States have primarily tried to solve for child care affordability through subsidies for individual children and families. The subsidy system we rely on now was developed in the 1990s on the premise that the market was providing adequate options, and low-income parents just needed a subsidy that would let them purchase in the market what middle- and higher-income families were buying on their own. The Market Rate Survey was required to help states understand how much of the child care market they were allowing subsidy recipients to access. States were encouraged (but not required) to set subsidy reimbursement rates at the 75th percentile of private-pay prices to ensure low-income families were able to access most of the child care market.
Recently, the field has become wary of ensuring subsidies match the “market rate.” Critics rightly point to the fact that the price that parents pay for child care—while too often unaffordable—still falls far short of the “true cost” of care. Cost studies reveal that a child care program operating according to best practices, with appropriate teacher-to-child ratios and paying competitive wages, costs far more to operate than most parents are currently paying. Further, focusing solely on market rates may lead to important inequities in rates over time, as prices rise more slowly in economically depressed regions than they do in higher-income parts of the state. For these reasons, many advocates have called for states to begin setting reimbursement rates based on cost modeling, and some have even called for doing away with Market Rate Surveys altogether.
But the truth is that states don’t set rates too low because of the Market Rate Survey. States set rates too low because they are trying to balance access to subsidy with adequacy of funding in the context of far, far too little investment in child care. Setting rates high enough to cover the true cost of high quality care with adequate compensation means fewer children receiving subsidies. This may be the right trade-off for a state to make, but it is a trade-off. There is no magic wand to fix the troubled child care market absent a major increase in funding.
If a state is ready to provide subsidies to the vast majority of parents, then cost modeling alone may indeed be the best approach for setting rates. New Mexico and Washington, D.C. are great examples of systems that are scaling up to serve nearly all families. But few states have committed to a near-universal system, and we have to solve for the market we’re dealing with right now. To do that, we need to understand both the true cost of care and the prices parents are currently paying. A comprehensive Market Rate Survey remains an important tool for creating equitable financing strategies to close the gap between current child care prices and the true cost of quality care.
Consider a typical child care center that participates in its state’s subsidy system, serving an ever-changing mix of subsidized and non-subsidized children. Even if the state starts setting reimbursement rates based on the true cost of care, the center’s budget—and the wages it pays its teachers—will continue to be driven by what private-pay parents can afford because private tuition is the majority of their revenue. Another issue in many states may be an existing broad-based policy that mandates that no provider can charge the state more than it charges on the private pay market, meaning many providers won’t benefit from higher reimbursement rates unless they raise tuition for their already-strapped private-pay families.
If states want to drive better compensation and quality, they will need to develop targeted financing strategies to support these goals. For example, several states used the recent Child Care Stabilization Grants to incentivize providers to raise wages. Illinois, for example, has piloted contracts with providers that specifically focus on increased compensation. In order to design these new financing mechanisms well, states need to understand what providers are currently charging as well as what services would cost to provide if programs were paying the competitive wages that will be needed to attract and retain a well-qualified early childhood workforce.
Market Rate Surveys can also illuminate important differences in child care markets across regions in a state that are relevant to financing design. For example, in a major metropolitan area, the range of prices charged for child care may be wide, with providers at the 75th percentile charging as much as 40% more than the median price. In less economically-diverse regions, the range of prices charged may be much smaller, and prices may be closer to the reimbursement rate that the state has been paying. In fact, in Illinois we know in many of our rural counties, the state’s rate is the market rate because there is so little care available for children. Understanding this range of prices can help a state to design a combination of subsidy reimbursement rates and operating supports for programs in all communities to provide high quality services and pay competitive wages.
The time has indeed come to recognize that the 75th percentile benchmark can’t be the only factor that a state considers as it sets its reimbursement rates. But a Market Rate Survey can still help support equitable child care funding design. Until we have the resources we need to adequately fund the whole ECEC system, states will continue to have to make difficult trade-offs with their limited resources. To do that well, they need all the information they can get about the current market. Cost models and the Market Rate Survey both have an important place in the policymaker’s toolbox in order to develop effective financing strategies and truly make it possible for more children and families to access high quality child care services.
Dr. Theresa Hawley is the Executive Director of Center for Early Learning Funding Equity at Northern Illinois University. CELFE guides and inspires states and communities as they design, transform and sustain public Early Childhood Education and Care systems to be equitable, efficient and effective.