Child Care in Appalachian Kentucky

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					Child Care in
Appalachian
Kentucky
Financial sustainability
in a low-income market




                 Melissa Fry Konty
                 and
                 Jonathan Harrison


                 Prepared by
                 Mountain Association
                 for Community Economic
                 Development (MACED)

                 For
                 Eastern Kentucky
                 Child Care Coalition

                 January 2008
                                                      The Appalachian Counties
                                                      of Kentucky




Research on eastern Kentucky child care providers funded by a grant from Smart Start’s “Venture
Grant Fund: New Strategies and Partnerships to Link Economic Development and Child Care.”
This project is a collaboration of the Eastern Kentucky Child Care Coalition and the Mountain
Association for Community Economic Development. We thank Deborah Payne for conducting
interviews and gathering data from child care providers in eastern Kentucky. Thanks to all those
who provided helpful comments on earlier drafts.
Executive Summary
Introduction
Quality child care is a public good that increases the productivity of the workforce,
lowers future spending on public services and contributes to the development of
tomorrow’s workforce. Market inconsistencies and inadequate public policy result in a
dysfunctional market of under-funded organizations that struggle to pay bills and main-
tain quality standards. Business planning and management difficulties, capital shortfalls
and insufficient revenues make child care centers
serving low- to middle-income families financially
                                                            Eastern Kentucky child care
unsustainable. Based on existing research on the              businesses surveyed here
economics of child care and on interviews with six
                                                           experience negative returns on
for-profit and four nonprofit child care center opera-
tors in eastern Kentucky, we assess the primary           assets, negative profitability and
barriers to financial viability for eastern Kentucky       sales per employee that are 50
child care providers. We suggest the state can and
should do more to make quality child care finan-           percent less than the industry
cially viable and we provide recommendations for         average for centers of similar size.
reform.


Barriers to Financial Viability in Eastern Kentucky
   •   Dysfunctional Market Conditions
       Supply and demand in the child care industry do not operate according to stan-
       dard market assumptions. The benefits of high-quality child care exceed low-
       income families’ ability to pay for the service. Given limited incomes and the
       inadequacy of current child care subsidies, providers succeed by keeping prices
       low, making financial viability and quality improvement difficult.
   •   Insufficient Business Planning and Management Capacity
       Child care business owners often lack business training and experience. They
       love children and see the need for child care in their communities, but often have
       little or no experience running a financially sustainable business. Those serving
       low-income families most often set their prices based on what those families can
       afford, not on the actual cost of providing quality licensed child care.
   •   Insufficient Revenue
       Insufficient revenue is an ongoing threat to financial viability in the child care
       industry. Low-income workers struggle to pay for child care and state subsidy
       rates are set well below what it costs to provide child care. Unable to demand
       a fair price for their services and maintain enrollment, child care workers and
       center operators bear the remaining costs of child care in the form of low or fore-
       gone wages and profits.
   •   Capital Shortfalls
       Lacking business experience and a client base able to cover the full cost of care,
       child care operators struggle to acquire the capital they need to establish or
       improve their business. Owners often rely on personal savings and loans to cover
       start-up capital and improvement needs. With low cash flow and high levels of
       personally guaranteed debt, child care centers have little or no working capital to
       cover unexpected costs or accommodate slow periods.


                                                                                             1
Recommendations
 Subsidy Reform
 • Correct for depressed market rates in child care. Shift from using market rates to
    using a cost-based calculation as the basis for reimbursement rates.
 • Increase availability of quality in the child care industry through higher cost-
    based subsidy reimbursement rates for centers that meet standards for quality
    care. Kentucky’s STARS for KIDS NOW quality incentive program is a step in
    the right direction, but the incentives for quality need to be higher and the state’s
    level of support should be independent of depressed market rates that dominate
    the child care industry in low-income communities. Some existing incentives
    require that centers increase fees in order to receive increased reimbursement for
    expanded or improved services. State-sponsored incentives are not a boost to
    centers if they have to raise the rates charged to a low-income customer base. In
    addition, participation in the STARS quality rating program should be mandatory
    for centers to receive state subsidies.
 • Increase subsidy bonuses for concentration of need so centers in high poverty
    areas do not pay a penalty for serving mostly low-income children.

 Tax Reform
 • Designate child care tax credits as refundable and create a tiered tax credit struc-
    ture so that parents receive a higher credit for using child care services that meet
    higher quality standards.

 Increase Incentives for Workforce Development
 • Improve professional training in the industry by providing expanded incentives
     and scholarships for earning the Directors Credential and Interdisciplinary Early
     Childhood Education Associate Degree. Current programming offered through
     Kentucky Community and Technical Colleges is exactly what is needed, but
     directors do not take sufficient advantage of available scholarships as they are
     crunched for time and have little personal financial incentive to pursue expanded
     training and education.
 • Provide wage supports to help child care center operators pay more for workers
     who pursue further training and education. Kentucky’s Community and Tech-
     nical Colleges have good professional development programs, but the wage
     incentives for pursuing further education are insufficient.

 Provide Small Business Support
 • Expand opportunities for child care center owners and operators to access tech-
    nical assistance in navigating funding streams and small business financing.
 • Provide small business planning and development support through Community
    Development Financial Institutions, university extension offices and community
    colleges. Expand access to FastTrac business management and entrepreneurship
    training.
 • Encourage cooperatives so small businesses can gain some economy of scale and
    can learn from one another.

 Increase Access to Capital
 • Make financing more broadly available to child care providers through equity-
     like financing, capital grants, a loan guarantee pool or a loan fund.

                                                                                           2
Nationwide, the child care industry suffers from market dysfunction, inadequate busi-
ness planning and management, capital shortfalls and insufficient revenue. In eastern
Kentucky these barriers to financial viability are exacerbated by high poverty rates (more
than twice the national poverty rate) and the difficulties that accompany rural economic
development. High quality child care provides greater opportunities for today’s work-
force, encourages entrepreneurship, provides quality jobs and invests in the education
and social well-being of Kentucky’s future workforce. Partnerships of public and private
entities throughout Appalachian Kentucky can provide the market supports, technical
and managerial assistance, access to capital and increased revenue needed to make child
care a financially viable enterprise. Child care is an excellent investment in sustainable
economic development that will pay dividends in public savings and current and future
community well-being.



Child Care: The Business of Public Goods
Quality child care is a public good that increases the productivity of our workforce,
lowers future spending on public services and contributes to the development of
tomorrow’s workforce. Market inconsistencies and inadequate public policy result in
a dysfunctional market of under-funded organizations that struggle to pay bills and
maintain quality standards. The low-wage service sector jobs that dominate the current
economy simply do not pay enough to allow workers to afford quality child care, making
the child care sector one more low-wage service industry. State subsidies designed to
support the child care industry are insufficient to produce a financially viable market in
child care and fail to provide effective incentives for quality care.

High quality affordable child care is both a private concern for individual families and
a public issue affecting education, the economy and quality of life in communities.
Because quality child care provides both private and public benefits, efforts to improve
access, quality and the financial viability of the industry require both public and private
responses. Unfortunately, market forces alone cannot support a quality child care
industry for low-income families. In areas with high concentrations of low-income fami-
lies, public policies must do more to support the economic development, education and
social service functions served by early childhood education and care. Collaborations and
partnerships that bring together public funds for education and economic development
with private and nonprofit enterprises have the greatest potential to create a functional
market in child care.

The dysfunctional child care market is not a problem exclusive to parents and their chil-
dren. Nor are families and child care workers the only ones who pay a price under the
current system. Estimates suggest that for each dollar spent on quality early childhood
education and care, the public saves between $2 and $17 in future spending on educa-
tion, welfare, social services and crime (Barnett 1996; RAND 2005; Prichard Committee
2007; Warner et al. 2004). Quality child care has the greatest impact on low-income chil-
dren: the children who, without good nutrition, educational programming and early
socialization, may be most likely to depend on government assistance in the future. Child
care strengthens today’s economy by enabling stable workforce participation and ensures
a healthy economy in the future by laying the foundation for a productive workforce in
the next generation.

                                                                                          3
In a national study of all 50 states, higher public investment in child care is positively
correlated with stronger economic impacts in the community (Liu and Warner 2004).
The increase in returns is not simply the result of a higher investment, but reflects that a
higher investment actually buys higher quality child care in the form of a stable, qualified
child care workforce and lower child-to-staff ratios. High-quality child care has signifi-
cant impacts on children’s future educational attainment and productivity and thus has
a greater-than-proportional increase in economic impact. In addition, high quality child
care centers provide better jobs, sending more money into local economies. The bottom
line is that the public has a vested interest in supporting a financially viable market in
quality child care.

Federal and state policies to support child care focus on two primary areas of concern:
accessibility and quality of care (for a thorough discussion of quality in Kentucky, see
Childress 1999). As a Community Development Financial Institution, the Mountain Asso-
ciation for Community Economic Development (MACED) recognizes that improving
financial viability in the child care industry is essential to improving both access and
quality. Investments in child care are investments in locally owned businesses that
demand a qualified workforce. Our findings suggest the need for stronger state and
private partnerships to support an economically viable, high-quality child care industry
in eastern Kentucky. The positive ripple effects make child care a good investment in
economic development and in the future of our communities.


Financial Viability in Eastern Kentucky
Ten eastern Kentucky child care center operators were interviewed for this report. The
interviews provide illustrations for understanding how problems of the child care
industry nationwide manifest in rural Appalachia. In the distressed counties of eastern
Kentucky, where more than 30 percent of the population lives in poverty, many child care
centers are not financially sustainable. Central barriers to financial viability in the child
care industry are presented with supporting illustrations from eastern Kentucky child
care providers.


Dysfunctional Market Conditions
A market is functional when fluctuations in supply or demand have the capacity to
affect price and regulate industry content, quality, prices and wages in a way that will
best satisfy both buyers and sellers. Child care is a dysfunctional market. The majority of
buyers do not earn enough money to pay the true costs of quality care for their children.

Many working families must have child care in order to work, but limited resources
lead them to seek out affordable, convenient options with little room to consider quality.
Providers succeed in the market by providing the low-cost option, but this means that
they do not have sufficient revenue to cover the costs of employing a qualified stable
workforce. Unfortunately, most providers are not successful. They may stay open, but
only by paying stagnant low wages, offering few benefits, choosing not to pay them-
selves or operating a large facility that can capitalize on after school programming and
economies of scale. Few providers have the capacity to start such centers and even if they
can, quality may be sacrificed in larger settings.



                                                                                              4
The economic dysfunctions of the market depress wages and fail to provide market
incentives for entry or quality enhancement through continued education and creden-
tialing. Pricing is at the center of the problem. The disincentives to entry and quality
affect child care center owners and operators, but they also impact the workforce. Unable
to pay living wages, the child care industry falls short of providing the good jobs needed
for economic development.



 Eastern Kentucky Snapshot
 A 1999 study by the Kentucky Long-Term Policy Research Center found that “eastern
 Kentucky has the biggest shortage of licensed and certified slots with respect to
 estimated demand” (Childress 1999, 15). When demand outweighs supply, service
 providers should be able to garner higher prices for their services, encouraging busi-
 ness start-ups. However, six Area Development Districts statewide report markets
 where demand exceeds 100 percent of the licensed child care spaces, and five of
 the six are in eastern Kentucky. Out of the four development districts served by the
 Eastern Kentucky Child Care Coalition, only the Big Sandy area had excess supply of
 licensed child care spaces (15). Demand is neither driving up prices nor encouraging
 new entrants.

 Several directors mention concern over the fact that state subsidies are higher in
 Kentucky’s urban areas to reflect the higher cost of living. They think this differ-
 ence sends “the wrong message.” The cost of living may be higher in urban areas,
 but those areas are not as economically distressed, on the whole, as rural eastern
 Kentucky. Child care providers believe that lower market supports hurt the industry
 in low-income rural areas where the majority of children enrolled receive subsidies.

 Many providers in distressed rural communities sympathize with the families they
 serve. “We encourage parents to pay what they can, but to keep their balance due
 at less than $100.” Recognizing the problems in their market, child care providers
 operate more on altruism than on sound business practices. “We won’t raise our rates
 because the families we serve can’t afford it and they will withdraw.”

 Communities plagued by economic vulnerability may also provide an inconsistent
 demand for child care services. Market fluctuations may cause lay offs or increases
 in fuel prices that affect the financial viability of child care providers. “Our business
 is directly affected by economic conditions in the region. When gas prices go up, we
 lose 17-20 percent enrollment. Mothers quit their jobs to take care of children because
 they can’t afford the expense of both the gas price increase and child care. When gas
 prices go back down, . . . they can go back to work.”

 In addition to curtailing effective demand for quality, market dysfunctions translate
 to actual disincentives to qualified staff. Because providers are unable to set prices
 in a way that truly reflects the costs of providing quality care, they struggle to attract
 and retain qualified staff. “We have a high staff turnover rate. They tend to stay about
 three years, long enough to get their Child Development Associate certification.
 Then they look for work in the school system. I can’t offer health insurance so I have
 nothing to barter with.” Another director echoes this concern, “If they choose to, they
 can make more money working for a Head Start program.”


                                                                                              5
Market dysfunctions in the child care industry, particularly for those providers serving
low- and middle-income families, warrant public attention because the industry provides
significant public benefits. The returns on investing in safe, high-quality child care are
both immediate and long-term and the greatest opportunity for significant gains lies in
quality child care for low-income families, the portion of the market that suffers from the
greatest dysfunction.


Insufficient Business Planning
and Management Capacity
Business planning and management involve financial decision-making and leadership
skills. Maintenance of sound financial records and careful planning are essential to oper-
ating an economically viable business. Child care center owners and directors often move
from providing informal home-based care to providing center-based care when their
enrollments become too large. They may have little or no business training or experience.
Child care providers may love children, see the need for child care in their communities
and have a strong desire to help families, but they often do not think of themselves as
business owners or entrepreneurs. MACED’s experience analyzing the financial state-
ments of eastern Kentucky child care providers can attest to the extent of this problem.
Ten center directors were interviewed and all were asked for access to their financial
records. Despite repeated efforts, only four centers were able to provide us with complete
financial statements, and only one had kept complete records for three consecutive years.
The other centers simply did not have their books systematically organized in a way that
would allow them to share the information.

Lack of training, education and experience in business management and entrepreneur-
ship can be a barrier to success. Organizations may fail to keep records in a form that
allows them to take advantage of funding opportunities, or they may fail to meet neces-
sary deadlines and requirements for licensing and funding. Difficulty managing financial
records also precludes participation in the STARS rating system—an option that would
help centers improve the quality of their programs and increase the reimbursements
they receive from the state. Moreover, inadequate financial management often means
that child care providers do not have a clear sense of what it actually costs to provide the
services they offer.

The pervasive management challenges in child care are due in part to the career path
that brings women into the field. Many times, child care is not seen as a profession, but
rather as an extension of women’s household and mothering roles. In addition to these
flawed perceptions, the industry—particularly in low-income rural communities—fails
to provide economic incentives for those with business training and management expe-
rience to enter the child care profession. Child care center owners and directors earn
low wages relative to their responsibilities and low profit margins leave little room for
improving management salaries or building equity in the business. People with business
and management training recognize this market failure and either opt out of the child
care industry or seek better opportunities in more affluent markets where clients can
more than cover the true costs of care.

Sound business planning and management in the child care industry needs to include
managing multiple funding streams, seeking out supplemental funding, setting prices for
a reasonable return in order to provide livable wages and benefits and finding ways to
efficiently improve quality.
                                                                                            6
 Eastern Kentucky Snapshot
 Despite extensive responsibility for planning, finances, managing state licensing
 requirements and day-to-day operations, child care center directors make very little
 money. Among those we spoke with, one earns $30,000 and the other nine have
 incomes ranging from $12,000 to $25,000 per year.

 Many report using a combination of intuition and management-by-crisis as their
 strategy and most lament their inability to pay better wages and offer benefits to
 employees. Only one of the 10 centers surveyed is able to provide 100 percent health
 care coverage to its employees. One center reimburses 50 percent for its employees.
 Two other centers provide health care plans only to the owners of the business. Even
 with good financial management skills, one director notes that she still faces difficul-
 ties in covering the costs of training and maintaining employees.

 Directors often recognize the hypothetical utility of having a clear plan and oper-
 ating like any other business, raising rates to adjust for inflation and charging more
 for quality improvements. However, they find that these ideals are unrealistic in the
 face of the financial realities of their client base. “My biggest concern is cash flow. I
 haven’t raised rates since 2005 because I’m afraid I will lose kids.” One director who
 operates without a business plan maintains the goal of making a profit but adds,
 “I feel this will always be a challenge as the success of my business depends on the
 economy of the region.”

 Eastern Kentucky child care operators struggle, but for the most part, they do not
 enter the industry blindly. Many comment on the fact that the business has been a
 financial struggle, if not a drain, since day one. “When we first opened, I had to give
 the staff an IOU until the business had sufficient funds.” Altruism is laudable, but
 the willingness of owners to operate this way may contribute to continued market
 dysfunction and insufficient state response.



Insufficient Revenue
A business cannot be financially viable without sufficient revenue. For child care
providers serving low-income families, cash flow is a consistent problem. Providers
may set their prices at a rate that covers expenses, but if 85 percent of the children they
serve are on state subsidies that pay a lower rate and parents are unable to pay the differ-
ence, centers may be left with less revenue than needed to cover expenditures. Child
care providers must supplement revenue from fees with public funds funneled through
Kentucky’s Child Care Assistance Program (CCAP) as well as private grants and federal
programs. Again, accessing and managing these funding streams may require business
skills that are often in short supply in the child care industry. For child care providers
serving primarily low-income families, insufficient revenue is an ongoing threat to finan-
cial viability.




                                                                                             7
Eastern Kentucky Snapshot
Of the 10 businesses surveyed, nine reported monthly cash flow constraints that are
disruptive to efficient operations. One director reports that insufficient revenue is not
a constraint, but only five percent of the children at her center receive state subsidies,
compared to several centers at which 95 percent of children receive subsidies. This
director qualifies her answer by adding that she wishes she could afford to pay her
workers higher wages. Even in a relatively well-funded center with middle- to upper-
middle-class clientele, cash flow is a concern.

An average of 70 percent of children in the 10 centers surveyed receive state subsi-
dies for care compared to the U.S. average of only 16 percent. One in three children in
eastern Kentucky lives below the federal poverty line compared to a national average
of one in five. In other markets, families able to pay full fare help subsidize those who
cannot. In the eastern Kentucky centers we visited, four of 10 centers serve more than
85 percent subsidized children. The state of Kentucky subsidy is set by legal statute
at the 68th percentile of the child care market rate, as determined in a 2005 biennial
market survey. Center directors estimate that less than two percent of households
receiving state subsidies are regularly paying the difference between the subsidy
amount and the full fee. As a result, the revenue base for centers in these areas is
lower than in regions where private-pay cross-subsidy (subsidizing low-income fami-
lies with the full-fee revenue from non-subsidized families) is available and where
the market rate is not depressed by regional economic distress.

Insufficient revenue affects a business’ ability to pay employees, pay bills, reduce debt,
appropriately fund programming, conduct maintenance and improve the quality of
services the business provides. The most basic personnel expenses, even at low wages,
are a financial hurdle for providers in eastern Kentucky. “There is always some diffi-
culty making payroll, especially at the end of the month,” notes one provider. Another
director concurs and points to the challenge of covering costs when the customer
base has few resources. “I know salaries are not high enough. We can’t compete with
the $30,000 per year jobs in the public school system or salaries in Head Start, but I
can’t raise tuition.” Regular fluctuations and accommodations for pay schedules can
cause significant hardship. “It’s a real challenge to make payroll when there are three
paydays in one month.” Many directors take care of their employees first and pay
themselves last. “I do not always bring home a paycheck. On a good month I might be
able to pay myself $500.”

After making payroll, providers struggle to pay their bills each month. “We pay
the most important bills first. Others sometimes do not get paid on time.” Several
providers quote the phrase “You have to rob Peter to pay Paul” in describing their
monthly balancing act. Church-sponsored centers are able to offset expenses because
they do not have to pay rent and other capital maintenance and improvement costs.
But even these centers struggle to make payroll and pay bills. “There have been times
when church members had to make contributions in order to meet payroll.”

“The most urgent concerns are being able to pay health insurance and improve wages.
We could improve child-to-teacher ratios and improve working conditions if the state
paid higher subsidies.” Another director describes her struggle to stay on top of rent,
“We currently have debt between $8,000 and $10,000 because we are behind on rent.
We’re only paying $400-$500 per month on the $1,500 we actually owe.”

                                                                                             8
Capital Shortfalls
Accessing capital is difficult in the child care industry. Significant cash flow problems
mean that loans to providers are risky and many owners and operators must person-
ally guarantee start-up debt. The same market factors that make these loans high risk
also make it difficult for owners to pay off the personal loans they take out to start their
businesses. Personal liability for business debt can be dangerous as the owners and their
families have no protection from the consequences of failure.

In addition to problems with capital for start-up, child care centers have little or no
capital to improve facilities and equipment or to use as a buffer during slow months
or in the wake of local lay-offs that may affect demand for their services. Among the
eastern Kentucky child care operators with whom we spoke, some mentioned the need
for capital improvements at their facilities and several indicated that accumulated wealth
would allow them to reduce their debt, make up for slow reimbursements from the state
and pay their teachers and staff better wages.

A common strategy for financial viability in the child care industry lies in gaining capital
efficiencies and economies of scale by operating large facilities. Small centers of less
than 100 children are less profitable than larger facilities or those with multiple locations
and centralized front and back office capacity. Larger centers often house after school
programs, which have a far larger profit margin due to lower staff and capital require-
ments. These school-age programs subsidize affordable infant and toddler care in large
centers. However, in rural areas with transportation constraints, communities with
low population density cannot support larger facilities. Even when rural centers are at
capacity, revenue remains insufficient to cover the costs of expansion or new facilities.



 Eastern Kentucky Snapshot
 Capital shortfalls are not the result of insufficient demand for child care services
 in eastern Kentucky. Eight out of 10 centers surveyed are at their licensed capacity,
 with three centers reporting an active waiting list. Existing centers do not have the
 physical capacity to meet demand. In a functional market, high demand provides
 the funds necessary to cover the costs of expansion, or at least enough to repay debt
 incurred in the process of expansion. This is not the case for child care in eastern
 Kentucky. Demand exceeds supply (Childress 1999), but does not determine pricing
 because those who need the service cannot pay any more for the service than they
 now pay.

 One child care operator comments on facility concerns, “Our facility was not
 designed to be a day care and it does need work. Our equipment is worn out as well.
 But to buy any new equipment or make improvements, I would have to take out a
 personal loan.” Facility maintenance is often a barrier to financial viability, “We’re
 constantly paying for repairs and upgrades and it’s just hard to get ahead.”

 In addition to facility concerns, capital shortages leave child care providers without
 a safety net as they navigate enrollment fluctuations, late and missed fee payments,
 slow payments from the state and other funding agencies and unexpected expenses.
 “We do not have enough working capital throughout the year. When we first started,


                                                                                                9
 we (the two co-directors) didn’t take home paychecks at all.” Another director echoes
 the personal income trade-off for the lack of working capital, “I do not have enough
 working capital for operations during the year. I often borrow money from my
 personal account to pay bills for the center.”



Conclusions
Child care centers, whether for-profit or nonprofit, housed in churches or free-standing,
struggle to stay afloat. Centers that serve affluent communities are able to charge high
enough rates to cover expenses and operate with stability, but in rural eastern Kentucky,
where more than 30 percent of the population lives in poverty and low population densi-
ties make it hard for large centers to flourish, child care centers are not financially viable.
Centers that stay open do so because owners, operators and workers make sacrifices
through low or no pay and few benefits. Even centers that appear to be financially viable
struggle to make ends meet and provide good jobs. Directors across eastern Kentucky
voice the same frustrations and concerns over insufficient funds for health insurance,
high staff turnover and regionally specific economic barriers to success. The primary
barriers to economic viability include the dysfunctional market for quality child care,
inadequate business planning and management skills, too little access to capital and
insufficient revenue.



Recommendations
MACED believes that investment in business infrastructure, coupled with policies
that support a market in child care for low- and middle-income families, will promote
good jobs, higher quality of life for child care workers and positive economic impacts
for years to come. In order for the industry to become economically stable in eastern
Kentucky, public and private resources need to be directed at creating a functional
market, improving business planning and management, providing access to capital and
improving revenue.

The following recommendations in these areas further the discussion of the policy
changes necessary to support sustainable, high-quality child care in eastern Kentucky:

Subsidy Reform
   • Shift to cost-based state subsidies for quality child care. Subsidies should be
      based on the cost of providing the service rather than on artificially depressed
      market rates. Child care providers need to be able to depend on stable revenue
      that matches the cost of providing care. Low-income families often cannot afford
      to pay the cost that remains after the subsidy reimbursement to the provider.
      The state should expect parents to pay a portion of the fee as they are able, but a
      sliding reimbursement rate should accurately reflect the ability to pay based on
      income and family size. The total revenue to the child care provider should cover
      the actual cost of care.
   • Create demand for quality in the child care industry. Because low- and middle-
      income workers cannot afford to pay more for quality child care and because high
      quality care provides a significant public good and savings on future spending,

                                                                                              10
       the state has a role to play in demanding quality. The state is the primary
       customer for child care in low-income communities as the bulk of revenue
       is public money. State reimbursement rates should be cost-based and should
       increase with the quality of care. The STARS program establishes tiered reim-
       bursement rates based on quality, but the program is voluntary and reimburse-
       ment rates are too low to incent participation or to cover the costs of providing
       high-quality care. Participation in the STARS quality rating program should
       be mandatory for centers receiving state subsidies and reimbursements should
       reflect the cost of quality improvements.
   •   Include concentration of need in calculating subsidy rates. Higher subsidies
       in urban areas reflect higher market rates that accompany the cost of living in
       those areas. However, the same logic means lower subsidies in rural areas that
       have higher concentrations of poverty. Subsidy rates should be tied to the cost of
       providing care, not to market rates that simply reflect the strength or weakness of
       the local economy. In addition, centers serving more than 70 percent subsidized
       families, whether rural or urban, should receive a reimbursement bonus so that
       they do not pay a penalty for serving low-income children, but rather receive
       support for serving the population with greatest need. The STARS quality dollars
       program recognizes this need, but fails to provide a sufficient bonus to offset
       disparities. Private foundations also provide assistance to centers serving needy
       families, but these groups are not as active in rural areas as they are in urban
       areas.

Tax Reform
   • Designate child care tax credits as refundable. Refundable child care tax credits
      with a high income threshold will support low-to-middle-income working
      families’ ability to pay a true market rate for child care services. Tax credits can
      provide incentives for quality as well. A tiered tax credit system provides a higher
      credit for using a child care center with a higher quality ranking.

Increase Incentives for Workforce Development
    • Provide stronger incentives for professional development. Provide expanded
       incentives and scholarships for earning a Directors Credential and Interdisci-
       plinary Early Childhood Education Associate Degree at Kentucky Commu-
       nity and Technical Colleges. Kentucky should expand the existing scholarship
       program and provide support for pay increases to accompany credentials.
    • Provide wage supports as incentives for workforce training and development.
       The WAGE$ program supports workforce development in several states’ child
       care industries. The program combines state money and support from child care
       owners and directors to help staff get Child Development Associate’s degrees and
       Bachelor’s degrees in return for wage increases. In order for these programs to
       function effectively, the state must provide support for wage increases to accom-
       pany higher credentials. Wage supports provide a useful incentive for the child
       care worker to invest time and energy in the program.




                                                                                         11
Provide Industry-specific Small Business Support
   • Expand opportunities for technical assistance. Community Development Finan-
      cial Institutions, regional child care resource centers and other service providers
      can increase technical assistance and help child care owners and operators
      manage the multiple funding streams and licensing requirements that structure
      the child care industry.
   • Increase business planning and management support. With additional funding,
      university extension services, business development organizations and commu-
      nity colleges can lead workshops and group trainings that build entrepreneurial
      capacity and provide technical assistance to in-home and center-based providers.
      Entrepreneurship short courses, such as the FastTrac program offered by several
      community development organizations including MACED, can provide business
      management and entrepreneurship training for more family child care providers.
      During the classes, participants explore their roles as care providers, entrepre-
      neurs and business managers and develop a business plan.
   • Encourage cooperatives. In-home and center-based providers can pool their
      buying power in cooperative organizations to gain some economy of scale in
      purchasing office, classroom and food supplies and sharing administrative and
      staffing resources. University extension or child care resource and referral agen-
      cies may be able to provide assistance in organizing cooperatives.

Increase Access to Capital
    • Provide equity-like capital and capital grants. Because future returns on invest-
       ments in quality child care do not come back to the child care center, attracting
       equity capital can be difficult—there is no cash pay-off for investors. Equity-like
       programs that provide patient, long-term debt, paired with technical assistance
       and business management training, may offer a venue for public-private partner-
       ships to support high-quality child care centers. Coal severance tax funds are a
       possible source of capital grants for facilities in eastern Kentucky’s coal producing
       counties. Community Development Block Grant funds offer an additional oppor-
       tunity for public-private partnerships in constructing facilities to house commu-
       nity services including child care.
    • Increase loans and financing. Create a loan guarantee pool to encourage lenders
       to provide loans to child care providers, which are often seen as risky invest-
       ments. Additionally, the state could create a loan fund for child care providers
       similar to North Carolina’s Department of Health and Human Services’ Child
       Care Revolving Loan Fund (CCRLF).

           [The CCRLF] offers subsidized interest rates to those working in early
           childhood education. The funds are available at a five percent fixed
           interest rate for nonprofit providers serving subsidized children.
           Proceeds may be used for working capital, equipment purchase, vans,
           renovations, improving STARS levels and obtaining licensure. It can
           not be used for purchasing a building.

       Increasing the availability of debt financing is a useful strategy only if we can
       increase child care center revenue. Without such a change, centers cannot afford
       to incur any additional debt.



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Conclusions
High poverty rates in Central Appalachia significantly heighten the role that quality
licensed child care programs play in improving child health, safety and school readiness.
Formalizing these arrangements in home- or center-based care creates small business
enterprises and improves the quality of life and economic well-being of rural commu-
nities. The recommendations of this report focus on improving the financial viability
of the basic business model of child care. In order to attract successful entrepreneurs
and qualified staff, child care must become a financially viable enterprise that provides
living wages and opportunities for career success. MACED is interested in improving the
market for quality child care by supporting public and private structures that increase
revenue, business planning and management capacity and access to capital. Additional
reforms to improve quality and access are essential, but in order for those efforts to move
forward, child care must be financially viable.

These recommendations require resources. Significant funds are currently available
through federal programs for quality improvement (Early Reading First, Higher Educa-
tion Act, Child and Adult Care Food Program) as well as the Temporary Aid to Needy
Families and Child Care and Development Block Grant programs that grant funds for
states to use as they see fit. Better and more creative use of these funds is necessary but
not sufficient in the effort to correct the dysfunctions of the child care market. Child care
providers need additional resources in the form of technical and management support
for sound business planning, an increase in month-to-month cash flow and improved
access to capital.

Increased public and private investment in early childhood care and education is essen-
tial to current and future economic well-being. The good news is that investments in
early childhood education and care are investments that we know pay dividends in
increased productivity and decreased spending on special education, welfare, social
services and crime. High-quality early childhood education and care are essential to a
sustainable and prosperous future.




                                                                                                13
References
  Barnett, C.R. 1996. “Lives in the Balance: Age-27 Benefit-Cost Analysis of the High/
     Scope Perry Preschool Program.” Monographs of the High/Scope Educational
     Research Foundation: Number 11. Ypsilanti, MI.

  Childress, Michael T. 1999. Child Care in Kentucky: Current Status and Future Improve-
     ments. Frankfort, KY: The Kentucky Long-Term Policy Research Center

  Karoly, Lynn A., M. Rebecca Kilburn, and Jill S. Cannon. 2005. Early Childhood Inter-
     ventions: Proven Results, Future Promise. Santa Monica, CA: RAND.

  Liu, Zhilin, Rosaria Ribeiro and Mildred Warner. 2004. Comparing Child Care Multi-
      pliers in the Regional Economy: Analysis from 50 States. Ithaca, NY: Cornell Univ.
      Dept of City and Regional Planning.

  “Strong Start Kentucky: Investing in Quality Early Care and Education to Ensure
      Future Success.” The Prichard Committee, October 2007.

  RAND Corporation. 2005. “Children at Risk: Consequences of School Readiness
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    Cannon 2005). Santa Monica, CA: RAND.

  Warner, Mildred et al. 2004. Economic Development Strategies to Promote Quality Child
     Care. Ithaca, New York: Department of City and Regional Planning Cornell Coop-
     erative Extension.




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