What happens when states run out of federal dollars for pandemic child care?

As part of the historic infusion of assistance to states during the COVID-19 pandemic, the federal government provided nearly $53 billion in one-time funding to the child care industry. This support was distributed to states through Child Care and Development Block Grants and Child Care Stabilization Grants, funded over the course of three COVID-19 relief packages.

A total of $24 billion in child care stabilization grants — the entire program — and $13.5 billion in child care and development grants expired in September 2023. An additional $15 billion in child care block grants will expire this September. While this funding proved effective in supporting child care availability, the one-time nature of the money, coupled with the ongoing needs for child care services, has created a potential fiscal cliff for states to navigate as funding expires. How can state policymakers limit the potential risks of such sudden drops in funding?

Dramatic drops in funding could mean fiscal or operational struggles for states

The public health emergency and economic downturn during the COVID-19 pandemic exacerbated the problems already facing child care providers, such as high demand for their services, staff shortages and rising costs. During the first year of the pandemic, analysts estimated that nearly 10 percent of the nation’s licensed child care programs were permanently or temporarily closed.

Lawmakers provided nearly $53 billion in federal aid to the sector to help states combat challenges in the child care sector. The effect of funding was important; more than 80% of child care providers across the country received funding. Child care facilities used those dollars in a number of ways: for operating expenses, such as wages and rent; and one-time investments, such as the purchase of program materials, facility improvements, and debt payments incurred during the pandemic. This funding allowed child care providers to continue providing services: 92% of stabilization grant recipients said the funds helped them stay open.

As a result of the expiration of funds, many kindergartens may have to take measures such as raising fees or withdrawing operations. Last year, The Century Foundation, a think tank that examines education, health and workforce policy challenges, found that about a third of centers that received funding for the stabilization of the ‘child care could close with consequences for parents, children, providers and the economy, with an estimated cost to families of $9 billion in reduced income and a cost to states of $10.6 billion annually in a decrease in economic activity.

How States Handled Pandemic Child Care Funds

A Pew report released last December offered recommendations on how states can reduce their exposure to fiscal risks when spending one-time federal aid. Possible approaches include spending the funds on one-time needs, identifying alternative funding sources for when federal aid expires, or planning to wind down the aided program after funding ends.

These strategies are also relevant to the effective management of temporary child care funding states. Some states are already thinking about how to deal with the financing of these activities in the future.

Use temporary financing as a stopgap

When single funds expire, states can use other single funds as a supplement to make responsible longer-term fiscal plans. For example, Wisconsin in October 2023 initiated an interim measure to continue its child care stabilization program, directing $170 million to provide financial assistance to child care providers. The measure changes the Federal Emergency Management Agency’s one-time pandemic reimbursements to fund the Child Care Stabilization Payment Program through June 2025. In a statement, Gov. Tony Evers (D) and their administration acknowledged that this is not a permanent solution and said that the administration will explore opportunities for long-term sustainability in the child care sector.

Identification of a new source of permanent financing

One way to reduce the fiscal risk of spending one-time funds on operating expenses is to identify a new permanent funding stream for the program. For example:

  • New Mexico voters in 2022 approved a constitutional amendment to provide funding for child care through non-renewable natural resource revenues and capital investment returns in the state’s Permanent Land Grant Fund. The amendment could bring in about $150 million a year to make daycare affordable for most families and provide child care centers with enough funding to offer competitive wages. This reliable source of funding should ensure that parents and child care providers do not experience funding or service shortfalls.
  • Maine, meanwhile, used part of the Child Care Stabilization Grants, starting in 2022, to provide scholarships to child care workers. As federal funding began to dwindle, the state provided more than $12 million in revolving general fund appropriations to allow the grants to continue.
  • In fiscal year 2024, Illinois funded the first year of a proposed multiyear plan to invest in child care. The $250 million investment includes $130 million for early workforce compensation contracts aimed at increasing wages for kindergarten workers and $75 million in additional funding for block grants for in early childhood to create more pre-K spots. While this appropriation does not fully replace the nearly $800 million in federal money the state received for its child care stabilization program, the plan reduces the severity of a fiscal cliff.

Prioritize specific expenses and communicate completion dates

Spending one-time money on one-time expenses avoids the risk of future tax liabilities. States can better prepare recipients for the end of a program and encourage responsible spending by making it clear that funding will expire. For example, Arkansas mitigated the risk of a child care spending cliff with allocation decisions, according to an Arkansas Department of Education official. State leaders encouraged providers who received funding to apply it to one-off projects such as facility improvements or the purchase of educational materials. This helped ensure that recipients knew the funds were temporary and reduced the risk of a fiscal cliff.

Child care stabilization grants are just one example of how one-time funding streams can present challenges for states if service needs persist after funding expires. As pandemic aid expires, states should assess the needs associated with operational activities funded by this one-time money. If acute needs persist, as is largely the case with child care funding, states can identify new funding streams. And if the needs no longer exist, policymakers can phase out activities and clearly communicate end dates.

Kate Watkins is an Associate, Rebecca Thiess is a Manager, and Laura Pontari is an Associate Manager of the Tax Risk Management Project at The Pew Charitable Trusts.

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