Journal Issue: Financing Child Care Volume 6 Number 2 Summer/Fall 1996
The Amounts Spent on Child Care and Early Education
Estimating the amount of money spent on child care and early education can be difficult because it requires both a careful definition of which services and activities are subsumed in the discussion and the availability of good data. In her article in this journal issue, Sandra Hofferth identifies child care centers, nursery schools, Head Start, public prekindergarten programs, family child care, in-home providers, and relatives. In considering the array of public and private expenditures, it is also helpful to broaden the discussion to include funds made available to support school-age child care programs (including recreation programs and summer camps) and to consider funds for services that are often defined as early intervention, such as special care and education programs for preschool-age children with disabilities.1
Even with a clear definition, however, the availability and quality of the data concerning expenditures for these services are very uneven. The public and private entities involved in financing early childhood programs often operate in isolation from one another, view early childhood services in very different ways, and report data differently. Some do not collect data at all or group expenditures only into broad categories. Data are sometimes reported for the calendar year, federal fiscal year, or state fiscal year. Further, the language used to describe the contributions made by the various sectors varies. For example, local school districts do not typically view the support they provide to preschool education or school-age child care as a subsidy, even though this support helps reduce child care costs paid by families. Despite these challenges, by making some generalizations in language and approach, it is possible to paint a broad picture of how child care and early education services are financed in the United States.Families as Payers
Families bear the brunt of the burden of paying for child care. According to the Census Bureau, total consumer expenditures for child care before taxes were estimated as $23.6 billion in 1991.2 Researchers have estimated that, in 1990, consumer expenditures represented about 70% to 75% of all expenditures for child care, with the balance derived largely from public subsidies.3,4 There has been a notable increase in government spending since 1990. It is not known whether the expansion of government spending resulted in some substitution of governmental for parental expenditures. However, even if one assumes substantial substitution, one would still conclude that the parental stake represents the majority of total expenditures.
Child care expenditures vary across families. Some families incur no child care costs, either because they are able to obtain care without charge or because a government subsidy covers its full cost. As reported in the article by Hofferth in this journal issue, in 1993, employed mothers with children younger than five years of age reported spending, on average, $79 per week for child care; but this amount varies widely, depending upon the child's age, the location of the program, and the type of care. In New York State, for example, a family with a four-year-old child living in a rural area and using a family child care home could pay as little as $60 per week, but a family with a nine-month-old enrolled in a New York City child care center could pay more than $240 per week (both for full-time care).
The percentage of family income consumed by child care costs also varies widely. In 1991, among women making child care payments, women in families that were in poverty expended 27% of their monthly income on child care, but those in families that were not in poverty expended 7% of their monthly income on child care.2 (See also the article by Hofferth in this journal issue.) Even families that have relatives to care for their children incur child care costs. In 1990, one out of three employed mothers who reported that they rely on relatives as their primary child care arrangement paid their relatives for the care of their children.5Government as Payer
Federal, state, and local governments each contribute to the cost of child care and early education. The federal contribution can be quantified most easily because data from existing reporting are available to identify annual expenditures for most of the relevant programs. State expenditures that qualify for federal match are also not difficult to determine, though estimates are necessary for a range of other state programs. The role of local government is most difficult to quantify; it is clear that some local governments make significant ongoing contributions to the cost of child care for their residents, but it has been difficult to locate any comprehensive survey or other instrument from which to estimate the aggregate local role.
In considering the role of each level of government, it is helpful to draw a distinction between tax-based subsidies and expenditure-based subsidies. About one-fourth of government support for child care comes in the form of tax-based subsidies, which primarily benefit middle- and upper-income families. The remaining three-quarters of government support comes in the form of expenditure-based subsidies, which are largely targeted to low- and moderate-income families. The federal government provides a modest additional amount of support for child care in its role as an employer.
Tax-based subsidies for child care take the form of tax credits, tax deductions for employers, and arrangements that allow employees to use pretax dollars to pay for child care. In general, these subsidies are designed either to help individuals cover the costs of child care or to encourage employers to address the child care needs of their employees. Tax credits can be either refundable or nonrefundable, but the largest tax-based subsidy for child care, the Child and Dependent Care Tax Credit (CDCTC), is a nonrefundable credit. This means that families can never recover more in credit than what they actually owe in taxes. Families that have not earned enough to pay taxes but nevertheless have child care expenses cannot benefit from the credit.
Federal Tax-Based Subsidies
The estimated revenue loss associated with the CDCTC was $2.8 billion in federal Fiscal Year 1995,6 an amount exceeding the combined federal spending for the four programs (Child Care and Development Block Grant, AFDC Child Care, Transitional Child Care, and At-Risk Child Care) that are often identified in discussions of the federal role in child care assistance.7
Taxpayers using the CDCTC may receive a credit of up to 30% of the first $2,400 of the cost of caring for a child under the age of 13 or an incapacitated dependent or spouse.8 A family with two or more qualifying children or dependents may receive a credit of up to 30% of the first $4,800 of its costs. The maximum credit is $720 for one child and $1,440 for two or more children. The percentage of the credit declines as family income increases.
Current tax expenditures for the CDCTC are significantly lower than comparable levels for 1988, when the cost of the CDCTC was $3.8 billion.9 The Family Support Act of 1988, among other changes, modified the law to provide that a taxpayer would not be eligible for the CDCTC unless the tax return included the name, address, and taxpayer identification number of the dependent care provider. In apparent response, the number of returns claiming the CDCTC dropped from 9 million in 1988 to 6 million in 1989 and was projected to be 6.1 million for 1994.9
By design, low-income families can receive a higher percentage credit than can higher-income families. In practice, however, the benefits of the CDCTC are primarily received by middle- and upper-income taxpayers. Because the provision allows only for a reduction in tax liability, it provides no assistance to lower-income taxpayers who owe no federal income tax and only limited assistance to those whose otherwiseallowable child care credit exceeds their tax liability. In other words, if a family has spent $2,000 on child care over the year but has a tax liability of only $500, it can receive a credit of at most $500, even if it would otherwise be eligible for a larger child care tax credit. According to preliminary data from 1994, only about 14% of the benefits of the CDCTC went to families with adjusted gross incomes of less than $20,000, nearly half (47%) of the benefits were provided to families with adjusted gross incomes between $20,000 and $50,000, and about 39% of the benefits were received by families with adjusted gross incomes in excess of $50,000.10
A second federal tax provision also provides significant support for private child care arrangements. Under an employerestablished Dependent Care Assistance Plan (DCAP), the Internal Revenue Code permits an employee to use up to $5,000 per year ($2,500 for a married individual filing separately) in pretax earnings for child care, shielded from income and Social Security taxes. If an employer participates in such a plan, the employee's pay is reduced by the amount designated by the employee (up to the cap), and the employee receives reimbursement for allowable dependent care costs (up to the amount designated). The employer also saves its share of Social Security taxes on funds placed in a DCAP. In 1994, the estimated revenue loss from DCAP participation was $675 million.11
The DCAP is not a tax credit; rather, it reduces taxable income. As a result, it provides its greatest benefits to families in the highest tax brackets. Moreover, unlike the CDCTC, it does not phase out as taxable income increases. Accordingly, one would anticipate that the benefits of DCAP programs would be even more sharply tilted toward middle- and upper-income families than are the benefits of the CDCTC, but no data are available on distribution of DCAP benefits.
State Tax-Based Subsidies
In addition to the tax subsidies provided by the federal government, many states provide tax-based subsidies. A 1994 report indicated that 22 states and the District of Columbia currently offer a tax subsidy for families incurring child care costs.12 The total value of these state tax benefits is not available but has been estimated in the range of 5% to 10% of the total federal tax-based subsidy (CDCTC and DCAP),13 which would translate to $175 million to $350 million for 1994.
In addition, 14 states have established an Employer Tax Credit,14 which typically allows an employer to claim a corporate tax credit of up to 50% of the cost of an employee child care benefit. Unfortunately, these tax credits appear not to have stimulated much employer involvement in early childhood services. As a result, they have produced minimal revenue loss for the states that have established them. A study by the Child Care Action Campaign found that, in 1989, fewer than 1% of eligible employers actually took advantage of the availability of employer credits.15 Employers who do not use tax credits or who reside in states that have not established them may still deduct expenditures for child care programs as reasonable and necessary business expenses, but there are no available data to estimate the revenue loss associated with these deductions.
Expenditure-based subsidies are those involving direct government spending on child care programs and services rather than forgone tax revenue. In contrast with tax-based subsidies, most federal expenditure-based subsidies are designed to serve children from low-income families, including those that receive Aid to Families with Dependent Children (AFDC or "welfare"). The funding programs differ from one another in some significant ways: (1) whether states are required to provide assistance to all eligible families or individuals (an "individual entitlement"), (2) whether the funding programs require state contribution of funds to draw down some or all federal dollars available to a state, and (3) whether federal funding is available to states on an open-ended or capped basis. (See Table 1 for a listing of key federal funding streams for child care and early education services.)
Some funding streams provide what is called an individual entitlement to services. For those funding streams, states have a legal responsibility to provide child care assistance for qualifying individuals or families. Where there is no individual entitlement, a state may, but has no responsibility to, provide assistance to any eligible family.
Some federal child care and early education programs require states to contribute their own dollars to draw down federal funds. The required level of state match is based on a formula (known as the "Medicaid match rate") under which a state's match rate varies with state per capita income. The wealthiest states have a match rate of 50% (one dollar from the state is matched by one dollar from the federal government); a poor state's match rate may be as low as 20% (one dollar from the state is matched by four dollars from the federal government).
Finally, some funding streams are capped at a particular level each year, while others provide open-ended funding. When a funding stream is open ended, the federal government has an ongoing duty to match qualifying expenditures, even if expenditures increase beyond anticipated amounts. In a capped funding stream, federal funding is limited to a specific allocation regardless of the demand for services.
Federal Expenditure-Based Subsidies
Although many federal funding streams may be used to support child care and early education, most of the federal funds expended for child care and early education in 1995 were attributable to the following six programs, which are described in Table 1:
- Head Start is a federally funded program subject to a 20% local match (which may be in-kind or waived) primarily targeted at low-income families with three- and four-year-old children. Head Start programs include child development, early education, social, health, and nutrition services and are typically part-day and part-year. Federal funding for Head Start in FY 1995 was $3.5 billion, the largest amount for any single tax- or expenditure-based child care/early education program.
- The Child and Adult Care Food Program (CACFP) provides open-ended federal funding for reimbursing costs of meals, snacks, and nutrition education in licensed child care centers, family and group day care homes, and Head Start centers. Eligible providers are public and private nonprofits and, in some circumstances, for-profit providers.16 In FY 1995, federal funding for the CACFP reached $1.6 billion; 98% of the expenditures were for children, the remainder being for adult day care centers.
- The Child Care and Development Block Grant (CCDBG) provides a block grant of federal funds to states with no requirement for state match. CCDBG funds may be used for child care services for low-income families (defined as having incomes at or below 75% of the state median income) and for activities to improve the quality and supply of child care. Federal funding for CCDBG was $935 million in FY 1995.
- AFDC Child Care provides states with an open-ended federal funding stream, subject to a state match requirement, to pay the cost of child care for families receiving AFDC assistance and working or participating in a work or training program. AFDC Child Care is an entitlement for individuals: states have a legal responsibility to provide child care assistance for qualifying families. Federal funding was $666 million in FY 1995.
- The At-Risk Child Care Program provides a limited amount of federal funding to states, subject to state match, to provide child care assistance for working poor families whom the state considers at risk of receiving AFDC unless such assistance is provided. The annual capped amount for the program is $300 million; federal funding was $357 million in FY 1995 (because funds were carried over from a prior year).
- The Transitional Child Care (TCC) Program is an open-ended federal funding stream available to states, subject to state match, to pay the cost of child care for up to one year for qualifying families that have left AFDC due to employment. TCC is an entitlement for qualified families. Federal funding for TCC was $199 million in FY 1995.
In addition to these six programs, Title XX or the Social Services Block Grant (SSBG) is a significant federal source of child care funding in some, but not all, states. SSBG provides a block grant to states without a state match requirement; in FY 1995, federal funding for SSBG was $2.8 billion. A state's SSBG allocation may be used for a broad array of social services. Unfortunately, there are at best very limited data regarding how states use their SSBG funds or what percentage they spend on child care. Data from 23 states concerning their 1990 SSBG expenditures indicate that they spent 16% of their SSBG funds on child care.9 Child care advocates have raised concerns, however, that some states significantly reduced their use of SSBG funds for child care when new federal child care funds became available to the states under the Family Support Act of 1988 and the 1990 Child Care and Development Block Grant. Because more recent data are not available, it is not possible to know how current SSBG utilization patterns compare with the limited 1990 data.
Two additional federal programs are not typically included in discussions of funding for child care and early education but are potentially significant sources of funding: the Individuals with Disabilities Education Act (IDEA) and Title I of the Improving America's Schools Act (formerly called Chapter 1).
The IDEA established an entitlement to special education services for children ages 3 through 21 with disabilities, and authorized three primary grant programs to assist states in serving them: State Grants (Part B) may be used for children with disabilities ages 3 through 21; Preschool Grants (Section 619) are specifically targeted to children ages 3 through 5; and Grants for Infants and Toddlers (Part H) may be used to develop and implement a comprehensive statewide system of early intervention services for children under age 3 and their families. Slowly, these services are becoming part of the mainstream child care and early education system.17 In FY 1995, total federal funding for infants and toddlers (Part H) was $316 million, while total federal funding for preschoolers (Section 619) was $360 million, although the percentages of these totals used for child care are unknown.
School districts may also use federal Title I funds to support preschool education and school-age child care programs. Title I, Part A grants are made available to local school districts serving a high percentage of low-income families to support services for "educationally disadvantaged" children. Providing support to preschool and school-age child care programs is an allowable use of these funds. Although the total Title I funding level is substantial (almost $6.7 billion in 1995), fewer than 2% of children served with these funds are of preschool age, and the amount expended for preschool or school-age child care activities is unknown. In addition, Title I, Part B grants (the Even Start Program) are made available to schools to provide a variety of services, including child care, to educationally disadvantaged one- to seven-year-old children and their parents. Again, the percentage of Even Start funds used for early childhood education is unavailable, but is estimated to be small.
Federal expenditure-based support for child care and early education is not limited to the funding programs mentioned; several smaller funding streams exist that may be used to support these services. In fact, a 1994 General Accounting Office (GAO) report identified more than 90 federal early childhood programs in 11 federal agencies and 20 offices.18 However, although child care and early education may be an allowable expenditure under many funding programs, the vast bulk of federal expenditures (other than tax expenditures) is clearly in six programs (Head Start, the Child and Adult Care Food Program, the Child Care and Development Block Grant, AFDC Child Care, At-Risk Child Care, and Transitional Child Care) plus the Social Services Block Grant. In the GAO's analysis, 34 "key" early childhood programs were identified, but 80% of the federal funding attributable to early childhood in this set of programs was concentrated in the six programs already noted, plus the SSBG.
State Expenditure-Based Subsidies
State expenditure-based support for child care and early education programs falls into two general categories: state matching funds that must be contributed as a condition of drawing down federal funds and state funds that support state-sponsored child care and early education initiatives. Although the amounts required to match federal funds are readily ascertainable, it is more difficult to quantify the second category of state expenditures.
In 1994, states spent $724 million for the required match for AFDC Child Care, At-Risk Child Care, and Transitional Child Care.19 States also make significant investments in part-day, part-year preschool programs, primarily for four-year-old children. In 1991–92, some 32 states with aggregate state investments in preschool programs reaching approximately $665 million served almost 290,000 children.20,21
Some state governments have also developed subsidy programs to help low-income families pay for child care. These initiatives may also address specific needs, such as child care services for teen parents, families participating in substance-abuse programs or that are homeless, campus-based child care programs, or school-age child care programs. States typically garner resources for these initiatives from a range of federal and state sources, making it difficult to quantify the precise amount of funds expended by states alone. Data contained in a Children's Defense Fund survey suggest that states spent a total of $1.2 billion on such initiatives in FY 1990; however, based on the manner in which data were reported, it is impossible to be certain how much of this figure may have represented state expenditures of federal funds.22,23
State funds also support initiatives to increase the quality and supply of child care programs, including start-up and training funds, licensing and monitoring efforts, or accreditation initiatives. Data are not available on the total amount of state funds invested in these initiatives, although much may have been derived from federal funds.
In considering the state role, it is important to appreciate the enormous variation in funding levels across states. In 1990, state expenditures for child care and early education ranged from $0.24 to $152 per child under age 14.22 Two-thirds of all state expenditures for state prekindergarten initiatives in 1991–92 were concentrated in just five states.20
Local Expenditure-Based Subsidies
Local support for the child care and early education system is significant in some communities, especially when the contributions made by local school districts and recreation departments are considered. But comprehensive information on the amount of local funds expended to support early childhood services is not available. Local city and county government contributions often constitute the matching funds necessary to draw down federal and state appropriations; in 1992, 11 states required local governments to provide a part of the required state match to draw down federal child care funding.24
In addition, local government expenditures may include special programs or services that are supported by local tax levy funds. For example, in FY 1993, the District of Columbia spent more than $18 million in district funds to support its system of subsidized child care centers and homes,25 and in FY 1994, the New York City Department of Human Resources contributed more than $137 million in city tax levy funds to help support its subsidized child care system and more than $146 million to support preschool programs in the city schools during the 1993–94 school year.26
Other locales may use generic federal and state funds, such as Community Development Block Grant (CDBG), Community Services Block Grant (CSBG), and Job Training Partnership Act (JTPA) funds to support child care. Dallas and Minneapolis, for example, spend approximately half a million dollars each in CDBG funds for local child care subsidy programs.27
Special education and early intervention services for young children with disabilities are supported by local funds in at least 26 states,28 and local governments have also paid for building or renovating child care facilities. The Housing and Redevelopment Authority in Sacramento, California, for example, used $2.48 million in tax increment and CDBG funds to support the construction of various child care facilities in low-income areas.29
Before- and after-school child care programs are often located on school grounds and operated by the school district or a community-based agency. Although most families that use these programs pay fees (80%), more than one-third of the programs receive free or reduced rent and other donations or in-kind services.30 In some communities, local recreation departments administer or fund before- and afterschool child care or recreation programs and summer camps, and a few are involved in sponsoring full-day child care programs as well. Estimates of national totals for these types of programs are not available.
Government as an Employer
In 1988, the Bureau of Labor Statistics reported that 26.4% of government establishments provided some form of child care benefit or service to employees.31 These services range from sponsoring an on- or near-site child care center or providing assistance with child care expenses to providing child care resource and referral or other counseling services. A 1989 survey on the implementation of work/family policies in state government indicated, however, that government activity in this area has focused largely on reevaluating policies regarding flexible work schedules, such as flextime and permanent part time, to ensure that they meet the needs of employees with families or on establishing pretax dependent care assistance plans for their employees.32
The U.S. General Services Administration (GSA), along with 29 state governments and a number of local governments, has helped to develop work site child care centers. GSA has sponsored a network of more than 100 child care centers located on or near federal work sites. Roughly 15% of the families that use these programs receive some form of subsidy from the center. Although some of the state workplace initiatives are extensive (New York State, for example, has 55 work site centers and a host of other child care initiatives for state employees), most are very small. A 1991 study found that most states had established only one or two centers.32,33The Private Sector as Payer
Contributions from the private sector probably represent less than 1% of the total expenditures for child care and early education services in a given year. However, this support can be very significant for some early childhood programs and some communities.
Employer-Supported Child Care Initiatives
In the past five years, major corporations have invested more than $350 million in child care initiatives.34 These funds have primarily been used to help start new child care centers, recruit new family child care homes, and improve the quality of child care services.
However, the role of the business community remains limited. The most extensive survey on employer-supported child care initiatives indicated that in 1988 only about 2% of U.S. work sites with 10 or more employees (25,000 establishments) had established on-or near-site child care centers, and about 3% (35,000 establishments) offered some form of child care subsidy. When services such as counseling and resource and referral are added to the picture, about 11% of employers provided some form of child care benefit or service.35
Charitable organizations help to support child care and early education services in communities across the country. Chief among these is United Way, a network of local organizations that employ community-wide campaigns to raise funds to support local human service agencies. A 1994 survey conducted by United Way of America found that nearly $193 million—or 8.8% of the total dollars distributed by United Way—was awarded to child care programs.36 Unlike other private-sector contributions, United Way funds are often used for general operating support to specific child care programs that serve large numbers of low-income families. In addition, United Way funds sometimes support the local child care system, for instance, by creating a communitywide scholarship program for low-income families that do not receive government subsidies or as local match to help draw down funds from the state or federal government.
Private foundations provide support to the child care and early education system as well. In the Foundation Grants Index covering the 1993 or late 1992 fiscal years, 174 foundations reported that they awarded 383 grants for the primary purpose of child care; these awards totaled almost $18 million.37 Most foundations do not provide general operating support,38 but they may offer one-time assistance in starting a new center or network of family child care homes; support for staff training and professional development initiatives, technical assistance, and community planning; or one-time grants for large purchases such as playground or classroom equipment. Several foundations have been instrumental in establishing facilities funds to help early childhood programs with financing, planning, designing, or building facilities. (For a discussion of some initiatives to finance child care facilities, see Appendix B to this journal issue.)
Religious organizations also support child care and early education programs. A 1983 study of 15 Protestant denominations reported that 26% of the churches that housed child care centers offered scholarships or other direct subsidies to low-income families. When all forms of financial assistance were considered, including free or reduced rent, utilities, janitorial services, and so forth, it was estimated that, of the 14,589 church-housed centers included in the study, 94% were subsidized in some way by the churches in which they were housed.39
In addition to receiving support from individual congregations, some child care programs receive support from religious organizations that raise funds for human services. The United Jewish Appeal/Federation of Jewish Philanthropies and Catholic Charities, for example, distribute millions of dollars each year to human service agencies, many of which sponsor early childhood programs.Hidden Subsidies: In-Kind Donations and Forgone Wages
Data from a national survey of child care programs suggest that approximately one-third of all child care centers receive in-kind donations, including free space, supplies, food, equipment, and toys.40 Many centers also receive donated services, such as janitorial and maintenance help; nursing or other medical support; and legal, accounting, clerical, or teaching assistance. A few early childhood initiatives have been able to raise as much as $1 million a year in various forms of in-kind contributions and volunteer services. 41 (See the article by Helburn and Howes in this journal issue for a discussion of the role of in-kind contributions and donations in the funding of child care centers.)
It has also been suggested that an important hidden subsidy to the cost of child care programs is provided by their staff, who earn significantly less in child care than they could in other occupations.42 One estimate concluded that when the full cost rather than the expended cost of operating a child care center is considered, the contributions made by staff in forgone earnings and benefits account for approximately 19% of the cost. The estimate concluded that, taken together, in-kind contributions and forgone wages account for more than 25% of the full cost of operating a child care center.43 (See also the article by Helburn and Howes in this journal issue.)Tentative Conclusions from Limited Data
The data concerning current funding for child care are limited in some areas (especially state, local, and private contributions). But those available lead to three major conclusions. (1) Parents bear the largest burden in the current system of financing child care. (2) The federal government's contribution is next largest and is due primarily to six expenditure-based subsidy programs and two tax-based subsidy programs. (3) The great majority of subsidy funding comes from either the federal government or from state expenditures required to match federal funding.