federal tax credit, 12 states have made their credit partially or fully refundable, which means that families can benefit from it regardless of whether they owe state tax (any amount of the credit above the state tax owed before applying the credit is refunded to the household). These credits range in maximum annual value to families from $192 (Montana) to $2,310 (New York). The aggregate value of the foregone-tax cost of the credit across the relevant states is not readily available (National Women’s Law Center, 2016).

In addition to the state tax credit available to families, employer-based tax credits are in place in some states to subsidize employer contributions to ECE costs. For example, in Pennsylvania, mirroring the federal credit, employers can receive a tax credit equal to 25 percent of costs incurred for employee early care and education and 10 percent of costs incurred for ECE resources and referrals for employees. Pennsylvania also has an Educational Improvement Tax Credit, which allows businesses to take a tax credit equal to 75 percent of their contributions to approved nonprofit ECE organizations (e.g., scholarship or educational improvement organizations). Louisiana has a number of state tax credits to benefit early care and education, including refundable credits for childcare providers, directors, and

staff and a dollar-for-dollar refundable credit for individuals or businesses that give up to $5,000 to ECE resource and referral agencies (ChangeLab Solutions, 2016).

Other Stakeholders in the Private Sector

The nonparental private sector (including employers, other businesses, corporate foundations, and philanthropic organizations) currently plays an important role in championing early care and education, but its financial contributions to ECE services and programs, although difficult to quantify, are small relative to the contributions of families and the public sector. Because of the service that early care and education can provide as a work- and-life support for working parents, a limited number of private employers have been leaders in offering their employees onsite care or ECE cost assistance as an employment benefit. Visionary companies have established family-friendly policies and practices that have resulted in documented greater job satisfaction, employee retention, and productivity from these expenditures (Horizons Workforce Consulting, 2016; Marcario, 2016). Some corporations and economic development entities have developed position statements in support of investment in early care and education, have established funded programs to advance recognition of the importance of early care and education and other investment in human capital in the earliest years, or have taken both these steps.¹⁷ In many communities, place-based philanthropies address critical local ECE needs, including augmenting local funds to expand access to quality ECE services in their communities, building awareness of ECE options and relevant policy issues, incubating innovations and pilot programs, and supporting research and evaluation (see e.g., PNC Financial Services Group, 2017). In addition, local and national philanthropic investments in technical assistance and systems change contribute to improving quality in the ECE system.¹⁸ These contributions from employers, corporate and private philanthropy, and economic development entities are discussed separately below.

Employers

In addition to public funding and payments from families, another part of the funding for early care and education in the United States comes from employers. Typically, these employer contributions take the form of employee benefits or incentives, such as an onsite ECE program, resource

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¹⁷ See, e.g., https://www.strongnation.org/readynation/our-work [December 2017]; Stevens, 2017.

¹⁸ See, e.g., https://www.fcd-us.org/about-us/ [December 2017].

and referral services for finding an ECE provider, or support for quality ECE services through a direct contribution to service providers. Paid family leave policies for employees, which may allow families to delay enrolling infants in a nonparental care option, are discussed in Box 2-3.

The Society for Human Resource Management’s 2016 National Study of Employers¹⁹ identified seven forms of ECE assistance that companies most often adopt (Matos, Galinsky, and Bond, 2017). These forms of assistance are listed below, along with the share (percentage in parentheses) of surveyed employers that reported offering the benefit:

1. DCAP plans that allow employees to pay ECE costs with pretax dollars (56%)
2. Access to information to help locate ECE services in the community, also known as Child Care Resource and Referral services (41%)
3. ECE option provided at or near the work site (7%)
4. Back-up ECE option for employees when regular arrangements fall through (5%)
5. Sick care for employees’ children (4%)
6. Childcare for school-age children on vacation (3%)
7. Payment for ECE cost with vouchers or other subsidies that are a direct cost to the organization (2%)

As the percentages indicate, direct provision of an ECE option by employers was considerably less prevalent among these employers than allowing employees to take advantage of an employment-based tax subsidy for ECE costs they incur (discussed earlier).

Large employers²⁰ were considerably more likely to offer multiple forms of ECE assistance than smaller employers, especially forms of assistance that incurred direct costs to the employer (e.g., onsite ECE program) or indirect costs, such as compensating human resources personnel for hours spent on administering and maintaining benefits under the employer’s DCAP plan. Smaller employers were more likely to provide forms of assistance such as ECE resource and referral materials or more scheduling flexibility in emergency situations than forms of assistance with direct costs to the employer (Matos, Galinsky, and Bond, 2017).

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¹⁹ The 2016 National Study of Employers sample included 920 employers with 50 or more employees. Seventy-eight percent of businesses surveyed were “for profit,” while the other 22 percent were nonprofit. Thirty-eight percent of businesses operated from only one location, and 62 percent operated from multiple locations (Matos, Galinksy, and Bond, 2017).

²⁰ The 2016 National Study of Employers defined large employers as those with 1,000 or more employees and small employers as those with 50–99 employees.

As noted earlier, employers can deduct from their federal income tax (and in some cases, from state income tax) a portion of the cost of direct ECE subsidies provided to employees or the cost of ECE resource and referral services, up to a maximum amount (i.e., a cap). The IRS estimate of $10 million in foregone tax revenue annually from the federal employer-based credit, as of fiscal 2016, can be used to generate a very rough estimate of the value of this employer-provided care. In particular, assuming a marginal federal corporate tax rate of 35 percent and assuming that all corporate deductions were for the direct provision of an ECE cost subsidy, the value of employer-provided ECE cost subsidies as of fiscal 2016 would amount to at least $29 million (given the cap on the deduction). This is a very modest amount in comparison with the billions of dollars contributed by families, as well as the billions of dollars in subsidies provided by federal, state, and local governments.

Although an employer-based ECE subsidy may be viewed as directly or indirectly supporting the cost of ECE services for employees, these contributions effectively constitute a component of employee compensation. As with other types of nonwage compensation or fringe benefits such as health insurance, pension benefits, and so on, theoretical and empirical research by economists suggests that at least some, if not much, of the cost associated with these benefits is borne by employees in the form of lower cash compensation (Gruber, 1994; Gruber and Krueger, 1991; Olson, 2002). Thus, to the extent that employers may be counted as contributing to ECE costs, at least a portion of that contribution would be more accurately classified as being a cost borne by the employees themselves (as foregone cash compensation).²¹ Of course, public spending on early care and education is derived from revenues from taxes on individuals and businesses, and in this way, employers are indirectly contributing to ECE spending.

Private and Corporate Philanthropy

Private philanthropic organizations support ECE programs in a variety of ways, although estimates of the total contribution are not readily available. Examples of this sector’s support for early care and education include financial contributions and leadership in piloting innovation, system-building, and quality improvement; public-private partnerships including pay for success models and shared services alliances; and advocacy for public policies to support the development of high-quality early care and education. While the committee is unaware of a systematic review of the

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²¹ However, ECE-related benefits are only claimed by a small share of employees in any given year. Thus, a relatively large benefit to the small share of employees with young children is paid for by a small loss of compensation for the larger group of employees.

effects of these efforts on the ECE landscape, this section describes a range of current efforts that have the potential to improve the quality of ECE services and, thus, bear further examination.

While philanthropic programs tend to be limited in scope and relatively small in their financial contributions to early care and education, compared to the contribution from families and the public sector, they may serve as models for future expansions of similar programs. Field-testing innovations through targeted pilots can provide insights and models for the public sector to consider and adopt at larger scale. Especially when combined with rigorous evaluation of results, corporate philanthropy can serve a role of incubating innovation for the more risk-averse public sector.

For example, business and community leaders created the Minnesota Early Learning Foundation in 2005 with $20 million in private funds to seed several strategies to learn more about improving the quality of early care and education in targeted Minnesota communities. These leaders were deliberate in their insistence that the venture be purely privately funded in its beginning stage and that a rigorous evaluation of pilot efforts be conducted. The innovative effort included testing a market-based quality rating and improvement system called Parent Aware and a scholarship program for low-income children in St. Paul to access high-quality early care and education.²²

Another means for contribution toward funding early care and education by corporate philanthropy is through direct contributions to community efforts and to providers, often targeting those serving at-risk children. For example, PNC is a financial services group that sponsors two early child care initiatives: Grow Up Great and Crezca con Éxito. These programs were designed to help prepare children, particularly underserved children, from birth to 5 years for subsequent success in school and life.²³

Public-private partnerships have also been used to fund innovative models. Educare, for example, uses Early Head Start funds (and other federal funds), as well as funds from private philanthropy, to support 21 programs in 18 cities across the United States. Comprehensive services, including supports for families, are provided on a full-day and year-round

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²² While participation in Parent Aware was voluntary, participating ECE providers received benefits including grants and technical assistance for implementing best practices. Parent Aware aimed to drive improvements in quality through rewards and to use ratings to ensure that public dollars for childcare subsidies were distributed only to those centers that performed well with best-practice implementation. The scholarship model tested initially in St. Paul was designed to be user-friendly for parents, portable across ECE programs, and to drive parental choice of high-quality ECE options by requiring selected centers to demonstrate best practice through participation in Parent Aware.

²³ See: https://www.pnc.com/en/about-pnc/topics/pnc-pov/commentary/pnc-pov-mccrady-investment-in-childrens-future.html [January 2018].

basis to children from birth to 5 years who come from low-income families (Yazejian et al., 2017).²⁴ Focusing on data utilization, coaching and ongoing professional learning, high-quality interactions between adults and children, and school and family partnerships, Educare has shown a positive association with receptive language outcomes, significantly fewer problem behaviors, and greater auditory and expressive language skills (Yazejian et al., 2015, 2017).

In recent years, there has been growing interest in exploring pay-for-success strategies as a public-private investment in early care and education. Perhaps the most widely known example is Goldman Sachs’s creation of a social impact bond for Utah’s prekindergarten program.²⁵ While interest in pay-for-success is keen, implementation is still nascent and the outcomes are unknown.

Shared Services Alliances (SSAs) are another example of direct contributions to ECE services. Most ECE centers are small enterprises, with a median of 8 teaching staff and 50 enrolled children, and are thus prone to diseconomies of scale (National Survey of Early Care and Education Project Team, 2014). SSAs attempt to rectify this issue by bringing efficiencies and economies of scale to the otherwise fragmented market of early care and education, which is infamous for thin profit margins. In an SSA, a centralized hub entity provides “back-office” supports such as bookkeeping, payroll, bulk purchasing, collections, facility maintenance, and custodial services for a cluster of otherwise autonomous private ECE providers. The theory behind SSAs is that cost savings on the business side can enable greater investment in high-quality staff and pedagogical supports, increasing the quality of ECE services and ultimately leading to better outcomes for children (Opportunities Exchange, n.d.). Box 2-4 describes an SSA initiative supported by the David and Laura Merage Foundation in Colorado.

Economic Development Entities

Organizations focused on economic and workforce development can also contribute to improving early care and education and call attention to the importance of high-quality ECE services as priorities for the vitality of communities, states, and the nation. While these contributions are rarely financial in nature, they serve a role in bringing influential attention to the need for greater public investment. Initiatives from Ready Nation, the Committee for Economic Development, and the Business Roundtable,

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²⁴Yazejian and colleagues (2017) reported that costs per child at Educare schools amount on average to $18,268 per year.

²⁵ See http://www.goldmansachs.com/what-we-do/investing-and-lending/impact-investing/case-studies/impact-bond-slc-multimedia/fact-sheet-pdf.pdf [December 2017].

for example, have been influential in raising awareness and calling attention to the significance of high-quality early childhood education as a key workforce and economic issue.²⁶ In 2017, the U.S. Chamber of Commerce Foundation launched an effort called “Workforce of Today; Workforce of Tomorrow: The Business Case of High-Quality Child Care” (Stevens, 2017), and the Virginia Chamber of Commerce released “Blueprint 2025,” the state’s economic competitiveness plan with recommendations to support high-quality early care and education in Virginia.²⁷

CONCLUSION

The current ECE system is a patchwork of programs with different funding streams, constituencies, and quality standards. Programs have evolved with very different goals and are situated across different areas of the government and across public and private sectors and funders. As a consequence of this piecemeal approach, the financing structure for ECE is not cohesive, with a myriad of eligibility requirements across programs. Moreover, families shoulder a heavy burden in paying for their contribution to the cost of ECE, especially low- and middle-income families, many of whom are priced out of participating in licensed, higher-quality ECE options and have to enroll their children in mediocre or low-quality programs or use unlicensed care arrangements. While a number of programs have recently dedicated funding for quality improvements and the professionalization of the ECE workforce, quality remains inconsistent across programs. These issues are explored further in Chapter 3.

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²⁶ See https://www.strongnation.org/readynation [January 2018]; https://www.ced.org/ [January 2018]; http://businessroundtable.org/ [January 2018].

²⁷ The recommendations include: “improve access to affordable, high-quality early childhood education for Virginia’s working families; encourage employer policies and strategies that support access to high-quality early learning for families; protect the early education workforce by ensuring access to affordable, competency-building credentials and exploring strategies that value and retain this talent pool; expand public-private partnerships and mixed delivery of the Virginia Preschool Initiative; establish an integrated early childhood data system to inform financing and policymaking decisions and promote accountability; create an integrated public-private financing model that promotes innovative, flexible, and collaborative approaches to high-quality early childhood services for at-risk children; explore performance-based financing policies that incentivize and sustain high-quality early childhood services as part of Virginia’s quality improvement framework” (Virginia Chamber of Commerce, 2017, p. 10).