The 2023-24 Budget: Child Care Proposals

2023-24 BUDGET The 2023-24 Budget: Child Care Proposals GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2023 SUMMARY This brief provides an overview and initial analysis of the Governor’s key child care budget proposals for 2023-24, estimates of child care program costs, and the effects of allowing some temporary policies to expire. Governor’s Budget Proposal to Delay Child Care Slot Increase Seems Reasonable. The 2021-22 budget agreement included a plan to add 200,000 child care slots by 2025-26. Since 2021-22, the state has added about 146,000 new slots, which more than doubled the number of subsidized slots in the state. The state partially funded these new slots with one-time federal relief funds. The Governor’s budget proposes to delay the planned child care slot increases by one year, resulting in $134 million in General Fund savings in 2023-24. The administration intends to resume adding new slots in 2024-25, reaching the overall 200,000 new slots goal by 2026-27. We find that the Governor’s budget proposal is reasonable because (1) the state is facing a projected budget problem, and (2) the majority of funding for new slots has not yet been allocated to child care providers. Overall, we do not expect access to child care to be significantly impacted given the amount of currently unfilled slots. Seeking Clarification From Department of Social Services (DSS) on Key Questions Regarding Child Care Expenditures. We are still seeking clarification on key questions about child care expenditures, including, but not limited to, (1) how all federal relief funds are allocated, (2) how much federal relief funds would be freed up in the current year due to not all new slots being filled, and (3) whether the administration would fully backfill additional Proposition 64 revenue losses in 2023-24 and future years to keep child care Proposition 64 funding levels flat. Based on the information we receive from DSS, we may identify additional savings or costs in the child care program. Potential Savings the Legislature Could Immediately Capture in Budget for Other Legislative Priorities. These potential savings include: (1) as much as roughly $800 million savings in 2022-23 resulting from delays in allocating 2021-22 slot increases, (2) $80 million to $100 million in excess funding related to allocating a cost-of-living adjustment to certain child care providers, and (3) several hundreds of millions of dollars in one-time federal relief fund savings across 2022-23 and 2023-24. We are in the process of verifying these potential savings with DSS and will update the Legislature as more information becomes available. Consider Merits of Maintaining Temporary Changes to Family Fees and Reimbursement Flexibilities. During COVID-19, the federal government allowed the state to waive family fees. Additionally, the state modified reimbursement rules so that (1) child care providers receiving payments through vouchers were funded based on the maximum hours they were certified to care for enrolled children, rather than attendance, and (2) providers that directly contract with the state received 100 percent of their maximum reimbursable contract amount or actual reimbursable program costs, whichever is less. The expiration of the family fee waiver likely will create barriers to care for low-income families who are not able to afford these fees. The Legislature could ask the administration the benefits and trade-offs of different ways to mitigate the access barriers created by family fees. We also find that maintaining some form of reimbursement flexibility for voucher-based providers has merit, but maintaining the flexibility for direct contract providers is not aligned with the goal to maximize children served. www.lao.ca.gov 1 2023-24 BUDGET INTRODUCTION In this brief, we provide an overview of the (3) increase funding levels for certain child care Governor’s budget proposals related to child care programs based on an 8.13 percent cost-of-living programs administered by the DSS. Specifically, adjustment (COLA); and (4) allow for the expiration we analyze the Governor’s proposals to (1) delay of temporary COVID-19 relief activities, including planned child care slot increases by one year; family fee waivers and reimbursement flexibilities. (2) continue to use one-time federal relief funds; BACKGROUND State Subsidizes Child Care, Primarily Subsidized Child Care Costs Primarily Split for Low-Income Families. Most of the state’s Between Federal Government and the State. subsidized child care is administered by DSS The state uses federal Temporary Assistance for through three programs: (1) California Work Needy Families/Title XX funds to partially cover Opportunity and Responsibility to Kids (CalWORKs) CalWORKs child care costs. Additionally, the state child care, (2) the Alternative Payment (AP) program, uses federal Child Care and Development Fund and (3) General Child Care (GCC). As Figure 1 (CCDF) dollars to partially cover AP program and shows, these programs have different eligibility GCC costs. As a condition of receiving CCDF requirements and payment models. CalWORKs dollars, the state must spend a portion of funds on child care programs focus on families enrolled in activities intended to improve the quality of child or transitioning out of CalWORKs welfare-to-work care and establish a sliding fee scale for families activities. The remaining programs are primarily receiving federally funded subsidized child care. designed for low-income, working families that The state’s share of costs for child care programs have not participated in CalWORKs. Families are are primarily funded with General Fund. eligible for subsidized child care if they have a family State Also Funds Child Care Using income of less than 85 percent of the state median Proposition 64 Revenue. In November 2016, income ($82,102 annual income for a family of three California voters approved Proposition 64, and $95,289 annual income for a family of four). which legalized the nonmedical use of cannabis. State Funds Child Care Programs in Different Ways. Figure 1 The state funds CalWORKs State’s Major Child Care Programs child care and the AP program Program Payment Type Key Eligibility Requirements through voucher payments. That is, the state provides funds CalWORKs Voucher • Family is low income. Child Care • Parent(s) work or are in school. to administering entities—either • Child is under age 13. county welfare departments or • Slots are available for all eligible children. AP agencies—which make child Alternative Voucher • Family is low income. care voucher payments to child Payment • Parent(s) work or are in school. care providers on behalf of eligible • Child is under age 13. families. In the case of GCC, the • Slots are limited based on annual budget appropriation. state contracts directly with child General Child Direct contract • Family is low income. care providers to serve a specified Care • Parent(s) work or are in school. number of eligible children. • Child is under age 13. • Slots are limited based on annual budget appropriation. 2 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Proposition 64 revenues are allocated based on The state also used the funds for a variety specific formulas. A portion of Proposition 64 of other one-time or temporary purposes, revenues are deposited into the Youth Education, including temporary stipends and supplemental Prevention, Early Intervention and Treatment rate increases. Account (Youth Account), which funds child care, State Temporarily Modified Two Key Policies. cannabis surveillance and education, local prevention These actions were first implemented in 2020-21 programs, and youth community access grants. and are set to expire at the end of 2022-23. Since 2019-20, the state has provided 75 percent of First, the state temporarily waived the requirement total Youth Account funds (minus $12 million that is that certain families pay a fee to receive subsidized earmarked for cannabis surveillance and education child care. (The federal government granted states activities) for AP and GCC slots. temporary authority to waive these fees during California Received Over $5 Billion in the pandemic.) Second, the state modified its Temporary COVID-19 Federal Relief Funds for reimbursement policies to minimize the effects of Child Care. During COVID-19, the federal government pandemic-related attendance declines on child enacted three relief packages. Across these care programs (referred to as reimbursement relief packages, the state received over $5 billion flexibilities). Voucher-based providers were funded in one-time federal funds to support child care based on the maximum hours they were certified to programs. The state must expend $3.7 billion by care for enrolled children, rather than attendance. September 2023 and most of the remaining $1.4 billion Direct contract providers were funded based by September 2024. The state has used these federal on 100 percent of their maximum reimbursable funds on various child care program activities. Most contract amount or actual reimbursable program notably, the state used these funds to temporarily costs, whichever is less. (Typically, direct contract support provider rate increases and additional child provider reimbursement is also generally based on care slots (discussed more in the next section). the attendance of eligible children.) RECENT CHANGES TO CHILD CARE SLOTS AND RATES 2021-22 Budget Agreement Intended to Given the RFA process for direct contract providers Add 200,000 Child Care Slots by 2025-26. takes more time to administer, GCC slots were Since 2021-22, the state has added about funded assuming contractors would not begin 146,000 new slots (from about 108,000 to about serving additional children until the last two or three 254,000). These child care slots were split between months of the fiscal year. the voucher-based program (about 96,000) and State Increased Child Care Provider Rates the direct contract programs (about 50,000). In the in Recent Years. Historically, the state has used voucher-based child care program, contracts with two different provider rates: the Regional Market AP agencies are proportionally increased to reflect Rate (RMR) and the Standard Reimbursement Rate the additional funding for the new slots. In the case (SRR). The RMR varies based on the county in which of GCC providers, DSS awards funding for new slots the child is served and is based on regional market through a request for application (RFA) process. surveys of a sample of licensed child care providers. In the first year of funding, the state provided The SRR is the same rate for providers across the partial year funding to reflect the time necessary state. Historically, the voucher-based child care for DSS to provide the funds to AP agencies programs received the RMR while direct contract and GCC providers. For voucher slots, the state child care providers received the SRR. In 2021-22, provided nine months of funding, assuming the state increased rates for voucher-based providers slots would be issued beginning in October. to the 75th percentile of the 2018 market survey. www.lao.ca.gov 3 2023-24 BUDGET (The state was previously using the 75th percentile an increase in total program funding to AP of the 2016 survey.) In addition, the state shifted agencies. This effectively operates as a slot direct contract providers to the RMR to the extent increase. The 2022-23 budget followed this the RMR was higher than the SRR. Currently, the longstanding practice by increasing total program state still provides a statutorily required annual funding by 6.56 percent (same value as the COLA—the same rate provided to K-12 education SRR rate COLA) for AP agencies. programs—to the SRR. The 2022-23 budget 2022-23 Budget Included Backfill for included a 6.56 percent COLA to the SRR. Potential Decline in Proposition 64 Revenue. The state typically has not provided annual rate As part of the 2022-23 budget package, the state COLAs to providers whose rates are based on the eliminated the cannabis cultivation tax, which RMR. These providers typically only receive rate provided roughly one-fifth of Proposition 64 tax increases when the state takes action to increase revenue. Recognizing the resulting fiscal risk, the the RMR (usually by using a higher percentile of the budget package also established a target funding RMR or updating to a more recent survey). level for programs that receive Proposition 64 State Also Increased Total Funding Levels revenues (the “2020-21 baseline”) and included for Voucher-Based Providers in 2022-23 provisions intended to keep funding from falling Budget. While the state typically does not apply below that target. For example, the budget package the annual SRR COLA to providers whose rates included $150 million one-time General Fund that are based on the RMR, the state’s longstanding the State Controller’s Office (SCO) could transfer to budgeting practice is to apply the same COLA as Proposition 64 programs in 2023-24 and 2024-25. GOVERNOR’S BUDGET PROPOSAL Budget Provides $6.6 Billion for Child Care Continues to Use One-Time COVID-19 Federal Programs in 2023-24. As Figure 2 shows, Relief Funds to Cover Costs for Rate and Slot the Governor’s budget includes $6.6 billion for Increases. The Governor’s budget allocates subsidized child care programs, a decrease of $1.5 billion one-time federal funds in 2022-23 and $802 million (or 10.9 percent) compared to the $930 million in 2023-24 to cover costs associated previous year. The change consists of $500 million with rate and slot increases. The administration has in increases, offset by the expiration of $1.3 billion indicated that slot and rate costs previously covered in temporary spending. with federal relief funds will shift to the General Fund Annualizes Costs for 2022-23 Slots and as one-time federal funding is exhausted. Delays Planned 2023-24 Slot Increase. Provides $303 Million General Fund to Apply The Governor’s budget includes an additional an 8.13 Percent COLA to Certain Child Care $149 million in 2023-24 to capture the annualized Programs. Figure 3 lists the various child care costs of new slots added in 2022-23. Additionally, programs and activities that are currently budgeted to the Governor’s budget proposes to delay the receive a COLA and the associated costs. In general, planned increases in child care slots by one year— the cost of the COLA reflects 8.13 percent of total meaning no new slots would be added in 2023-24, 2022-23 costs for GCC, AP, and other child care resulting in $134 million in General Fund savings programs activities. The effect of the COLA-related in 2023-24. The administration intends to resume augmentation, however, varies by program. For GCC adding new slots in 2024-25, reaching the overall and other direct contract programs, funding will be 200,000 new slots goal by 2026-27. used to provide rate increases to those providers that receive the SRR. (Providers receiving the RMR would not receive a rate increase.) For the AP program, the COLA will be applied as an increase in total program funding, which effectively operates as a slot increase. 4 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Figure 2 Child Care Budget As Reflected in 2023-24 Governor’s Budget (In Millions) Change From 2022-23 2021-22 2022-23 2023-24 Reviseda Revisedb Proposedb Amount Percent Expenditures CalWORKs Child Care Stage 1 $381 $518 $524 $6 1.2% Stage 2c 290 314 364 50 16.1 Stage 3 643 636 606 -30 -4.7 Subtotals ($1,314) ($1,467) ($1,494) ($27) (1.8%) Non-CalWORKs Child Care Alternative Payment Program $1,252 $1,866 $2,101 $234 12.5% General Child Cared 750 1,750 1,960 210 12.0 Bridge program for foster children 54 97 115 18 18.7 Migrant Child Care 65 69 75 6 8.1 Care for Children With Severe Disabilities 2 2 3 — 8.1 Subtotals ($2,123) ($3,784) ($4,252) ($468) (59.4%) Support Programs $1,443 $2,139e $842 -$1,297 -60.6% Totals $4,881 $7,390 $6,588 -$802 -10.9% Funding Proposition 98 General Fundf $2 $2 $2 —g 8.1% Non-Proposition 98 General Fund 1,671 2,835 2,729 -$106 -3.7 Proposition 64 Special Fund 295 292 292 — — Federal 2,914 4,261 3,564 -697 -16.3 a Reflects administration’s revised estimates for CalWORKs Child Care and budget appropriation for all other programs. b Reflects 2023-24 Governor’s Budget estimates. c Does not include $11.1 million provided to community colleges for certain child care services. d Includes family child care home education networks. e Includes cost estimates for child care infrastructure; Child and Adult Care Food Program; and AB 131, AB 185, SB 116 supplemental rates. f Reflects Proposition 98 funds for Child and Adult Care Food Program. g Less than $500,000. (This has been the state’s longstanding practice Figure 3 for the AP program.) The estimate of the COLA will 2023-24 COLAa Costs be finalized as part of the May Revision. for Certain Child Care Programs Assumes Proposition 64 Funding for Child As Reflected in 2023-24 Governor’s Budget Care Will Remain Flat. The Governor’s budget (In Millions) assumes that SCO transfers $95.7 million of the $150 million included in the 2022-23 budget to Programs and Activities COLA Costs prevent reductions to Proposition 64 programs Alternative Payment $151.7 in 2023-24. As a result, the Governor’s budget General Child Careb 142.3 assumes Proposition 64 funding levels for child Migrant Child Care 5.6 care will remain flat in 2023-24. The administration Resource and Referral 1.8 Child and Adult Care Food Program 1.5 has indicated it intends to allocate a fixed Care for Children With Severe Disabilities 0.2 amount of Youth Account funding to child Local Planning Councils — care moving forward, regardless of changes in Total $303.2 Proposition 64 revenue. a Reflects 8.13 percent cost-of-living adjustment (COLA) estimate. b Includes family child care home education networks. www.lao.ca.gov 5 2023-24 BUDGET Allows Expiration of One-Time COVID-19 Figure 4 Relief Activities, Including Family Fee Waiver and Reimbursement Flexibilities. As shown in Key COVID-19 Relief Activities Figure 4, several COVID-19 relief activities that Set to Expire on June 30, 2023 were funded with one-time federal relief funds (In Millions) in 2022-23 are set to expire June 30, 2023. This includes funding for family fee waivers and Policy 2022-23 Costs reimbursement flexibilities. We understand that the expiration of the state’s family fee waiver aligns Child care relief stipends $320 Supplemental rates 184 with when the federal government will no longer Family fee waivers 136 waive the CCDF family fee schedule requirement. Reimbursement flexibility for voucher-based 108a (Prior to the pandemic, families with income providers Resource and Referral Capacity Support 5b greater than 40 percent of the state median Licensing incentive 2 income paid family fees.) Total $755 a Reflects costs to pay voucher-based program providers based on the maximum certified hours of care for the child and costs for the COVID-19 non-operational days policy. b Reflects net amount of COVID-19 federal relief funds that will not be backfilled with General Fund in 2023-24 and ongoing. LAO COMMENTS In this section, we provide our key findings Delay in Child Care Slot Increase Seems from our analysis of the Governor’s budget Reasonable Given Projected Budget Problem. proposals. We find the Governor’s proposal to As we noted in a previous brief, the Governor’s delay child care slot increases seems reasonable budget addresses an $18 billion budget problem given the projected budget problem and delays through spending-related budget solutions, in allocating new slot funding. Additionally, we including reductions, delays, and trigger identify various ways the Legislature could provide restorations. The Governor’s proposal to delay a COLA to child care providers. With regard to the slot expansion plan by not adding additional possible cost pressures, we find that the high risk child care slots in 2023-24 would save $134 million of Proposition 64 revenues coming in lower than General Fund. The proposed delay in the slot the Governor’s budget assumption may result in expansion plan seems reasonable given state’s an additional General Fund cost. We also explore budget problem. what impact the expiration of family fee waiver and Delay in Take-Up of New Slots Not Surprising reimbursement flexibilities could have on access to Given Magnitude of Recent Increases. The child care. increases enacted over the past two years more Overall, we identify the following potential than doubled the number of slots available in savings the Legislature could immediately capture the AP program (from about 66,700 to about in the budget and redirect to other legislative 161,300) and GCC (from about 28,400 to about priorities: (1) as much as roughly $800 million 78,500). It was expected these slots would not savings in 2022-23 resulting from delayed allocation be immediately filled given the amount of time of annualized funds associated with 2021-22 slot needed by DSS to allocate funds to providers. increases, (2) $80 million to $100 million in excess Specifically, the past two budgets assumed DSS COLA funding, and (3) several hundreds of millions would require at least three months to modify of dollars in federal relief fund savings across AP agency contracts to reflect new slot funding. 2022-23 and 2023-24. We are in the process of Additionally, the past budgets assumed DSS verifying these potential savings with DSS and would not begin to award new slot funding to GCC will update the Legislature as more information providers until the last two or three months of each becomes available. fiscal year. Moreover, we have heard from providers 6 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET that even after they receive new slot funding from April 2023. However, given current contracting DSS, it takes time to advertise the additional delays, it likely would take an additional few slots, complete the required paperwork, and for months for GCC providers to actually be able families to select a child care provider. Based on to draw down the funding. Moreover, we are our conversations with child care providers, filling clarifying with DSS if the annualized amount new slots also has been challenging because of funding associated with the 2022-23 slot providers are still building up program capacity to increases ($90 million) will be fully or partially pre-pandemic levels and dealing with workforce awarded in April 2023. shortages. Overall, we do not expect access Expected One-Time Savings Due to GCC to child care to be significantly impacted by the Providers Not Spending Full Amount of New delay in the overall slot expansion plan given that Slot Funding. Given the delay in finalizing GCC providers likely will be able to serve additional contracts, it is likely that the $257 million awarded families in 2023-24 with current unfilled slots. in 2021-22 will not be fully spent in 2022-23 (and Delay Also Reasonable Given Majority possibly 2023-24). Similarly, GCC providers will of Direct Contract Funding Has Not Been not be able to fully expend $800 million in 2022-23 Allocated to Fill New Slots. As previously and likely 2023-24 since these funds will not be mentioned, the state provided funding to add available until April 2023 or possibly a few months about 50,000 new slots in GCC across 2021-22 later depending on contracting delays. Overall, and 2022-23. We understand that the majority of there may be as much as roughly $800 million in this funding has not been allocated to providers one-time budget savings in the current year, with to serve additional children. This, in part, is due to some additional savings in 2023-24 likely. We will contracting delays associated with funding awarded continue to refine our estimate of one-time savings to GCC providers in spring of 2022. Additionally, as we receive more information from DSS. DSS plans to award the majority of new slot funding Expected Growth in General Fund Backfill through the 2022-23 RFA process, meaning the for Ongoing Rate and Slot Increases After earliest these funds would be available to GCC 2023-24. One-time federal funds used to cover providers is April 2023. We describe each of these costs associated with rate increases are set to two reasons in more detail below. expire September 2023, while federal funds used • DSS Still in the Process of Finalizing to cover costs associated with slot increases are Contracts for About 8,800 New Slots. set to expire September 2024. As these one-time As a part of the 2021-22 RFA process, DSS federal funds expire, the administration intends awarded $257 million ongoing annual slot to use General Fund to backfill for these costs, funding to 114 GCC providers in the spring of resulting in higher General fund costs in 2024-25. 2022. With this funding, GCC providers could We continue to work with DSS to understand the begin filling about 8,800 slots (or roughly amount and fund source of backfill dollars included 20 percent of total new slots). We understand in 2023-24 and how these levels increase in future that DSS is still in the process of finalizing years as the remaining one-time federal funds contracts with many of these GCC providers. expire in September 2024. The additional costs are As a result, many GCC providers have not likely to be several hundreds of millions of dollars been able to draw down all of the funding in 2024-25. needed to begin to fill the new slots. We are Seeking Clarification From DSS on Key working with DSS to identify the exact number Questions Regarding Child Care Expenditures. of contracts still pending and how long it will We are still seeking clarification on key questions take to finalize these contracts. about child care expenditures. Some of these • DSS Has Not Yet Awarded Funding for questions may identify General Fund and federal Remaining 41,200 New Slots. DSS plans to relief funds that could be freed-up in 2022-23 award $800 million as a part of the 2022-23 and 2023-24 and redirected to other legislative RFA process. The earliest these funds would priorities. These questions include: be available to GCC providers would be www.lao.ca.gov 7 2023-24 BUDGET • How Does the Governor’s Budget Allocate • What Fund Source Will Be Used to Backfill Over $5 Billion in Federal Relief Funds? Federal Relief Funds Set to Expire in Based on our analysis of DSS budget September 2023? We calculate that under documents, we do not know how the the Governor’s budget, General Fund costs administration plans to use $232 million of the associated with rate and slot increases over $5 billion in federal relief funds. We are remain flat between 2022-23 and 2023-24. working with the administration to confirm This suggests that the administration is using that our estimate is correct and, if so, when another fund source to backfill federal relief and how the $232 million federal funds will funds set to expire in 2023-24. The alternative be used. Additionally, we estimate that the fund sources could be ongoing CCDF or administration has shifted hundreds of millions other federal relief funds that are set to of federal relief funds initially allocated in expire September 2024. To the extent other 2021-22 to 2022-23. We believe this is likely one-time federal relief funds are being used due to actual costs for certain child care as a backfill, these funds would need to be program changes, such as slot increases, swapped out with ongoing General Fund in coming in lower than expected. We are 2024-25. This would increase future General working with DSS to identify what program Fund costs by several hundreds of millions costs came in lower and how DSS redirected of dollars, which the administration says is the freed-up federal funds. included in their multiyear budget. We are • What Amount of Additional Federal Funds working with the administration to better Likely Will Be Freed-Up Due to Expected understand their out-year backfill projections. Current-Year Savings? Historically, child Governor’s Budget Overestimates 2023-24 care program cost estimates are not based COLA Costs for GCC. The Governor’s budget on the actual number of slots that likely will calculates COLA costs by applying the 8.13 percent be filled in a given fiscal year. Instead, the to the total costs of each child care program. In Governor’s budget fully funds each slot theory, this amount of funding reflects the costs under the assumption that all slots will be associated with providing an across-the-board filled immediately following the release of funding increase to all child care providers by funds by DSS to providers. This means that 8.13 percent. Under current law, however, only the 2023-24 funding levels technically reflect GCC providers receiving the SRR receive an costs of all 146,500 new slots being filled by increase to their rates based on COLA. We estimate July 1, 2023. However, the administration the COLA-related costs for SRR providers are acknowledges that all 146,500 new slots will $80 million to $100 million lower than budgeted by not be fully filled by the end of 2022-23 and the administration. (The final estimate of the COLA providers will continue to work on filling all will be available in the May Revision, which will new slots throughout 2023-24. As a result, impact our potential savings estimate.) actual costs associated with slot increase COLA for AP Agencies Would Result in likely will come in lower than the Governor’s Additional Slots, Running at Odds With budget cost estimates. If cost estimates Proposal to Delay Scheduled Slot Increases. for slot increases were rightsized to reflect The Governor’s proposal to increase the AP a more reasonable ramp-up assumption, program based on COLA and effectively provide then hundreds of millions of one-time federal additional AP slots is consistent with the state’s funds and General Fund would be freed-up longstanding budgeting practice for the program. in 2022-23 and 2023-24. We will continue to However, the Legislature may want to consider refine our estimate of potential savings as we taking a different approach in the budget year receive more information from DSS. considering the significant number of additional slots added in recent years and the existing barriers to get slots used in the current year. 8 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Legislature Has Various Options for • Forgo the COLA and Score General Distributing COLA-Related Funding. Fund Savings in Light of Broader Budget The Legislature could choose to apply the Problem. To the extent the projected budget COLA-related funds as proposed under the problem is worse in the May Revision, the Governor’s budget (and score the identified Legislature could forgo using the $303 million General Fund savings). This approach would in COLA-related funds to reduce total increase the number of voucher-based slots and program expenditures. would help GCC providers funded on the SRR to High Risk of 2023-24 Proposition 64 address inflationary pressure. One drawback to Revenues Coming in Lower Than Governor’s this approach is that GCC providers on the RMR Budget Assumption. As previously mentioned, would not receive any additional funding to help the Governor’s budget assumes that SCO address inflationary pressures. Below, we outline transfers $95.7 million from the General Fund different ways the Legislature could distribute to Proposition 64 programs in 2023-24 and the COLA-related funding. While some options maintains Proposition 64 funding levels for child would maximize the number of child care providers care flat in 2023-24. Based on recent declines receiving some form of a funding increase, in Proposition 64 revenue, we think there is a they would require forgoing the $80 million to high risk that revenue levels will come in lower $100 million in possible General Fund savings. than the Governor’s budget assumption. (We will • Provide an Across-the-Board Rate update our Proposition 64 revenue assessment Increase to All Child Care Providers. in late February.) As a result, the $95.7 million The Legislature could use all COLA-related assumed in the Governor’s budget might not be funds to provide a rate increase to all child enough to maintain overall 2023-24 Proposition 64 care providers, regardless of program and funding levels. The Legislature may want to ask reimbursement rate type. The state would the administration if SCO will transfer a greater need to direct the COLA-related funding for amount of the available $150 million General Fund AP agencies to be used for rate increases in 2023-24 if Proposition 64 revenue is lower than rather than additional slots. the Governor’s budget estimate. To the extent • Reduce the Gap Between the RMR and that the Proposition 64 revenue shortfall exceeds SRR. Currently, GCC providers can receive $150 million, the Legislature would need to either the RMR or SRR, whichever is higher. consider whether to appropriate additional General Consistent with current law, the Governor’s Fund to backfill funding to child care and other budget would only provide a rate increase to Proposition 64 funded programs. GCC providers receiving the SRR, resulting More Details Needed on Administration’s in a larger gap between the RMR and SRR Plan for Using Proposition 64 Funding for Child among GCC providers. The Legislature could Care in Out-Years. Based on our conversations address this gap by only providing a rate with the administration, the intent is to maintain increase to providers receiving the RMR and Proposition 64 funding levels for child care at target keeping SRR levels flat. (This approach would baseline levels on an ongoing basis, irrespective of require statutory changes.) Proposition 64 revenue. (We are still confirming with • Redirect COLA-Related Funds for Another the administration on the exact amount of the target Child Care Program Purpose. Rather than baseline level for child care.) However, it is unclear use COLA-related funds to provide rate and to us how this can be guaranteed since the current slot increases to certain child care programs General Fund backfill is temporary. To the extent and activities, the Legislature could redirect that a backfill is not provided in future years where the $303 million General Fund for other Proposition 64 revenues are low, this would result legislative priorities. For example, the funds in a reduction to child care slots. The Legislature could be used to backfill any additional will want to ask the administration how it intends Proposition 64 revenue losses included in the to ensure that Proposition 64 funding levels remain May Revision. flat in child care in cases where Proposition 64 www.lao.ca.gov 9 2023-24 BUDGET revenues decrease after 2024-25. For example, While Maintaining Some Form of would the administration propose an additional Reimbursement Flexibility for Voucher-Based General Fund backfill or reduce the Proposition 64 Program Has Merit… The reimbursement flexibility funding allocation to other Youth Account enacted during COVID allowed voucher-based programs? Additionally, based on our conversations providers to receive more predictable child care with the administration, there may be as much as payments. Prior to COVID-19, voucher-based child $185 million in carryover Proposition 64 funds that care payments would be based on the actual hours were allocated to child care in prior years. The of care provided to a child. Providers that served Legislature could ask the administration for greater families who did not always use all of the care they information on how it plans to spend Proposition 64 were authorized would experience fluctuations in funds moving forward, and for greater detail on the their payments. We have heard from stakeholders total amount of carryover funds and use of these that the general unpredictability of how many hours carryover funds in the budget year and beyond. of care a family would ultimately use in any given Explore Ways to Mitigate Access Barriers month may deter some child care providers from Resulting From Family Fees. The specific fees enrolling families that receive vouchers. Maintaining families pay vary by family size and family income. the temporary reimbursement flexibility enacted For example, a family of four with annual income during COVID-19 may improve the chances of of $48,000 would pay $104 a month for full-time providers enrolling subsidized families. Alternatively, child care (or $52 a month for part-time child care), the Legislature could explore other ways to improve while a similarly sized family with annual income the predictability of voucher-based payments. of $60,000 would pay $356 a month for full-time …Existing Reimbursement Flexibility for child care (or $178 for part-time child care). The Direct Contract Providers Does Not Align With expiration of the family fee waiver likely will create Goal to Maximize Children Served. However, we barriers to care for low-income families who are do not see as strong of a rationale for continuing not able to afford family fees. (Families that began the existing reimbursement flexibility for direct receiving subsidized child care during the pandemic contract providers. Although continuing the policy may not be aware that the state has typically would provide more fiscal stability for child care assessed fees.) The Legislature may want to ask providers as they are trying to fill all their slots, it the administration to report on how big of a barrier would not address the root causes of why providers they expect the expiration of the family fee waiver are struggling with filling slots (such as workforce will have on families seeking child care. Additionally, shortages or parents electing to enroll their child in the Legislature could ask the administration the transitional kindergarten). Additionally, the policy benefits and trade-offs of different ways to mitigate does not incentivize providers to fill child care slots the access barriers created by family fees. For and disconnects program funding from the number example, the Legislature could explore other of children served. The Legislature may want to options that reduce the negative effects of family ask the administration if there are other ways the fees, such as modifying the family fee schedule so state could help providers maximize the amount that fewer families have to pay a fee and/or capping of funding they receive (ideally by providing child fees at a more affordable level (similar to legislation care to as many children as possible) while also that was vetoed by the Governor in September maintaining the right program incentives. 2022). In exploring options, the state will want to work with the federal government to ensure the state remains in compliance with CCDF rules. 10 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET www.lao.ca.gov 11 2023-24 BUDGET LAO PUBLICATIONS This report was prepared by Jackie Barocio, and reviewed by Edgar Cabral and Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 12 LEGISLATIVE ANALYST’S OFFICE