Fix needed for underutilization of existing subsidies
By Makenzie Huber, South Dakota Searchlight
South Dakota doesn’t invest much state money in child care — unlike several of its counterparts across the country — and existing subsidies for child care are underutilized.
Unless that changes, South Dakota will fall behind in its workforce and economic development, according to legislators, child care providers, and economic leaders who participated in a recent panel discussion hosted by South Dakota Public Broadcasting.
The state matches around $800,000 a year (the minimum requirement) to receive federal dollars for low-income child care subsidies, and the state used millions of dollars in federal COVID relief for child care provider grants over the last few years. The latest state effort, using more COVID relief money, is another round of grants for communities to find “innovative solutions” to address child care’s accessibility and affordability issues in the state.
But that federal money is running out, and the state doesn’t have a plan to replace it. Even then, providers say the money didn’t fix underlying problems.
While the urgency and the need for collaboration between the public and private sector was front and center at the SDPB panel, the need for more state involvement was also loud and clear.
Something needs to change, said President of the South Dakota Chamber of Commerce and Industry David Owen.
“Inflation coming out of COVID is a threat and that’s a domino this economy can’t afford,” Owen said. “If we don’t figure something out, we’re going to go from child care being marginal and on the edges to ceasing to exist. This needs to be addressed.”
SD’s current subsidy program is ‘perpetuating the problem’
Of the roughly 29,000 South Dakota children who qualify for subsidized child care, only 1,800 receive assistance — about 7%.
That’s “abysmal,” Early Learner South Dakota Executive Director Kayla Klein told South Dakota Searchlight.
Klein says there are two main reasons for the poor subsidy participation rate: paperwork and reimbursement rates.
The first step to increasing the low participation rate of children in the child care subsidy program is to address regulations that disqualify otherwise low-income families from the program. Current regulations often disqualify people who need subsidized child care the most, Klein said, such as single parents, teen parents and homeless families.
Nicole Weiss, early learning director for the YMCA in Rapid City, explained that of the roughly 50 people in the organization’s child care programs for homeless families and children with teen parents, only three receive subsidized child care.
That’s because regulations require that single parents pursue child support payments before they qualify for assistance — though some mothers might not want to because they don’t know who the child’s father is to collect payment, they may not want to push for child support because of an abusive relationship, or other factors. Teen parents especially are less likely to pursue child support, according to national nonprofit Zero to Three.
The child care subsidy program also requires parents work or attend school a certain amount of hours, Klein said. In the case of a homeless parent searching for work, that can be difficult. Homeless parents sometimes do not have the necessary documents needed for the program application, either.
If homeless parents can’t put their children in care so they can search for work, they can’t afford housing or escape poverty, Klein said.
“It’s like the system is perpetuating the problem,” Klein said.
Those fixes can be made administratively, Klein said, but they won’t fix everything.
Child care providers lose money when accepting state subsidies
The second reason participation rates are so low in the state is because child care providers lose money when they accept state subsidies, Klein said.
About 60% of child care providers in South Dakota are unregulated by the state, which means those providers don’t have access to subsidy dollars. Even then, state-licensed providers can opt out of the subsidy program.
Providers can choose to be unregulated for a variety of reasons — facility requirements that are difficult to achieve in an in-home setting, they don’t want state involvement, or there’s no financial incentive. The latter is what Klein hopes to change.
“People tend to want paying parents and don’t want to deal with subsidies because there are so many flaws in the system,” she said.
State subsidies typically do not cover a child’s entire tuition. Providers can either accept that they’ll lose money by taking on the child, or they can require the family to pay the remaining balance after the subsidy is paid.
If providers try to have the family pay a co-pay, they risk not getting fully paid — causing a headache for the provider, a fight with the family, and eventually leading to the child being kicked out of the facility.
“Because we know that the parent is on child care assistance because they can’t afford it, why would I anticipate they’re able to afford anything more than the state is subsidizing?” Klein added.
A lag time in being paid by the state also contributes to providers being hesitant to accept subsidies, she said.
Additionally, the state reimburses providers on an hourly basis, but most families don’t keep their children in day care for the entire time the provider is open. If parents who are eligible for a subsidy pick up their child early, the provider doesn’t get the full day’s amount, even though the spot is reserved for a full day.
Basing child care subsidy rates on true cost, not market rates
Sen. Tim Reed, R-Brookings, is spearheading the child care discussion in the supermajority Republican Legislature. He says there is a drive within his caucus to address the issue in the coming session, which begins in January.
Reed’s concern, as the CEO of the Brookings Economic Development Corporation, is that South Dakota isn’t investing in its own workforce, he told South Dakota Searchlight. Research shows that early learning is essential to a person’s development.
“I’m afraid other states will get ahead of us and have a better educated workforce,” Reed said of other states’ support for child care.
New Mexico approved a constitutional amendment devoting a portion of the state’s Land Grant Permanent Fund — fees the state collects from oil and gas development on public land — to early education and child care, generating an estimated $150 million a year for early childhood programs. Since August, the state has made child care free for all families making up to 400% of the federal poverty level, or $120,000 for a family of four.
The Washington Supreme Court upheld a 7% capital gains tax (passed in 2021) that will pay for early education, child care and public school construction projects. The state collected $850 million from the tax in its first year.
And Minnesota passed a host of bills this legislative year dealing with child care improvements, including a continuation of previous grant programs for child care workforce programs funded through federal COVID relief money and creating the new Department of Children, Youth and Families.
Vermont increased reimbursement rates for child care providers and expanded low income child care assistance subsidies to 575% of the federal poverty level ($172,500 for a family of four). New York similarly expanded its low income child care subsidies to 300% of the federal poverty level ($90,000 for a family of four).
Reed’s focus is to increase provider reimbursement rates for child care subsidies.
Child care subsidies for low income families at or below 209% of the federal poverty level ($62,700 for a family of four) are reimbursed to providers through a regional market rate. The issue with that, Reed said, is that the public already recognizes that child care providers aren’t charging enough to properly pay their employees and keep their businesses afloat.
Instead, he said the state should base its subsidy reimbursements on the “true cost” of doing business, thereby increasing the state funds to providers to more accurately reflect how providers should be paid. He likened the reimbursement model to how nursing homes are currently reimbursed at 100% for Medicaid residents — a decision the Legislature made last session.
“We at least have to get to the true cost,” Reed told South Dakota Searchlight. “Even at that point we’re not necessarily giving enough money to pay the employees enough.”
Klein hopes increasing subsidy rates will incentivize more providers to register with the state — which would then hopefully lead to a higher subsidy participation rate in the state — but it won’t immediately address the issue since subsidies only account for a fraction of the need.
Mike Bockorny, CEO of the Aberdeen Development Corporation, said during the panel discussion that he hopes something is done in the next year.
“The answer can’t be at the end of this legislative session, ‘We don’t have the money,’” Bockorny said. “We can’t not do anything. That’s not going to work. I think the people who are saying ‘Oh, this is going to cost a lot of money’ are looking at it wrong. It’s not a cost. This is an investment.”
Finding more data and evaluating funding options
Reed was one of six legislators who traveled to Nashville this summer for the Hunt Institute’s Early Childhood Leadership Summit. It was there he realized how much other states contribute to child care.
The takeaway from the event for Rep. Linda Duba, D-Sioux Falls, is that South Dakota needs an evaluation of what the state is already doing.
“What are the sources of funding? Where are they coming from? Who administers them? Are they strictly federal pass-through dollars? What are they and how many families are we leaving behind?” Duba said about the state involvement.
The group plans to present a proposal to Gov. Kristi Noem this year on how to partner with the Hunt Institute to analyze South Dakota. Noem campaigned on child care accessibility and affordability last year.
Legislators are determined to use grants or business donations to pay for the analysis, so it won’t be taxpayer-funded.
“A lot of this hinges on getting a thumbs-up from the governor,” Duba said, “but I think what we’ve proposed is a good starting point. We don’t know what we don’t know. Emotions are fine, but data is what drives good policy decisions.”
Beyond subsidies: What about the 60%?
Duba is doubtful increasing subsidy reimbursement rates will increase the number of state licensed providers.
“With licensing and regulation comes other things an in-home provider needs to do,” Duba said, referencing facility requirements, such as square footage and bathroom requirements. “I understand encouraging providers to become licensed and I’m not pooh-poohing that, but is that an immediate fix? Not necessarily.”
That’s where the state and private sector can play a role, Duba said. Businesses can make child care part of a benefits package for employees, like Black Hills Energy in Rapid City, which partnered with Rapid City YMCA to offer child care.
Faced with 21 staff openings, the YMCA has decided to temporarily close three classrooms and cut 10 positions while trying to hire the other 11. The organization has several private partnerships, and it offers benefits, substantial paid time off and retirement packages.
But it’s not enough, said YMCA Learning Director Nicole Weiss, calling for more state involvement to help boost pay.
“If you can’t buy your groceries, you’re not looking at what your benefits are,” she said.
It’s the same issue in Sioux Falls at Embe, which serves up to 400 children.
“Our starting wage is higher than average, but it’s not enough,” said Brandon Hanson, executive director of child care and school age care at Embe. “On a daily basis, we are choosing between pushing our families into poverty or pushing our employees into poverty.”
As an independent, in-home child care provider in Sioux Falls, Karen Rieck said she makes about $7 an hour after factoring in the other expenses and the hours she works off the clock. She has to work a second job.
The state has to help “take the financial burden” off of child care providers to properly support the economic ecosystem, Weiss said.
“We have to do something right now,” she said. “In a year or two years we’re not going to have employees, because we won’t have child care. The time is now.”
South Dakota Searchlight is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. South Dakota Searchlight maintains editorial independence.
