Child Care: States' Efforts to Expand Programs Under Welfare Reform
(Testimony, 04/22/1998, GAO/T-HEHS-98-148).

A GAO review of seven states' child care subsidy programs found that the
seven states are using additional federal dollars and their own funds to
expand their child care programs to serve increasing numbers of welfare
recipients required to work and at least some of the working poor. In
addition, states are trying to further increase the supply of child care
by funding initiatives to support and encourage the entrance of new
child care providers into the market. At the same time that states are
expanding their programs and attempting to increase supply, they appear
to be maintaining child care standards and enforcement practices.
However, it is too soon to know how effective these efforts will be in
meeting the child care needs of poor families.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-HEHS-98-148
     TITLE:  Child Care: States' Efforts to Expand Programs Under
	     Welfare Reform
      DATE:  04/22/1998
   SUBJECT:  Child care programs
	     Welfare recipients
	     State-administered programs
	     Public assistance programs
	     Disadvantaged persons
	     Subsidies
	     Eligibility criteria
IDENTIFIER:  Child Care and Development Block Grant
	     HHS Child Care and Development Fund
	     HHS Temporary Assistance for Needy Families Program
	     California
	     Connecticut
	     Louisiana
	     Maryland
	     Oregon
	     Texas
	     Wisconsin

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GAO/T-HEHS-98-148

Cover
================================================================ COVER

Before the Subcommittee on Social Security and Family Policy,
Committee on Finance, U.S.  Senate

For Release on Delivery
Expected at 10:00 a.m.
Wednesday, April 22, 1998

CHILD CARE - STATES' EFFORTS TO
EXPAND PROGRAMS UNDER WELFARE
REFORM

Statement of Mark V.  Nadel, Associate Director
Income Security Issues
Health, Education, and Human Services Division

GAO/T-HEHS-98-148

GAO/HEHS-98-148T

(116017)

Abbreviations
=============================================================== ABBREV

  AFDC - Aid to Families With Dependent Children
  CCDBG - Child Care and Development Block Grant
  CCDF - Child Care and Development Fund
  HHS - Department of Health and Human Services
  JOBS - Job Opportunities and Basic Skills Training
  SMI - state median income
  TANF - Temporary Assistance for Needy Families

CHILD CARE:  STATES' EFFORTS TO
EXPAND PROGRAMS UNDER WELFARE
REFORM
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee:

Thank you for inviting me here today to discuss our work on states'
efforts to expand their child care subsidy programs for low-income
families.  The cost of child care often creates a barrier for
low-income parents attempting to support their families through work.
In fact, our previous work has suggested that child care subsidies
can be an important factor in poor mothers' decisions to find and
keep jobs, increasing the probability that poor and near-poor mothers
will work.\1

Recognizing the important role that child care subsidy programs play
in helping low-income families support themselves through work, you
asked us how those programs are changing at the state level in light
of the revisions the Congress made to them through the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L.
104-193).  My testimony today is based primarily on our recent report
on state child care programs.\2 I will discuss (1) how much federal
and state funds states are spending on child care subsidy programs
and how they are allocating these resources, (2) how states are
trying to increase the supply of child care to meet the projected
demand under welfare reform, and (3) the extent to which states are
changing standards for child care providers in response to the
anticipated increased demand under welfare reform.  Our work is based
on case studies of seven states' child care subsidy programs
conducted between December 1996 and October 1997;\3 information about
the child care subsidy programs of all 50 states and the District of
Columbia, as described in the plans states are required to submit to
the Department of Health and Human Services (HHS) under the Personal
Responsibility Act; and other studies.

In summary, our findings provide an early indication that the seven
states are using additional federal dollars and their own funds to
expand their child care programs to serve increasing numbers of
welfare recipients required to work and at least some of the working
poor.  In addition, states are making efforts to further increase the
supply of child care by funding initiatives to support and encourage
the entrance of new child care providers into the market.  At the
same time that states are expanding their programs and attempting to
increase supply, they appear to be maintaining child care standards
and enforcement practices.  However, it is too early to know how
effective these efforts will be in meeting the child care needs of
low-income families.

--------------------
\1 Child Care:  Child Care Subsidies Increase Likelihood That
Low-Income Mothers Will Work (GAO/HEHS-95-20, Dec.  30, 1994).

\2 Welfare Reform:  States' Efforts to Expand Child Care Programs
(GAO/HEHS-98-27, Jan.  13, 1998).

\3 These states are California, Connecticut, Louisiana, Maryland,
Oregon, Texas, and Wisconsin.

   BACKGROUND
---------------------------------------------------------- Chapter 0:1

To better help low-income families meet their child care needs, the
Congress combined four programs with different target populations
into one program--the Child Care and Development Block Grant
(CCDBG)--with a single set of eligibility criteria and
requirements.\4 This program, now referred to as the Child Care and
Development Fund (CCDF), provides federal funds to states for child
care subsidies for families who are working or preparing for work and
who have incomes of up to 85 percent of a state's median income
(SMI).\5 \6 Unlike the previous programs, which segmented working
low-income families into different service categories on the basis of
welfare status, the CCDF allows states greater flexibility to create
integrated programs that serve all families in similar economic
circumstances.  Such programs are important to ensure that families
who have never been on welfare are not penalized for their work
efforts and that families can move easily from welfare to
self-sufficiency.

The CCDF provided states with about $3 billion in federal funds in
fiscal year 1997 --$605.7 million more than was available in 1996
under previous law.\7 This increase was in part a response to the
fact that under the Personal Responsibility Act states are required
to place a greater percentage of individuals receiving aid through
the new Temporary Assistance for Needy Families (TANF) block grants
in work or work-related activities, creating a greater need for child
care assistance.\8 The act requires that a significant percentage of
states' CCDF funds are used to provide child care assistance to
current or potential TANF recipients.\9

--------------------
\4 Three of the four child care programs--(1) Aid to Families With
Dependent Children (AFDC)/Job Opportunities and Basic Skills Training
program (JOBS) child care, which provided child care assistance to
welfare families involved in work or approved education or job
training activities; (2) Transitional Child Care, which provided 1
year of child care assistance to families leaving AFDC because of
employment; and (3) At-Risk Child Care, which assisted low-income
working families who were deemed to be at risk of becoming dependent
on welfare without child care assistance--were repealed.  The new law
modified the fourth existing child care program, the CCDBG, which
previously had assisted low-income families who were working or in
approved education or training.

\5 This is an increase from 75 percent under previous law.

\6 Nationwide, for fiscal year 1997, 85 percent of SMI for a family
of four ranged from a low of $31,033 in Arkansas (1.93 times the
federal poverty level) to a high of $52,791 in Connecticut (3.29
times the federal poverty level).

\7 In the future, the amount of federal CCDF funds available could
rise from about $3.1 billion in fiscal year 1998 to about $3.7
billion in fiscal year 2002.

\8 The Personal Responsibility Act requires that 25 percent of a
state's entire adult TANF caseload participate in work and
work-related activities in fiscal year 1997, and the required rate
increases by 5 percentage points annually to 50 percent in fiscal
year 2002.  A separate and much higher minimum work participation
rate is specified for two-parent families:  75 percent in fiscal year
1997, rising to 90 percent in fiscal year 1999.  States' minimum work
participation rates are lowered if their welfare caseloads decrease.
Specifically, each state's minimum participation rates are reduced by
an amount equal to the number of percentage points by which the
state's welfare caseloads have declined since fiscal year 1995.
States risk losing some of their TANF allocation unless they meet the
participation rates.

\9 Federal TANF funds include discretionary, mandatory, and matching
funds.  At least 70 percent of the mandatory and matching funds must
be used for current or potential TANF families.  In fiscal year 1997,
mandatory and matching funds together equaled almost $2 billion.

   STATES ARE EXPANDING CHILD CARE
   SUBSIDY PROGRAMS FOR LOW-INCOME
   FAMILIES
---------------------------------------------------------- Chapter 0:2

In response to welfare reform, the seven states we reviewed are
expanding funding for child care programs.  As table 1 shows, the
increase in combined federal and state CCDF funding in the seven
states between state fiscal years 1996 and 1997 ranged from 2 percent
in Maryland to 62 percent in Louisiana.  On average, funding in these
states increased from about $1.1 billion in fiscal year 1996 to about
$1.4 billion in fiscal year 1997.  According to child care officials,
these additional funds have allowed six of the seven states to expand
the number of children served under their child care subsidy programs
by an average of about 17 percent between fiscal years 1996 and 1997.

                                Table 1

                    Combined Federal and State Funds
                 Available for Child Care Subsidies and
                  Associated Costs, State Fiscal Years
                             1996 and 1997

                         (Dollars in Millions)

                                                Total federal
                                                  and state
                                                 funding for
                                                states' fiscal
                                                    years
                                                --------------
                                                                Percen
                                                                  tage
                                                    FY      FY  increa
State                                             1996    1997      se
----------------------------------------------  ------  ------  ------
California                                      $677.6  $855.5      26
Connecticut                                       71.3   101.2      42
Louisiana\a                                       37.2    60.5      62
Maryland                                          54.2    55.1       2
Oregon                                            76.0  85.0\b      12
Texas                                            166.0   180.3       9
Wisconsin                                         63.0  87.0\c      38
======================================================================
Total                                           $1,145  $1,424      24
                                                    .3      .6
----------------------------------------------------------------------
Note:  State and federal fiscal years differ.  Some of the seven
states' fiscal years run from July 1 through June 30.  Texas' fiscal
year is September 1 through August 31.  The federal fiscal year is
October 1 through September 30.

\a Louisiana data are for the federal fiscal year.

\b Includes $17.2 million in TANF funds used for child care.

\c Includes $13 million in TANF funds used for child care.

Source:  GAO analysis of data from state child care administrators.

The CCDF allows states to operate their child care programs
exclusively with federal funds, thereby reducing or eliminating the
need for state funds to be used for child care.\10 Nevertheless, the
seven states we reviewed intend to spend at least enough state funds
to qualify for the maximum amount of federal CCDF funds available for
child care.  State funding in three of the states will exceed the
amount required to maximize their federal CCDF allocation.

In addition, some states are using the increased flexibility provided
under TANF to augment spending on child care.  In addition to CCDF
funds, states may use federal TANF funds to support their child care
programs.\11 With caseload declines, many states have more TANF funds
available per family than were previously available under AFDC.\12 As
a result, some states are using TANF funds to fund child care
subsidies.  For example, while Wisconsin expanded its child care
funding by 38 percent between state fiscal years 1996 and 1997, the
increase came from federal, not state, funding sources.

--------------------
\10 States do not need to obligate or spend any state funds to
receive about three-quarters of the federal CCDF funds.  To receive
the remaining amount, states must maintain expenditures at specified
levels and spend additional state funds above those levels.

\11 States can transfer up to 30 percent of their TANF funds to the
CCDF.  Families who receive child care services paid for with the
money that is transferred are not subject to TANF rules.  States can
also spend an unlimited amount of their TANF dollars directly on
child care services, but families receiving those services are
subject to the TANF rules, including the time-limit and child support
requirements.

\12 For those states that have experienced welfare caseload declines
in recent years, more funds are available per family in fiscal year
1997 from TANF than were available from AFDC, Emergency Assistance,
and JOBS before welfare reform because federal TANF allocations are
based on previous federal expenditures in the state for these
programs.

      STATES USE VARIOUS MEANS TO
      ALLOCATE LIMITED CHILD CARE
      RESOURCES
-------------------------------------------------------- Chapter 0:2.1

Even though the seven states we reviewed are expanding their
programs, they are still unable to provide child care subsidies to
all families meeting federal eligibility criteria who might benefit
from such assistance.  In fact, a recent Urban Institute study
estimated that only about 48 percent of the potential child care
needs of low-income families would be met if states maximized federal
dollars available under welfare reform.\13 Because they cannot serve
all eligible families, states have devised strategies to target
subsidies to subsets of the eligible population.

For example, although the CCDF allows states to extend eligibility
for subsidized child care to families earning up to 85 percent of
SMI, not all states had extended their eligibility to this level.  Of
the seven states we reviewed, only Oregon had established income
eligibility limits that allow subsidies for families with incomes
this high.\14

Examining only income eligibility criteria can be misleading,
however, since eligibility does not guarantee access to services.
States with a relatively high income ceiling may not actually provide
services to many families at the high end of the eligible income
range.  For example, they may use family copayments for child care
services to control access to child care subsidies and manage child
care funds.  Copayment amounts required of parents are typically
based on a sliding fee scale, so that copayments increase as family
income increases, and high copayment requirements may make
participation in subsidized child care programs too expensive for
higher-income eligible families.

Comparing the systems in Wisconsin and Oregon can help illustrate how
states can use these different criteria to target child care
subsidies toward specific populations.  Wisconsin has established a
relatively low income eligibility criterion (53 percent of
SMI--$21,996 in fiscal year 1997), coupled with relatively low
copayments (6 to 16 percent of gross income).\15 Thus, although it
has restricted the population of eligible families to those with very
low incomes, it has designed the copayment structure to make
subsidized child care affordable to all eligible families who apply.
In contrast, Oregon has a relatively high income eligibility
criterion (85 percent of SMI--$33,012) and a relatively high family
copayment level (31 percent of monthly income up to $2,042).  While
families with higher incomes are eligible for child care subsidies in
Oregon, the copayment structure discourages them from participating
and, in effect, targets aid to lower income families.

Welfare status is also an important consideration in establishing
access to child care subsidies in many states.  Five of the states we
reviewed distinguish between welfare families (including those
transitioning off of welfare) and nonwelfare families in determining
who will be served.  Connecticut and Louisiana consider child care as
an entitlement to working families receiving TANF, and Texas
guarantees child care subsidies to former TANF families who are
transitioning to work.  In California, child care programs are
administered separately for welfare and nonwelfare clients, and in
Maryland, TANF families and families transitioning off of TANF are
given first priority in obtaining subsidies when all eligible
families cannot be served.  California, Connecticut, and Texas said
they have insufficient resources to serve all nonwelfare families who
meet individual state eligibility requirements.  In California and
Texas, this results in waiting lists for subsidies, while in
Connecticut, the nonwelfare child care program was closed to new
applicants at the time of our study.

--------------------
\13 Sharon Long and Sandra Clark, The New Child Care Block Grant:
State Funding Choices and Their Implications (Washington, D.C.:  The
Urban Institute, July 1997).  The researchers made the following
assumptions:  (1) income eligibility was based on the number of
families with incomes less than 150 percent of the federal poverty
level in the 1996 Current Population Survey, a criterion that most,
but not all, eligible families would have met; (2) an approximation
of the number of children in paid child care arrangements was based
on the number of children in low-income working families using
nonrelative care in the 1992-93 Survey of Income and Program
Participation; and (3) it was assumed that families in the
then-current AFDC caseload who had earnings were all working the
number of hours required under welfare reform law.  However,
according to researchers, since some of the families in the AFDC
caseload with earnings probably needed to increase their hours
worked, the study underestimated the increased need for child care
under welfare reform.

\14 Louisiana planned to increase its eligibility to this level in
fiscal year 1998.

\15 States periodically redetermine a family's eligibility for
subsidies once it starts receiving those subsidies.  In Wisconsin,
the income eligibility criterion for families at redetermination for
child care subsidies is higher than the criterion that applies at
initial application.

      STATES' ABILITY TO MEET
      FUTURE CHILD CARE NEEDS IS
      UNKNOWN
-------------------------------------------------------- Chapter 0:2.2

The seven states in our study reported that they could meet the
immediate child care needs of welfare families and those of at least
some low-income nonwelfare families, but they were uncertain of their
ability to fund child care programs adequately in the long term.
Although most of the states have not formally estimated how much the
demand for child care is expected to increase over the next few
years, some data suggest that the increase could be significant.
Connecticut has estimated that an additional 5,000 TANF-related
families will need child care assistance during its next 2 fiscal
years, and Maryland estimates the number of families needing child
care will more than double from 1997 to 1999.  In Oregon, which began
in 1992 to require more welfare parents to participate in
welfare-to-work activities and has emphasized child care assistance
as a way to help welfare and other low-income families support
themselves through work, the number of children served by the state's
Employment-Related Day Care program increased by 137 percent from
July 1992 to February 1997.\16 In fact, almost 61 percent of
projected child care expenditures in Oregon for 1997-99 are
designated for that program.

States' ability to meet the anticipated increased demand for child
care will depend on future levels of state child care funding as well
as on changes in demand for child care subsidies resulting from
welfare reform's work participation requirements.  The Personal
Responsibility Act's requirement that states place increasingly
higher percentages of their caseloads in work activities, combined
with the capping of federal child care funds through the CCDF, could
strain the states' capacity to sufficiently expand child care
programs in future years.  On the other hand, if states' welfare
caseloads continue to decline, then demand among welfare families
could decline or increase at a slower rate.  Consequently, TANF funds
previously devoted to cash assistance could be redirected to the
states' child care subsidy programs.  However, states may face
pressures to spend these additional resources for other TANF-related
services.

--------------------
\16 Oregon's Employment-Related Day Care program served both families
who left AFDC for employment and nonwelfare low-income working
families.

   STATES ARE INITIATING EFFORTS
   TO ENSURE ADEQUATE SUPPLY OF
   PROVIDERS
---------------------------------------------------------- Chapter 0:3

Welfare and child care program officials in six of the seven states
report that with the additional funds available under the CCDF, the
supply of child care appears so far to have kept pace with increases
in demand.  One indication of this is that these states had granted
few exemptions from work requirements because of unavailability of
child care, and most did not expect to grant such exemptions on a
large scale in the near future.

In addition, all seven states are funding efforts to support and
encourage the entrance of new child care providers into the market.
Some states are working to engage the private sector in expanding or
improving the provider supply.  Maryland, for example, funds a grant
program to help registered family child care providers comply with
regulations and enhance or expand their services.  Other states have
created incentives for employers to provide child care assistance.
These approaches include loan and grant programs, corporate tax
incentives, policies to require or encourage developers to set aside
space for child care centers in business sites, and information
referral and technical assistance to increase private sector
involvement.  Overall, according to their CCDF plans, 38 of the 51
states plan to make grants or loans available for establishing or
expanding child care facilities.

However, some kinds of child care are and will continue to be in
short supply.  In a previous report we estimated that, in the four
sites we examined, the demand for infant care and after-school care
would grow substantially over time in response to the new welfare
reform legislation and would greatly exceed the supply of those types
of care, if the supply did not increase.\17 The gap between projected
demand and supply was estimated to be even greater in low-income
areas.  On the basis of our analysis, given the current supply, the
four sites would also have trouble meeting increased demand for
nonstandard-hour care.

Furthermore, child care centers and other formal arrangements are
only part of the picture.  It is expected that informal care--child
care arrangements that are not subject to state licensing or
regulatory requirements--will meet some of the increased demand for
child care and, in some cases, may account for most of the child care
used.  For example, in Connecticut, state officials estimated that 80
percent of welfare families used informal child care arrangements.
Similarly, Oregon officials estimated that nearly half of their
welfare-to-work program clients had used informal care.  We
previously reported that families with annual incomes below $15,000,
low-income mothers who are single and employed, and parents whose
jobs require them to work nonstandard hours tend to rely heavily on
informal care.\18

--------------------
\17 Welfare Reform:  Implications of Increased Work Participation for
Child Care (GAO/HEHS-97-75, May 29, 1997).  This report examined only
the supply of child care that was known to the states and,
consequently, did not consider relative care, unregulated family
child care, and care provided in a child's home by a nanny.

\18 GAO/HEHS-97-75, May 29, 1997.

   MOST STATES ARE MAINTAINING OR
   INCREASING STANDARDS FOR CHILD
   CARE PROVIDERS
---------------------------------------------------------- Chapter 0:4

At the same time that states are expanding their programs and
attempting to increase supply, they appear to be maintaining child
care standards and enforcement practices.  In fact, some of the seven
states we reviewed are making incremental changes that tend to
strengthen existing standards.  For example, Texas planned to phase
in a requirement that will reduce the ratio of children to staff
members.  Similarly, a survey done by the American Public Welfare
Association of all the states reported that quality standards have
generally been maintained and, in many cases, enhanced.\19 In
addition, recognizing that enforcement is important to ensure that
standards are maintained and children receive adequate care, none of
the seven states plans to reduce the size of its staff responsible
for inspecting or regulating child care providers.  However, the
long-term effects of welfare reform on states' efforts to regulate
child care providers and ensure that children receive quality child
care are as yet unknown.  As we previously reported, fiscal pressures
could ultimately lead states to devote fewer state resources to
monitoring and regulating child care providers in the future.\20

As noted earlier, informal care arrangements are widely used by
welfare and other low-income families.  Much of this care is exempt
from state standards or is minimally regulated.  To address concerns
about the safety and quality of informal child care, some states have
imposed additional requirements on informal providers who receive
subsidies.  California and Oregon conduct background checks on the
criminal histories of subsidized providers, including those who are
otherwise exempt from regulatory or licensing requirements.
Nonetheless, some child care advocates and researchers continue to be
concerned that efforts to expand the supply of state-subsidized child
care could focus on informal care, placing more children in
unregulated settings.  At this point, it is too early to assess the
types of child care that states and parents will rely on as more
parents participate in work or work-related activities.

--------------------
\19 John Sciamanna and Ellen Lahr-Vivaz, The Child Care Challenge:
States Leading the Way (Washington, D.C.:  Government Affairs
Department, American Public Welfare Association, July 1997).

\20 Child Care Quality:  States' Difficulties Enforcing Standards
Confront Welfare Reform Plans (GAO/T-HEHS-94-99, Feb.  11, 1994).

   CONCLUSIONS
---------------------------------------------------------- Chapter 0:5

States are expanding their child care programs in response to welfare
reform, but it is too early to know how effective these efforts will
be in meeting the child care needs of low-income families.  Although
they now have more funds devoted to child care and greater
flexibility in designing their child care subsidy programs, states
still face difficult choices in deciding who will be served through
the programs.  Since none of the states in our study has sufficient
resources to serve all families who meet the federal eligibility
criteria, these states are targeting subsidies to certain groups of
eligible families, while attempting to balance the needs of welfare
and nonwelfare families.

In addition, although the seven states have many initiatives under
way to expand their supply of child care providers, the outcomes of
their efforts are not yet known.  Moreover, it is too soon to know
what kinds of child care states and parents will rely on as more
parents are expected to support themselves through work.  States'
efforts to increase the number of children receiving child care
services while at the same time ensuring safe care for children will
deserve attention as welfare reform evolves.

-------------------------------------------------------- Chapter 0:5.1

Mr.  Chairman, this concludes my formal remarks.  I will be happy to
answer any questions you or other Members of the Subcommittee may
have.
*** End of document ***