Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

Child Care and Development

The 2003-04 Governor's Budget proposes $1.3 billion in state and federal funding for child care and development programs in the State Department of Education (SDE). This is a decrease of $1.1 billion, or 46.2 percent, from the enacted 2002-03 budget. (As we discuss below, $967.6 million of the proposed reduction reflects Proposition 98 savings associated with the administration's "realignment" proposal.) The $1.3 billion proposed for 2003-04 consists of $432.5 million from the General Fund (Proposition 98) and $903.9 million in federal funds. The SDE child care programs would be funded as follows:

• $314.2 million in General Fund support to serve about 100,000 children in state preschool.
• $107.3 million in General Fund support for the After School Education and Safety Program to provide homework assistance and recreational activities to about 116,000 students in kindergarten and grades 1 through 9.
• $11 million in General Fund carryover from 2001-02 child care appropriations.
• $863 million in federal funds for child care subject to pending realignment proposal.
• $40.9 million in federal funds for federal 21^st Century Community Learning Centers, which provide academic enrichment and recreational activities to students in kindergarten and grades 1 through 12.

In addition, the Governor's budget provides another $546.5 million for California Work Opportunity and Responsibility to Kids (CalWORKs) child care in other departmental budgets, including $531.5 million in the Department of Social Services (DSS) budget. This brings the state's total child care and development expenditures from state and federal funds to approximately $1.9 billion in the budget year. This total does not include another piece of California's subsidized child care system—the federal Head Start program, which provides preschool services at many sites in California but is managed directly by the federal government without state involvement. In federal fiscal year 2001-02, the federal government spent nearly $690 million on Head Start programs in California, serving roughly 98,000 children.

Child Care Realignment

A centerpiece of the Governor's budget is a major realignment of state and county programs. In "Part V" of the 2003-04 Budget: Perspectives and Issues (a companion document to this Analysis), we (1) present the Governor's realignment proposal, (2) discuss fiscal and policy considerations related to realignment, and (3) review the programs proposed for realignment. In this section, we summarize our assessment of the child care realignment proposal.

The Governor's proposal shifts responsibility for most child care programs (excluding state preschool and before and after school programs) from the state to counties. Turning the programs over to the counties would result in savings of $967.6 million in General Fund (Proposition 98) from the level of the enacted 2002-03 budget. (The realignment proposal raises various issues regarding the Proposition 98 minimum funding level. See the text box (page 140) for a discussion of some of these issues.) Under the Governor's realignment plan, counties would receive $8.2 billion in revenue from increased taxes for child care and other programs proposed for realignment. (We further discuss available funding to carry out realignment responsibilities in "Part V" of the 2003-04 Budget: Perspectives and Issues.)

Problems With the Current Child Care System

California's subsidized child care system is currently administered primarily through SDE and DSS. The enacted 2002-03 Budget Act allocates about $3.1 billion—$1.7 billion from the General Fund and $1.4 billion in federal funds—for over 15 different child care and development programs. About half of this amount is spent on programs restricted to current and former CalWORKs recipients. All other programs, however, are also open to former CalWORKs recipients after they leave CalWORKs-funded child care, depending on space availability and income eligibility. The main rationale for the CalWORKs child care programs is to address the particular needs of families moving from welfare to work.

As we have discussed in prior budget analyses, the existing system of child care programs creates significant problems for families, local providers, and the state. These include:

• Child Care Delivery System Is Unnecessarily Complex. The state's child care programs generally are funded from different sources, use separate eligibility criteria, use different points of entry, and maintain separate waiting lists. The uncoordinated manner in which the programs have been designed and administered impedes families' access to the system. For example, the separation of the CalWORKs child care system into three stages can cause a disruption in services because not all Stage 1 providers are available under Stage 2. (We describe the CalWORKs child care system in further detail below.)
• Administration of Child Care Contracts Is Cumbersome and Expensive. The complexity of child care program rules creates problems for local child care providers. This complexity permeates every aspect of the child care system. For example, different programs have different eligibility rules and different rate structures. Providers that operate under more than one program also have to negotiate separate contracts for each program. They must also follow complex rules regarding allowable expenditures and attendance accounting, and collect detailed administrative information on these factors. Most of the child care-related positions in SDE are devoted to assisting contractors and implementing the cumbersome rules and requirements.
• Stage 3 Costs Are Growing. The Legislature created the CalWORKs Stage 3 child care program in order to provide continuing child care for former CalWORKs recipients who reach the end of their two-year Stage 2 time limit. (Participants can stay in Stage 2 while on CalWORKs for up to two years after the family stops receiving a CalWORKs grant.) So long as funding is available—and legislative practice to date has been to fully fund estimated need—former CalWORKs recipients may receive Stage 3 child care as long as they are income eligible. According to the administration, the cost to fully fund Stage 3 in the budget year is $451.4 million. This is an increase of $92.9 million, or 26 percent, above the enacted 2002-03 budget. With no restrictions for former CalWORKs recipients, costs can be expected to continue to increase in the out years.
• Current System Treats Similar Families Differently. As we pointed out in our Analysis of the 2000-01 Budget Bill (see page E-94), the current child care system treats families with similar incomes differently, depending on whether they have received public assistance in the CalWORKs program. In general, families who have been on CalWORKs and subsequently leave the program can continue to receive child care under Stage 3. However, working poor families that have never been on CalWORKs receive care only if space is available. (Typically, there are long waiting lists for non-CalWORKs child care.)

Child Care Realignment Merits Consideration

In view of the problems identified above, we believe the Governor's proposal to realign child care programs deserves legislative consideration. First, realignment would provide counties greater flexibility to use available funds as part of an integrated strategy to serve low-income families. Such flexibility would allow counties to use the funds to more efficiently tailor programs to their local child care needs and better coordinate with other social services, thereby providing families greater access to services. Second, realignment would reduce administrative complexity in the system by allowing counties to provide child care under their own set of program rules related to eligibility, family fees, and reimbursement rates. It recognizes that child care needs vary greatly from county to county, and that local governments are in the best position to make detailed program decisions. Finally, the proposal would allow counties to allocate resources in a way that more equitably serves welfare, former welfare and nonwelfare families. Such flexibility would facilitate innovative approaches in balancing the needs of these families.

Option of Realigning Child Care to the California Children and Families Commissions (CCFCs). The Governor's proposal does not address the question of which local agencies would receive the proposed child care realignment funds. The county-operated CCFCs are a potential candidate to receive these realignment funds. These commissions, created by Proposition 10 in 1998, receive certain tobacco tax revenues (about $460 million in the budget year) and use these funds for the purpose of improving early child development. The Legislature may amend this initiative statute by a two-thirds majority vote so long as the amendment advances the purposes of the initiative. County boards of supervisors appoint the local commissioners. The county commissions currently expend some of their funding on child care.

Potential advantages of realigning child care to the CCFCs include their expertise in child development, their existing administrative structure, and at CCFC discretion, additional funding for child care from the cigarette tax revenues. The main alternatives to the CCFCs would be county welfare departments (that currently oversee CalWORKs Stage 1 child care and thus have experience in this area), existing local child care and development planning councils, and newly created county child care departments.

State Operations Reduction Due to Realignment

We recommend that the Department of Finance and the State Department of Education provide additional information prior to budget hearings regarding the feasibility and implications of the proposed reduction of $9 million and 77.8 personnel years related to child care realignment, in order to better determine its appropriateness.

As part of the Governor's proposed realignment of child care programs, the budget reduces a total of $9 million ($2.7 million from the General Fund and $6.3 million in federal funds) and 77.8 personnel years (PYs) from SDE's state operations budget. Presumably SDE would no longer need this support if the various child care programs were shifted away to the counties. According to the Department of Finance (DOF), the proposed reduction would leave SDE with $4.7 million in the budget year for 38 PYs to (1) administer state preschool and before and after school programs, (2) assist in the realignment transition of state contracts to county allocations, and (3) close out pending child care audits.

At the time this analysis was being prepared, we were unable to determine the appropriateness of the proposed state operations reduction associated with child care realignment for two reasons. First, DOF has been unable to provide sufficient information to justify the magnitude of the proposed reduction and the rationale for cutting specific positions. Second, although SDE has raised preliminary concerns about the Governor's proposal, it has been unable thus far to provide an alternative proposal or explain the likely implications of the reduction. For example, the department cannot identify the level of funding and PYs necessary to adequately carry out the remaining activities after realigning most child care programs. In view of the above, we recommend DOF and SDE provide additional information prior to budget hearings to justify the magnitude of the proposed reduction and describe its possible implications. This information would allow the Legislature to determine the appropriateness of the reduction.

The CalWORKs Child Care System

The Governor's budget fully funds the estimated need for California Work Opportunity and Responsibility to Kids Stage 1 child care. However, the budget eliminates funding for Stage 2 and Stage 3 child care due to realignment.

Background

Currently, the CalWORKs child care system is delivered in three stages. Stage 1 is administered by county welfare departments (CWDs) and begins when a participant enters the CalWORKs program. In Stage 1, CWDs refer families to resource and referral agencies that help families find child care providers. The CWDs then pay providers directly for the child care services.

Families transfer to Stage 2 when the county determines that the families' situations have become "stable"—that is, families develop a welfare-to-work plan and find a child care arrangement that allows them to fulfill the obligations of that plan. Stage 2 is administered by SDE through its voucher-based alternative payment programs. Participants can stay in Stage 2 while on CalWORKs and for up to two years after the family stops receiving a CalWORKs grant.

Once CalWORKs families leave grant aid, they have two years of further eligibility in Stage 2. During this time, they may apply for a space in the non-CalWORKs subsidized child care system. We note, however, that typically there are long waiting lists for such child care since demand from eligible families substantially exceeds available child care "slots." Families with incomes up to 75 percent of state median income are eligible for SDE's other subsidized child care programs, but priority is given to families with the lowest income. Most available slots, therefore, go to families with incomes below 50 percent of the state median.

The Legislature created CalWORKs Stage 3 child care in 1997 in order to provide continuing child care for former CalWORKs recipients who reach the end of their two-year Stage 2 time limit. Recipients timing out of Stage 2 are potentially eligible for Stage 3 if they have been unable to find a space in SDE's other child care programs. These families may receive Stage 3 child care as long as their income remains below 75 percent of the state median and their children are age 13 or younger.

Governor's CalWORKs Child Care Budget

As indicated in Figure 1, the Governor's budget proposes $546.4 million for CalWORKs child care. This is a decrease of approximately $1 billion from the level of the current-year enacted budget. As discussed earlier, this decrease is primarily due to savings associated with the Governor's realignment proposal. The budget does provide $474 million to DSS for CalWORKs Stage 1 child care in order to serve roughly 70,000 children.

The proposed budget also includes a CalWORKs child care reserve of $57.4 million. This amount represents a "hold back" of 5 percent of the estimated need of Stages 1 and 2. Although the Governor's budget eliminates state funding for Stage 2 and shifts program responsibility to counties, the budget does set aside funds in the reserve for the program. At the time of this Analysis, DSS staff could not specify how these reserve funds would be allocated under the Governor's realignment proposal. Below, we discuss the Governor's proposed funding for Stage 3 in the current and budget year. 

Governor Eliminates Funding for Stage 3 in Budget Year

Current Year. As indicated in Figure 2, the 2002-03 Budget Act included a total of $358.5 million to fully fund the estimated Stage 3 need (approximately 58,000 children on an average monthly basis) as projected in the 2002 May Revision. This total includes $220.5 million in General Fund support (Proposition 98) and $138 million in federal funds. Figure 2 shows that $28.9 million of the General Fund support for Stage 3 consists of one-time funds from prior-year Proposition 98 savings and child care carryover.

For the current year, the Governor proposes to reduce total Proposition 98 funding for CalWORKs Stage 3 child care by $187.1 million (from $220.5 million to $33.4 million). The proposed reduction consists of:

• $10 million due to revised caseload estimates decreasing the average monthly caseload from 58,000 to 55,700 children.
• $98.8 million from the elimination of Stage 3 child care effective April 1, 2003. 
• $78.3 million to be replaced with one-time federal funds.

At the time of this writing, both houses of the Legislature had taken action to approve the Governor's proposal to (1) reduce Stage 3 funding by $10 million due to revised caseload estimates and (2) use one-time federal funds to free up $78.3 million in current-year Proposition 98 funds. However, they rejected the Governor's proposal to eliminate Stage 3 effective April 1, 2003.

Budget Year. For 2003-04, the Governor's budget reflects the proposed elimination of Stage 3 child care services. We note that the $967.6 million General Fund (Proposition 98) savings associated with realignment in 2003-04 includes the $191.6 million base funding for Stage 3 that is proposed for elimination in 2002-03 (see Figure 2). Under the Governor's realignment proposal, counties would essentially have the flexibility to meet the child care needs of former CalWORKs recipients, or other low-income families.

Proposition 49: After School Education and Safety Program

The Governor's budget for 2003-04 includes $107.3 million in General Fund support (Proposition 98) for the After School Education and Safety Program (known as the Before and After School Learning and Safe Neighborhoods Partnership Program prior to the passage of Proposition 49 in November 2002). This is a decrease of $14.3 million from the level of the enacted 2002-03 budget and an increase of $2.5 million from the Governor's proposed revision of the 2002-03 budget. For the most part, these changes result from the Governor's across-the-board reductions to categorical programs in K-12 education in the budget year.

What Are the Spending Requirements of Proposition 49?

Proposition 49 requires a "continuous appropriation" (that is, automatic year-to-year funding without further legislative action) from the General Fund beginning in 2004-05 for the After School Education and Safety Program. The annual amount of this appropriation would depend on growth in General Fund spending outside of Proposition 98, but not to exceed $550 million. Specifically,

• If General Fund spending on non-Proposition 98 programs will exceed by at least $1.5 billion the highest amount spent in any year between 2000-01 and 2003-04, then the state must increase funding for the after school program beyond its 2003-04 funding level. Once funding reaches $550 million, no further increases are required.
• Otherwise, the state is required to provide at least the same level of funding to the program as provided in the preceding fiscal year.

Thus, the minimum amount of the continuous appropriation starting in 2004-05 is the level of program funding the Legislature provides in 2003-04. (As discussed above, the Governor's budget proposes $107.3 million for the program.) According to Proposition 49, any annual increase in this amount would not count towards meeting the state's minimum funding requirement for Proposition 98 for that year. In effect, Proposition 49 would thus require the state to "over-appropriate" Proposition 98's minimum requirement. This would result in an increase in the annual level of state appropriations for K-14 education and would leave less money available for other General Fund supported programs.

When Will the State Be Required to Increase Funding?

In view of the significant General Fund budget shortfall facing the state, we believe that it is unlikely that additional funding would be required for the After School Education and Safety Program (Proposition 49) in 2004-05 and 2005-06.

Figure 3 summarizes General Fund spending on programs that do not count towards the Proposition 98 funding guarantee for K-14 education. Under the Governor's budget proposal, General Fund (non-Proposition 98) spending is the highest in 2000-01 at $48.1 billion during the base years specified in Proposition 49. This means that General Fund spending on non-Proposition 98 programs must reach at least $49.6 billion ($48.1 billion plus $1.5 billion), in order for the proposition's funding formula to "trigger" in 2004-05 or any subsequent year. We note, however, that the Governor's budget reduces state spending on non-Proposition 98 programs to $34.5 billion. (Over $7 billion of this reduction stems from the Governor's proposal to realign non-Proposition 98 programs.) As a result, Proposition 49 would require additional funds for the program in 2004-05 (the first year of the proposition's funding requirements) only if General Fund non-Proposition 98 spending increases by $15.1 billion from the proposed 2003-04 level.

We believe that it is unlikely that additional funding would be required for the After School Education and Safety Program in 2004-05 and 2005-06, given the current budget situation.