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Press Release · December 18, 2003

Child Care Subsidies Have Raised Prices For All Families

Government Support Remains Critical for Those in Poverty; Universal Preschool Could Cost State $5 Billion Annually

SAN FRANCISCO, California, December 18, 2003 — The rapid expansion of government child care subsidies in the mid- and late-1990s drove up prices for everyone, including low-income families not currently receiving assistance. At the same time, child care vouchers remain vitally important for poor families, who spend about one-quarter of their total income on child care, according to two new studies released today by the Public Policy Institute of California (PPIC). The reports also peg the cost of full-year, full-day universal preschool at as much as $5 billion annually.

Linked with welfare reform, public spending on child care support in California rose dramatically in the 1990s, soaring from $125 million in 1992-93 to $1.5 billion in 2000-2001. During that time, average prices for child care rose 14 percent in real terms, with the sharpest increases occurring in licensed family day care after 1996. State and federal voucher payments — which grew 289 percent between 1998 and 2000 and accounted for roughly 20 percent of total receipts in the private child care market —contributed substantially to this increase, leading to 8.1 percent price hikes for care in centers and 4.5 percent increases in family day care in a typical county.

Yet child care assistance remains a critical resource for low-income families. Families that pay for child care while parents are working pay an average of $373 per month out-of-pocket — 24 percent of monthly earnings for poor families. “If current budget efforts reduce child care subsidies, many families will suffer severe financial hardship,” says coauthor and PPIC adjunct fellow Margaret O’Brien-Strain, who directs the social policy program at the SPHERE Institute. The most recent state budget cut spending on vouchers by approximately $155 million.

The authors point to the need to consider the unintended effects of child care policies on the larger child care market. Current federal welfare reauthorization proposals increase child care funding levels but these subsidy increases are probably too modest to affect child care prices significantly. However, efforts to establish universal preschool for children ages 3 and 4 could have a significant impact.

The projected costs of universal preschool vary widely based on eligibility and enrollment criteria. At the high end, full-year, full-day universal preschool could cost as much as $5 billion annually when fully implemented, not including the cost of administering the program. If eligibility were limited to low-income families, this cost would fall to $1.4 – $2.7 billion. Part-day preschool would also be substantially less expensive — around $1.3 – $2.3 billion for a universal program — but would also be less accessible to working parents.

In an era of fiscal austerity, policymakers have to weigh the tradeoffs involved in supporting working parents and in providing early childhood education, says O’Brien-Strain. “Calls for universal preschool should not draw attention away from the ongoing need for child care assistance to help working parents. If welfare reauthorization further increases the work requirements for welfare recipients, additional resources will be needed.”

Other Key Findings:

  • Child care price increases could have been larger were it not for the substantial growth in the supply of care. In 2000, there were sufficient licensed slots for 23 percent of all children under age 5 — a 20 percent improvement over 1996.
  • California families are less likely than families elsewhere in the United States to use child care and preschool. Still, most children of working parents (83%) regularly spend time in nonparental care, averaging 35 hours per week.
  • Children from lower-income families and with less–educated parents are less likely to be placed in child care or attend preschool. Together, these factors help to create a particular gap in the preschool enrollment of Hispanic children: Only 35 percent of Hispanic children ages 3 and 4 attend preschool, compared to 45 percent of non-Hispanic children.

O’Brien-Strain coauthored Child Care Price Dynamics in California with Grecia Marrufo and Helen Oliver and Arranging and Paying for Child Care with Laura Moyé and Freya Lund Sonenstein. Child Care Price Dynamics in California was supported in part through a grant from the Child Care Bureau of the U.S. Department of Health and Human Services.

The Public Policy Institute of California is a private, nonprofit organization dedicated to improving public policy in California through independent, objective, nonpartisan research on major economic, social, and political issues. The institute was established in 1994 with an endowment from William R. Hewlett.