Solving the Rubik’s Cube of Child Care

The challenges in the Child Care Industry are like a Rubik’s Cube, a complex puzzle. Much like with every turn of the Rubik’s Cube, you are either one step closer to solving the puzzle or getting further away from a solution. As the challenges in the child care industry continue to intensify, the steps many take, although well-intentioned, do not provide lasting solutions but result in moving the industry further away from solving the puzzle.

As I write this article, I am celebrating 30 years of working in the child care industry. My role in the child care industry has not been that of a teacher, caregiver, or child care business owner. My roles have included serving as a child care mergers and acquisitions adviser and a financial management consultant. I help child care owners manage cash flow, budget for capital improvements, make payroll, keep the doors open, and operate a financially healthy, sustainable business. And assist them in creating an Exit Plan to help them prepare and fund their retirement. Seeing the child care industry from this different lens has shaped my perspectives, questions, and thoughts about the problems, as well as my ideas on what could help solve the challenges of the child care industry – the Rubik’s Cube.

Focusing on the Problems – Also Providing Some Thoughts About Solutions

In this article, I aim to highlight some of the problems and challenges in the child care industry, reframe common perceptions, and provide reasons to rethink our approach to these issues, ultimately offering solutions.

For the last 30 years, I have watched the child care industry evolve, adapt, struggle, grow, contract, and, in the most recent years, reveal real cracks – stress cracks that indicate potential major problems ahead. Greater problems than exist today – greater labor shortages, a growing lack of supply, declining quality, and ever-increasing financial instability.

Yes, many of the challenges in the child care industry are not new and have hampered the industry for decades. However, since the Pandemic, the problems within the child care industry have become front-page, above-the-fold news. This increased exposure and emphasis have come about for many reasons. First, the Pandemic resulted in the temporary closing of thousands of child care businesses across the country due to health and safety concerns. Most of these, but not all, were able to reopen. Every parent, community, and employer became accurately aware of just how “essential” child care is. Second, since the Pandemic, the voices decrying that the child care industry is broken and the voices advocating for changes have increased exponentially. Many of these new voices, although well-intentioned, have limited or no direct experience and knowledge of the child care industry. Some individuals have only personal experience – that of a parent dealing with the frustration and difficulty of finding child care. Others’ knowledge is limited to the articles, books, news stories, and videos they have read and viewed.

Advocacy is important to create awareness and promote change. However, many voices today are decrying the problems in the child care industry and recommending solutions that often amount to mere “noise,” and, unfortunately, often result in “twists” that move us further away from solving the Rubik’s Cube of child care.

Early Childhood Education is Important – More Money is the Only Solution

I’ve likely read hundreds of articles and listened to hundreds of presentations from well-meaning people, all of which emphasize the importance of early childhood education, particularly during the first five years, its long-term impact, and on and on. This central theme permeates the entire article, book, or presentation. It is as if there is some overwhelming public disagreement about the importance of early childhood education. And, its importance must be stated again and again. If they could just get everyone to acknowledge the importance of early childhood education, it would immediately lead to changes and increased support for the child care industry. Folks, in my 30 years of working in the child care industry, I have never heard anyone dispute or say that early childhood education is not important – nope, never even once!

These same articles, books, presentations, or videos also tie the importance of early childhood education to the requests (actual demands) for more money for the child care industry, more public funding, more funding from the government, and essentially more public and government takeover of the child care industry.

Again, many of the “voices” being heard decrying the problems in the child care industry have no direct experience in the industry. So, it leads to them just repeating what they have read in an article, book, or watched in a news report or video. But this constant repeating – beating the same drum – has produced few long-term solutions. Why? Because often the only solution recommended (or demanded) is more money.

The Child Care Industry is Broken – The Child Care Industry Has Failed

In my 30 years of working in the child care industry, I have rarely met a child care business owner, director, teacher, or assistant teacher who did not deeply care for the children. Many often work endless hours each week for not just years but decades, risking their own families’ financial stability, because their driving mission is to be a “positive part of children’s lives”. However, these selfless individuals are constantly told, “You have failed; you have not done enough. Your efforts, your life’s work, have resulted in a failed and broken industry.” This vilification of the people working in child care has not solved a single problem. It has only resulted in compounding the problems, as tens of thousands of child care owners and employees have decided to leave the child care industry.

Bringing about change and providing solutions should not include scapegoating, blaming, or vilifying those working so hard in the child care industry, as this approach has not and will not result in solving any problems.

More Money – Will Solve All the Problems: It is Not That Simple!

Yes, child care is expensive. Yes, many families struggle to pay for child care. Yes, more money, if used correctly, could help to solve some of the problems in the child care industry. However, “More Money” is not the answer.

The Child Care and Development Block Grant (CCDBG – often referred to as the Block Grant) was started in 1990. Since its founding, it has been the largest source of government (federal) funding for the child care industry. The Block Grant provides grants to states to help low-income families pay for child care. Is the Block Grant funded at a level that is needed to pay for the child care of every low-income family that needs assistance? No. Should we explore ways to increase the Block Grant, state, and local funding? Yes.

However, it is also important that systems be in place to ensure that funds are managed appropriately, allocated based on verified qualifications, and all funds are utilized to extend access to child care, improve child care quality, and pay child care providers at rates that provide financial stability and sustainability.

Unfortunately, many government-funded programs, such as Medicare, Social Security, and the Block Grant, have too much waste, fraud, and abuse. Although the United States is often credited with many of the world’s best technical advancements, most government programs are operated with antiquated technologies. This leads to much waste, fraud, and abuse in these government programs. Upgrading technology, including enhancing it with AI, would not only make these programs more efficient but also lead to substantial decreases in waste, fraud, and abuse. Let me illustrate a few examples:

In many states, there are multiple agencies involved in managing and distributing state funds and funds received through the Block Grant. Unfortunately, it is common to find duplication and overlapping across these multiple agencies. Technology upgrades would not only make their job easier but also more efficient, reducing waste. And save funds – funds that could be used to provide funding for more child care spots.
The family application process to receive funds for child care is often complicated. In many states (and counties), the verification process is limited or flawed. Some families receive child care funds they do not qualify for, while others who qualify are either disqualified or placed on a waitlist due to a lack of funds.

Every owner of a child care business or teacher will tell you they have known families that received 100% funding assistance for child care for multiple children, while living in an expensive home, driving expensive cars, taking frequent vacations, and always having the latest, most expensive cell phone. Obviously, something was off with the qualification and verification process for that family. The same child care owners and teachers have also known single working mothers, or both parents working overtime or having two jobs, and those families who are pinching pennies; yet they were told they did not qualify for financial assistance to help pay for child care. Waste, fraud, and abuse lead to deserving parents and children who are qualified receiving less assistance or none at all.

Utilizing readily available technology, enhanced with AI, can lead to a significantly improved application process. By connecting with other government agencies, data can be verified to determine which applicants qualify. For instance, if the DMV database says the family owns a $70,000 BMW and the real estate tax office indicates they live in a $500,000 home, something’s wrong with the low-income representations on their application. I’m just saying!

More accurate qualification and verification will result in families that do not meet the requirements not receiving funds and deserving families receiving financial assistance for child care, which is why the Block Grant was founded, and is still the goal of the program today – to provide qualified low-income families with funds to help pay for child care – not to provide funds to families that can afford to pay for child care – but instead they have other priorities and things they want to spend their money on so they figure out a way to game the child care assistance program.

I think many people support more government funding for low-income families who need financial assistance to pay for child care. However, when people feel they are being asked to pay more tax dollars to fund programs that they believe are poorly managed, waste funds, or resources are being lost through fraud and abuse, they are likely to be resistant. When undeserving families are receiving financial assistance, while those who qualify go without. People resist supporting and voting for these programs.

Different Subsidy Tuition Rates Paid to Providers

In many states, the formulas utilized to determine the amount a child care provider will receive need some serious recalculating. It is not uncommon to find states that want to increase the number of “spots” they provide for child care assistance. To increase the “spots,” they set the rate paid to the child care provider very low – often lower than what it costs the provider to deliver the care.

Or, one that really perplexes me – child care providers in larger cities receive a much higher rate than providers in rural areas of the same state. The explanation often is a cost-of-living adjustment – it is so much cheaper to live in a rural area, they say. Really? Housing may indeed cost a bit less in a rural area. However, gas, food, utilities, and most other expenses are about the same. I know states where providers in a large city, for instance, receive $1,250.00 a month for the care of an infant, subsidy assistance through the Block Grant program. You could drive less than an hour away to a smaller town, where child care providers receive only $600.00 a month for infant care, the same subsidy assistance program. You cannot pay providers in smaller, rural areas substantially less money to provide the same care and expect them to be able to operate a financially healthy, sustainable child care business.

And folks wonder why over 50% of the US is considered a child care desert. If child care providers in rural areas received a subsidy care funding rate equal to that of providers in larger cities, we would likely see an increase in child care programs in these areas and a decrease in child care deserts. Solving this part of the puzzle is not complicated – pay child care providers in large, medium, and rural areas the same rate – a fair rate that covers the cost of delivering care.

Pay Providers Based on Enrollment, not Attendance.

Speaking of Block Grant and subsidy care, in many states, the child care provider is paid based on the child’s attendance, not enrollment. So, if Johnny’s mother decides not to bring Johnny to child care for three days this week, the provider does not get paid for those three days by the subsidy program. To some, this may seem OK. However, the child care provider still must pay the teachers in that classroom, as well as cover all other expenses. The more children (receiving subsidized care funds) who do not attend each day, the more challenging it is for the child care provider to manage their business financially, because the provider is not being paid based on enrollment but on attendance. Why does the system financially punish (not pay) the child care provider when the children do not attend? When children in the public school system do not attend, the parents are held responsible – not the school. Why do we hold child care providers responsible for attendance and then financially punish them by withholding payment?

A quick fix for this problem. Child care providers are paid based on enrollment, allowing them to operate a more financially stable and sustainable business. Parents receiving financial assistance (subsidy) to pay for child care are responsible for their child’s attendance. Child care providers are already reporting attendance. When a child’s attendance falls below a minimum threshold (with exceptions for sickness, etc.), the family no longer qualifies for financial assistance. And the “spot” and financial assistance can be reallocated to another deserving family.

We have all heard the saying, “Free has no value.” Unfortunately, some parents receiving free child care take it for granted, and their children miss more days than they attend. This creates a losing situation – the child, the child care provider, and the child care funding systems all loose. “Financial assistance for child care should not be provided without parent accountability for attendance.”

Financially Destabilizing the Child Care Providers

In an industry that operates on small financial margins and profits, it is not hard to financially destabilize both the large and small child care providers.

In 1995, Georgia became the first state to offer free PreK funding. By 2010, 40 states offered some level of PreK funding. Today, only five states do not offer some funding for PreK.

The common initial goal of all these state-funded PreK programs was to provide free PreK for low-income families and at-risk children. In many states, these programs were promoted as a shared initiative between the public school system and private child care providers. However, in many states, the “shared program” has increasingly been taken over by the public school system, with more PreK classrooms each year in public schools (Elementary Schools) than in private child care.

In addition, most states do not require the public school system to meet the same regulations and licensing requirements that the private child care provider must comply with. This, of course, creates an unlevel playing field. And, unlike in the beginning, these PreK programs now take not only children aged four but also some school systems take children as young as three.

In addition to the PreK programs, many public school systems also offer after-school care, often at a rate substantially lower than that charged by local child care providers. Why has this happened? Public school systems seek revenue from PreK and after-school programs. And the superintendents, principals, and other public school system leaders get a lot of encouragement from the community, town councils, and political leaders to use the public school system’s facilities to provide child care and lessen the shortage of child care in the community, or the perceived lack of child care in the community.

In many states, both metropolitan areas and small towns, we are starting to see this increased involvement of the public-school system in PreK, and after-school care financially destabilize the child care providers in the area, particularly the private, for-profit-owned child care businesses. The level of negative impact is closely related to the population growth rate. Areas with high population growth rates have a larger population of children, so the impact on the private child care provider is less. In areas with slow growth rates or declining populations, the financial impact of the public school system offering PreK and after-school care is particularly financially destabilizing for child care providers.

Let me illustrate with a commonly repeated story across the country:

A small town has three large child care centers, each with a licensed capacity between 100 and 150, one medium church child care center, two medium private child care centers, four small centers, and a dozen or so family day–home child care providers. In total, there are about 750 licensed child care spots. There are three elementary schools and one YMCA, neither of which offers PreK or After School Care. Although the total licensed capacity is about 750, the total enrollment across all child care providers is about 500. Some providers have waiting lists because all classrooms are full. However, other providers are having difficulty finding teachers and must limit enrollment in some classrooms. And, some have available spots, depending on the age group.

Parents in the community complain about difficulty finding child care. Employers are struggling to find employees, partly because some potential employees are unable to find child care, which prevents them from taking a job right now.

Community leaders establish a committee to research and recommend solutions for increasing the supply of child care. The committee determines there is a need for 75 child care spots for infants to four-year-olds, and the need for about 75 after-school spots. The feedback and solution are for the elementary schools to start a PreK program, which will help provide some spots for children ages three and four. All three elementary schools agree to open one PreK class of 20 children each. Two of the elementary schools will add an after-school program, each with the capacity for 25 children. The YMCA also agrees to add an after-school program for 30 children. These new after-school programs will charge $50 less per week than private child care programs in the area. One of the largest employers will open an on-site child care program at a significantly reduced rate for its employees, with a licensed capacity of 50.

Community leaders are ecstatic; they have solved the lack of child care problems in their town. They have increased the number of child care spots by 110 and after-school care by 80.

The start of the new school year rolls around, and the elementary schools fill up their new Pre-K classrooms, after-school programs, the YMCA’s after-school program is almost full, and the employer-based care program is full, with a waiting list. Community leaders, parents, and area employers are all happy that the child care shortage in their community has been solved.

Or has it? Behind the scenes, this is what has happened to the private child care providers in their community. Those 110 children now in the elementary schools and employer-based care program used to be enrolled in one of the private child care providers, and the same for the 80 school-age children now attending the elementary school and YMCA programs. Not only is it a loss of children enrolled, but also the age groups of the children represent the most profitable age groups for child care providers because of the teacher-to-student ratios. Additionally, the private child care providers lost some teachers who now work for the elementary schools, YMCA, and employer-based child care programs.

The child care providers, known for their resilience, hustle to find new teachers, spend additional money on marketing, and gain some new enrollment. However, among all the private providers, the net loss of enrollment is still financially destabilizing.

One child care provider who built her facility just a few years ago can no longer afford the mortgage payments. She uses family savings for about six months, trying to make ends meet. She tries to sell her child care business – many buyers love it – but cannot get a loan to buy her business because of the loss in enrollment and revenues. Ultimately, she closes the child care business, sells the furnishings at a yard sale in the parking lot, and lists the building with a commercial real estate agent, praying it sells before the bank forecloses.

Although the population of the small town is growing, the growth is not coming soon enough. A couple of other child care providers also had to close due to low enrollment and financial problems.

So, the child care supply problem everyone thought was solved by adding 110 child care spots and 80 school-age spots between the elementary schools, YMCA, and employer-based care actually resulted in a loss of multiple private child care providers and 225 licensed child care spots. The people involved, although with good intentions, created a situation that “cannibalized” and “financially destabilized” their local child care industry. The community now faces a more significant child care supply problem.

Individuals not involved in child care often hear stories like this but fail to grasp the long-term implications and problems that lie ahead. Often, the response is that child care providers failed to provide an adequate supply of affordable child care and a stable child care industry, prompting the public school system and others to step in and solve the child care supply problem.

Blended Delivery and Shared Programs Should Not Result in “Cannibalizing” and “Financially Destabilizing” Other Child Care Providers

Similar to the story of a community that appointed a committee to study child care and offer solutions, the fallback, which is almost always presented, is that the child care supply problems can be solved by the public school system getting into child care. Rarely do the solutions include consideration for the impact on the private child care providers in the area.

Community initiatives should include partnering with existing child care providers to offer them more support and assistance, working together on solutions that will stabilize the existing providers and increase the community’s child care supply, long-term, not just short-term.

Given that the public school system is already in the “education business,” uninformed individuals think that makes them the best option. Why? Numerous studies over the last two decades have revealed the decline of public school systems for ages K–12, as well as those offering PreK and after-school programs. If studies show a lack of quality with the programs and age groups already in the public school system, why would anyone think these same schools will provide quality education to three and four-year-olds?

The common argument used to support these decisions is that child care and early childhood education are “essential”, and the best way to increase supply is for elementary schools to get into the child care business. Really?

I know that I am “preaching to the choir” as most of the readers of this article are actively involved in the child care industry and understand what I’m saying. However, I have come to realize that people outside the child care industry often fail to understand how the public school system is undermining and financially destabilizing the child care industry across the country.

I have learned to share this analogy to help people outside the child care industry better understand:

Just as child care is essential, so is access to high-quality, affordable meals – everyone should have it. A community determines there is a shortage of restaurants to provide the essential, high-quality food people deserve. Their Elementary Schools have massive kitchens and cafeterias, enabling them to produce large quantities of high-quality, affordable, essential food. So, the decision has been made for the Elementary Schools to start providing breakfast, lunch, and dinner to the public at an affordable price – only $5 Bucks – for a full meal, including a meat, three vegetables, bread, dessert, and drink.

The community engages in a comprehensive marketing campaign to inform everyone within the community. Word travels fast; in less than a couple of weeks, each of the Elementary Schools is serving thousands of meals every day. Community leaders are ecstatic; they have solved the shortage of access to “essential”, high-quality, affordable meals. Folks in the community are thrilled to get a full meal for just $5 Bucks!

Well, it is only a few weeks before the restaurants in the area begin to go out of business. How could they compete with the public school system providing breakfast, lunch, and dinner for only $5 Bucks?

Sharing this analogy, of course, results in laughs and some pushback. However, many people say, “I see what you are saying. The public school system can undermine the private child care providers and cause them to go out of business, and then we will face a larger shortage of child care in our community.”

That is correct. Now, let’s explore ways to partner with, support, and help financially stabilize private child care providers in the community, creating long-term solutions and a sustainable level of high-quality child care.

Needs Analysis and Business Feasibility

As a believer in free markets and entrepreneurship, I think anyone who desires to open a child care business should certainly have the right to do so. However, over the last 30 years, I have analyzed thousands of child care businesses. Too frequently, my analysis indicated that the child care business had limited viability. And it often shouldn’t have started. The most common reasons:

Market area had a high supply of child care, nearing saturation or already saturated – too many licensed child care spots for the number of children of child care age. (Yes, many markets have the opposite of a lack of child care supply and have more supply than demand for child care.)
The licensed capacity of the child care business, and the allowable number of children in each classroom based on the teacher-to-student ratio, did not allow for financial breakeven in all classrooms, much less the ability to make a profit.
The tuition rates needed to provide high-quality care, while also covering all expenses, and allowing for a reasonable level of profit, did not match the market demographics.
The child care facility design included excessive, unlicensed space, creating a facility cost above normal benchmark ratios.

These reasons, along with many others, meant the child care business would struggle financially and have a limited chance of being viable long-term – almost doomed to fail from the start. Why does this happen? Unfortunately, individuals looking to get into child care often have limited child care experience, limited financial and business acumen, and lack access to knowledgeable people who can help them analyze and determine the feasibility of the child care business (including the facility) they seek to start.

There needs to be a well-defined system that helps to ensure that “would-be child care entrepreneurs” must go through a process – call it a needs analysis, feasibility study, or some similar appropriate name. This process should encompass both the lending process (obtaining financing to start a child care business) and the steps required to obtain a child care license and qualify to enroll children whose tuition will be paid by public funding (subsidy funding).

The Small Business Administration (SBA) government-backed loans are the primary source of funding for individuals to start or buy a child care business. To qualify for a loan, the borrower must meet the SBA underwriting guidelines. However, the process rarely includes the in-depth analysis needed to determine if the proposed facility, location, market area, current supply of child care, and many other things meet the necessary criteria for a successful child care business.

In addition to better financing underwriting procedures, a more robust licensing process and facility review should be implemented. If the classrooms are too small, the building has functional obsolescence, or the maximum licensed capacity does not allow for financially sound operation, the building should not qualify for licensing.

Most child care businesses do not close because they do not offer quality child care programs, or due to licensing violations. Most child care businesses fail due to their owners’ lack of financial management skills. Child Care Is A Business. Only a small percentage of all business owners have formal training in budgeting, financial management, cash flow management, and other essential business knowledge. All child care business owners, whether they are just starting out or already in operation, should be required to undergo specialized training in child care business and financial management to qualify for loans, subsidy funds, and as part of ongoing continuing education.