A Rising Minimum Wage Reinforces the Case for Boosting Investment in California’s Child Care and Development System

California’s subsidized child care and preschool programs provide free or fee-based services to well over 200,000 children from low- and moderate-income families. These early care and education (ECE) services aim to prepare children for school, help families achieve economic security, and mitigate the harmful effects of poverty. However, insufficient state and federal funding means that these services fail to reach all families who need them. Given the broad benefits of ECE to children, families, communities, and the overall economy, there’s a slam-dunk case for substantially boosting investment in these services — a case that ECE advocates both in Sacramento and around the state have been making for years. Most recently, the Democratic members of the California Legislative Women’s Caucus have pressed for an $800 million increase in state funding for subsidized child care, and the Right Start Commission has called on the state to ensure “universal access to high-quality early learning and care” for children from birth to age 5.

This year, however, an additional factor is in play: the decision by Governor Brown and lawmakers to incrementally increase the state minimum wage from $10 to $15 per hour in the coming years. This change will benefit millions of Californians, including child care workers, who on a national level are among the lowest-paid workers. At the same time, raising California’s wage floor will have implications for ECE providers’ cost of doing business as well as for working families’ ability to access subsidized services as their incomes go up. These dynamics reinforce the case for boosting state support for child care and development programs in order to better meet the needs of working parents and their children — and the state as a whole — in the years ahead.

Payment Rates for Child Care and Development Providers Are Outdated and Need to Be Increased

A higher minimum wage will boost take-home pay for many Californians employed in the ECE field. Compensation will rise not only for employees who earn the minimum wage, but also for those who are higher on the wage scale and will benefit from the “ripple effect” of the minimum-wage increase. This includes, for example, teachers in licensed centers, many of whom currently earn in the neighborhood of $15 per hour. It also includes salaried employees who are exempt from overtime rules and must be paid twice the minimum wage. Increased pay not only improves “the economic well-being of care providers and their families,” but also enhances providers’ “ability to attract and retain a highly trained workforce,” according to a recent report from the Economic Policy Institute that highlights the benefits of investing in ECE.

Clearly, as the state minimum wage rises, ECE providers’ cost of doing business also will go up. In order to ensure that providers can absorb these new costs while continuing to serve families who receive subsidies, state policymakers must ensure that these higher costs are accounted for in the payments that ECE providers receive. However, in addition to planning for future costs, policymakers should address the current inadequacy of the state’s payment rates. It’s no secret that the current rates are outdated and fail to address providers’ existing cost of doing business. For example, some child care providers are reimbursed for services based on market rate data from 2005. While outdated rates reduce the state’s overall cost for ECE services, they also deny providers the resources they need to recruit and retain the most highly qualified workforce as well as boost their capacity to serve families in the subsidy system.

Higher provider payments also would help to maintain a robust network of individuals who offer “kith and kin” (family, friend, and neighbor) care. This informal child care is often provided at night or on weekends, when licensed centers or licensed family child care homes typically are closed. These “license-exempt” providers are a critical resource for low-income families, who often have nontraditional and/or unpredictable work schedules. However, such caregivers receive abysmally low payments from the state — the equivalent of roughly $3 per hour in many cases.

The Income Eligibility Limit for Child Care and Development Services Is Outdated and Needs to Be Raised

The income eligibility limit is the highest income at which a family qualifies for subsidized child care or preschool. (A limited number of children from families whose incomes slightly exceed the limit may enroll in the state preschool program.) The income limit is calculated as a share of the state median income (SMI). However, the state has not increased this limit since 2007-08, when it was based on the SMI from 2005. Not only has the state failed to increase the income limit for the past eight years, but in 2011 policymakers actually lowered the income cap from 75 percent of the 2005 SMI to 70 percent of the 2005 SMI, where it remains today.

Because the state has failed to increase the income limit, families lose access to subsidized ECE services sooner than they would if the limit reflected current income data. For example, a family of three loses eligibility for subsidized child care when their gross income (not their take-home pay) exceeds $3,518 per month. This income is far from sufficient to allow a family to pay market rates for child care — which can easily exceed $1,000 per month — while also paying for housing, food, transportation, and other necessities. If the income limit were updated to reflect 85 percent of the most recent SMI — as proposed in Assembly Bill 2150 (Santiago) — a family of three could have gross monthly earnings of up to $5,010 per month and still remain eligible for child care assistance. (This is based on the SMI for a family of three in 2014 — $70,732 — which is the most recent year for which SMI data are available.) Even with a pre-tax monthly income of around $5,000, many families would consider the loss of subsidized child care to be a financial hardship, since the cost of privately purchased care could consume more than one-fifth of their income. Nonetheless, these families would be better positioned to absorb the full cost of child care compared to families who currently lose eligibility for assistance at much lower income levels.

Overhauling the income eligibility limit will require state policymakers to (1) update the income limit to reflect the most recent SMI, which is from 2014, and (2) consistently adjust the limit to reflect increases in the state median income. Making annual adjustments will be critical as California’s minimum wage increases to $15 per hour, causing low-wage families’ incomes to rise rapidly in a relatively short period of time. If the income limit remains frozen at the 2007-08 level, many families’ incomes will exceed the cap sooner than would otherwise be the case, raising the prospect that these families will lose access to subsidized child care or preschool before they are financially stable.

In the short term, families with two low-wage earners are most at risk of losing ECE services as the minimum wage rises. This is because a family with two working parents is more likely to exceed the income limit than is a single-parent family with income from just one job, particularly in the early stages of the minimum-wage increase. Currently, a family with one child and two working parents comes close to exceeding the income limit even when both parents earn just the minimum wage. Two parents working full time at $10 per hour earn a pre-tax monthly income of $3,467, which is just $51 below the income cap of $3,518 for a family of three. Next January, the minimum wage will rise to $10.50 per hour for workers at firms with 26 or more employees. (For workers at smaller firms, the minimum wage will increase to $10.50 in January 2018.) With a minimum wage of $10.50 per hour, a dual-earner family will have a pre-tax monthly income of $3,640, which will exceed the income limit for a family of three if the state leaves the current limit in place. A family in this situation would lose their child care subsidy once their eligibility is reassessed. This could cause their child care expenses to jump by hundreds of dollars per month, even though their monthly pre-tax income would have risen by less than $200.

Over the longer term, if state policymakers fail to consistently update the income limit for subsidized ECE services, even more families will be at risk of losing care, potentially including single parents who earn more than the minimum wage. As noted above, a rising minimum wage will boost the incomes not only of minimum-wage earners, but also of workers with somewhat higher wages who will benefit from the ripple effect of the increase. This ripple effect could push many single-parent families above the income limit for child care and development services if the current limit remains in effect indefinitely. For example, a single parent with one child currently remains eligible for subsidized child care until her income reaches about $19 per hour (assuming full-time work), nearly twice the minimum wage of $10 per hour. As the minimum wage incrementally rises to $15 per hour in the years ahead, a single parent working full time for $19 per hour could also receive a raise as employers adjust their pay scales upward. However, such an increase in pay would boost this parent’s hourly wage above the income limit for subsidized ECE services if the state fails to update the income threshold.

How might families respond to the prospect of losing access to subsidized child care or preschool? Some parents might decide to cut their work hours or turn down a promotion in order to limit their incomes and, in turn, maintain eligibility for ECE services. But this might not be an option for all families. Those who lose subsidized child care might seek out less costly — and potentially less stable — arrangements. Other families might choose to leave the workforce and turn to the CalWORKs welfare-to-work program for both child care assistance and help with basic living expenses.

California Needs a Larger Number of Child Care and Development “Slots” in Order to Serve More Families

The number of children who can receive ECE services partially depends on the number of slots, or spaces, in the system. For many years, the state and federal governments have failed to provide sufficient funding to support the number of slots that are needed to meet working families’ need for affordable child care and preschool. As recently as 2011, more than 193,000 children were on the statewide waiting list for subsidized child care and development services, and it’s likely that the number of children waiting for a slot has increased since then. (The state eliminated funding to maintain this statewide waiting list in 2011, so the number of families waiting for care is no longer known.)

While state policymakers reduced ECE slots during and following the Great Recession, some slots were restored in 2014-15 and 2015-16, primarily in the state preschool program. Continuing to boost the number of slots is critical, particularly if the state increases the income eligibility limit for child care and development services. As noted above, if the income limit is raised, families could receive subsidized ECE services for longer periods as their incomes rise. However, this change would disadvantage lower-income families who are waiting for care. This is because slots would be “freed up” less frequently if children from higher-income families stay enrolled longer. In order to avoid reducing access for lower-income families, state policymakers would need to increase the total number of slots so that a greater number of families with lower incomes could be served.

Summing Up

State policymakers’ decision to gradually increase the minimum wage to $15 per hour lends new urgency to efforts to strengthen California’s child care and development system. As the Governor and lawmakers craft the state budget for the 2016-17 fiscal year, which begins this coming July 1, they should include a plan to boost payment rates for ECE providers, raise the income eligibility limit for subsidized ECE services, and increase the number of child care and preschool slots within the subsidized system. Proposals that would require even larger state investments, such as ensuring universal access to child care and preschool, may be on the horizon. Given the critical importance of early care and education in building a strong foundation for economic growth and broadly shared prosperity, this is clearly one issue that’s likely to remain near the top of the state’s policy agenda for many years to come.

— Scott Graves