The Impact of Federal and State Policy Changes on Child Care in California

M. Rebecca Kilburn (RAND)
Lingxin Hao (University of Iowa)

Sweeping demographic changes over the last 20 years have moved child care onto the public policy agenda. As more women with children entered the labor force, the public debated the desirability of publicly subsidizing child care in order to facilitate female labor force participation and ensure adequate developmental opportunities for children. Recent proposed changes in federal and state policies have propelled these issues to a more prominent role in policy discussions. This paper outlines the likely impacts of federal and state policy proposals that are expected to affect child care, with an emphasis on the state of California.

We group the proposed changes into five broad themes. The first is a rejuvenated focus on the transition to work in federal welfare reform discussions. Policymakers have recognized that requiring mothers to work fuels child care demand and hence they have incorporated child care provisions into welfare reform proposals. Second, while Republicans and Democrats alike have lauded investments in child development through child care program expenditures, this interest in school readiness has been overshadowed by interest in the other major goal of child care policy: facilitating maternal work. The result is that lawmakers may be trading one for the other. The third major policy initiative that will affect child care is consolidating the major federal child care programs into child care block grants. Lessons learned in 1981, when many federal child care services were consolidated into the Social Service Block Grant, suggest that such a move would have only minor pluses for child care programs. Fourth, while the block grants are expected to offer recipients "seamless" child care coverage, lighten administrative burdens, and reduce federal expenditures, they are also likely to decrease federal resources devoted to child care over the next half decade and to yield further quality compromises. Actions at the federal level on the whole tend to weaken child care quality, although many states are strengthening child care quality standards. Although this may have developmental benefits for children, it entails tradeoffs--providing higher-quality care costs more, which leads parents to utilize less care and to reduce mothers' labor force participation. Finally, the California state legislature is considering reinstating the California child care tax credit after a five-year hiatus. Researchers have found that child care tax credits encourage maternal labor force participation, but that the relief provided by the tax credits accrues primarily to middle-andupper-income families.

In this paper, we first provide the demographic and historic context leading up to the current policies influencing child care. Next, we describe the current status of government involvement in child care. We then outline the proposed federal and state policy changes and summarize their implications for child care in California. In this discussion, we pay particular attention to informing readers of research findings that have implications for the policies being considered. We conclude with a brief summary.

Demographic and Historic Background

From a historic point of view, the United States is in the midst of a second child care revolution, as more and more children under the age of six are cared for by someone other than their parents (Hernandez, 1993). The first child care revolution began more than 100 years ago and affected children over age five: Through compulsory education law, the government both mandated and paid for universal schooling for all children age six and over for reasons of equity and the "children as a public good" argument.

Over the past few decades, several broad demographic trends have led us to confront the second child care revolution. First, the fraction of working mothers with children below school age more than doubled over the last quarter-century, growing from less than a third in 1967 to 70 percent in 1993. Second, the divorce rate has grown rapidly, from 9 per thousand in 1940 to 20 per thousand in 1990. Coupled with the greater out-of-wedlock birth ratio, this led to one out of every four children living in single-mother families by 1993. Half of these families live under the official poverty line. The net result of these trends is that more children under the age of six are cared for during the day by someone other than their parents, and more children are living in economically disadvantaged households.

The second child care revolution gives rise to a similar question that arose in the first child care revolution: Should child care be provided publicly or mainly by parents? While a full role of the government in child care can be supported either for the well-being of the children and their parents (Blau, 1991) or for society-wide benefits, a consensus has emerged in which child care remains primarily the purview of families, with only limited government involvement--through partial assistance to low-income families for child care through government-sponsored programs and through tax breaks for middle- or high-income families. Questions still remain as to what extent of government involvement is in accordance with the societal benefits from child care.

Federal and state child care programs have been justified using two primary motivations. One justification stresses the potential developmental benefits of child care. Programs in this category are designed to improve child welfare and reduce the costs of government intervention later in the child's life. These types of programs include government regulation of quality standards such as the health and safety of child care environments, the provision of food for children in daycare, and subsidized or free child care such as Head Start. A second justification focuses on care during maternal employment. The focus of programs with this orientation is to encourage parents to work. These programs are often linked to public assistance programs with the hope that providing child care will help the parents move from welfare to work. Still other government child care programs attempt to satisfy the dual goals of child development and maternal employment. As we discuss below, rather than being complementary, these goals are often in competition with each other.

Portrait of Federal and State Child Care Provision Today

Federal and state governments participate in the child care market through a variety of programs that place different amounts of emphasis on maternal employment and child development goals. Here, we briefly review government involvement in the child care market at both the federal and state level.

Federal Child Care Programs

Federal support for child care comes from seven programs, briefly outlined here. Table 1 reports federal and state funding in federal child care programs, and Table 2 summarizes the primary motivation for each program and the state matching-fund requirements.

Table 1

Federal and State Funding of Child Care and Early Education Programs
(Millions of dollars in FY 1995)

Table 1

Table 2

Primary Motivation and State Matching Requirements, by Program

Table 2

Child Care Tax Credit. The child and dependent care tax credit accounted for about a quarter of federal funding for child care and early education programs in 1995 (see Table 1). This credit applies to work-related child care expenses of $2400 for one child and $4800 for two or more children. Families with adjusted gross income of less than $10,000 receive a credit of 30 percent. This credit decreases from 30 percent by 1 percent for every $2000 increase in adjusted gross income for families with incomes above $10,000 but below $28,000. Families with incomes over $28,000 receive a 20 percent credit. Since this is a nonrefundable tax credit, which cannot exceed the family's tax liability, the program primarily benefits middle- and high-income families (Blau, 1991). This tax credit represents the second largest federal expenditure on child care.

Head Start. Despite the consensus that child care remain in the family domain, Head Start is one of the most popular government programs today. This program receives more federal funding than any other child care or early education program, accounting for nearly a third of federal child care outlays (see Table 1). The program, begun as part of the "War on Poverty" in 1964, is designed to permit disadvantaged children to begin schooling with the same skills as their peers. Child care centers funded by Head Start matching grants aim to improve the health, learning skills, and social skills of poor children. At least 90 percent of the children served by a Head Start child care center must be below the federal poverty line. Despite increases in funding and population served in the last decade, the Government Accounting Office (GAO) reports that in 1993 Head Start still served less than 30 percent of the eligible population (GAO, 1995). Note that Head Start is primarily a child development program rather than a child care program--it does not require that parents work, and its half-day part-year programs typically do not meet the child care needs of working parents.

Child Care Food Program. The U.S. Department of Agriculture administers this program to provide nutritious meals to children under age 12 enrolled in licensed child care centers, family day care homes, and before- and after-school programs. In FY 1994, this program fed over two million children. The Child Care Food Program represents the third-largest expenditure on child care and early education programs with spending of over $1.5 billion in 1995 (see Table 1).

Child Care and Development Block Grant. This grant gives money to the states to expand the supply and improve the quality of child care and to provide child care subsidies to low-income parents who are working or in education or training programs. While 75 percent of CCDBG funds is earmarked for child care subsidies, 18.75 percent is reserved for early childhood development and school-age child care services, and 5 percent goes toward quality enhancement programs. The CCDBG is the only federally funded program that allocates some funds specifically for improving child care quality through such efforts as provider training. One of the requirements of the program is that subsidized providers (except children's family members), must meet basic health and safety standards. No state match is required for CCDBG funds.

AFDC Child Care. The Family Support Act of 1988 included provisions for two child care programs aimed at families on Aid to Families with Dependent Children. The first is child care for AFDC families, which provides child care assistance to parents on AFDC who are working or participating in educational or training programs.

Transitional Child Care Program. The second program included in the Family Support Act is the Transitional Child Care program, which offers child care assistance for the first year after working parents have left AFDC because of increased earnings. Like the AFDC Child Care Program, this program aims to support families as they transition from public assistance to self-sufficiency. States must match federal funds going to the two Family Support Act programs at the state Medicaid matching rate or lose the federal money.[1]

At-Risk Child Care Program. Low-income families "at risk" of going on welfare are eligible for child care subsidies. Since this program is so similar to the CCDBG, some states combine the two into one program. Unlike the CCDBG, which requires no state matching funds, states must contribute matching funds to the At-Risk Child Care Program at the Medicaid matching rate.

Social Services Block Grant. The SSBG allocates block grants to states to use for a variety of social services including child care. However, the use of these funds is at the discretion of the states. A 1990 survey of states yielded an estimated average of 16 percent of the SSBG being allocated to child care. Hence, out of $2.8 billion the government allocated to the SSBG, approximately $450 million was used for child care services.

States' Role in Child Care

The role of states in child care comes from both state involvement in the federally funded programs and state-initiated programs. The states' participation in the federally funded programs takes several forms. First, states decide whether or not to match or supplement federal funds for child care programs. For example, because not all states matched federal funds allocated to the At-Risk Child Care Program, in 1994 only 92 percent of the $300 million in federal funds earmarked for the program were spent (Adams and Poersch, 1996). Second, the states determine the eligibility criteria for participation in the federal means-tested child care programs. For example, the states have had the primary responsibility for identifying the income-level eligibility standards and whether parents must be working, enrolled in school, or participating in other programs to qualify.

Third, the states administer most of the federally funded programs including CCDBG, the At-Risk Child Care Program, and the Child Care Food Program, and often determine how to allocate the funds for those programs. Little information is available regarding state variation in administration costs and efficiency, and the potential for gains in this area has pretty much been ignored. A fourth issue relating to federally funded programs is that the state has jurisdiction in setting reimbursement rates to child care providers. Given that child care quality and availability are related to the price of care, this has implications for the supply of care as well as the quality of care in the state. Fifth, states set quality standards that providers must meet to receive state and federal funds. These include health and safety regulations, whether providers are checked for criminal records, educational content requirements, and other dimensions of quality. Sixth, as mentioned above, states must determine what fraction of their SSBG to devote to child care. This allocation varies by state with some states allocating no SSBG funds to child care. California currently does not use any of its SSBG to pay for child care services.

In addition to their participation in the child care market through their role in federally funded child care programs, states may also have a role in child care that is independent of federal programs. This type of state government involvement in child care includes state child care tax credits, subsidies for child care, prekindergarten initiatives, extending elementary school to include after-school child care, training grants and small business grants to child care providers, child care referral services, and a range of other child care services.

Thirty-two states offered prekindergarten programs during the 1991-1992 school years (Adams and Sandfort, 1994). Over half of these states fund their own prekindergarten programs, while the remainder used the funds to augment Head Start or other federal preschool programs. Most of the state programs targeted children who were likely to need improvements in school readiness. California has been a leader among states in developing prekindergarten programs, being one of only 10 states who have had programs since at least 1980 (Adams and Sandfort, 1994). During the 1991-1992 school year, California served over 35,000 children in prekindergarten programs at a cost of $83 million (Adams and Sandfort, 1994).

Most states have a state child care tax credit that supplements the federal child care tax credit. This is typically a fraction of the federal credit--for example, in 1992, California allowed families to credit 30 percent of their federal dependent care tax credit. California terminated its tax credit after the 1992 tax year, but legislation is pending to renew it.

Every state regulates child care in some form, but the types and level of states' involvement vary dramatically. All states license daycare centers and all states except Louisiana license family daycare homes.[2] In addition to controlling quality through licensing, all but a couple of states also control quality through minimum quality standards. The states generally mandate minimum standards for items that are believed to affect children's health, safety, or development. These include requiring immunization records, maximum child-to-staff ratios, minimum educational levels for staff, and a diverse set of additional requirements. In addition to setting these regulations, states must also determine the intensity with which they enforce the regulations, which has been found to affect compliance with regulations and overall child care quality. Thompson and Molynaux (1992) argue that child care standards are meaningless without enforcement and report that inspections and enforcement are meager at best in most states. In sum, state child care regulation exerts an important influence on the child care market, affecting both the quality of care in the state and, because quality comes at a price, the cost of care as well.

A Children's Defense Fund survey (Adams and Sandfort, 1992) of state expenditures on child care and early childhood development services revealed dramatic disparities across states. State expenditures per child in 1990 ranged from $0.24 per child in Idaho to $70.00 per child in Alaska. California ranked sixth in per-child expenditures, with a total outlay of $343 million.

Now that we have outlined government involvement in the child care market, we will describe proposed changes in this involvement and discuss the implications these changes would have for child care in California. The discussion highlights findings from the academic literature related to the proposed changes.

Proposed Changes at the Federal and State Level: Implications for Child Care in California

Rather than discussing every proposal that might have implications for child care, we analyze the likely impacts of five general themes that are expected to be important components of upcoming changes at the federal and state level. These are: (1) focus on transition to work in welfare reform, (2) interest in school readiness overshadowed by work emphasis, (3) consolidating federal child care programs into block grants, (4) stricter state-level regulations, and (5) reinstating the California child care tax credit.

Focus on Transition to Work in Welfare Reform

One of the primary drivers of change in child care in California is federal welfare reform. Congress produced three separate proposals last year regarding welfare reform that included provisions for child care. The House passed H.R.4, The Personal Responsibility Act, in March 1995, and in September the Senate passed H.R.4, The Work Opportunity Act. In December both the House and the Senate passed the Conference Agreement bill, which attempted to reconcile the differences between the House and Senate versions, but President Clinton vetoed this version. It did not have enough votes to override the veto. There is likely to be additional action on welfare reform later this year.

One of the predominant themes in these welfare reform bills has been to encourage mothers receiving public assistance to make the transition to work. This reinforced emphasis on work has been embodied in proposed legislation in two ways. First, proposals require states to increase the percentage of welfare recipients who are working. For example, the Conference Agreement would have required states to have 15 percent of welfare recipients working within two years and up to 50 percent of welfare recipients working within approximately five years. Second, the proposals make the definition of working more stringent. Under the Conference Agreement plan, by the year 2003, mothers must work 35 or more hours instead of the current 20 hours to qualify as working. Moving significant numbers of welfare mothers to the labor force implies a dramatic increase in the child care needs of this population. Lawmakers have recognized this fact and have incorporated child care programs into welfare programs in tandem with the work requirements. For instance, anticipating federal welfare reform, California proposed its own redesign of its welfare system (see California Department of Social Services, 1996a and California Department of Social Services, 1996b). This redesign proposed four employment-oriented programs to replace the existing welfare system and each of these four programs included child care as part of the program.

However, whether these efforts to increase government assistance meet the needs of child care among AFDC clients remains questionable. While federal funding targeted for child care appears to be relatively stable, it has dropped in real terms over last few years (Adams and Poersch, 1996). This funding will be expected to serve a much larger eligible population under congressional proposals. In particular, the reinforced work requirements will substantially raise the demand for child care in the welfare population. In estimates prepared for Congress when members were voting on the Conference Agreement, Department of Health and Human Services (DHHS) and the Congressional Budget Office (CBO) estimated that funding would fall $6 billion and $13.6 billion, respectively, short of paying for all mothers who must now work under the reinforced work requirements (Ebb, 1996).

Research findings in a variety of disciplines including child psychology, economics, sociology, and demography have bearing on the likely implications of this reinforced emphasis on work in welfare programs. To set the stage, first note that the labor force participation rate of public assistance program participants is substantially lower than that of other single mothers and that the labor force participation rates of program participants has fallen over time. Studies have found that young single mothers with infants have a labor force participation (LFP) rate of about 15 percent; rates increase to about 60 percent for mothers of preschoolers or school age children (Hao and Leibowitz, 1995). The LFP rate is much lower among those receiving income support from AFDC and has been falling: the LFP rate of AFDC recipients fell from 16 percent in 1979 to 5 percent in 1984 (Moffitt, 1992), and was about 6 percent in 1991 (U.S. House of Representatives, 1993).

Considerable research documents that child care costs present a major barrier for mothers' participation in the labor force. Higher child care costs are associated with lower levels of women's employment (Hotz and Kilburn, 1995; Ribar, 1992; Blau and Robins, 1988; Leibowitz, Klerman, and Waite, 1992). Hence, public programs that subsidize child care or provide free child care would be expected to boost mothers' LFP. The GAO (1995) estimates that providing a full subsidy to mothers who pay for child care could raise the percentage of poor mothers who work from 29 to 44 percent and that of near-poor mothers who work from 43 to 57 percent.

Other research indicates that child care presents a greater impediment to the LFP of single mothers than it does to the LFP of married mothers. First, single mothers receive less support from the father of the child and his family. Many married mothers depend on child care assistance from their husbands (Presser, 1989) or from an extended family that includes their husband's relatives (Leibowitz, Waite, and Witsberger, 1988; Cochran, Larner, Riley, Gunnarsson, and Henderson, 1990). While single mothers are less able to draw on the resources of the child's father, they are more likely than married mothers to live with relatives and so may receive more low-cost child care from their own relatives (Hogan, Hao, and Parish, 1989; Hofferth, 1984; Parish, Hao, and Hogan, 1991). However, relative care is not licensed and often of lower quality. Second, while research has shown that the child care tax credit promotes the employment of married mothers (Blau and Robins, 1989; Leibowitz et al., 1992), other research finds that child care subsidies have little effect in promoting the employment of single mothers (Michalopoulos et al., 1992). The child care tax credit may have little impact on low-income single mothers, since it requires having a tax liability and it is nonrefundable.

Despite a large literature on the effect of child care on women's work and the effect of AFDC on single women's labor force participation, only a few studies have examined the impact on maternal LFP of child care programs geared to assist low-income single mothers, such as AFDC disregard for child care costs and public-provided child care places. Berger and Black (1992) find that single mothers who receive child care subsidies from the Child Care and Development Block Grant are more likely to be employed. Kimmel (1995) finds that greater child care subsidies increase the probabilities of labor force participation among single mothers in poverty. Hao and Leibowitz (1995) report that subsidized child care and AFDC child care disregards increase single mothers' employment and school enrollment. There is little knowledge of how public child care programs affect the amount of child care help received from kin, or how much public programs merely "displace" assistance from families rather than provide additional assistance to families in need.

A novel component of the Conference Agreement was that welfare recipients be allowed to provide unpaid child care to other welfare families to meet work requirements. This proposal is conceived as a co-op between welfare mothers that could raise the productivity of the group as a whole. A counterpoint to this potential benefit of the policy is the concern that it may not provide quality care. The child development literature suggests that care providing cognitive stimuli is particularly important for older preschoolers (see next section). It is well known that welfare recipients have lower human capital on average than the rest of the population, and hence that they may not be in a position to provide the type of care that will encourage optimal development among the children.

In sum, evidence suggests that if lawmakers are serious about moving mothers from welfare to work, they must be prepared to address the concomitant child care needs. By including child care provisions as a component of the welfare reform legislation designed to raise the labor force participation of welfare mothers, Congress and the President have indicated that they realize the essential relationship between female labor force participation and child care. However, it appears that the proposals do not allocate adequate resources to accommodate the additional child care demand generated by the new work requirements.

Interest in School Readiness Overshadowed by Work Emphasis

Both Republicans and Democrats agree that investments in school readiness are worthwhile public expenditures. One manifestation of this is the overwhelming bipartisan support for increases in funding for Head Start, the primary federal school-readiness program. A hallmark of Head Start is its emphasis on quality child care provision that aims to prepare children for school--that is, child care that has a strong cognitive and socioemotional development component. In contrast to the interest in school readiness is the fact that a by-product of the work-oriented child care proposals may be a compromise on child care quality. Hence, although lawmakers have an interest in school readiness, it is likely to be overshadowed by the current emphasis on work-related child care programs.

In this section, we review the proposed changes that are likely to have an impact on school readiness. These include changes that directly target school readiness--like increasing Head Start funding--and changes designed to accomplish other goals--like moving mothers from welfare to work--which may indirectly influence school readiness. The proposals we examine are those that emphasize maternal labor force participation in welfare programs, the relaxation of quality standards for federal programs, and increased funding for Head Start.

Emphasis on Maternal Labor Force Participation. As discussed in the last section, one the most salient components of last year's welfare reform proposals was to encourage mothers receiving public assistance to make the transition to work. A review of research findings indicates that an unintended consequence of this orientation may be tradeoffs in school readiness for the children of welfare recipients. First, the literature on the relationship between maternal employment and child development finds mixed evidence of the effect of maternal employment on child development. Findings vary, depending on the child's age at which the mother returned to work, the continuity of the mother's work during the child's life, the gender of the child, the family's income, and other factors. In general, studies report a negative impact of maternal work on infant behavior (Belsky, 1988; Clarke-Stewart, 1989; Belsky and Eggebeen, 1991). However, several studies find positive effects of maternal employment on cognitive and behavioral outcomes for older preschoolers (Blau and Grossberg, 1992, Desai, et al., 1989; and Studer, 1992). Another perspective is that mothers' work increases family income and household production efficiency, which improves children's emotional adjustment and reduces behavioral problems for children of all ages (Greenstein, 1993).

A second line of research stresses that it is not only maternal work but also the type of child care that influences child development. Like the findings on the effects of maternal work on child development, the findings on the effects of types of nonmaternal child care on child development vary, often depending on the age of the child, family structure, and other factors. For infant care, some studies report that care from a relative yields the best outcomes (Baydar and Brooks-Gunn, 1991; Furstenberg, 1979; Kellam et al., 1977), especially if the child is unhealthy (Mott, 1991). For older preschoolers, the evidence is mixed (Barnett, 1995), ranging from no differences in outcomes by type of care (Desai et al., 1989), to better outcomes for family daycare (Studer, 1992) to better outcomes in centers (Clarke-Stewart, 1991).

Note that the drive to encourage mothers to work rather than stay home and care for their children and the trend toward using nonmaternal care to promote school readiness is in stark contrast to historic public perceptions that the appropriate role for mothers and the best child care setting for children was maternal child care (see e.g. Spock, 1946). Consistent with the idea that mothers are the best caregivers for their children is the design of the AFDC program up to the present: it could be considered a subsidy that allows mothers to stay home to care for their children rather than entering the workforce (Leibowitz, forthcoming). While the child care research has examined whether child care in one setting outperforms child care in another setting, the research has ignored the fact that maternal care is also a child care setting and has not compared the performance of maternal care and other child care settings. Given the substantial body of research that reports that parenting style has important implications for child outcomes (e.g., McLeod and Shanahan, 1993; McLoyd, 1990; Dornbusch, et al., 1985), discussions of attempts to promote school readiness should include parental care as one of the school readiness alternatives and might expand the set of policy options to include child care and parenting training for parents.

As part of the recent welfare reform proposals that encourage maternal work, it has been recommended that welfare mothers with infants be exempt from work requirements. Evidence in the literature suggests that this may be in the best interest of the development of the children. The mixed nature of the findings of the effects of maternal work and child care, however, make it unclear whether maternal work would have positive or negative consequences on child outcomes. Another perspective on the effect of maternal work and child care settings on child outcomes is that it is the quality of the child care setting that dictates the impact of nonmaternal care on children. We address this perspective in the next section.

Relaxing Quality Standards of Federal Programs. A second component of the federal welfare reform proposals that is likely to affect school readiness and child outcomes is the relaxation of quality standards in federal child care programs. Both the House and Senate versions of H.R.4 would have repealed or reduced CCDBG quality set-asides, the only federal funds specifically aimed at child care quality improvement. In addition, the Senate versions expanded the set of family-member caregivers who were exempt from health and safety requirements. The Conference version of the bill completely eliminated the requirement that any providers meet minimum health and safety standards.

Research indicates that some dimensions of child care quality improve the development of children. Studies have reported that among children in day care centers, cognitive skills and emotional development were higher the fewer the children in the group, the lower the child-to-staff ratios, and the more child-oriented training caregivers acquired (see Ruopp et al., 1979; Howes, 1983; Phillips and Howes, 1989; and Studer 1992, for example). These findings suggest that if quality dimensions such as group size, child-to-staff ratio, and provider education decline as a result of relaxed federal standards, the cognitive and emotional outcomes of children might suffer.

A recent study by Child Trends (forthcoming) finds that welfare homes provide little cognitive stimulation and emotional support to children. One interpretation of these findings is that moving welfare mothers to work and hence moving their children into child care may benefit the children. This argument assumes that the nonmaternal child care the family would utilize is of higher quality than the care available in the child's home. It is not clear that the child care alternatives to welfare mothers would in fact be of high quality, however. The potential for the "welfare-to-work" initiatives to achieve a second goal of preparing young children for school underscores the role that child care quality standards have in the welfare reform program.

Note, however, that child care quality entails tradeoffs. On one hand, higher quality is desirable since the child development literature suggests that quality care yields enhanced developmental outcomes for children. On the other hand, higher quality care costs more than lower quality care, and since the higher the cost of care the less likely mothers are to work, strict quality requirements might induce women to work less, counter to the goals of the welfare reform. Because of this link between quality and the price of child care, and between the price of child care and work, relaxing quality standards is consistent with the labor force participation goals of welfare reform while being inconsistent with the school readiness policy goals.

Increased Head Start Funding. Head Start is probably one of the most popular public programs in the United States. Both the Republicans and the Democrats have supported modest increases in funding for the program over the last several years. President Clinton proposed an 11 percent increase in Head Start funding for 1996 and encourages developing full-day, full-year services to supplement the current part-day programs. The popularity of this program is likely to be related to the consensus among policymakers and advocates that Head Start is a truly successful program (see, for example, DHHS World Wide Web site).

In contrast to this perception regarding the efficacy of Head Start are the research findings. A review of the literature in psychology, economics, and sociology indicates that the results of Head Start are mixed at best. In their recent American Economic Review paper on Head Start, Currie and Thomas (1995) write: "despite literally hundreds of studies, the jury is still out on the question of whether participation in Head Start has any lasting beneficial effects" (p. 343). Studies of the effects of Head Start on IQ find that while Head Start participants experience initial IQ gains greater than their contemporaries, these gains fade over time, disappearing by the third grade. Furthermore, most of the studies suffer from design flaws such as not including representative samples of Head Start children and attrition bias. Other claims in support of Head Start are that the program lowers teen pregnancy, reduces high school drop-out rates, and depresses grade repetition. These claims are based on studies from model preschool programs, the most famous of which is the Perry Preschool Project. These studies suffer from shortcomings, including small sample sizes and the fact that the model programs typically devoted more funding per child and had better-trained caregivers than typical Head Start programs. In their own study, Currie and Thomas find that Head Start is associated with large and significant gains in test scores among both whites and African-Americans, but that the gains are quickly lost among the African-Americans. They also find that Head Start substantially reduces the likelihood that white students repeat a grade but that the program has no effects of grade repetition for African-American students. They report that all students from Head Start gain better access to preventive health care services.

Considering the evidence on the relationship between child care quality and child outcomes, it is probable that like any child care program, Head Start centers are most effective when they achieve high quality. Hence, the mixed findings on the effect of Head Start may be less a condemnation of Head Start than a call for greater attention to quality in Head Start programs. Furthermore, the evidence suggests that Head Start is not a child care panacea, and that for all public child care programs, the quality of the child care setting is likely to be crucial to success in promoting school readiness. In addition, the ambiguity of results in investigations of the impact of Head Start programs and child care quality on children's outcomes suggests that more research in these areas is warranted.

Federal lawmakers claim to make school readiness a priority, but other than raising funding for Head Start, their actions seem to value other objectives more than school readiness. For example, while moving more welfare mothers to employment achieves welfare reform goals, it is questionable whether this will enhance or debase school readiness. Furthermore, relaxing quality standards promotes the labor force participation of low-income mothers by reducing child care costs, but this is likely to come at the cost of compromising children's developmental outcomes.

Consolidating Federal Child Care Programs into Block Grants

As part of the welfare reform, lawmakers have recommended consolidating At-Risk, AFDC, Transitional Child Care, CCDBG, and several other smaller child care programs for low-income populations into one child care safety net for working or nonworking program participants. Part of the impetus behind this recommendation is that mothers will not have to change from one child care program to another as their labor force participation status or income changes. It is also hoped that this change will reduce administrative costs for both program administrators and program participants.

Like many block grant proposals, this one also appears to be linked to federal spending cuts. The new block grant would be capped at a funding level of $2.1 billion a year over the FY 1996-2000 period. While this is $150 million above the FY 1994 funding allocated to the four programs that will be subsumed by the block grant, the Congressional Budget Office estimates that because of expected increases in price levels, the net result will be a reduction in real expenditures of about $1 billion or 9 percent over the five-year period (Clark and Long, 1995).

Currently, the AFDC, Transitional Child Care, and At-Risk programs all require state matching funds, while the CCDBG does not. Under the proposed block grant, states would not have to provide matching funds. Another change between the current program characteristics and the proposed block grant is that the AFDC and Transitional Child Care programs are entitlement programs, meaning that provision is guaranteed to anyone who meets the eligibility requirements and funding was provided to serve all participants. The block grant is a capped dollar allotment, implying that if the size of the needy population grew, either block grant dollars would have to be stretched over more recipients or some families would go unserved, although there are provisions for a federal "Rainy Day Fund" from which states could borrow during recessionary periods. Since more welfare mothers would be required to work under the welfare reform proposals, it is expected that the number of families needing child care services would grow.

A final issue related to the block grant consolidation is the possibility that more needy families would go without child care or early childhood development programs. This possibility arises as a result of maternal work becoming a condition for more child care programs and because of proposed welfare receipt time limits. For example, the Conference Agreement stipulated that no family can stay on welfare for more than two years without working and that the total time a family can spend on welfare is five years. Considerable disagreement exists about whether welfare recipients will be successful in finding jobs before their time limits run out (see Danziger and Danziger, 1995; and Ellwood, 1988, for example). If benefits to a child's family were terminated because of time limits, not only would the child be subject to poverty without income support, but that child would also become ineligible for many federally sponsored child care programs. To the extent that these child care programs provided subsidized meals as well as developmentally appropriate settings, the children who were most disadvantaged could receive the fewest benefits from child care services.

This would not be the first time that child care programs were consolidated into block grants from categorical entitlement programs. In 1981, President Reagan consolidated more than 90 categorical programs into a handful of block grants, one of which was the Social Services Block Grant. Federal social services funding was cut by nearly 20 percent as part of the consolidation. Lessons learned from this experience are likely to be informative in evaluating the potential impacts of another consolidation of child care programs into a block grant. First, in the 1981 grant consolidation experience, states replaced most but not all of the lost federal funds and replaced funds in some but not all programs. States made up the lost funding through a combination of increasing state expenditures and shifting part of the burden to local governments. Second, creation of the Social Services Block Grant suggests the order of magnitude of the administration savings that consolidation should be expected to yield. While the consolidation of programs did yield administrative savings, contrary to claims made by some consolidation proponents, these savings did not completely offset the 1981 budget cuts (Peterson, 1986). Program administrators claim that the administrative savings rarely exceeded 5 percent (Peterson, 1995).

Third, prior experience with the consolidation of programs into block grants showed that state programmatic standards are typically more lax than the federal standards they replace. This is perhaps most aptly illustrated by child care regulations. In 1980, Congress approved Federal Interagency Day Care Requirements (or FIDCR), a set of regulations to which caregivers receiving federal funds would have to adhere. These federal regulations were slated to take effect in 1982, but upon the approval of the Title XX block grant in 1981, the federal regulations were withdrawn and states were free to set their own standards for block grant child care providers. Only one state--Massachusetts--met the FIDCR staff-to-child ratio for both infants and toddlers, and only three states had infant staffing requirements as high as federal standards. This may be less of an issue in California, where policymakers have been more willing to impose tougher standards on the child care market.

Our experience with the creation of the Social Services Block Grant in 1981 provides a portent of what might result from the consolidation of the major child care programs into a block grant today. While the block grant proposal has the benefits of potentially providing families with "one-stop" child care services, helps control federal spending, and is likely to reduce the costs of administration, the proposal also has several drawbacks. One is that the block grant programs are capped at slightly more than current funding in nominal terms, and given inflation and expected pressures on child care demand from other welfare reform proposals, the potential for growing unmet child care demand is very real. Second, as the states control more child care services, child care quality requirements are likely to suffer, reducing the possibility that public child care is developmentally enriching.

Stricter State-Level Regulations

As just discussed, the tough federal child care regulations authorized under FIDCR never went into effect and were replaced instead by less stringent state regulations. Under proposed federal welfare reform measures, regulations covering federally-supported child care spaces would also be relaxed. At the same time that the federal government is relaxing child care quality standards, states are taking actions that strengthen child care quality standards. While this is typically justified on the grounds that it improves child well-being, there is reason to believe the regulations may not have their intended effects.

The rationale for imposing, tightening, and/or enforcing minimum quality standards for child care is that it will enhance child development or ensure child safety. Consistent with this argument are findings in the child development literature (discussed above) that indicate that lowering child-to-staff ratios or increasing the use of more educated providers appears to improve the rate of child development. Whether regulating child care in a market environment improves child outcomes is an open question, however, for at least two reasons. One is that child care quality standards may not be effective in altering the characteristics of care consumed--for example, providers could retreat to the underground economy to avoid regulation or regulation might be ineffective because it lacks effective enforcement. Second, parents may respond to the regulations and alter their child care choices, labor force participation, and other time and income allocation choices. For example, while the National Research Council Panel on Child Care Policy (Hayes, 1990) advocated the development of national quality standards, it acknowledged that:

just how costly [such standards would be] is difficult to estimate precisely since it will depend not only on the particular public and private policies and programs that are adopted, but also on how parents respond to them and other future changes in the economy and society, in their choices regarding childbearing, labor force participation, and child care arrangements. (p. 292)

Few studies have investigated the impact of child care regulations on parental choice of child care arrangements, the cost of such care, and, ultimately, on the child developmental process. Rose-Ackerman (1983) reports that stringent regulations may have the unintended consequences of curtailing the supply of child care, increasing racial segregation, and promoting large subsidized for-profit firms as child care providers. Gormley (1991) investigates the effects of state child care regulations on the number of providers of different types and finds that the effects depend on the costliness, intrusiveness, and enforceability of the regulations and that unenforceable regulations have no effect on the market at all. Waite et al. (1991) find that parents are not willing to pay higher child care prices to obtain child care with regulations associated with better child outcomes. Hotz and Kilburn (1994) find that child care regulations that improve the quality of care raise the price of the care, leading to a drop in the quantity of the care demanded. However, they also find that the regulations induce an increase in the quantity of care demanded independent of the price effect, consistent with a quality assurance effect. They find that the price effect dominates the quality assurance effect for a net decline in the utilization of care after the imposition of regulations. Finally, a recent study by Chipty and Witte (1995) investigates the impacts of state child care regulations on various measures of the quality of child care services parents select. They find evidence of parental substitution away from higher quality care in states that more stringently regulate such care and show that this substitution arises because more stringent regulations increase the cost of providing child care.

California ranks among the toughest states in terms of child care regulations. California is among the one-third of states that regulate family daycare homes serving as few as three children. The state also provides few exemptions from state licensing requirements, such as programs operated by public schools or religious institutions. In addition, California mandates unqualified parental visitation rights to child care sites and has low child-to-staff ratio regulations.

To summarize, although the evidence suggests that higher child care quality is associated with superior child outcomes, mandating child care quality is not necessarily a desirable policy. Higher-quality care is more expensive, inducing families to substitute away from higher-quality care. Furthermore, strengthening regulations could have the unintended effect of reducing maternal labor force participation, since stricter regulations raise child care costs and, as discussed earlier, higher child care prices discourage mothers from working.

Reinstating the California Child Care Tax Credit

Although the child care tax credit is the second-largest federal government outlay for child care, California currently has no state child care tax credit. In 1992, California repealed its dependent care tax credit, which was 30 percent of the federal credit. This may change depending on the outcome of a bill to reinstate this child care credit, submitted in February. This bill is in the Assembly Revenue and Taxation Committee.

The impact of a California state child care tax credit is likely to be similar to the impact of the federal child care tax credit. Research shows that a child care tax credit acts much like a reduction in the price of child care, raising the probability that a mother is employed (Blau and Robins, 1989; Leibowitz et al., 1992; Michalopoulos et al., 1992). Like the federal child care tax credit, the state child care tax credit will primarily benefit middle- and high-income families, with less benefit to lower-income families. For example, in 1988 one-third of working families with incomes over $25,000 per year claimed the federal credit. In contrast, only 12 percent of working families with incomes below the poverty line claimed the federal credit. The regressivity of this tax credit--the fact that it benefits higher-income individuals more than low-income individuals--is due to the fact that the policy is a nonrefundable tax credit and therefore is limited to the amount of the individual's tax liability. Although child care tax credits promote employment in a general population of women, this policy is likely to play a minor role in promoting disadvantaged mothers' employment and school enrollment.

The cost of the California child care and dependent tax credit in terms of forgone taxes is likely to be a large fraction of the state's total expenditure on child care. In an era of limited resources for child care programs, the utility of a program that subsidizes primarily middle- and high-income families is highly suspect.


In this paper we have described the major federal and state policy proposals that are likely to affect child care in the state of California. We conclude with a brief summary of our discussion of the five major themes into which we grouped these changes.

Focus on Transition to Work in Welfare Reform

One of the major themes of welfare reform has been to encourage welfare recipients to make the transition to work. Policymakers have recognized that moving mothers to the workplace implies a need for child care and have incorporated child care provisions into proposals that include work requirements. Indeed, the consensus among researchers is that child care assistance is a great boon to female labor force participation. However, federal funding remains at roughly the same level as last year, making it likely that child care funds would fall short of meeting the surge in child care demand that is expected to result from the work requirements.

Interest in School Readiness Overshadowed by Work Emphasis

Child care programs often serve dual purposes: to facilitate maternal labor force participation and to contribute to child development. Contrary to public and policymaker opinion, the research results are far from conclusive on the point of whether child care programs--even the popular Head Start program--enhance child development. The most encouraging potential for child care to improve school readiness appears to be in full-day programs with high quality that serve older preschoolers from disadvantaged families. Such programs are expensive, however, leading to a direct conflict between the child development goals and labor force participation goals of child care programs: The best programs for kids may be the most expensive programs, the cost of which discourages mothers' labor force participation. In an era of retracted government funding and at a time when lawmakers are enamored of programs that encourage maternal work, school readiness may become a casualty.

Consolidating Federal Child Care Programs into Block Grants

Block grants have several potential benefits: They provide child care recipients with "seamless" benefits, reduce administrative costs, and help the federal government manage financial difficulties. Moving federal child care provision to block grants is also likely to have unfavorable consequences for child care recipients. One is that child care is no longer an entitlement but rather becomes subject to state allocation of an ever-shrinking pot of fixed federal resources. Another is that states have been less likely to maintain quality standards, which could compromise the ability of government child care programs to fulfill the mission of enhancing child development.

Stricter State-Level Regulations

At the same time that federal child care quality requirements seem to have gone into remission, states are tightening their quality standards. The justification for minimum quality regulations is typically that higher-quality care yields healthier, safer, and more developmentally appropriate child care. Researchers have found associations between higher-quality care and better child outcomes. Nevertheless, stricter state-level regulations may not have their intended effect because of the vexing relationship between quality and price: Raising quality standards raises the price of care, and the higher the price of care, the less likely families are to use care and the less likely mothers are to work.

Reinstating the California Child Care Tax Credit

After a five-year hiatus, the California state legislature is considering reinstating the California child care tax credit. Tax credits have been shown to promote mothers' labor force participation and ease the burden of child care costs, but they do so primarily for middle- and high-income families, providing little assistance to families with lower incomes. Given the paucity of funding available for child care and other programs to help lower-income families, the appeal of this program is limited.


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[1] Another feature of AFDC that could be considered a child care program is the fact that AFDC provides an income disregard under which earned income spent on child care is not subtracted from AFDC benefits (as earned income normally is).

[2] Well over half of all children are cared for in modes of child care (such as care by relatives) that are typically not subject to licensing.