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National Center on Child Care Quality Improvement ECE Finance: Framing Our Discussion QRIS Financing Learning Table Session One (Part One) June 28, 2012
National Center on Child Care Quality Improvement
ECE Finance: Framing Our Discussion
QRIS Financing Learning Table Session One (Part One)
June 28, 2012
ECE Revenue
Families
Gov't
Private
Sector
Consumer tuition is the largest source of revenue, roughly 57% of total industry receipts
Private sector revenue has increased dramatically, but still less than 4% of total
Government funding
@ 39% of total, and
is primarily portable
$ (vouchers
or tax benefits)
National Center on Child Care Quality
Improvement
Welfare Reform Dramatically Increased Dollars but not Quality
• Federal and State spending on child care skyrocketed between 1995-2010
• Focus on increasing supply; little attention to policies that support provider quality
• Result: dramatic government cost increase without corresponding improvement in quality or child outcomes
The Great Recession Added New Challenges
• As child care demand boomed, cost/quality challenges not as apparent
• With recession, ECE programs that serve all socioeconomic sectors suffering from:
– Lower enrollment
– Insufficient fee collection
– Pressure to lower prices
• End result: Oversupply of poor- and mediocre quality programs, significant fiscal challenges for higher quality programs
National Center on Child Care Quality
Improvement 4
Key Implications for ECE Finance
• Most ECE funding (public & private) is tuition or fees
• Little funding is linked to quality standards
• Welfare reform focus on parent choice among any legal provider meant $$ were spread thinly among many providers
• Implication: public sector $$ not focused or deployed in a way that drives a demand for quality
National Center on Child Care Quality Improvement
5
QRIS Offers Opportunities/Challenges
• QRIS is powerful tool to help: structure markets, link funding to program costs (not prices), drive demand for quality.
• QRIS can be used by multiple funders, to help break down silos & create framework for cost-sharing
• But without careful thought to new finance and policy strategies, ECE programs at higher star levels face enormous challenges
National Center on Child Care Quality Improvement
6
Effective ECE Finance & Policy: Addressing the Cost-Quality Gap
• Higher quality ECE costs more than lower quality (higher degrees, lower ratios, etc.)
• Typical answer – to raise public reimbursement rates – is a simplistic response to a complex problem
• Effective policy rooted in deeper understanding of ECE finance from provider perspective:
How to increase program operating revenues and improve business management, while acknowledging that child care markets are price sensitive?
National Center on Child Care Quality Improvement
7
8
The Iron Triangle of ECE Finance
• Ensure full enrollment – every day, in every classroom
• Collect tuition and fees – in full and on-time
• Revenue covers per-child cost (tuition, fees + 3rd party funding)
7/9/2012
Children 0-5 years in Public and Private ECE Programs, 2010 Source: US Census Bureau 2010
9
EC&E Services: Large majority of providers are Independent Businesses (profit and non-profit) that are tuition-based
Children in private sector
EC&E programs
Children in Head Start Children in public
school Pre-K
4,814,698
953,313 958,944 72%
14% 14%
($80,000)
($60,000)
($40,000)
($20,000)
$0
$20,000
$40,000
$60,000
$80,000
84.0% 86.0% 88.0% 90.0% 92.0% 94.0% 96.0%
Impact of Increasing Enrollment on Net Income
Star 1
Star 2
Star 3
Star 4
QRIS Finance
State Costs Administrative decisions:
standards, evidence, automation, scope of TA,
participation levels, frequency of rating all affect
costs
• Monitoring & assessment
• TA & PD systems
• Financial incentives
• Data collection
• Evaluation
Provider (ELD) Costs To attain and sustain
compliance with high-quality standards ELDs make a range of program/fiscal decisions.
Issues such as program staffing, ratios & group size,
coupled with QRIS requirements (scope of
evidence) all affect costs
QRIS Finance Tools
• State Costs – On-line QRIS Cost Estimation Tool (CEM)
• ELD Program Costs – Mitchell Cost-Modeling Methodology
National Center on Child Care Quality
Improvement 12
Lessons Learned from CEM
Strategic use of CEM can help states:
• Quantify trade-offs among QRIS costs (e.g. $ spent for TA vs $ spent for financial incentives)
• Costs at various participation levels
• Financial implications of targeting QRIS to specific communities and/or sectors
• Comparison with national norms
National Center on Child Care Quality Improvement
13
Cost Summary: Options for Scaling Quality Counts (in millions)
Prof
Dev
Technical
Assist
Financial
Incent
Assess,
Monitor
Admin
Evaluation Data Public
Aware
Facility
Fund
Shared
Services
on-line
Total
Option 1 (QC as is.
For all)
3.703 8.983 13.714 3.919 .334 .200 .100 $30.953 Option 1 (QC as is,
targeted)
1.518 3.032 4.712 2.006 .133 .194 .100 $11.695 Option 2 (Team
recommend)
3.067 2.893 5.921 3.473 .193 .194 .100 1.000 .024 $16.865 Option 3 (Cost-
Neutral)
2.102 1.019 3.099 3.473 .134 .198 .100 1.000 .024 $11.148
Lessons Learned from ELD Cost Modeling
Helps understand financial impact of QRIS requirements at each Star Level.
• ELDs at higher star levels can’t break even without additional operating $ from Head Start, PreK and private sector
• State financial rewards rarely correlate with ELS expenses by Star Level
• Size matters: at NAEYC ratios, a center must serve 100+ children, maintain enrollment at 95%, and collect all fees in full just to break even.
• Infants and toddlers are very expensive to serve; the greater the proportion of preschool classes the better the bottom line will be.
• ELDs that offer full-day, year round services to children of all ages are the most challenged financially.
National Center on Child Care Quality
Improvement 15
Example Provider-Level Output of Model Center: 106 children, infants, toddlers and preschoolers
QUALITY Net Income as
% of Expense
Annual profit or
loss per Child
Regulated $828,943 Expense
$847,626 Revenue
$18,683 Net Income 2% $176
Star 2 $846,319 Expense
$847,626 Revenue
$1,307 Net Income 0% $12
Star 3 $890,845 Expense
$855,825 Revenue
($35,020) Net Income -4% ($330)
Star 4 $946,116 Expense
$873,394 Revenue
($72,722) Net Income -8% ($686)
Star 5 $1,014,520 Expense
$882,765 Revenue
($131,756) Net Income -13% ($1,243)
Business Management is Key to Sustainable ELD Finance
• Sustainable quality requires strong leadership and sound financial footing (Iron Triangle)
• Poor fiscal management is the #1 reason ECE programs fail
• Even programs with high QRIS/ERS scores may fail to see fiscal trouble until it is too late
National Center on Child Care Quality
Improvement 17
The Iron Triangle of ECE Finance
• Ensure full enrollment – every day, in every classroom
• Collect tuition and fees – in full and on-time
• Revenue covers per-child cost (tuition, fees + 3rd party funding)
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The Many Roles of an ECE Director
The average child care center serves 75 children; In many centers a single director is responsible for multiple tasks.
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Shared Services
20
Services provided by Hub:
• Administrative services
• Classroom supports
• Comprehensive services
• Fundraising
• Staff recruitment/screening
• Bulk purchasing
• Human resources
• Research and development
National Center on Child Care Quality Improvement
Finance Learning Table Session One (Part 2)
June 28, 2012
Market Rates & Quality: Modeling ECE Cost
The Cost-Quality Conundrum
• Higher quality ECE costs more than most families can afford
• Market-based ECE encourages price competition – low tuition fees – and discourages investments in quality
Market Rates & Quality
• Setting subsidy rates at percentile of ‘market’ rates is intended to offer low-income families access to some portion of the market
• Market rates reflect what the average family can afford – or is willing to pay – for tuition
• Market rates do not ASSURE high quality & do not necessarily correlate with ELD cost
• If Tiered Reimbursement is the only source of funding for higher-quality, it can drive up prices for non-subsidized families unless it is a ‘bonus’ on top of the rate
What drives the cost of quality?
• Expense drivers:
– Ratios
– Group size
– Staff compensation
• Revenue drivers:
– Parent tuition fees/other revenue – Revenue collection – Enrollment efficiency
Modeling the Cost of Quality: Method
• Mathematical models of ECE center operations and home operations
• State-specific data
• Revenue & Expense budget for program meeting regulations
• Revenue and Expense budget for each level of state’s QRIS
Key Revenue & Expense Features of the Cost Model
• QRIS expectations increase by tiers
• Primarily better qualified staff as quality increases (slightly higher wages)
• More staff time for assessment, family activities and conferences, curriculum planning, staff meetings
Modeling the Cost of Quality
• Illustrate ‘iron triangle’ principles to provider community
• Quantify the cost-quality gap
• Strategize to fill the gap using every means possible: public investment, other third party payers, etc.
Example Provider-Level Output of Model Center: 106 children, infants, toddlers and preschoolers
QUALITY Net Income as
% of Expense
Annual profit or
loss per Child
Regulated $828,943 Expense
$847,626 Revenue
$18,683 Net Income 2% $176
Star 2 $846,319 Expense
$847,626 Revenue
$1,307 Net Income 0% $12
Star 3 $890,845 Expense
$855,825 Revenue
($35,020) Net Income -4% ($330)
Star 4 $946,116 Expense
$873,394 Revenue
($72,722) Net Income -8% ($686)
Star 5 $1,014,520 Expense
$882,765 Revenue
($131,756) Net Income -13% ($1,243)
Key Revenue & Expense Features of the Cost Model
• Expense – Staff wages from BLS, 2-5% increase for top 3 tiers
– Mandatory benefits, 5 paid holidays/5 days paid leave, no health insurance at lower tiers/20% employer contribution at upper tiers
– 85% enrollment, minimal bad debts
• Revenue – Subsidy at MR ceiling or parent tuition at same rate
– All possible QRIS financial awards
– CACFP
– Prekindergarten funding, if possible
Quantify the Gap in $
$176
$12
$330
$686
$1,243 $1,400
$1,200
$1,000
$800
$600
$400
$200
$0
$200
$400
Star 1/Reg Star 2 Star 3 Star 4 Star 5
Gap Between Revenue and Cost (Annual $/Child)
Quantify the Gap as %
4%
8%
13%
0%
2%
4%
6%
8%
10%
12%
14%
Star 3 Star 4 Star 5
Revenue Needed to Close The Gap as Percentage of Current Revenue
What data are needed to model costs?
• Expense – Cost drivers in regulation
– Cost drivers in each tier of QRIS
– Wage data for your state
• Revenue sources – Subsidy
– PreK
– QRIS financial incentives
How can cost modeling inform policy?
• Help determine levels for Tiered Reimbursement bonus
• Help determine size of quality improvement grants (on-going and one-time)
• Help gauge whether QRIS standards are realistic in terms of program financial sustainability
• Help estimate cost of QRIS overall (the financial incentive element)
Supporting Financial Stability
• State can… – Set family income eligibility high for entry and higher for exit
– Use contracts more than vouchers
– Make timely payments
– Set rate ceilings as high as feasible
• Providers can… – Fill vacancies immediately to keep enrollment as close to
100% as possible
– Collect all revenue on time
– Diversify revenue: Participate in CACFP, PreK & other revenue sources
DRAFT - 3-27-12
Financing Statewide ECE Systems Built on QRIS Principles
Cost modeling shows how expensive it is for ELD programs to attain and sustain quality. Given this reality, financing statewide ECE systems built on QRIS principles means: • Understand trade-offs between quality and quantity • Remember the Iron Triangle – full enrollment & full fee
collection is a financing strategy • Work in partnership with other funders to leverage $
and build collaborative budgets, systems, monitoring • Think strategically about targeting dollars – for
subsidy, financial incentives, TA, etc.
Thank You
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www.qrisnetwork.org
National Center on Child Care Quality Improvement
