The 2024-25 Budget: Child Care

2024-25 BUDGET The 2024-25 Budget: Child Care GABRIEL PETEK | LEGISLATIVE ANALYST | APRIL 2024 SUMMARY This brief analyzes key Governor’s budget proposals related to various child care and development programs administered by the Department of Social Services (DSS). Seems Reasonable to Rightsize General Child Care and Development (CCTR) Budget Based on Awarded Slots. Between 2020-21 and 2022-23, the state approved adding up to 50,080 new CCTR slots, increasing ongoing program costs by $1.1 billion. However, as of March 2024, only 21,194 of the 50,080 new slots have been awarded to providers. The Governor’s budget proposes to reduce CCTR funding levels to only reflect costs associated with the estimated number of awarded slots, resulting in $662 million total savings in 2023-24 and $385 million total savings in 2024-25 relative to the 2023-24 Budget Act. (These savings are partially offset by costs associated with other proposed program changes.) Given the projected budget deficit, we believe it is reasonable to rightsize the CCTR budget to only reflect the amount of funding needed to implement the estimated number of awarded CCTR slots. Recommend Rejecting Proposed Changes to Budgeting Process for New Child Care Slots and Developing an Alternative Approach. Historically, the Legislature would reach an agreement with the administration on the maximum number of new CCTR slots to be added in any given fiscal year and prospectively appropriate the necessary funds for DSS to award and implement all of the agreed upon slots. To rightsize the CCTR funding levels, the Governor’s budget proposes various changes to current budgeting practices and the implementation time line for new CCTR slots. These changes would significantly reduce legislative oversight and input over the slot expansion plan. Specifically, the proposed CCTR time line changes would allow DSS to issue annual requests for applications (RFAs) and award slots without the necessary legislative funding authority. While these changes would result in some initial General Fund savings, we do not believe the savings outweigh the trade-off of side stepping the legislative budget process. We recommend the Legislature reject the Governor’s proposal. The Legislature could continue to use existing budgeting practices or develop an alternative approach to achieve the same savings. Recommend Directing Administration to Prioritize Spending COVID-19 Relief Funds to Minimize Federal Reversion and Maximize General Fund Savings. During the COVID-19 pandemic, the state received over $5 billion in one-time federal funds to support child care programs. Most of these funds expired September 30, 2023. The department is currently spending down the remaining $1.4 billion that expire September 30, 2024. Any unspent funds revert back to the federal government. We estimate that roughly $450 million of COVID-19 relief funds may remain unexpended by the end of 2023-24. We recommend the Legislature request the administration provide an updated May Revision estimate on (1) the total amount of COVID-19 relief funds (including funds obligated in prior years) that would likely go unspent by the end of 2023-24, and (2) what amount of these unspent funds could be used to effectively free-up General Fund in 2024-25. The Legislature could score the estimated amount of freed-up General Fund as budget savings. Recommend Consideration of Additional Budget Solutions. Given the deterioration in the state’s budget, additional solutions would help the Legislature close the deficit. Beyond the budget solutions included in the Governor’s budget, we identify roughly $1 billion in additional one-time General Fund net savings across 2023-24 and 2024-25. These savings include sweeping unspent 2023-24 funds and offsetting General Fund costs with newly available federal funds and carryover funds. (These savings would be partially offset by higher costs associated with collective bargaining agreement, required quality improvement activities, and previously awarded slots.) www.lao.ca.gov 1 2024-25 BUDGET INTRODUCTION In this brief, we analyze the Governor’s (1) ramp-up assumptions and costs associated budget proposals related to child care programs with the multiyear child care slot expansion plan, administered by DSS. (None of the child care (2) Proposition 64 funding levels, (3) federal fund and development proposals were addressed expenditures, and (4) implementation of the current in early action.) We provide background on collectively bargained child care Memorandum child care programs and an overview of total of Understanding (MOU) and parity agreement. expenditures and budgeted slots included We also identify potential budget solutions the in the Governor’s budget. We then analyze Legislature could consider beyond what is include key Governor’s budget proposals related to in the Governor’s budget. BACKGROUND State Subsidizes Child Care, Primarily for Low-Income Families. As shown in Figure 1, the Figure 1 state administers various child care Overview of Child Care Programs and development programs. Most Program Descriptiona of the state’s subsidized child care CalWORKs Child Care Provides subsidized child care services to current and is administered by DSS through former CalWORKs families. Slots are available to all three programs: (1) California Work children. Opportunity and Responsibility to California Alternative Provides subsidized child care vouchers to working families. Kids (CalWORKs) child care, (2) the Payment Program Slots are limited to budget appropriation. California Alternative Payment General Child Care Directly contracts with center-based and licensed family Program (CAPP), and (3) the CCTR and Development child care providers to serve working families eligible for subsidized care. Slots are limited to budget appropriation. program. CalWORKs child care CFCC Family Child Directly contracts with consortia of licensed family child care programs focus on families enrolled Care providers to serve working families eligible for subsidized in or transitioning out of CalWORKs care. Slots are limited to budget appropriation. welfare-to-work activities. Migrant Child Care Provides subsidized child care services to migrant families The remaining programs are working in agriculturally related industries.b Services are provided throughout the Central Valley. Slots are limited to primarily designed for low-income, budget appropriation. working families that have not Care for Children Provides additional access to child care services for children participated in CalWORKs. For With Severe under the age of 21 years and with exceptional needs.c example, the state operates the Disabilities Program is located in the San Francisco Bay Area. Slots are limited to budget appropriation. Migrant Alternative Payment Emergency Child Provides temporary child care services to children in foster Program (CMAP) and Migrant Child Care Bridge care system and under age 13. Child care services Care and Development Program are temporary until family finds longer-term child care that specifically serve migrant solution.d families that work in agriculturally a Unless otherwise specified, child must be under age 13 and families must earn at or below 85 percent of the state median income to be eligible for subsidized child care programs. For related industries. Overall, families example, a family of three cannot earn more than $83,172 annually in 2023-24 to be eligible for programs. are eligible for subsidized child care b Family earned at least 50 percent of their total gross income from employment in fishing, agriculture, if they have a family income of less or agriculturally related work during the 12 months immediately preceding the date of application for services. than 85 percent of the state median c Child must have an individualized education program or an individualized family service plan issued income ($83,172 annual income through a special education program. d Child care services provided up to 12 months, but may be extended for a compelling reason. for a family of three and $96,300 annual income for a family of four). 2 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Subsidized Child Care Costs Split Between About $3.6 billion of the COVID-19 relief funds Federal Government and the State. The state’s expired on September 30, 2023. The remaining subsidized child care programs are primarily $1.4 billion in COVID-19 relief funds were obligated funded with state General Fund, with a substantial by September 30, 2023 and need to expended by portion of costs also covered by various federal September 30, 2024. funding sources. The state uses federal Temporary State Also Funds Child Care Using Assistance for Needy Families/Title XX funds Proposition 64 Revenue. In November 2016, to partially cover CalWORKs child care costs. California voters approved Proposition 64, Additionally, the state draws down federal Title which legalized the nonmedical use of cannabis. IV-E funds to partially cover Emergency Child Care Proposition 64 created two excise taxes on Bridge program costs—referred to as the Bridge cannabis: a retail excise tax and a cultivation tax. program—and federal Child Care and Development Chapter 56 of 2022 (AB 195, Committee on Budget) Fund (CCDF) dollars to partially cover CAPP and eliminated the cultivation tax on July 1, 2022. CCTR program costs. As a condition of receiving Proposition 64 revenues are allocated based on CCDF dollars, the state must spend a portion of specific formulas. A portion of Proposition 64 these dollars on activities intended to improve the revenues are deposited into the Youth Education, quality of child care and establish a sliding fee scale Prevention, Early Intervention, and Treatment for families receiving federally funded subsidized Account (Youth Account), which funds child child care. care, cannabis surveillance and education, local California Received Over $5 Billion in prevention programs, and youth community Temporary COVID-19 Federal Relief Funds access grants. Since 2019-20, the state has for Child Care. During the COVID-19 pandemic, provided 75 percent of total Youth Account funds the federal government enacted three relief (minus $12 million that is earmarked for cannabis packages. Across these relief packages, the state surveillance and education activities) for CAPP received over $5 billion in one-time federal funds and CCTR slots. Proposition 64 revenues are to support child care programs. These funds continuously appropriated, meaning that they are must be obligated and liquidated by specific allocated by the administration and are not subject federal deadlines. Any unobligated or unliquidated to the legislatively driven annual budget process. funds revert back to the federal government. GOVERNOR’S BUDGET PROPOSALS Governor Proposes $7.2 Billion for Child Care 2024-25 ($336 million total savings). Additionally, Programs in 2024-25. As shown in Figure 2 on we estimate the Governor’s budget shifts about the next page, we estimate the Governor’s budget $900 million in program costs to the General Fund increases total funding levels for child care in 2024-25 as a result of the expiration of COVID-19 programs in 2024-25 by $510 million (8 percent) federal relief funds. As shown in Figure 3 on relative to revised 2023-24 levels—from $6.7 billion page 5, under the Governor’s budget, proposed to $7.2 billion. The year-over-year net increase funding would support about 374,000 child care in child care expenditures reflects the net effect slots in 2023-24 and 422,000 child care slots in of cost increases, savings, and cost shifts. For 2024-25. The year-to-year slot increase includes example, the Governor’s budget includes about projected growth in CalWORKs child care programs $460 million to increase CCTR and CAPP slots (about 17,200 net slot increase) and scheduled in 2024-25. These costs increases are partially slot increases in CAPP and CCTR (28,000 total offset by the expiration of one-time funding in slot increase). www.lao.ca.gov 3 2024-25 BUDGET Figure 2 Child Care Budget (Dollars in Millions) Change From 2023-24 2022-23 2023-24 2024-25 Reviseda Revisedb Proposedb Amount Percent Expenditures CalWORKs Child Care Programs Stage 1 $532 $649 $709 $61 9% Stage 2c 310 470 691 221 47 Stage 3 608 604 572 -31 -5 Subtotals ($1,450) ($1,723) ($1,973) ($250) (15%) Non-CalWORKs Child Care Programs Alternative Payment $1,834 $2,054 $2,242 $189 9% General Child Care and Developmentd 960 1,204 1,500 296 25 CFCC Family Child Caree 53 54 54 —f 1 Emergency Child Care Bridge 97 94 94 — — Migrant Child Careg 69 71 71 —f — Care for Children With Severe Disabilities 2 2 2 —f 2 Subtotals ($3,015) ($3,478) ($3,964) ($486) (14%) Support Programs $2,187 $1,539h $1,313i -$226 -15% Totals $6,653 $6,740 $7,250 $510 8% Funding Proposition 98 General Fundj $2 $3 $2 -$1 -37% Non-Proposition 98 General Fund 2,275 3,283 4,756 1,473 45 Proposition 64 Special Fund 292 270 247 -23 -8 Federal 4,084 3,183 2,245 -938 -29 a Reflects 2023-24 May Revision estimates with LAO adjustments. b Reflects 2024-25 Governor’s Budget. c Does not include $11.2 million provided to community colleges for certain child care services. d Reflects funding for centers and family child care home education network providers operating through general child care and development contract. e Reflects funding for family child care home education networks operating through CFCC contract. f Less than $500,000. g Reflects costs associated with Migrant Child Care and Development program and Migrant Alternative Payment program. h Includes cost estimates for quality programs, child care infrastructure, Child and Adult Care Food Program, CCPU Retirement Benefit Trust, accounts payable, whole child community equity, court cases, and costs associated with 2023-24 collective bargaining and parity agreement. i Includes cost estimates for quality programs, Child and Adult Care Food Program, accounts payable, whole child community equity, and costs associated with 2023-24 collective bargaining and parity agreement. j Reflects Proposition 98 funds for Child and Adult Care Food Program. CCPU = Child Care Providers United. We Estimate Roughly $700 Million of Child child care funds. Specifically, the administration Care Funds May Go Unspent by the End of estimates that about $1.4 billion of the funds that 2023-24. As a part of the 2023-24 budget, the were obligated to be expended in 2023-24 and have Legislature adopted supplemental reporting been put into contract remain unspent as of the end language that required DSS to provide, on or before of January 2024. To the extent monthly expenditure March 1, 2024, an estimate of child care program trends continue at current levels, we estimate that funds that may go unspent by the end of 2023-24 roughly $700 million ($450 million COVID-19 federal and what amount of unspent funds cannot be relief funds and $250 million other funds) could go reappropriated and would revert back to the state unspent by the end of 2023-24. (In later sections or federal government. Thus far, the administration we discuss in more detail the slower than expected has provided a point-in-time estimate of unspent expenditure trends in certain fund sources.) 4 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Figure 3 Child Care Subsidized Slots Change From 2023-24 2020-21 2021-22 2022-23 2023-24 2024-25 Final Revised Revised Revised Proposed Amount Percent CalWORKs Child Care Stage 1 25,018 29,066 48,095 58,322 63,241 10,227 18% Stage 2 55,484 25,718 26,705 38,427 57,220 11,722 31 Stage 3 66,073 62,464 56,191 51,421 47,782 -4,770 -9 Subtotals (146,575) (117,248) (130,991) (148,170) (168,243) (17,179) (12%) Non-CalWORKs Programs Alternative Payment 66,712 129,332 161,332 161,332 177,332 16,000 10% General Child Care and 28,375 37,179 49,569 49,569 61,569 12,000 24 Developmenta CFCC Family Child Careb 3,816 3,816 3,816 3,816 3,816 — — Emergency Child Care Bridge 5,037 5,537 5,537 5,537 5,537 — — Migrant Child Carec 3,962 5,262 5,262 5,262 5,262 — — Care for Children with Severe 111 111 111 111 111 — — Disabilities Subtotals (108,013) (181,237) (225,627) (225,627) (253,627) (28,000) (12%) Totals 254,588 298,485 356,618 373,797 421,870 45,179 12% a Reflects slots for centers and family child care home education network providers operating through general child care and development contract. b Reflects slots for family child care home education networks operating through CFCC contract. c Reflects slots for Migrant Child Care and Development program and Migrant Alternative Payment program. Note: Reflects Department of Social Services slot estimates. Under the 2024-25 Governor’s Budget, the number of budgeted slots in each program reflects projections of filled or awarded slots beginning in 2021-22, which is different from historical budgeting practices. Stage 2 does not include certain community college child care slots (less than 1,000 slots annually). Budget Includes Four Major Child Care CHILD CARE SLOT Proposals. The Governor’s budget includes EXPANSION PLAN four major child care proposals that change implementation of existing policies, update Background estimates of certain funding sources, and provide Legislature and Administration Agreed updated estimates of certain costs. In the rest of Upon Multiyear Child Care Slot Expansion this brief, we cover these proposals in more detail. Plan in 2021-22. The 2021-22 budget agreement LAO Bottomline: Recommend Consideration intended to increase the number of child care of Additional Budget Solutions. Given the slots by 206,500 across CAPP (142,620 slots), projected budget deficit, we recommend the CCTR (62,080 slots), CMAP (1,300 slots), and Legislature (1) proactively revert any unspent Emergency Child Care Bridge (500 slots). Initially, General Fund dollars from the 2023-24 fiscal year, these new slots were expected to be fully rolled and (2) explore ways to offset General Fund costs out by 2025-26. However, as part of the 2023-24 in 2024-25 with unspent funds from other fund budget, the slot expansion plan was paused for sources. As shown in Figure 4 on the next page, we one year, delaying the full roll out to 2026-27 (see estimate these actions could yield roughly $1 billion Figure 5 on the next page). The details of the slot in one-time General Fund net savings across expansion plan are not codified in statute, but 2023-24 and 2024-25 beyond what is included in are tracked by the administration and Legislature. Governor’s budget. To get a more accurate estimate The administration estimates that sufficient funding of potential savings, we recommend the Legislature has been provided in prior budgets to fully roll out direct the administration to provide an updated all intended new CMAP and Emergency Child Care estimate of potential 2023-24 unspent funds that Bridge slots. The state is still in the process of include more recent monthly expenditure trends, rolling out all intended new CAPP and CCTR slots. uncontracted funds, and unspent COVID-19 federal relief funds from prior years that would expire on September 30, 2024. www.lao.ca.gov 5 2024-25 BUDGET Funding for New CAPP Slots Is Awarded to and administrative costs. Additional funds for new Existing Alternative Payment (AP) Agencies. CAPP slots are generally distributed proportionately DSS currently contracts with about 70 regional across existing AP agency contracts. AP agencies to administer CAPP. AP agencies’ New CCTR Funds Are Awarded Through an primary responsibilities are to determine a family’s RFA Process. DSS currently contracts directly eligibility for child care, make payments to the child with over 350 private agencies, local education care provider of a family’s choice, collect fees from agencies, tribes and tribal organizations, and other certain families, ensure families and providers local governments that provide child care through are complying with state rules and regulations, the CCTR program. Under the CCTR program, and create and maintain detailed records about child care services are provided through centers each family and provider. Total contract levels and family child care home education networks. reflect funds needed to cover program service Total contract levels reflect funds needed to cover program service and administrative costs. Additional funds for new Figure 4 CCTR slots are generally awarded Recommend Scoring Additional One-Time to providers through a competitive General Fund Savings RFA process. The department LAO Estimates (In Millions) generally releases an RFA in the fall following the legislative Additional Savings approval of additional funds to Offset costs with unspent COVID-19 federal relief fundsa $450 award new CCTR slots. Under the Offset costs with Proposition 64 carryover fundsb 415 Proactively sweep potential unspent 2023-24 fundsc 280 RFA process, providers must fill Offset costs with additional CCDFd 89 out an application explaining their Offset Emergency Child Care Bridge costs with 2022-23 carryover funds 40 program philosophy, intended Additional Costs service levels, staff qualifications, Increase funding to cover higher than estimated MOU and parity costs -$107 facility capacity, family engagement Increase funding to reflect actual CCTR award amounts -22 strategies, and finances. The Net Savings $1,145 department approves applications a Assumes funds can offset slot costs and free-up General Fund. b Reflects administration’s estimate of carryover balance by the end of 2023-24. Proposition 64 and issues slot award letters revenues are continuously appropriated, meaning the administration would need to redirect in the spring. Additionally, the carryover funds to offset General Fund costs. c Reflects rough LAO estimate of program funds that will go unspent by end of 2023-24, including department allocates funds for new estimate of $30 million unspent General Fund from the Emergency Child Care Bridge program. CCTR slots to selected providers Assumes savings from non-General Fund sources can be used to offset General Fund costs in 2023-24. by either amending existing d Reflects net amount of available CCDF dollars after backing out increase to federally required CCDF provider contracts or issuing new quality set aside (about $10 million). contracts to providers not currently CCDF = Child Care and Development Fund; MOU = Memorandum of Understanding; and CCTR = General Child Care and Development. involved in the CCTR program. Figure 5 Child Care Slot Expansion Plan Under 2023-24 Budget Acta New Slots Added by Program Programs 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 Total General Child Care and Development 46,080 4,000 — 4,000 4,000 4,000 62,080 Alternative Payment 62,620 32,000 — 16,000 16,000 16,000 142,620 Migrant Alternative Payment 1,300 — — — — — 1,300 Emergency Child Care Bridge 500 — — — — — 500 Totals 110,500 36,000 — 20,000 20,000 20,000 206,500 a Does not include proposed changes to CCTR ramp up under 2024-25 Governor’s Budget. 6 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET While previous budgets assumed CCTR contracts services until an ongoing child care slot becomes for newly awarded slots would be in place on available in the regular subsidized child care the same date as award letters are issued, it system, and (2) child care navigators to assist realistically takes DSS several months to finalize resource families in accessing long-term subsidized these contracts. child care. Additionally, the Bridge program Funding for Slot Expansion Typically Not provides participating child care providers with Fully Spent in Initial Years. After DSS allocates trauma-informed training and coaching. The Bridge and awards new CAPP and CCTR slots, it typically program is jointly administered by DSS and county takes agencies and providers a few months to ramp welfare departments. County participation in the up capacity to recruit, enroll, and serve additional Bridge program is voluntary. Currently, 48 counties children. Additionally, some budgeted new CCTR are participating in the Bridge program. Funding slots may ultimately go unawarded to the extent the for the Bridge program is capped and generally department does not receive enough applications. consists of a mix of General Fund, Proposition 64 In both cases, a portion of budgeted funds for funds, and federal Title IV-E funds. new slots would go unspent, resulting in one-time Governor’s Budget savings. Historically, the state would continue to appropriate the same amount of funding needed Modifies Ramp-Up Schedule for New to fully implement all new CAPP and CCTR slots CCTR Slots, but Continues to Assume All New regardless if the actual number of filled or awarded Slots Are Rolled Out by 2026-27. While the Governor’s budget continues to assume a total of slots fell below budgeted levels. Any unspent funds 62,080 new CCTR slots will be added by 2026-27, result in state savings in subsequent years. the administration proposes changes to how these Historically, CAPP and CCTR Contracts Are slots are phased in relative to 2023-24 Budget Not Finalized Until After Legislative Approval of Act. As a result of these and other changes to the State Budget. Overall, DSS does not release any CCTR budgeting process and RFA time line, the program funds until contracts have been finalized Governor’s budget includes, on net, $581 million and executed. In past years, DSS would not award total savings in 2023-24 and $318 million total or place into contract funds for new slots until the savings in 2024-25. We describe these changes in funds were approved and appropriated by the more detail below. Legislature through the annual budget process. For example, in 2022-23, the department began • Reduces CCTR Budget to Only Reflect to amend initial CAPP contracts after July 1, 2022 Estimated Number of Awarded Slots, with the goal of implementing all the new 2022-23 Resulting in $662 Million Total Savings slots as early as October 1, 2022. For CCTR, the in 2023-24 and $385 Million Total Savings in department released an RFA in the fall of 2022, 2024-25. Between 2020-21 and 2022-23, the with the goal of awarding and implementing state increased funding to support up new 2022-23 slots as early as April 1, 2023. The to 50,080 new CCTR slots, resulting in a department also released an RFA in the fall of $1.1 billion ongoing increase to total program 2023 and is currently in the process of determining costs. However, as of March 2024, only 21,194 provider award amounts. The 2023-24 Budget of the 50,080 new CCTR slots have been Act appropriated $1.1 billion to support up to awarded to providers. The Governor’s budget 50,080 new CCTR slots intended to be awarded proposes to reduce CCTR funding levels through these RFAs. However, only 21,194 slots in 2023-24 to only reflect costs associated with have been awarded thus far. the estimated number of awarded slots, resulting in $662 million total savings relative to Funding for Emergency Child Care Bridge the 2023-24 Budget Act. Similarly, the Allocated to Opt-In Counties. In 2017-18, the Governor’s budget proposes to fund a total of state created the Bridge program. This program 33,194 new CCTR slots in 2024-25, which is aims to stabilize foster placements by providing about 21,100 fewer slots than what would (1)time-limited vouchers for immediate child care www.lao.ca.gov 7 2024-25 BUDGET have been funded under current budgeting is about $26,380 annually (17 percent higher practices. This slot difference results in than past estimates), increasing total costs $385 million savings in 2024-25. (The 2023-24 for the slot expansion plan by $81 million in and 2024-25 savings are partially offset 2023-24. Similarly, the Governor’s budget by costs associated with other proposed assumes the annual cost per slot after program changes discussed in more detail 2023-24 is about $23,150 (3 percent higher later in this section.) than past estimates), increasing total costs for • Pushes Out Unawarded CCTR Slots From the slot expansion plan by $8 million annually 2023-24 to Later Years. As previously from 2024-25 to 2026-27. We understand mentioned, the Governor’s budget reduces that the revised cost per slot estimate reflects the number of budgeted new CCTR slots by more recent data on actual program costs. 28,886 in 2023-24—from 50,080 to 21,194— Changes Budgeting Process and Time Line to to reflect the current number of awarded Award, Put Into Contract, and Implement New slots. As shown in Figure 6, the Governor’s CCTR Slots. The Governor’s budget proposes budget assumes the 28,886 unawarded multiple changes to the timing in which new CCTR slots are phased in across 2024-25 to CCTR slots are awarded, put into contract, and 2026-27 instead. implemented. We compare the various proposed • Updates Total Costs Associated With New changes to the current time line in Figure 7. (Costs CCTR Slots Awarded in Fall 2021 RFA and in the current time line are based on 2023-24 Fall 2022 RFA to Reflect More Recent Cost Budget Act maximum slot cost estimates.) Overall, Per Slot Data. Under the 2023-24 Budget we estimate these changes eliminate the need to Act, DSS estimated each new CCTR slot provide three months of slot funding—$22 million would cost about $22,470 annually across General Fund—in the remaining years of the CCTR 2021-22 to 2026-27. The Governor’s budget slot expansion plan. We explain the proposed time estimates that the average costs of new CCTR line changes and associated cost impacts in more slots awarded between 2021-22 and 2022-23 detail below. Figure 6 Governor's Budget Pushes Out Unawarded 2023-24 CCTR Slots to Later Years The Governor's budget changes CCTR slot ramp-up schedule relative to the 2023-24 Budget Act in the following ways: 2023-24 Budget Act: 50,080 Total New Slots Reduces new CCTR slots in 2023-24 by 28,886 to only reflect awarded slots As of 2023-24 ↓ 2024-25 Governor's Budget -8,000 -8,000 -12,886 21,194 Total New Slots (21,194 awarded slots as of March 2024). 2024-25 ↑ 4,000 +8,000 Shifts 28,886 unawarded new CCTR slots from 2023-24 to 2024-25 (8,000 slots), 2025-26 (8,000 slots), and 2026-27 2025-26 ↑ 4,000 +8,000 (12,886 slots). 2026-27 ↑ 4,000 +12,886 CCTR = General Child Care and Development. 8 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Figure 7 Proposed Changes to CCTR RFA and Award Time Line Current Time Lineª Governor's Budget Time Lineb End of June 2024 Legislature approves 2024-25 budget Includes three-months of funding for slots to be awarded Does not include funds for fall 2024 RFA through fall 2024 RFA Fall 2024 DSS releases RFA to award new slots Winter 2024 RFA submission deadline January 2025 Release of 2025-26 Governor's budget Maintains $1.15 billion appropriated in 2024-25 budget to Maintains $836 million appropriated in 2024-25 budget to fund fund 54,080 new slots, including three-months of funding 33,194 new slots. for slots awarded in fall 2024 RFA. Proposes $278 million in 2025-26 to reflect annualized costs of Proposes $67 million in 2025-26 to reflect annualized costs an additional 12,000 new slots expected to be awarded and of slots awarded through fall 2024 RFA. implemented through fall 2024 RFA beginning July 1, 2025. Proposes $22 million in 2025-26 to reflect three months Does not include funds for fall 2025 RFA. of costs of an additional 4,000 new slots expected to be awarded and implemented through fall 2025 RFA beginning April 1, 2026. March 2025 DSS notifies applicants of score and if application was approved or denied April 1, 2025 DSS releases initial award letters Award letters include fall 2024 RFA funds approved by Award letters include fall 2024 RFA funds not yet approved Legislature in 2024-25 budget. by Legislature. Assumes provider contracts are finalized and awarded fall 2024 RFA slots are fully implemented. End of June 2025 Legislature approves 2025-26 budget Includes funds for fall 2025 RFA. Does not include funds for fall 2025 RFA. Beginning July 1, 2025 DSS finalizes provider contracts and assumes fall 2024 awarded slots are fully implemented. ª Reflects maximum slot cost estimates from 2023-24 Budget Act. b Reflects revised slot cost estimates from 2024-25 Governor's Budget. CCTR = General Child Care and Development; RFA = request for applications; and DSS = Department of Social Services. www.lao.ca.gov 9 2024-25 BUDGET • Assumes Later Implementation Date for necessary funding authority for the fall 2024 CCTR Slots Awarded Through Fall 2023 RFA as part of the 2025-26 budget process. RFA. Although the state did not provide As a result of no longer proactively proposing funding for new slots in 2023-24, the a three month set-aside to support future department was able to issue an RFA in the RFAs and award letters, total CCTR program fall of 2023 given the significant amount of costs decrease by $22 million General Fund in previously appropriated funding that had not 2024-25 relative to the 2023-24 Budget Act. yet been awarded to providers. As a result of • Includes Provisional Language Allowing the fall 2023 RFA, the department anticipates Administration to Increase CCTR Funding awarding at least 12,000 CCTR slots in April Levels Mid-Year. The Governor’s budget 2024. Under the state’s current budgeting proposes provisional budget language that practices, the state would have assumed would allow the Department of Finance (DOF) all of these awarded CCTR slots would be to increase CCTR funding levels mid-year if implemented in April 2024, resulting in three expenditures are “estimated to exceed the months of costs in 2023-24. However, the expenditures authorized” in the 2024-25 Governor’s budget assumes all awarded budget. While DOF would be required to CCTR slots from the fall 2023 RFA would be report any mid-year augmentations to the implemented in July 2024. As a result, the Legislature, legislative approval would not Governor’s budget does not need to provide be required for the funding augmentation to three months of slot funding in 2023-24 take effect. ($22 million General Fund). The administration Assumes DSS Would Allocate and Execute assumes the new July implementation date Contracts for Future New CAPP Slots Prior to assumption will apply to all new CCTR slots Legislative Approval. Consistent with the multiyear awarded in future years. expansion plan, the Governor’s budget proposes • Assumes DSS Would Release Future to provide 16,000 new CAPP slots in 2024-25. RFAs and Award New CCTR Slots Prior Under current budgeting practices, the department to Legislative Approval. By continuing to would have waited until after July 1, 2024 (or when appropriate funds for slots that had not yet the Legislature approves the 2024-25 budget) to been awarded, the 2023-24 Budget Act allocate the new CAPP slots and amend existing provided DSS with the necessary funding contracts to include additional funds. Under this authority to release a fall 2023 RFA and practice, the state would have assumed new slots issue award letters in the spring of 2024. would be allocated and implemented beginning We understand that DSS plans to release a October 1 and would have provided nine months’ fall 2024 RFA and issue award letters in the worth of funding in the first year of implementation spring of 2025. Based on current budgeting ($138 million General Fund). However, as shown practices, the administration would have in Figure 8, the Governor’s budget assumes new sought legislative approval to set aside at least CAPP slots will be allocated and implemented three months of new slot funding as a part beginning July 1 and provides 12 months’ worth of the 2024-25 budget process so that DSS of funding in 2024-25 ($184 million General Fund). has an authorized funding stream to release a Compared to current budgeting practice of fall 2024 RFA and award slots in the spring of assuming an October 1 implementation date, this 2025. However, the Governor’s budget does results in $46 million additional General Fund costs not propose to provide any funding in 2024-25 in 2024-25. Additionally, to meet the July start date, to support slots awarded through the fall 2024 DSS would need to allocate and add funds for new RFA (see Figure 7). The administration instead CAPP slots to existing CAPP contracts in the spring plans to seek legislative approval for the of 2024—prior to enactment of the 2024-25 budget. 10 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Figure 8 Proposed Changes to New CAPP Slot Contract Time Line Current Time Lineª Governor's Budget Time Lineb January 2024 Release of 2024-25 Governor's Budget . Proposes $138 million to implement 16,000 new CAPP slots Proposes $184 million to implement 16,000 new CAPP beginning October 1, 2024. slots beginning July 1, 2024. Spring 2024 DSS releases initial CAPP contract amounts Initial contract amounts do not include proposed 2024-25 funding. Initial contract amounts do include proposed 2024-25 funding. By the end of June 2024 Legislature approves 2024-25 budget, potentially including funding increase to provide new CAPP slots DSS finalizes initial CAPP contracts Summer/Fall 2024 Beginning July 1, 2024 DSS works to amend initial CAPP contracts to include funds AP agencies begin to draw down additional funds to for new 2024-25 CAPP slots recently approved by Legislature. fill new CAPP slots. October 1, 2024 DSS finalizes CAPP contract amendments, allowing AP agencies to draw down additional funds to fill new CAPP slots. ª Reflects maximum slot cost estimates from 2023-24 Budget Act. b Reflects revised slot cost estimates from 2024-25 Governor's Budget. CAPP = California Alternative Payment Program; DSS = Department of Social Services; and AP = Alternative Payment. Assumes Temporary Ineligibility of Federal drawn down for other components of the Bridge Funding for Emergency Child Care Bridge program.) During COVID-19, the state modified Vouchers, Effectively Reducing Budgeted Slots reimbursement rules and allowed providers to by Roughly 1,400. The Governor’s budget provides effectively draw down reimbursement payments a total of $94 million ($83 million General Fund, for child care vouchers that exceed actual service $7 million Title IV-E, and $4 million Proposition 64 costs. This policy was set to expire June 30, 2023, funds) in 2023-24 and 2024-25 to support the but was extended for an additional two years Bridge program. Of these funds, $58 million is under the child care MOU and parity agreement provided to cover costs associated with Bridge and 2023-24 Budget Act. We understand that child care vouchers. In the past, the state has also federal Title IV-E funds can only be drawn down to drawn down between $10 million and $20 million in cover costs associated with actual service costs. additional federal Title IV-E funds to partially cover As a result, the state is ineligible to draw down Bridge voucher costs. The Governor’s budget, $21 million in federal Title IV-E funds for Bridge however, assumes the state would be ineligible to vouchers in 2023-24 and 2024-25. The Governor’s draw down any federal Title IV-E funds for Bridge budget does not propose to backfill this temporary vouchers in 2023-24 and 2024-25 due to the loss of federal Title IV-E funds. We estimate that this continuation of the reimbursement flexibility policy. results in a reduction in funding for Bridge vouchers (A total of $7 million in Title IV-E funds would still be that is equivalent to roughly 1,400 slots. www.lao.ca.gov 11 2024-25 BUDGET Assessment following the award date. Based on conversations with the department and providers, the delay in Governor’s Budget Does Not Include the executing contracts may be due to various reasons, Right Amount of Funding to Support Previously including the department prioritizing amending Awarded CCTR Slots, but Will Be Corrected in contracts for existing providers before executing May Revision. Across the fall 2021 RFA and fall contracts for new providers, new providers 2022 RFA, the state awarded on an ongoing basis a needing additional technical assistance to obtain total of $559 million for new CCTR slots. However, a state license, and providers receiving conflicting the Governor’s budget only includes $544 million guidance from different DSS staff members total funds in 2023-24 and $552 million total funds on supporting documents needed to execute in 2024-25 to cover these costs. We understand contracts. Additionally, some CCTR providers have the administration plans to increase CCTR funding expressed that, given the contracting delays, they levels by $15 million General Fund in 2023-24 and may be less likely to apply for additional slot funding $7 million General Fund in 2024-25 to reflect actual in future years. awarded levels as part of the May Revision. This would partially offset the net savings associated Changes to CCTR Budgeting Process and with the previously mentioned changes to the CCTR Time Line for New Slots Reduces Legislative ramp-up schedule and RFA time line ($581 million in Oversight of the Slot Expansion Plan. Historically, 2023-24 and $318 million in 2024-25). the Legislature reached an agreement with the administration on the maximum number of new Seems Reasonable to Push Out Funding CCTR slots to be added in any given fiscal year for New CCTR Slots Based on Current Slot and associated funding levels. We are concerned Take-Up Trends and Projected Budget Deficit. that allowing the administration to release RFAs As a part of the 2023-24 Budget Act, the state and award new CCTR slots prior to the enactment reduced 2022-23 CCTR funding levels to reflect of the state budget gets ahead of the Legislature’s more realistic estimates of expenditures based appropriation authority. Decisions regarding on the actual number of awarded CCTR slots. budgeted slots would effectively be based on the Similarly, the Governor’s 2024-25 budget reduces spring RFA process, which is completely controlled the number of funded CCTR slots to only reflect by the administration. Furthermore, while the estimates of awarded slots on an ongoing basis. provisional language in the Governor’s budget We estimate this change has the effect of reducing requires notification to the Legislature, ultimately total CCTR slot costs, on net, by about $570 million it would allow the administration to independently in 2023-24 and about $310 million in 2024-25 increase CCTR funding levels beyond what was relative to the 2023-24 Budget Act. We believe appropriated by the Legislature through the this is a reasonable budgeting approach given the budget process. slower than expected take-up of new CCTR slots and projected budget deficit. (However, we do have Unclear Under What Conditions concerns with changes to CCTR budgeting process Administration Would Use Provisional Language and time line the administration proposes to achieve to Increase CCTR Funding Levels Mid-Year. The these savings, which we discuss in more detail later proposed provisional language lacks any detail in this section.) on how DOF would go about determining whether CCTR funding levels should be increased. Based Slower Than Expected CCTR Slot Take-Up on our conversations with the administration, May Be, in Part, Due to Delays in Contracting CCTR funding levels could be increased if actual Processes. We understand that it takes DSS, on costs for slots awarded through the fall 2023 average, between six to seven months to finalize RFA exceed budgeted levels. For example, CCTR and execute a contract once new CCTR slot funding levels could be increased to address funds are awarded to providers. This exceeds the higher than expected cost per slot. Under this Governor’s budget assumption that final CCTR scenario, it is unclear how big of a cost difference contracts will be executed within three months the administration would need to observe to make 12 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET a mid-year adjustment. The administration also Depending on how quickly AP agencies ramp up expressed that provisional language may allow the internal capacity to administer new CAPP slots, administration to increase CCTR funding levels in families may also be served earlier. This proposal, order to issue another RFA and award additional however, would effectively eliminate legislative CCTR slots above what was authorized in the oversight of total CAPP funding levels by allowing 2024-25 budget to the extent provider demand and DSS to issue and execute contracts with additional capacity increases. However, it is unclear how the slot funds prior to the Legislature enacting a state administration would go about monitoring provider budget. Moreover, the projected budget deficit demand and capacity throughout the fiscal year makes it so that the state would need to identify and what amount of excess provider demand $46 million in other budget solutions in each of the and capacity would need to be observed for the next three years to afford this proposal. administration to make a mid-year adjustment. We Actual Bridge Voucher Expenditures Likely also do not know to what extent the administration to Come in Lower Than Budgeted Levels would consider broader issues, such as the in 2023-24. Since the inception of the Bridge projected multiyear budget deficit, prior to making program, actual program expenditures for Bridge any mid-year funding adjustments. vouchers have generally come in below budgeted Governor’s Budget May Underestimate Costs levels. For example, in 2020-21 and 2021-22, about Associated With Future CCTR Slot Expansions. $13 million General Fund of annual Bridge voucher As previously mentioned, the Governor’s budget funding went unspent. In 2022-23, the amount increases the annual cost per slot estimate for of unspent Bridge voucher funding increased to CCTR slots awarded in 2021-22 and 2022-23 about $40 million General Fund. Based on most by 17 percent (from about $22,470 to $26,380). recent program data, monthly Bridge child care However, the Governor’s budget only slightly voucher levels in 2023-24 are relatively equal to increases the annual cost for slots awarded and 2022-23 levels. To the extent this trend continues, implemented between 2024-25 to 2026-27 by we estimate that actual Bridge voucher costs in 3 percent (from about $22,470 to $23,150). To the 2023-24 may be roughly $30 million General Fund extent CCTR slot costs come in higher during this lower than total budgeted levels. period, the Governor’s budget would underestimate Governor’s Budget Does Not Include the ongoing cost of the slot expansion plan. Carryover of Unspent 2022-23 Bridge Voucher Specifically, we estimate the costs of the CCTR Funds Into 2023-24. In past years, DSS carried slot expansion plan would be $119 million higher over unspent Bridge voucher funds into the at full implementation if we assume the higher cost following fiscal year. The Governor’s budget, per slot estimate across 2024-25 to 2026-27. (We however, does not display the availability of the are awaiting responses from DSS explaining the 2022-23 carryover funds in 2023-24. If these methodology used to estimate costs associated unspent funds were accounted for, total Bridge with scheduled CCTR slot increases.) voucher costs could be offset by $40 million Assuming Earlier Implementation of General Fund in 2023-24. New CAPP Slots Gets Ahead of Legislative Recommendations Authorization and Increases Costs. We understand that one potential benefit to assuming Adopt Governor’s Proposed CCTR Funding an earlier July 1 implementation date in CAPP is Levels to Only Reflect Awarded New Slots. that DSS would be able to incorporate additional Given the projected budget deficit, we believe it is slot funds in initial contracts rather than having reasonable to right-size the CCTR budget to only to take the extra step to amend contracts reflect the amount of funding needed to implement after July 1. Additionally, we understand that the estimated number of awarded CCTR slots. incorporating additional funds for new CAPP slots This approach would free-up hundreds of millions in initial July 1 contracts could make it easier of one-time General Fund dollars in a time where for AP agencies to budget expenditures on an the state is projected to not have enough state annual basis. resources to afford existing spending commitments. www.lao.ca.gov 13 2024-25 BUDGET Reject Proposed Changes to Budget Explore Ways CCTR Contract Process Can Process and Time Line for New CCTR Slots. Be Streamlined to Increase Number of Awarded We believe the administration’s proposed changes and Filled Slots. Given the concerns around to the process for issuing new CCTR slots would CCTR contract delays, the Legislature may want to significantly reduce legislative oversight and input consider ways to streamline the contract process. over the slot expansion plan. Specifically, the For example, the Legislature could direct DSS to proposed CCTR time line changes would allow DSS develop a simplified funding application for existing to issue annual RFAs and award slots without the CCTR providers who have demonstrated success necessary legislative funding authority. While this in enrolling and serving subsidized children. change would result in some initial General Fund Additionally, the Legislature could request the savings, we do not believe the savings outweigh department explore ways to improve coordination the trade-off of side stepping the legislative budget across various DSS teams that review and execute process. Additionally, the proposed provisional final contracts. language would allow the administration to Adopt Proposed Funding Levels for Bridge independently change the total CCTR funding levels Vouchers and Further Offset General Fund and potentially the total number of funded CCTR Costs With Carryover Funds. Given that slots through mid-year adjustments. The Legislature actual Bridge voucher expenditures have been could reject the Governor’s proposal and continue significantly lower than total budgeted levels, state to use the existing process, where RFAs are based funds alone would likely be more than enough on the amount of funding provided in the enacted to cover actual Bridge voucher expenditures in budget. Under this approach, the Legislature 2024-25. Additionally, to further address the overall could include a modest amount of funding in the budget deficit, we recommend reducing 2023-24 2024-25 budget as a way to provide DSS with Bridge voucher costs by $40 million General Fund the necessary funding authority to release a fall to reflect the carryover of unspent 2022-23 funds. 2024 RFA. The Legislature could also develop an The Legislature could also ask the administration to alternative budgeting approach that achieves the provide a more precise estimate of the anticipated same amount of General Fund savings, avoids any unspent 2023-24 funds as a part of the May cost increases, and maintains legislative oversight. Revision and proactively sweep these funds as For example, the Legislature could codify the additional budget savings. ramp-up schedule for the child care slot expansion Consider Adjusting Cost Estimates of Slot plan to maintain legislative input over the maximum Expansion Plan to Reflect More Recent Cost number of slots the administration could award in Per Slot Data. In order to effectively estimate the any given year. availability of state resources in future years, the Reject Proposed Changes to Time Line Legislature could direct the administration to update for Awarding New CAPP Slots. Given the the cost estimates of the slot expansion plan based proposed changes to CAPP time line would on more recent cost per slot data. This would allow eliminate legislative oversight of CAPP funding, we the Legislature to more accurately plan for ongoing recommend rejecting the proposal and continuing costs associated with the child care slot expansion to use the current time line, where new CAPP plan, including assessing the capacity of future slots are not allocated and CAPP contracts are budgets to support this ongoing cost pressure. not finalized until after the Legislature enacts a budget. We also recommend assuming new slots are implemented beginning October 1 and reducing 2024-25 funding by $46 million General Fund. 14 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET PROPOSITION 64 FUNDING LEVELS Proposition 64 funds in 2024-25. These funds are spread across CAPP ($173.8 million in 2023-24 Background and 2024-25), CCTR ($92.2 million in 2023-24 and State Had a $296 Million Carryover Balance $69.4 million in 2024-25), and the Bridge program in Child Care Proposition 64 Funds by the ($3.8 million in 2023-24 and 2024-25). End of 2022-23. Since 2019-20, an average of Projects Proposition 64 Carryover Balance $74 million in Proposition 64 funds allocated to Will Total $415.3 Million by the End of 2023-24. child care programs go unspent each year. These The administration estimates only $150.5 million Proposition 64 funds went unspent primarily due to of the $269.8 million Proposition 64 allocated to slower slot take-up in the CAPP, CCTR, and Bridge child care in 2023-24 will be spent. The unspent programs. Any unspent funds are carried over into funds will carry forward into 2024-25, increasing the following fiscal year. The Proposition 64 child the total carryover balance from $296 million care carryover balance as of March 2024 totals to $415.3 million by the end of 2023-24. $296 million. The Governor’s budget does not include a proposal Portion of Child Care Carryover Funds for using this carryover balance. Were Intended to Backfill Decline in 2023-24 Does Not Provide Backfill for CCTR Proposition 64 Funding Levels in CCTR Proposition 64 Shortfall in 2023-24. Program. As part of the 2022-23 budget package, The Governor’s budget assumes Proposition 64 the state eliminated the cannabis cultivation tax, funding levels in CAPP and the Bridge program which provided roughly one-fifth of Proposition 64 remain equal to 2020-21 baseline levels in tax revenue. Recognizing the resulting fiscal 2023-24. The Governor’s budget, however, risk, the budget package also established a assumes Proposition 64 funding levels increase by target funding level for programs that receive $23.5 million in 2023-24 relative to 2023-24 Budget Proposition 64 revenues (the “2020-21 baseline”) Act levels—from $68.7 million to $92.2 million. and included provisions intended to keep This increase is due to Propositions 64 revenues funding from falling below that target. For projected to come in slightly higher than initial example, the 2022-23 budget package included 2023-24 estimates. Despite this increase, $150 million one-time General Fund—referred to Proposition 64 funding levels for the CCTR program as the 2022-23 backfill set aside—that the State in 2023-24 remain $22.5 million below 2020-21 Controller’s Office could transfer to Proposition 64 baseline levels. This is, in part, because the programs in 2023-24 and 2024-25. Ultimately, Governor’s budget does not include the previously 2023-24 Proposition 64 revenues declined by a agreed upon backfill. greater amount than the total 2022-23 backfill set Continues to Assume CCTR Proposition 64 aside. As a result, the 2022-23 backfill set aside Funding Levels Remain Below 2020-21 could only partially backfill losses in Proposition 64 Baseline Levels in 2024-25. The Governor’s funds in 2023-24. In the case of child care, budget assumes Proposition 64 funding levels the 2023-24 budget assumed a $46 million for CAPP and the Bridge program remain flat Proposition 64 shortfall in the CCTR program between 2023-24 and 2024-25. In the CCTR relative to 2020-21 baseline levels. We understand program, however, Proposition 64 levels decrease that as a part of the 2023-24 budget agreement, the from $92.2 million in 2023-24 to $69.4 million in $46 million Proposition 64 shortfall was intended to 2024-25. As a result, Proposition 64 funding levels be filled with Proposition 64 carryover funds. in the CCTR program remain $45.3 million below 2020-21 baseline levels in 2024-25. We understand Governor’s Budget that the administration does not propose to backfill Continues to Appropriate Proposition 64 Proposition 64 funds in 2024-25. Funds to Child Care Programs. The Governor’s budget provides a total of $269.8 million Proposition 64 funds in 2023-24 and $247 million www.lao.ca.gov 15 2024-25 BUDGET Assessment and Recommendation Any CCDF dollars not obligated or liquidated by the appropriate deadlines revert back to the federal While Proposition 64 Backfill Is Not Needed government. CCDF dollars are generally considered Under New CCTR Budgeting Methodology… to be obligated if the dollars are included in the state The new budgeting methodology proposed by budget and liquidated once DSS releases funds the Governor reduces total CCTR funding levels to providers. to only reflect estimated costs of awarded slots. Additionally, the Governor’s budget assumes CCDF Rules Require States Spend a Certain any CCTR program costs not offset by federal Amount of Funding on Quality Improvement funds or Proposition 64 funds will be covered with Activities. As a condition of receiving CCDF dollars, General Fund. As a result, a Proposition 64 backfill the federal government requires states use at least is technically not needed to fully fund the CCTR 9 percent of total CCDF dollars on general quality program in 2023-24 and 2024-25. improvement activities and at least 3 percent of total CCDF dollars on quality improvement …Legislature Could Consider Working With activities specific to infant and toddler child care Administration to Use Proposition 64 Carryover services. Allowable quality improvement activities Funds to Further Offset General Fund Costs. include training and professional development Proposition 64 revenues, including carryover funds, opportunities for child care providers; developing are continuously appropriated, meaning that they and implementing a quality rating system; and are allocated by the administration and are not supporting child care providers to develop and subject to the legislatively driven annual budget adopt high-quality program standards related to process. Proposition 64 carryover funds may be health, mental health, cognitive development, and leveraged by the state in various ways. For example, physical activity. carryover funds could make up for any future declines in Proposition 64 revenues. Alternatively, The State Is Still Spending Down Temporary all or a portion of the Proposition 64 carryover COVID-19 Federal Relief Funds. During the funds could be used to offset General Fund costs in COVID-19 pandemic, the state received over child care programs, resulting in additional one-time $5 billion in one-time federal funds to support child General Fund savings. Given the significant budget care programs. About $3.6 billion of the COVID-19 shortfall, the Legislature could consider working relief funds expired on September 30, 2023. The with the administration to determine if and how administration estimates that DSS obligated and much of the Proposition 64 carryover funds could liquated nearly all of these funds by the federal be used to maximize General Fund savings. deadline, resulting in less than $1 million in federal relief funds reverting back to the federal government. FEDERAL FUNDS UPDATE The department is still in the process of spending down the remaining $1.4 billion in COVID-19 relief Background funds, which expire on September 30, 2024. State Draws Down Three Different Federal CCDF Dollars. Figure 9 As shown in Figure 9, each type of Spending Deadlines for Child Care and Development CCDF dollar has its own obligation Fund Dollars and liquidation deadline. Matching Federal Fiscal Year 2023-24 and Mandatory funds received through the federal 2023-24 CCDF Fund budget must be obligated by Source Obligation Deadline Liquidation Deadline September 30, 2024. Matching Mandatory September 30, 2024 (by the end No requirement to liquidate by a funds must be liquidated by of first federal fiscal year) specific date September 30, 2025. States have Matching September 30, 2024 (by the end September 30, 2025 (by the end of an additional year to obligate and of first federal fiscal year) second federal fiscal year) liquidate Discretionary funds. Discretionary September 30, 2025 (by the end September 30, 2026 (by the end of of second federal fiscal year) third federal fiscal year) 16 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Governor’s Budget Assessment Continues to Appropriate CCDF Dollars in Governor’s Budget Does Not Fully Obligate 2023-24 and 2024-25. The Governor’s budget All Available CCDF Dollars. We estimate that the assumes the state will draw down $1.08 billion in state could draw down an additional $99 million CCDF dollars in 2023-24 and $1.04 billion in CCDF in CCDF dollars across 2023-24 and 2024-25. dollars in 2024-25. The budgeted amounts of A portion of these funds would need to be set aside CCDF dollars are subject to change based on the for quality improvement activities. We describe redistribution of unobligated funds from other states the reasons for these additional CCDF dollars and and anticipated increase to CCDF Discretionary quality set aside below. funding levels in 2023-24 that was recently • Updated Estimates of Available CCDF approved by the federal government in March 2024 Dollars Based on Federal Award Notices. (which we describe in more detail below). Based on actual federal notices of awards Continues to Appropriate Federally Required and revised estimates, the administration CCDF Quality Funds. The Governor’s budget anticipates receiving, on net, an additional sets aside $157 million CCDF dollars in 2023-24 $3 million CCDF dollars in 2023-24 and and 2024-25 to support quality improvement $38 million CCDF dollars in 2024-25 relative activities—referred to as CCDF quality funds. to Governor’s budget estimates. Some of We understand that these funding levels reflect the these funds would need to be obligated by administration’s estimate of the federally required September 30, 2024 to comply with federal minimum amount of funding that must be spent obligation deadlines. on quality improvement activities. Based on the • Federal 2024-25 Budget Increases to CCDF 2023-24 CCDF quality plan, some of the activities Discretionary Funding Levels. The recently that would be funded with the 2023-24 quality enacted federal 2024-25 budget included a set aside include child care license enforcement, $725 million increase to CCDF Discretionary resource and referral agencies, local child care levels. We estimate that California would planning councils, and education stipends for child receive $58 million of these additional care professionals. DSS is still finalizing the 2024-25 CCDF Discretionary funds in 2024-25. CCDF quality plan. These funds would need to be obligated Continues to Use One-Time COVID-19 by September 30, 2025 to comply with the Federal Relief Funds to Cover Costs for Slot federal obligation deadline. Increases. As shown in Figure 10, the Governor’s • Increase in Required Amount of CCDF budget continues to obligate most of the remaining Quality Funds. As a result of the updated $1.4 billion in COVID-19 relief funds to offset costs estimates of available 2024-25 CCDF dollars associated with the child care slot expansion plan. (The administration has indicated ongoing slot costs previously Figure 10 covered with federal relief funds Distribution of COVID-19 Federal Relief Funds That would shift to the General Fund Expire September 30, 2024 once the federal funds expire.) The Governor’s budget also obligates (In Millions) a portion of remaining COVID-19 2022-23 2023-24 2024-25 Total federal relief funds to support various one-time or temporary Slot expansion $544 $779 $38 $1,361 Reimbursement flexibilities 50 — — 50 activities, including infrastructure Infrastructure grant program 1 24 — 25 grants and development of a new Child care data system 1 4 — 5 child care data system. CDE after school program 3 — — 3 Totals $599 $807 $38 $1,443 CDE = California Department of Education. www.lao.ca.gov 17 2024-25 BUDGET and recently approved increase to total we recommend the Legislature direct the CCDF Discretionary levels, we estimate administration to obligate all available CCDF dollars that the state will need to set aside roughly as a part of the May Revision in order to maximize $10 million in additional CCDF quality funds the amount of General Fund costs that could be in 2024-25 to comply with the federally offset in 2024-25. (The Legislature could revise required minimum amount of funding for 2024-25 CCDF levels next year to the extent actual quality improvement activities. The remaining funding levels are different than initial estimates.) CCDF dollars—$89 million—may be used Require Annual CCDF Quality Plan Be for other child care and development Included in May Revision on an Ongoing Basis. program activities. While the Legislature approves the amount of CCDF funds that are set aside for quality improvement Unclear How 2024-25 CCDF Quality Funds activities as a part of every annual budget process, Will Be Used. As previously mentioned, the the administration generally does not share with the administration is still in the process of finalizing the Legislature how these funds would be used until list of quality improvement activities that would be after the budget is approved. We recommend the supported by CCDF quality funds in 2024-25. In the Legislature direct the administration to include the past, CCDF quality plans were generally finalized proposed CCDF quality plan in the May Revision after the Legislature approved the associated of every state budget. This would ensure the same funding through the annual budget process. level of oversight and input the Legislature exercises COVID-19 Relief Funds Are Being Expended over other components of the child care budget. at a Slower Pace Relative to Initial Estimates. Direct Administration to Prioritize Spending The administration assumed about $600 million COVID-19 Relief Funds to Minimize Federal of the $1.4 billion in COVID-19 relief funds would Reversion and Maximize General Fund Savings. have been spent by the end of 2022-23. However, Last year, our office identified about $550 million as of December 31, 2023, only $383 million of of COVID-19 relief funds that were at risk of going the COVID-19 relief funds have been expended. unspent by the September 30, 2023 federal By the end of 2023-24, the Governor’s budget deadline. To avoid these funds from reverting assumes only $38 million of COVID-19 relief back to the federal government, the Legislature funds would remain unexpended. However, we worked with the administration to carry over estimate that roughly $450 million of COVID-19 these unspent funds into 2023-24 and prioritize relief funds may remain unexpended by the end of the use of expiring COVID-19 relief funds prior to 2023-24. The slower than expected expenditures using other fund sources, including the General of COVID-19 federal relief funds are likely due to Fund. This approach had the effect of freeing slower than expected slot take-up. To the extent up an equal amount of General Fund, which the expenditure trends continue to come in lower than Legislature and administration set aside to support initial estimates, hundreds of millions of COVID-19 costs associated with the child care MOU and relief funds would likely revert back to the federal parity agreement. government in 2024-25. Similar to last year, we recommend the Recommendations Legislature request the administration provide Direct Administration to Fully Obligate an updated May Revision estimate on (1) the All Available CCDF Dollars as a Part of May total amount of COVID-19 relief funds (including Revision. We estimate that the state can draw funds obligated in prior years) that would likely down an additional $99 million in CCDF dollars go unspent by the end of 2023-24, and (2) what across 2023-24 and 2024-25. (About $10 million amount of these unspent funds could be used of these funds would need to be spent on to effectively free-up General Fund in 2024-25. quality improvement activities per federal CCDF The Legislature could either score the estimated requirements.) While some of these funds do not amount of freed-up General Fund as budget need to be obligated until September 30, 2025, savings or recommit all or a portion of these funds 18 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET to other budget priorities. For example, to the 2021 to assist in the development of a single extent the child care infrastructure grant program reimbursement rate structure.) The alternative currently funded with temporary COVID-19 relief methodology would also be informed by a new cost funds would not be fully implemented by September study and cost estimation model. We understand 30, 2024, the Legislature could instead fund the that the cost study and model would consider program with General Fund and extend the duration costs to comply with current program requirements of the program. (such as health and safety standards, staffing requirements, and licensing requirements), provide CHILD CARE MOU AND PARITY high-quality care, and provide higher compensation AGREEMENT UPDATE to staff relative to current levels. Governor’s Budget Background Maintains Initial Funding Levels to Support 2023-24 Budget Adopted a New Two-Year, Child Care-Related MOU and Parity Costs. Collectively Bargained MOU and Parity The 2023-24 budget included $1.3 billion in Agreement. The MOU agreement provided monthly one-time funds from various state and federal per-child cost of care plus supplemental rate fund sources to cover child care costs resulting payments, a one-time transitional payment, and from the MOU and parity agreement. At the time, temporary extension of reimbursement flexibilities. the set aside amount exceeded estimated child The state negotiated the MOU agreement with Child care-related MOU and parity costs by $106 million. Care Providers United (CCPU), which represents The Governor’s budget continues to set aside the licensed family home and license-exempt family, same amount of funding to cover child care-related friend, and neighbor providers. Similar to the first MOU and parity costs. MOU agreement, the state extended the collectively Continues Progress Towards Developing bargained provisions to non-represented, Alternative Rate Methodology. Per the MOU center-based child care and State Preschool agreement and associated 2023-24 trailer bill providers to ensure parity across all early education language, by February 15, 2024, DSS was programs (with the exception of the health, required to reach agreement with the JLMC on the retirement, and training funds, which is limited to definitions of base rate elements and any enhanced CCPU-represented providers). The collectively rates for purposes of informing the single rate bargained and parity agreement provisions are structure. On March 6, 2024, the administration generally set to expire on June 30, 2025. In total, and JLMC reached a general consensus on base the child care-related components of the MOU and and enhanced rate definitions. Additionally, the parity agreement were initially estimated to cost up department provided the Legislature with the to $1.2 billion across 2023-24 and 2024-25. (These required report on progress made to conduct an costs do not include costs related to the State alternative methodology and cost estimate model to Preschool program.) inform a future single rate structure for subsidized MOU Agreement Requires Development child care and development services. of Alternative Methodology for Single Child Care and Preschool Rate Structure. The MOU Assessment and Recommendation agreement and associated 2023-24 trailer bill Consider Reappropriating One-Time Unspent language required DSS, in collaboration with the Funds to Offset Higher Than Expected Child California Department of Education, to develop and Care MOU and Parity Costs. In June 2023, the conduct an alternative methodology for a single administration estimated the child care MOU and rate structure. Additionally, the administration parity agreement would cost up to $1.2 billion. was directed to work with the Joint Labor Based on more recent data, DSS now estimates Management Committee (JLMC) to define the that total child care MOU and parity costs would elements of the base rates and any enhancement be $1.4 billion, which is $213 million above 2023-24 rates for purposes of informing the alternative Budget Act cost estimates. We anticipate that a rate methodology. (The JLMC was created in www.lao.ca.gov 19 2024-25 BUDGET portion of these additional costs would be covered DSS Anticipates Meeting All Future with the previously mentioned unobligated MOU Alternative Methodology Milestones. Even and parity set aside funds ($106 million). Beyond though DSS did not reach an agreement with JLMC the unobligated MOU and parity set aside funds, on rate element definitions by the required deadline, the state would need to provide an additional we understand that DSS anticipates meeting all $107 million to cover the remaining amount of future milestones. This includes submitting the child care-related MOU and parity costs. Given necessary information to support the use of a single the projected budget deficit, the Legislature could rate structure based on the alternative methodology reappropriate a portion of the previously identified to the federal government no later than July 1, 2024. funds that are projected to go unspent to cover We will continue to monitor progress made by DSS the remaining amount of child care-related MOU to meet future milestones and, if necessary, update and parity costs not covered by the MOU and the Legislature on any concerns. parity set aside. LAO PUBLICATIONS This report was prepared by Jackie Barocio, and reviewed by Edgar Cabral and Ross Brown. 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. 20 LEGISLATIVE ANALYST’S OFFICE