Legislative Analyst's Office

Analysis of the 2000-01 Budget Bill

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Child Care

Child Care for CalWORKs
Families and the Working Poor

In 2000-01, the budget proposal for child care is $2.6 billion and about half of this amount will be spent on child care for current or former California Work Opportunity and Responsibility to Kids (CalWORKs) recipients with the other half provided to non-CalWORKs working poor families. In contrast to the non-CalWORKs working poor (where waiting lists for child care are common), the budget fully funds the estimated need for child care for both former and current CalWORKs recipients.

Compared to California, the Wisconsin child care system (1) provides child care to more families, (2) treats welfare and nonwelfare families more equitably, and (3) requires higher copayments from the participating families. In order to determine the impacts of a Wisconsin-style subsidized child care system on families and on public costs, we recommend enactment of legislation to conduct a pilot test of the Wisconsin system in up to four California counties.

Background

The State Department of Education (SDE) and the Department of Social Services (DSS) provide state supervision over most of the state's child care programs. Figure 1 summarizes the various child care programs in California. As the figure shows, California provides full-time child care slots (on an average monthly basis) for approximately 383,000 children and part-time preschool or after school programs for an additional 198,000. Of the full-time slots, about 250,000 (65 percent) are for CalWORKs recipients. (For a description of the CalWORKs three-stage delivery system for child care, please see the inset box.)

CalWORKs Child Care Is Delivered in Three Stages

Stage 1. Stage 1 begins when a participant enters the CalWORKs program. In Stage 1, county welfare departments (CWDs) refer families to resource and referral agencies to assist them with finding child care providers.

Stage 2. Families transfer to Stage 2 when the county determines that the families' situations become "stable"--that is, they develop a welfare-to-work plan and find a child care arrangement. Stage 2 is administered by the State Department of Education (SDE) through its voucher-based Alternative Payment (AP) programs. Participants can stay in Stage 2 while they are on CalWORKs and for up to two years after the family stops receiving a CalWORKs grant. Although Stage 1 and Stage 2 are administered by different agencies, families do not need to switch child care providers upon moving to Stage 2.

Stage 3. Stage 3 refers to the broader subsidized child care system administered by SDE that is open to both former CalWORKs recipients and the non-CalWORKs working poor. Once CalWORKs recipients leave aid, they have two years of eligibility in Stage 2. During this time, they are expected to apply for "regular" Stage 3 child care. We note, however, that typically there are waiting lists for such child care.

Stage 3 "Set-Aside." In order to provide continuing child care for former CalWORKs recipients who reach the end of their two-year time limit, the Legislature created the Stage 3 set-aside in 1997. Recipients timing out of Stage 2 are eligible for the Stage 3 set-aside if they have been unable to find "regular" Stage 3 child care. Assuming funding is available (and the practice has been to fully fund the estimated need), former CalWORKs recipients may receive Stage 3 set-aside child care as long as their income remains below 75 percent of the state median and their children are below age 14.

CalWORKs Child Care Is Fully Funded. For 2000-01, the estimated need for child care for current and former recipients is proposed to be fully funded. CalWORKs recipients on aid will receive necessary child care to meet their participation mandate (through a combination of work and/or training for 32 to 35 hours per week). If child care is not available, then the recipient does not have to participate in CalWORKs activities for the required hours, until child care becomes available.

After leaving aid, former CalWORKs recipients receive up to two years of Stage 2 child care. Although funding for this child care is capped by the budget appropriation, current practice suggests that it is highly unlikely that a former CalWORKs Stage 2 family would lose its child care. Specifically, these recipients in Stage 2 would have the highest priority for funds. Consequently, if there were not sufficient funds for the Stage 2 former CalWORKs recipients, the Alternative Payment programs (APs) that administer Stage 2 would either draw on the child care reserve and/or transfer aided Stage 2 recipients back to Stage 1, thus freeing-up funding for nonaided Stage 2 child care recipients.

Former CalWORKs families who have exceeded their two years of Stage 2 child care will move into either "regular" Stage 3 child care or Stage 3 "set-aside." Regular Stage 3 child care is the broader system of subsidized child care operated by SDE. The Stage 3 set-aside was specifically established for former recipients who have reached their two-year time limit. Like Stage 2, funding for Stage 3 set-aside is capped by the appropriation. Nevertheless, the Legislature's and the administration's practice has been to fully fund this program on a year-by-year basis. In the current year, the administration has notified the Legislature that it will address a shortfall of about $10 million mostly through a transfer of prior-year savings. For 2000-01, the budget proposes $115 million for the Stage 3 set-aside, an increase of almost $90 million compared to the current year.

Non-CalWORKs Child Care Has Waiting Lists. In contrast to the CalWORKs child care system, child care for the non-CalWORKs working poor is not fully funded. Typically, there are waiting lists for non-CalWORKs subsidized child care because there are significantly more eligible families than available slots. Families with incomes up to 75 percent of the state median are eligible for regular SDE child care, but priority is given to families with the lowest income. Most of the available slots go to families with incomes at or below 50 percent of the state median. Although a family may retain its subsidized child care slot as its income rises up to 75 percent of the state median, it is very unusual to initially obtain a subsidized slot with an income above 50 percent of state median.

As we mentioned in our Analysis of the 1999-00 Budget Bill, there are no reliable data to predict how many eligible families are not receiving child care. Since many families sign up on a waiting list with more than one child care agency, the waiting lists likely double-count some families. We note that the budget for SDE proposes $1.5 million for a pilot project to analyze waiting lists and begin to collect data on the unmet demand for subsidized child care.

Current Law Treats Similar Families Differently

As described above, families on CalWORKs receive child care if they need it. Families that leave CalWORKs are eligible for two years of post-assistance child care, and on a year-by-year basis may continue to receive child care in the Stage 3 set-aside. Conversely, working poor families that have never been on CalWORKs receive subsidized child care only if space is available. The incomes of these families may be quite similar. During 1999-00, a family of three becomes ineligible for a CalWORKs grant when its income reaches $1,477 per month (about 44 percent of state median income). A working poor (never-CalWORKs) family with an identical income would only receive child care if slots are available and preference goes to families with the lowest incomes. In all likelihood, such a family would end up on a waiting list, rather than receive a slot.

The current system ensures that CalWORKs recipients have uninterrupted child care. The policy rationale for this practice is that former CalWORKs recipients--having received aid in the past--may be more likely to go back on CalWORKs if they lose their child care than would a non-CalWORKs working poor family, even though the incomes of the two respective families may be very similar. We know that some persons who leave CalWORKs later go back on aid, but we are aware of no data to assess the validity of the rationale that former CalWORKs recipients are more likely to return to aid if their child care is terminated than are persons with similar incomes but who have never been on aid.

Options for Modifying the California Child Care System

The administration expects to complete a comprehensive review of child care policies for CalWORKs recipients and the working poor during the spring of 2000. The review will cover eligibility standards, family fees, state and federal subsidy levels, and how existing resources may be more efficiently focused to serve more equitably the state's low-income families. In addition, the SDE will hold hearings on revisions to the family fee schedule that are proposed by a legislative and staff working group.

To assist the administration and the Legislature in considering the future of California's subsidized child care system, we examine different policy options. Below we discuss (1) options for treating welfare/former welfare families and nonwelfare families more similarly, and (2) modifying eligibility and copayment amounts (sliding scale fees paid by the families) for both populations so as to treat CalWORKs and the non-CalWORKs working poor more equitably.

Increasing or Decreasing Child Care Funding. A decision on whether to increase or decrease spending on child care is a policy choice for the Legislature. If the Legislature elects to increase funding for the non-CalWORKs working poor, this would increase equity between the two populations. Due to data limitations, we cannot estimate the cost of fully funding the child care needs for non-CalWORKs working poor families. In addition, we note that expenditures for CalWORKs child care have been increasing more rapidly than for the working poor. In 2000-01, the budget for the Stage 3 set-aside (exclusively for former CalWORKs recipients) is $116 million. Preliminary estimates from the DSS indicate the cost for the Stage 3 set-aside will increase to about $200 million in 2001-02 and $265 million in 2002-03 because more former CalWORKs recipients are expected to reach their two-year post-assistance time limit.

Another way to increase equity, of course, would be to reduce funding for child care for former CalWORKs recipients. This would achieve more equity but could lead to more former recipients returning to assistance.

Modifying the Copayment Structure. An alternative approach to providing child care for more families without increasing state expenditures is to increase copayments (the sliding scale fees paid by families that receive subsidized child care). Currently, families with incomes below 50 percent of state median income have no copayment obligation. Families at 50 percent of the state median ($1,669 per month for a family of three) pay a monthly fee ($44) which is 2.6 percent of their income. As family income rises, the copayment amounts increase. At 75 percent of the state median (the highest level of income at which a family is eligible for subsidized child care), the monthly copayment is $200, which is about 8 percent of the family's income. The fees are the same regardless of the cost of child care or the number of children in the family receiving the child care. Because most families receiving subsidized child care have incomes below 50 percent of the state median, total copayments in California are relatively low. In 1998-99, total parent copayments were $12.7 million, which was less than 1 percent of the state budget for subsidized child care.

Decisions on copayment amounts involve trade-offs between the conflicting goals of (1) cost-effectiveness to government and (2) not overburdening poor families. Higher copayments increase the amount of child care that can be purchased within existing resources (or reduce state costs if the amount of child care purchased statewide remains constant), but also increase the financial burden on low-income families. Varying copayment amounts by the type or cost of child care raises similar issues. Higher copayments for more costly child care arrangements will tend to lead to more cost-effective allocation of resources because parents will have a financial incentive to choose less costly child care options. On the other hand, this may lead parents to select lower quality child care arrangements.

Modifying Eligibility Rules. Another policy option is to change eligibility rules. Currently families with incomes up to 75 percent of the state median income are eligible for subsidized child care. Because there are no reliable data indicating the distribution of subsidized child care benefits by family income, it is difficult to predict the impact of changing financial eligibility rules. If the Legislature were to reduce the maximum income limit for program eligibility, it would result in savings that could be used to reduce the waiting lists for the families with lower incomes. As with copayments, changes in eligibility present difficult trade-offs between applying resources to the most needy families and serving more families.

In the above discussion, we have (1) explained how the existing child care system favors former CalWORKs recipients over the working poor and (2) examined the advantages and disadvantages of different policies with respect to resource allocation, modifying copayments, and changing financial eligibility rules. Below we describe how the State of Wisconsin has addressed these issues in its child care system.

The Wisconsin System. In Wisconsin, eligibility for child care is independent of welfare status. Since the program is fully funded, it serves all eligible families. Effective March 2000, a family's income must be below 185 percent of the federal poverty guideline ($2,082 for a family of three) to enter the state's program for subsidized child care. Once enrolled, families remain eligible as long as their income remains at or below 200 percent of the federal poverty guideline.

All Wisconsin families make monthly copayments even if they are also receiving a welfare grant. The copayments vary depending on family income, the type of child care purchased, and the number of children receiving child care. For families on assistance and for families with earned incomes up to 70 percent of the federal poverty guideline, the copayment for one child in "licensed" care is $17 per month (up to 2.7 percent for a family of three). For a family at 200 percent of the federal poverty level, the monthly copayment for one child in licensed care is $216 per month (about 11.8 percent of the family's income).

Copayments are generally higher for more children and lower if the family elects lower-cost "certified" child care instead of the higher-cost "licensed" child care. Regardless of the number of children, the maximum copayment for a family is about 11.8 percent of income. As a point of reference, we note that 200 percent of the federal poverty level is about 70 percent of the California state median income for a family of three and 75 percent of state median income for a family of four. (Eligibility for subsidized child care in California, as noted above, is set at 75 percent of the median income for a family of three, although few families above 50 percent actually receive services because of funding limitations.)

In general, Wisconsin's copayments are higher than California's, ranging up to 12 percent of family income. Total annual copayments are estimated to be about $20 million, which is about 10 percent of the state's total program budget. Figure 2 compares copayments in California and Wisconsin, at selected income levels.

Although there is significant uncertainty, we estimate that a Wisconsin-style program in California would cost roughly the same as California's existing subsidized child care program ($2.6 billion). This is because the cost of providing child care to more persons generally would be offset by additional reimbursements from changes in the copayment structure.

Analyst's Recommendation. With respect to subsidized child care, the Legislature has many options. The current system treats families with similar incomes differently, depending on whether or not they have received public assistance in the CalWORKs program. Although the current system is not completely equitable, it does tend to ensure that former CalWORKs recipients do not return to aid because of a lack of subsidized child care.

Figure 2
Monthly Child Care Copayments Comparison of Wisconsin and California Family of Three--Licensed Child Care
(Actual Dollars)
Selected Income Levels	Monthly Income	Wisconsin Copayment for			California Copayment for
		1 Child	2 Children		1 Child	2 Children
Equivalent of CalWORKs grant	$626	$17	$30		--	--
Working full-time at California minimum wage	998	39	56		--	--
Federal poverty guideline	1,157	61	91		--	--
50 percent of California median income	1,669	147	182		$44	$44
185 percent of poverty	2,140	199	251		128	128

Compared to California, the Wisconsin system provides proportionately more child care to more families and treats welfare and nonwelfare families more equitably. It achieves these objectives by collecting higher copayments from the participating families. We think this is a trade-off worth considering.

In deciding whether to adopt the changes contained in the Wisconsin program, the Legislature would want to have some knowledge of the system's effects on families and on public costs. Accordingly, we recommend enactment of legislation to conduct a pilot test of the Wisconsin-style child care program in up to four counties in California. The pilot project would include an evaluation that would assess the impact on public costs and identify the effects on families. We estimate that the evaluation would cost about $1.5 million over a three-year period. Although we anticipate that child care costs in the pilot counties would be similar to costs under current law, there should be some provision for funding potential additional costs. This could be accomplished by setting aside funds in a child care reserve that could be used to pay for any child care cost increases in the pilot counties, with authorization for a deficiency request if necessary.