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Financing Child Care

June 2000

By Scott Groginsky, Program Manager
Julie Poppe, Research Analyst II
Jenna Davis, Policy Associate

State lawmakers across the country are focusing on policies that will help children have a good start in life. A central component of these policies is the care that a child experiences every day, whether in a center, a preschool, another family's home or their own home. The quality and reliability of the care and education will significantly affect how this child develops over the course of his or her life, with wide-ranging implications for state education systems, welfare reform, workforce and economic development and crime prevention, according to research.

With increasing evidence of the dramatic effects of good early childhood care and education on a child's learning and behavior, as well as on a parent's ability to work, state legislators and other policymakers are exploring and establishing approaches to support effective programs. Legislators have multiple opportunities for such support, including federal and state funding, tax strategies, business partnerships and other innovative sources. This report examines the array of child care and early education financing options and practices to which state policymakers can and do turn.

For low-income families with young children, child care assistance is essential to the parents' ability to get or keep a job. State child care policies, however, extend beyond helping poor families for a variety of reasons. First, child care supply is an issue across income levels. Supply is needed in many areas, including facilities, qualified providers and teachers, programs that serve children with special needs, and programs that operate during off-peak hours or in hard-to-reach areas. Second, child care programs that have shown to positively affect children, and families rely on a certain level of quality, regardless of the family's income level. State financing policies can address child care quality issues from several different angles, including regulation, training and worker incentives. Third, all children benefit from parents who are involved in their lives, according to research. Early childhood financing policies that incorporate ways to include parents in their child's development have been found to contribute to better child outcomes and parenting skills. Finally, child care is an economic development investment because service industry workers, who comprise the fastest-growing sector of the U.S. economy, rely on child care subsidies disproportionately to other industry employees.

The Child Care and Development Block Grant (CCDBG), also known as the Child Care and Development Fund (CCDF), is the primary federal child care funding stream, providing states with money to support child care services for young children in families that earn below 85 percent of the state median income (SMI). The CCDBG, funded at $3.55 billion in FY 2000, allows states to spend the dollars on children in care if they are under age 13.

As provided by CCDBG rules, states have flexibility in setting income eligibility standards, parent copayment levels and reimbursement rates for child care providers in order to promote parent choice and equal access to care for subsidized families. In addition to these important affordability actions, states use CCDBG funds to improve the quality of care by funding provider training and recruitment, resource and referral services, health and safety measures, and consumer education. To ensure that child care providers receive adequate state reimbursement, federal law requires states to conduct a market rate survey every two years.

The CCDBG requires states to spend a minimum of 4 percent of their total allocation on quality initiatives, including expanding supply, providing consumer education, and assisting parents to select child care providers, which is often conducted through state and local resource and referral agencies. Several states used more than 4 percent of the CCDBG money in 1999 on quality activities such as child care provider training, grants and loans to programs, and increased worker compensation. With these funds, states provided child care assistance for families with children under age 3, expanded the supply of infant care, raised child care provider reimbursement rates for infant and toddler care and expanded child care provider training. States also had to spend some of their discretionary funds this year on infant and toddler improvements, resource and referral services and school-age programs. Congress will examine authorization of the CCDBG in the 2001 congressional session, as part of the authorization of the welfare law, the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA). In the 1996 federal welfare law, Congress required that state legislatures appropriate both the CCDBG and TANF block grant.

States also may transfer up to 30 percent of their federal welfare allocation, the Temporary Assistance for Needy Families (TANF) block grant, to the CCDBG or directly use TANF funds for child care without transferring them to CCDBG. For more information, see page 5.

Federal child care allocations to states represent a part of public child care funds. States have spent and continue to spend their own money on child care. According to the Children's Defense Fund (CDF), 17 states adopted significant increases in state general revenue funds for child care in 1999. 2 As mentioned previously, states can draw from three components of the CCDBG and two of these, the maintenance of effort (MOE) for the mandatory funds and the state match, require state appropriations. Some states have spent state funds on child care or early education that are in addition to their required MOE or match and, as discussed on page 6, these states typically count the additional expenditures as part of their MOE for TANF. One FY 1999 estimate shows that states are spending about $535 million in excess of their CCDBG MOE and match requirements. 3

Some states have spent a large amount of state funds to establish wide-ranging early childhood initiatives. For example, North Carolina legislators appropriated $236 million in 2000 for Smart Start, a statewide comprehensive child development and care initiative, which is a tenfold expansion since its inception in 1993. 4 This initiative provides counties with flexibility to decide how to spend these funds, whether for subsidies for low-income families, child care quality improvements, child care connections with health care services, family support services or increasing caregiver wages. South Carolina appropriated $20 million in state funds in 1999 for a similar initiative.

Since the 1996 federal welfare act provided states with more flexibility in serving families on welfare and those making the transition off welfare, legislators have used state funds for a variety of subsidy purposes. A year after the federal act, several states increased income eligibility limits, revised their sliding fee scale and increased state funds to serve all eligible families. For example, Illinois added $100 million in state funds in FY 1998 to provide child care to all families below 165 percent of the federal poverty level (FPL), with a copayment structure that capped parent fees at 13.5 percent of family income for the highest income earners receiving a subsidy. Rhode Island, Vermont and Wisconsin similarly assured services through sufficient funding, and eliminated lists of eligible families waiting to access child care.

Some states currently have waiting lists, but these lists change frequently and are only one measurement of how a state meets demand. Many families are not on a waiting list because they are unaware of their eligibility, were frustrated with the length of time they had to wait for services or their state disallowed adding more families to the list. A recent national report found that an average of only about 10 percent to 25 percent of eligible families receive a child care subsidy. 5

In 1999, at least five states used state money to raise eligibility limits or provide transitional child care assistance to families leaving welfare, according to a CDF report. The report also found that three states used state funds to reduce parent fees and nine states used state funds to enhance child care provider reimbursement rates in some way. Of these states, four generally increased rates, two conducted new market rate surveys to make their child care rates more reflective of current prices, and six states raised rates specifically to encourage better quality care or hard-to-find care. This latter approach is commonly termed "differential" or "tiered" reimbursement rates. Programs that usually receive these differential rates are accredited to meet stricter regulatory standards, care for infants, toddlers, children with special needs or serve children in underserved geographic areas. 6

Recent research that links good early childhood education to future school success, less crime and better jobs is prompting some state policymakers to fund preschool programs. At least 41 states and the District of Columbia fund prekindergarten programs-that mainly are half-day-for 3- and 4-year-olds. In 1998-99 states invested nearly $1.7 billion to serve approximately 725,000 children, and legislators in many states have recently provided more state money for prekindergarten programs. 7 States often use general funds to expand preschool services, but some states are drawing on alternative funding sources, such as gambling fee funds in Missouri and lottery revenues in Georgia. These and other examples are discussed on page 14. Almost half the states that have state-funded prekindergarten programs use some local communities to provide services and fund these initiatives through tax levies, parent fees, foundations and other sources. States continue to focus on early learning for children in low-income families by adding state money to Head Start or supporting connections between Head Start, prekindergarten and child care. Nineteen states and the District of Columbia supplement Head Start with state funds; two states also use federal welfare funds. 8 This is discussed further on page 7.

In addition to the CCDBG, the federal government provides states with money for key early childhood services that can supplement and complement out-of-home child care needs, while supporting a child's healthy development. These resources include:

• Welfare funds (TANF),

• Social services funds (Title XX, the Social Services Block Grant-SSBG),

• Nutrition programs (the Child and Adult Care Food Program-CACFP), and

• Preschool funds for children in low-income families (Head Start).

Child care is essential to accomplishing the goals of self-sufficiency as established by welfare reform. Research has shown that when welfare families cannot find safe, reliable and affordable child care, their requirement to find and maintain employment can fall short. Temporary Assistance to Needy Families (TANF), created in 1996 through PRWORA, provides states with a funding opportunity for child care programs that expand child care availability to low-income families, while also supporting TANF's major purpose-to end the dependence of needy parents by promoting job preparation and work. States tripled their spending of welfare funds on child care from FY 1998 to FY 1999, either directly or indirectly.

States can choose from several funding options for spending TANF on child care, including transferring funds into two federal block grants or directly allocating TANF funds for child care services. In order to directly spend federal TANF funds on child care programs, the services must be for "needy families," a term that is usually set by state legislators and reported in the state TANF plan. For example, a state could include families with incomes of up to 200 percent of the FPL ($28,300 for a family of three) or up to 250 percent of the FPL ($35,375 for a family of three). For after-school programs, a state may need no eligibility limit if these programs meet the third PRWORA purpose to prevent and reduce out-of-wedlock pregnancies. Child care services for working families are not considered "assistance" and therefore do not trigger the time limits that affect cash assistance and some other support services. States have flexibility to decide who is included in the definition of "working families." Time limits do apply for non-working families who receive child care services funded by TANF. Many states have spent TANF funds directly on child care programs. In FY 1999, states directly spent $1.99 billion in TANF funds on child care-without transferring to the CCDBG. This amount included $604 million of federal welfare funds and $1.38 billion of state welfare MOE funds. 9 These funds have been used to eliminate waiting lists, support after-school programs, train welfare recipients to become licensed providers, and support other activities to improve child care access.

States may transfer up to 30 percent of their TANF funds into the CCDBG, Access to Jobs Program under the Department of Transportation or the Social Services Block Grant. The transfer to the SSBG, a federal block grant for family services including child care, is limited to 10 percent of the TANF grant. Beginning in FY 2001, states may only transfer 4.25 percent of their TANF money into the SSBG. In FY 1999, 47 states reported transferring TANF funds to these block grants, ranging from less than 1 percent to as much as 30 percent of their total TANF amount. Transferred funds are used in accordance with the rules of the receiving block grant program. For example, TANF's five-year lifetime limit does not apply to services paid for by transferred funds.

By transferring TANF funds into CCDBG, states make additional funds available to increase the quality-as well as the affordability-of child care services. States transferred 11 percent-or $1.76 billion-of their 1999 TANF funds to the CCDBG and transferred an additional $670 million in unobligated TANF funds from previous years for a total of $2.43 billion. This amount is more than twice the amount transferred in FY 1998. These quality investments include funding for professional development, increasing payment rates to allow for better compensation of child care workers, and establishing incentives for providers who attain accreditation. 10 States have two years to spend TANF funds after transferring them to the CCBDG.

States also have the option to count state child care spending above their CCBDG match as part of their TANF maintenance of effort (MOE) funds. These state MOE funds, which are different from the CCDBG MOE discussed on page 3, must be spent on those families that are eligible for TANF assistance. States have the flexibility to determine TANF eligibility and can have different eligibility criteria for different TANF-funded services. Depending on the state MOE program, lawmakers can tailor a child care program based on state needs using MOE funds. States also can create separate state programs using MOE that give states even more flexibility to create their own rules, including serving families that otherwise are ineligible to receive TANF funds, such as immigrant families that arrived in the United States after 1996.

Congress will reexamine both TANF and the CCDBG in 2001 for reauthorization. Some states have unspent TANF money, and child care is a key option for the use of these funds. It is important that state policymakers prepare for reauthorization and access the funding opportunities TANF can offer child care services.

SSBG

The Social Services Block Grant (SSBG) is authorized under Title XX of the Social Security Act to direct social services toward achieving economic self-sufficiency or preventing or remedying child abuse and neglect, among other purposes. Child care services are included in the program goals approximately one-fourth of SSBG recipients (2.3 million children) received child care-related services in FY 1997. Many states spend SSBG money on child care assistance, and in FY 1997 14 percent of SSBG funds were spent on child care. 11 In FY 2001, state transfers will be limited to 4.25 percent of their TANF amount to the SSBG, down from a allowed maximum of 10 percent in previous years. Funds that are transferred from TANF to SSBG may be used only for services to children whose family incomes are less than 200 percent of the FPL. In FY 1999, states transferred $1 billion (or 6 percent) of their TANF funds into SSBG, and it is estimated that in recent years one-sixth of these funds were spent on child care. 12 Each state has the flexibility to determine what services will be provided, who is eligible and how the funds are distributed among the various services.

The Child and Adult Care Food Program (CACFP) is a federal program for children who receive care in family child care homes, child care and Head Start centers, and before- and after-school programs. All licensed or approved nonprofit child centers and homes are eligible to receive CACFP funding. For for-profit centers to participate in CACFP, however, 25 percent of children receiving care also must receive some SSBG funds, illuminating another advantage for states to use at least some of their SSBG allocation for child care services. All children enrolled in qualified child care programs can participate. In FY 1999, more than 2.6 million children were served, and Congress funded the program at $1.77 billion in FY 2000. In 1998, Congress expanded eligibility to include children of all ages in after-school programs. The CACFP program's tiered reimbursement system for centers and homes allows children from low-income families and programs in low-income areas to claim the highest level of reimbursement. Child center reimbursement rates are based on the family's income, and family child care providers are reimbursed at a rate based on the average family income level of all children for which they provide child care. In addition to meal and snack reimbursements, the program supports providers' administrative costs and ongoing training in children's nutritional needs and food safety. 13

Head Start

Head Start is a 30-year-old federal early childhood education program for children between the ages of 3 and 5 who are low-income or have disabilities. The program, which served approximately 825,000 children in 1999, is funded at $5.27 billion for FY 2000. 14 Head Start provides comprehensive services, including parent involvement, and requires programs to meet national performance standards. The federal government provides grants directly to local public agencies, private nonprofit organizations, Indian tribes and school systems to operate Head Start programs at the community level. The federal government requires local grantees to contribute 20 percent of the total state allocation. Head Start is targeted to families that earn below the FPL ($14,150 for a family of three) or children who have special needs. 15

Recent amendments to the Head Start Act have included financial incentives that encourage programs to focus on school readiness, family literacy goals and improving teacher staff salaries. Other federal Head Start set-asides include evaluation and quality improvements for children with disabilities, teacher training, and language development in young children with disabilities. In addition, federal law gives supplemental funding to states that develop unified plans for early childhood education and child care that include participation by Head Start agencies and states that engage in other innovative collaborations. 16

Nineteen states and the District of Columbia supplement Head Start and use these funds to provide full-day services, improve quality or increase the number of slots for children. Idaho and Wisconsin are using federal welfare funds to expand Head Start services. 17

Some states coordinate child care and early childhood education programs with Head Start programs to maximize funding opportunities and services. According to a dozen state reports, coordination among early childhood education programs, including Head Start, has resulted in positive outcomes, including better child development, more affordable child care, increased access to better quality services, more funding, more comprehensive services, and consistency in caregivers and settings for children over time. A new Florida law requires local communities to develop school readiness plans that coordinate fiscal policies, standards, needs assessments and outcome measures of preschool, Head Start, child care and other early family support programs. A recent Colorado law allows 18 pilot counties to pool child care, Head Start and state prekindergarten funding to offer full-day, full-year child care and early childhood services for children from birth to age 5.

Some state leaders have recognized the importance of full-day care-which supports working families' needs-and have taken different approaches to achieve this goal. Ohio invests more than $100 million per year in both Head Start and state preschool programs, thus allowing the state to provide services to virtually all eligible families who want them. An Ohio legislative report found that collaboration between child care, Head Start and preschool resulted in more children and families receiving services. Several years ago, Ohio legislators earmarked education dollars and welfare funds for full-day preschool for low-income children, which they folded into the state's Head Start budget in 1998. State lawmakers continued to increase state funding in Head Start and preschool over the next two fiscal years. Several states, including Ohio, combine children funded by Head Start in classes with children funded by state preschool funds, so they can receive the same quality services. 18

Early Head Start

The federal government recently created the Early Head Start Program, which provides several key support services-such as voluntary home visiting; parent involvement; child development; and health, mental health and nutrition-to low-income families with infants and toddlers and pregnant women. Funded at $337.5 million in FY 1999, Early Head Start served approximately 35,000 children and their families. As it does for Head Start, the federal government directly funds local grantees, with local programs focusing on child and family development, community building and staff enrichment. Some states-including Georgia, Kansas, Minnesota, Ohio and Oklahoma-use either state or federal welfare funds to supplement Early Head Start to provide extended-day or full-day, full-year services. 19 Some of these states have essentially replicated the federal program, and other states have shaped their own programs.

States sometimes rely on local governments and community agencies to provide funding for early childhood services. In addition, some states require local communities to provide a financial match or in-kind donation to draw down federal or state child care funds. Several states that require local contributions have experienced local fiscal constraints because of limited county or city budgets. Some states also authorize local entities to make critical policy decisions related to the funding of child care or prekindergarten programs.

Local Child Care and Preschool Matches

Some states have established funding structures that incorporate local funds into a child care or preschool match. North Carolina legislators, for example, required that the state nonprofit partnership for children provide a 10 percent match to the total Smart Start amount, half of which can be in-kind contributions. The state partnership initially asked local programs to identify resources that could count for the match, but after a Smart Start evaluation indicated that requiring a local match may be too burdensome on communities, the state partnership assumed responsibility for the Smart Start match. In the last year, however, effective efforts by some counties to contribute matching resources have led to a renewed state effort to gain a local match.

At least six states require a local preschool match, and in three other states local contributions comprise a sizeable amount of the overall prekindergarten funding, even though these contributions are voluntary. 20 A 1999 South Carolina law requires a 15 percent local match for its First Steps School Readiness initiative. The Texas Legislature provided an insufficient amount of state funds to draw down the full federal child care match, leaving it to local workforce boards to provide donations. Under this strategy, however, local boards generally are struggling to produce the remainder of the full state match.

State early childhood financing policies to involve local communities extend beyond requiring them to provide more money. Some state legislatures have used innovative approaches to build opportunities for local governments and communities to decide how to use state and federal child care and early education funds. North Carolina's seven-year initiative, Smart Start, established local partnerships-now in every county-that formulate comprehensive, long-range plans for using state funds for early care and education services. Local partnerships must spend some of the money on child care subsidies, but have considerable flexibility on how to use the rest of the funds. Local partnerships have spent the money on a range of services, such as child care quality improvements, parent education, teacher support, health and nutrition programs, resource and referral, evaluation and community outreach. 21 The Florida Legislature required local school readiness coalitions to develop school readiness plans for which the state approves funding. Iowa's recent law offers school ready grants to communities that provide flexible funding for preschool, child care, and parent support and education programs. Colorado legislators authorized some counties to integrate early childhood funds.

Many states have county-delivered social services systems, and these states and others are moving to increase local child care decision making, including some subsidy choices. These policies require local decisions on raising, spending and combining funds and setting funding standards for subsidized child care and early education programs. For example, Colorado, Florida and Texas allow local entities to establish their child care income eligibility limits, within certain state and federal limitations. Florida's 1999 law also requires local school readiness plans to include parent fee scales and reimbursement rates for child care. Texas authorizes local workforce boards to set reimbursement rates, and Colorado permits counties to negotiate reimbursement rates with the state.

Some local governments have contributed finances to early care and education services, especially through property taxes and sales taxes. Examples include a special taxing district in Florida, a property tax increase in Seattle and a property tax revenue set-aside in San Francisco, all of which are directed to child care and development services. A few cities-such as Ames, Iowa, and Aspen, Colorado-also have established initiatives to use sales tax receipts for early childhood programs. 22 In addition to local sales taxes, several state legislatures have approved state sales taxes for child care programs. In 1999, the Florida Legislature enacted a sales tax exemption for purchases of materials and toys for good quality child care facilities. Arkansas legislators approved a sales tax exemption for child care construction several years ago. Other state tax-related policies are discussed in the next several sections.

Tax credits are another way state lawmakers support care for working parents. The two primary child care tax credit approaches are dependent care tax credits for parents and employer tax credits for businesses that assist workers with child care needs. Businesses have an inherent interest in child care because research shows that workers' job experiences benefit from stable, affordable child care.

A family with a preschool-age child spends 6 percent to 25 percent of the family's income on child care expenses, and state policymakers are recognizing that child care expenses can be financially difficult for families. A recent survey found that child care costs exceed college tuition costs in every state. To help alleviate such high child care costs, the federal government and some states have established a dependent care tax credit that parents can claim.

Federal child care tax credit applies to families with employment-related child care expenditures for children under age 13. The amount of child care expenses that taxpayers can deduct is limited to $2,400 for one child or $4,800 for two or more children. The credit declines as income rises; families that make more than $28,000 receive 20 percent of the allowable amount. The federal tax credit to families, unlike some state refundable tax credits, is not refundable, so low-income families with little or no federal income tax cannot receive this benefit. Because of this constraint, low- and moderate-income families are unlikely to spend enough on child care per year to claim the full credit. In addition, a recent report notes that the amounts generally are too small to make a difference in consumer behavior for families that can claim the maximum credit. 23 The proposed federal administration FY 2001 budget would expand the federal credit for low- and middle-income families and would make this credit refundable beginning in 2003. 24

Most state credits are based on the federal credit. Twenty-three states and District of Columbia have state child and dependent care tax provisions credit or deduction for employment-related child care expenses; some go beyond the limitations of the federal credit. Eight of these states have a refundable child care tax credit, so that a taxpayer who owes no taxes may claim the credit. Several states have incorporated a sliding scale for determining the tax credit or deduction amount, which is based in some states on a percentage of the federal tax credit (this is discussed further below). For example, Colorado's credit is based on a family's income; specifically 10 percent, 30 percent or 50 percent of the federal credit for child care expenses. Oregon does not set a limit on the amount of expenses that can be claimed, which can help families better afford child care. Arkansas and Maine taxpayers can receive a higher credit if child care is in a center or home that is accredited or developmentally appropriate. 25

Businesses increasingly are recognizing the value of good, reliable child care for their workers. A recent survey found that more than half of the employers that offer child care assistance to their employees found reduced absenteeism and increased productivity. Assistance can include on-site care, referrals for workers, financial assistance to employees, or contributions to child care programs.

In 1999, policymakers in at least 21 states encouraged business involvement in child care, building on several years of state policies that encourage employer support. 26 State approaches include:

• State or community partnerships to directly involve businesses in child care funding;

• Statewide business commissions or local councils to make policy recommendations on involving businesses in child care; and

• Tax credits or incentives to encourage businesses to become involved in the development of child care.

Even with these efforts, less than 1 percent of child care funding comes from the private sector. 27

Some states are finding that public/private partnerships are a way to expand the supply of child care. Florida's public/private funding partnership is an innovative example. The state Legislature appropriates $12 million to be matched with $12 million from employers throughout the state. Large and small companies with many low-income workers contribute to the fund, which has increased in amount and has served thousands of children since 1996.

Businesses can also directly fund child care initiatives. The private sector has provided $55 million to North Carolina's Smart Start. In New Hampshire, Providian Bank provided more than $5 million in grants and $1.8 million in loans to improve child care services, such as facility improvements, business training for providers and creation of new child care slots. 28

Several states-including Colorado, Indiana, Maine and Nebraska-have established commissions and partnerships in which businesses work with policymakers and child care experts and providers to help make policy recommendations. Colorado's Business Commission on Child Care Financing examined and recommended how Colorado could expand and finance good quality child care. The Indiana Symposium on Child Care Financing encouraged the private sector to become involved in improving the supply of quality child care. As a result, the Indiana Child Care Fund, which is comprised of business, foundation and individual contributions, has helped improve child care in Indiana. In 1999, the Maine Legislature established a business commission to examine financing and economic development incentives that promote quality child care and early education. An Oklahoma law requires the state to encourage stronger public/private partnerships for unmet child care needs, and many businesses in the state have participated in policy-related early childhood conferences with policymakers and other stakeholders. Recently, Nebraska's governor created the Business Council on Child Care Financing, which made recommendations on financing and access to quality early childhood care and education. 29

Different types of incentives and tax credits can be offered by states to corporations for employer-supported child care, including corporate or franchise tax credits and sales tax exemptions for child care facility construction and other material costs. At least 24 states have tax credits-mostly corporate income-for employers for child care assistance, which can include on-site care, contracted off-site care and referral information. Most states limit a percentage of the total employer expense and some of these states also place a maximum limit on the credit. A few states limit the child care tax credit to employers that provide child care services to low-income people or welfare recipients. Survey results of several states during the mid-1990s indicate that use of these credits has been minimal.

Private sector funds also can help finance needed facilities and other services to improve the supply of child care. Because the cost of constructing child care centers is high, state policymakers have been creating laws to offer financial assistance such as loans, loan guarantees, bonds and technical assistance. Some successful child care loan programs are administered by a community development financial institution (CDFI), which can generate financing for early care and education facilities. By working with CDFIs, states can leverage additional federal funds set up under the federal CDFI act and states can use the CDFI's financial expertise to manage the loan and provide technical assistance to child care programs. This approach has been used in Illinois, Massachusetts, North Carolina, Ohio and San Francisco.

Some states operate their own loan program. At least 14 states have established direct loan programs to increase the supply of facilities. State legislatures limit loans by capping amounts or percentages of the overall cost. Maryland, which has one of the longest running state loan programs, finances up to 50 percent of the cost of construction, renovation or acquisition of real property. Since its inception in 1988, the Maryland direct loan program has made 41 loans for a total of $5 million, which has benefited more than 5,000 children. In 1999, the Maine Legislature enacted a law providing loans to child care businesses.

When some states operate their own loan programs, they have experienced low participation, high default rates and difficulties in administration. Connecticut's program aims to avoid these problems by using a pooled revenue bond program, established in the state's recent school readiness law. This program helps providers finance the debt by requiring payment of 15 percent to 25 percent of a loan; the state pays the balance of the loan principal and interest. The state has earmarked TANF funds to help repay the loans. Since the issuance of the first $10 million bond, the program has served 1,050 children through renovation of six child care facilities. 30 Illinois also has issued bonds for construction of facilities.

Similar measures that legislators in some states have adopted include loan guarantee funds, which are an inexpensive way to help child care programs that can afford debt to build facilities. A unique approach, approved by legislators in Ohio and Texas, encourages lenders to provide low-interest loans. Through this linked deposit strategy, which has been used in other states and communities, a state entity deposits money in a bank and the revenue that the bank earns from this deposit helps offset the lower interest on the child care loan. Banks and other lending institutions invest in community child care as part of their obligations under the federal Community Reinvestment Act.

Recent studies show that a child's relationship with his or her parents in the first year is a decisive factor in that child's development. In addition, infant and toddler care is more expensive than care for older children. To support parents' time with their infants and to assist parents with the high cost of infant care, states are considering various options. These include innovative financing of paid parental leave, offering funds for parents who choose to stay at home with their baby and exempting parents on welfare from work requirements during their child's first year.

Some states are considering expanding upon the federal Family and Medical Leave Act (FMLA) of 1993, which guarantees up to 12 weeks of unpaid family leave if a parent works in a company of more than 50 employees. Because people cannot afford to take unpaid leave under the FMLA, states are considering a range of options. One new alternative for states is to draw upon unemployment insurance (UI) funds to finance paid parental leave. Since President Clinton proposed a federal rule change that allows states to use UI for paid parental leave, state legislators in 14 states have proposed this policy in the 2000 sessions. 31 Opponents argue that using UI distorts its original intent, endangers an already precarious system in need of reform and jeopardizes benefits for those who are out of work for economic reasons. In addition, temporary disability insurance (TDI) programs in five states and Puerto Rico that provide paid maternity leave benefits have been considered as state models that could provide paid family leave.

By promoting policies that encourage parents to stay at home with their infants, states advance the bond between parent and baby and also ease the high demand and costs for infant child care. Minnesota and Utah legislators have enacted tax credits for parents who stay at home with their infants. In 1997, Minnesota enacted a reimbursement payment for low-income, non-welfare families if a parent stays at home with a child during his or her first year. This payment represents three-fourths of the maximum child care subsidy reimbursement rate. State legislators also have formed policies designed to meet the particular needs of parents on welfare who have young children. These laws and policies include exempting welfare recipients with infants from work requirements or applying work requirements only if the parent can find affordable child care.

Other early childhood financing sources include lottery and gambling revenues. Georgia finances its state voluntary prekindergarten program with lottery funds. Funded at $217 million in 1999, the program serves more than 62,000 children. The program started in 1993 as an at-risk program for 4-year-olds and expanded a few years later to serve all 4-year-old children, regardless of income. The Missouri legislature approved using riverboat gambling revenues to support child care and early childhood education to support the state's prekindergarten program, funded at $9 million in 1999. 32 The fund also is used to assist low-income families with child care reimbursement, especially accredited facilities and parents who care for their infants and toddlers at home.

Since the $250 billion tobacco settlement, state lawmakers are deciding how to use their state's share. Policymakers in 44 states are spending the funds on children's anti-smoking programs, many states are directing these funds to health-related efforts, and 12 states are focusing on education and community initiatives, including after-school programs. Several states also are spending their settlement funds on early childhood care and education services. Kentucky legislators approved using $56 million from the state's tobacco settlement share for child care and child health services, with a quarter of the total settlement being used for child care initiatives. The child care changes include an eligibility increase, a scholarship fund to help pay for training of child care workers, a new rating system with reimbursement incentives, state technical assistance for quality, an increase in licensing personnel, business and other councils, and evaluation. Policymakers in several other states-including Alabama, Maine, Nevada and Wyoming-have appropriated tobacco settlement funds for child care and early education services. Hawaii and Missouri legislators also are proposing to use tobacco settlement funds for child development activities. 33

In addition, California voters approved a 50-cent per pack tax on cigarettes in 1998 to raise $700 million per year in the state. Local commissions throughout the state are using these tax revenues for a variety of early childhood care and development services, as well as for smoking prevention programs for children. The early childhood services include providing parent education and family support, improving child care providers' skills, establishing an integrated information system and media campaign for early development, and providing prenatal care and infant health and nutrition programs. 34

Many states use creative and innovative sources to help finance child care, although these sources tend to raise small amounts. Massachusetts established the "Invest in Children" license plate program to raise funds to improve child care services. A Kentucky law established a child care assistance account to subsidize child care for low-income working families that have incomes in excess of assistance eligibility guidelines. The amount is funded by a voluntary $1 donation collected during motor vehicle registration and renewal. Colorado legislators established a voluntary state income tax check-off to support child care teacher training and quality improvements, that in 1998 produced more than $188,000. Recently, the South Carolina legislature allowed tax return contributions to the school readiness fund. Several states-including California, Tennessee and Virginia-use child care licensing and renewal fees to support training and education programs for child care teachers. 35

The multiple opportunities to finance child care include federal and state funds, tax strategies, business partnerships and other innovative resources. These options are significant because they provide a way for legislators to support working families from a range of incomes with good, accessible child care, while also promoting healthy early childhood development through quality child care services that nurture children's learning and behavior. By financing child care and early education programs, state lawmakers have a concrete strategy to achieve wide-ranging, long-term public policy goals, including welfare reform, workforce and economic development, school success and crime prevention.

1. Helen Blank, Karen Schulman, and Danielle Ewen, Key Facts: Essential Information About Child Care, Early Education, and School-Age Care (Washington, D.C.: Children's Defense Fund, 1999), 117-118.

2. Helen Blank and Nicole Oxendine Poersch, State Developments in Child Care and Early Education 1999 (Washington, D.C.: Children's Defense Fund, 2000), 9.

3. State Child Care Expenditures Beyond CCDF MOE and Matching: TANF MOE Child Care Expenditures in Excess of CCDF MOE, Calculated by Center for Law and Social Policy using financial data reported by states to HHS, posted on the ACF website at http://www.acf.dhhs.gov/programs/ofs/data/q499/index.htm, May 2000.

4. Blank and Poersch, State Developments in Child Care and Early Education 1999, 12.

5. Access to Child Care for Low-Income Working Families, HHS, 1999, n.p.

6. Blank and Poersch, State Developments in Child Care and Early Education 1999, 29-33.

7. Schulman, Blank and Ewen, Seeds of Success: State Prekindergarten Initiatives 1998-1999, xiii.

8. Schulman, Blank and Ewen, Seeds of Success: State Prekindergarten Initiatives 1998-1999, 8.

9. Internet site: http://www.acf.dhhs.gov/programs/ofs/data/q499/hilites.htm

10. Ibid.

11. Internet site: http://www.thearc.org/ga/ssbg_report.htm

12. Blank, Schulman and Ewen, Key Facts: Essential Information About Child Care, Early Education, and School-Age Care, 99; Internet site: http://www.acf.dhhs.gov/programs/ofs/data/q499/hilites.htm

13. Ibid., 101; Internet site: http://www.frac.org

14. Ibid., 99.

15. Internet site: http://www2.acf.dhhs.gov/programs/hsb/about/99_hsfs.htm

16. Internet site: http://www2.acf.dhhs.gov/programs/hsb/regs/hsactogc.htm

17. Schulman, Blank and Ewen, Seeds of Success: State Prekindergarten Initiatives 1998-1999, 18; Blank and Poersch, State Developments in Child Care and Early Education 1999, 91. The following states and jurisdictions supplement Head Start: Alaska, Connecticut, Delaware, District of Columbia, Hawaii, Kansas, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Rhode Island, Texas, Washington and Wisconsin.

18. Scott Groginsky, Susan Robison and Shelley Smith. Making Child Care Better: State Initiatives (Denver, Colo.: National Conference of State Legislatures, 1999), 44; Mary L. Culkin, Scott Groginsky and Steve Christian. Building Blocks: A Legislator's Guide to Child Care Policy (Denver, Colo.: National Conference of State Legislatures, 1997), 66.

19. Blank, Schulman and Ewen, Key Facts: Essential Information About Child Care, Early Education, and School-Age Care, 99; Groginsky, Robison and Smith. Making Child Care Better: State Initiatives, 46.

20. Schulman, Blank and Ewen, Seeds of Success: State Prekindergarten Initiatives 1998-1999, 36.

21. Groginsky, Robison and Smith. Making Child Care Better: State Initiatives, 50.

22. Anne Mitchell, Louise Stoney, and Harriet Dichter, Financing Child Care in the United States: An Illustrative Catalog of Current Strategies (The Ewing Marion Kauffman Foundation and The Pew Charitable Trusts, 1997), 11-23.

23. Louise Stoney, Looking into New Mirrors: Lessons for Early Childhood Finance and System-Building, (Horizons Initiative, 1998), 17.

24. Sheri Steisel, Presidential Budget, (Denver, Colo.: National Conference of State Legislatures, April 2000).

25. National Women's Law Center, Recent Changes in State Child and Dependent Care Tax Provisions: Tax Year 2000 (Washington, D.C.: National Women's Law Center 2000), 7.

26. Blank and Poersch, State Developments in Child Care and Early Education 1999, 105-110.

27. Louise Stoney and Mark H. Greenberg, "The Financing of Child Care: Current and Emerging Trends," The Center for the Future of Children, The Future of Children: Financing Child Care 6, no. 2 (Los Altos, Calif.: The David and Lucile Packard Foundation, Summer/Fall 1996), 93.

28. New Hampshire Child Care Advisory Committee, Child Care in New Hampshire: Five Year Plan, January 1999, 16.

29. Governor's Business Council on Child Care Financing, Nebraska's Child Care Challenge 1999; Culkin, Groginsky and Christian, Building Blocks, 12.

30. Blank and Poersch, State Developments in Child Care and Early Education 1999, 57.

31. Internet site: http://www.ncsl.org/programs/employ/fmla-ui.htm

32. Schulman, Blank and Ewen, Seeds of Success: State Prekindergarten Initiatives 1998-1999, 186, 195.

33. Lee Dixon, State Tobacco Settlement Legislation and Activities, (Denver, Colo.: National Conference of State Legislatures, April 2000).

34. Internet site: http://www.ccfc.ca.gov/fact_sheet.htm

35. Groginsky, Robison and Smith. Making Child Care Better: State Initiatives, 11-12.