Minnesota Democrats might spend big in bid to fix a struggling child care industry

Hiring and keeping staff has been the greatest challenge for the Stay ’n Play child care centers in Litchfield and Willmar. Pay is typically around $15 an hour, including a $2 bonus that stems from federal COVID-19 relief money. But raising wages above that would mean increasing tuition, which executive director Kristin Jaquith said isn’t so easy.

“Parents can’t afford to pay any more,” Jaquith told MinnPost. “We’re rural, so our rates are quite a bit lower than what they are in the metro.”

Jaquith’s dilemma is not unique. Industry leaders and politicians — all the way up to Treasury Secretary Janet Yellen — say the economics of the child care sector in Minnesota and beyond have long been broken, creating a system of high prices for parents, low pay for workers, and businesses operating precariously on razor-thin margins.

As a result, Democrats who control Minnesota’s government have proposed a massive expansion of spending on child care from the state’s historic budget surplus in a push to revitalize the industry and cut costs for families. It’s complicated to tally an exact figure aimed at children who are too young for school, but Gov. Tim Walz’s $65.2 billion two-year budget plan would lead to several billion in new state spending with direct ties to child care over the next four years.

That money would increase subsidy rates for low-income families to meet federal recommendations, which is something DFLers have wanted for years but stalled while Republicans controlled the state Senate. Walz would also significantly expand a tax credit that would help parents cover tuition.

And the governor wants to offer permanent monthly payments for child care providers meant to give child care workers pay raises statewide and keep businesses afloat. Regular grants for the sector began during the pandemic, but the idea of turning money meant to stabilize the industry amid COVID-19 into a long-term infusion of cash would be a first in Minnesota.

Republicans have been wary about much of the spending, arguing the family subsidy program was recently troubled by sweeping fraud allegations. Some say burdensome government regulations are more to blame for the continuing decline in smaller family child care providers in mostly rural areas across the state.

But Democrats now have majorities in the House and Senate and won’t be forced to negotiate with the GOP on the issue. Lawmakers might not approve Walz’s exact budget plan, but DFL legislators are likely to vote for major spending on child care either way.

“It is important that we begin to recognize how critical this sector is for our economy, not only now for parents and employers, but also in the long run for the benefit of kids as well,” said Rep. Dave Pinto, a St. Paul DFLer who leads the House’s Children and Families Finance and Policy Committee.

Low wages, high tuition

For years, lawmakers have studied how the number of smaller in-home, family providers have plummeted across the state. And they have scrutinized why teacher pay remains dismally low while child care prices in the state, especially in the Twin Cities metro area, can cost as much as college tuition.

Those issues predate the pandemic. But they also reached crisis levels as COVID-19 caused parents to withdraw children from child care. That starved providers of critical income while they were asked to remain open to serve the kids of essential workers.

Minnesota tried to keep its industry intact with a series of payments to providers, much of which was paid for by federal cash. But problems remain now that enrollment is back up. The average tuition for an infant in a child care center in Minnesota is more than $16,000 a year, while the average cost for an infant enrolled with a family child care provider is more than $8,500. That’s according to a report issued in February by a child care task force that includes industry advocates, as well as Walz officials, plus DFL and Republican lawmakers.

But the income for providers is limited by regulations, namely small staff-to-child ratios meant to ensure safety and quality. Most of a child care provider’s expenses are staffing costs.

In 2018, Minnesota had about 8,119 family providers and about 1,761 licensed child care centers. The number of licensed family providers, which serve mostly rural areas, has dropped as low as 6,250.  The number of licensed centers has ticked up to more than 1,800, though most of the growth is in the Twin Cities metro, said Clare Sanford, government relations chair for the Minnesota Child Care Association, a trade group representing centers. (Jaquith is also on the MCCA board.) Centers and in-home providers are two common types of child care operations, though there are others, including school-based pre-K.

One problem for child care providers has been hiring and retaining employees on low salaries. “Our own child care workforce is still about 8% below the already inadequate levels we had before the pandemic,” Sanford said during a January hearing in Pinto’s committee. “We are not even back to the bad place we were in before.”

Gospel Kordah, an advocate for the Kids Count on Us campaign run by the progressive organization ISAIAH, testified that he opened a child care business during the pandemic, but they closed down because they couldn’t find and keep qualified teachers. Kordah said they lost lots of staff to Amazon, or other nearby industries with higher wages.

Walz budget plan goes big

Since being reelected, Walz has pledged to make Minnesota the best state to raise a family. And a large slice of the governor’s budget plan is related to child care for infants and kids too young for school. Much of that cash would be distributed as tax credits.

One major item Walz proposed — about $2.33 billion over the next four years — is an expanded child tax credit. That’s not solely targeted for the youngest kids. It would allow some families to get $1,000 a year for each child under age 18, up to a maximum of $3,000. The credit would start to phase out starting at $50,000 in income for married couples and $33,300 for single filers.

But another large tax credit is squarely aimed at who Lt. Gov. Peggy Flanagan has taken to calling our “littlest Minnesotans.” 

The Walz budget would expand a child and dependent care credit at a cost of $1.1 billion over four years. Under that plan, families would get $4,000 a year for every child under the age of 5 for child care expenses, up to a maximum of $10,500. This credit would begin to phase out at $200,000 in total household income. Parents of older children would get some money under the proposal as well.

But Walz also proposed nearly $700 million over four years aimed at supporting the industry and its workforce, primarily through retention payments.

Early in 2020, soon after the COVID-19 pandemic hit, Minnesota approved $30 million to keep the child care industry running. In the summer of 2021, however, the state began its “child care stabilization grants” program, giving monthly payments to most providers. Most of the cash was earmarked for worker pay, and the program was paid for by money in the federal American Rescue Plan stimulus package. The state distributed more than $146 million between June 2021 and June 2022, the program’s first year.

Nearly 8,000 providers received some money from the program in that time frame, and 96% in a survey released by the state said the grants were helpful in keeping their program open and operating. The initiative is set to end in June.

Debra Messenger, another Kids Count on Us advocate and child care provider in St. Paul, testified that one of her staff members cried when they got a bonus from the stabilization grants. “They cried because they were overwhelmed at how impactful a few hundred dollars was for them,” she said.

Walz’s new proposal, dubbed “retention payments,” would have some differences from the stabilization program. But the basic concept would be the same. “What we hear from child care providers across the state is how essential those payments are,” said Erin Bailey, who leads Walz’s Children’s Cabinet.

Another proposal would pump $484 million over the next four years into a full-day pre-K program that would include public schools and private child care programs.

What the Legislature is doing

State lawmakers haven’t promised to adopt all of Walz’s proposals, which even include creating a new state agency focused on children and families. DFLers are advancing a similar child and dependent care tax credit. But so far, the Legislature has made the most progress on raising reimbursement rates in the Child Care Assistance Program, the main program that subsidizes low-income families and serves about 30,000 kids every month.

Minnesota has been lagging behind federal recommendations for the program for years, and as recently as 2020 the state faced sanctions for having reimbursement rates below minimum standards.

The feds recommend rates at the 75th percentile of a market-rate survey for what providers charge, which Democrats have long pushed to obtain. Under those rates, a parent would have the full cost of tuition covered at three out of four providers. Supporters say higher rates would make it easier for more providers to accept kids using the subsidy, and raise income for businesses that already take kids accessing the program.

Following the notice from the feds, lawmakers in 2020 and 2021 hiked the maximum rates incrementally. The state is now at the 40th percentile of what providers charge to care for infants and toddlers, and at the 30th percentile for preschool and school-aged children.

But House Democrats this year wasted little time in approving a bill on a 69-59, party-line vote, to meet the 75th percentile rates. Walz also proposed a rate hike to the 75th percentile in his budget. 

The Senate DFL has yet to vote on the measure but the policy cleared a key committee. Raising Child Care Assistance Program rates would cost Minnesota roughly $360 million over four years on top of existing programs costs and comes with some federal cash.

The state House also passed a bill to continue stabilization grants at current rates for a few more months, using $12.25 million in state money. Payments are expected to drop in March without the measure. They end altogether in June unless lawmakers continue them in some fashion. That same bill also had $40 million for early learning scholarships, which help low-income families access high-quality child care programs. The program has bipartisan support, and Walz also proposed expanding the number of scholarships long term.

Pinto said the money for stabilization grants and scholarships was a temporary stop-gap for the industry until lawmakers strike a broader agreement on how much money to spend on what issues. That will come after an economic forecast that will be released Monday.

Republicans in the House opposed the bill to hike child care subsidy rates and temporarily increase stabilization grants, despite their support for scholarships. They argued it was too soon to spend far more money on the Child Care Assistance Program after it was wracked by fraud allegations in 2018. Lawmakers did pass a series of policies meant to combat fraud. But the recent Feeding Our Future scandal over separate allegations of fraud in nutrition programs has Republicans cautious.

In December, the Star Tribune reported that two people charged with stealing millions from a federal meals program had continued to collect public money in the Child Care Assistance Program. The Minnesota Department of Human Services distributed at least $22 million in the last five years to centers owned or managed by 14 people indicted on federal charges of fraud in the meals program, the Star Tribune reported.

“I know that child care centers need funding, and it’s critical we do that,” said Rep. Brian Daniels of Waseca, who is the top Republican on Pinto’s committee. “But I don’t see (how) maybe, possibly, throwing fuel on the fire, if there’s more fraud, is going to help.”

Pinto’s Child Care Assistance Program bill included a provision meant to give DHS more power to stop payments to people accused of fraud in other programs, though Republicans said it wasn’t strong enough.

During a House floor debate, Rep. Anne Neu Brindley, R-North Branch, said the stabilization grants didn’t do enough to stem losses in family child care providers. And so lawmakers shouldn’t pump more money into what she believes was a failed solution. “It is not stabilizing the child care crisis that we have in Minnesota,” Neu Brindley said.

Still, Jaquith, from the Stay ’n Play centers, urged lawmakers to continue monthly payments. She said the $2-an-hour payments she could give staff were vital. “I do feel like since I’ve been able to give these pay increases that the staff that we’ve got has stayed,” she said. “I just can’t take that back.”

Editor’s note: Walker Orenstein wrote this story for MinnPost.com. It was originally posted on Feb. 23.

Orenstein reports on the state Legislature for MinnPost, with a particular focus on covering issues affecting Greater Minnesota.

MinnPost is a nonprofit, nonpartisan media organization whose mission is to provide high-quality journalism for people who care about Minnesota.