Proposals for Reimbursement Rate COLA Represent Necessary but Incremental Progress for California’s Early Educators 

This month, Governor Newsom put forth his 2023-2024 May Revision for the state budget, which reflects a looming shortfall of $31.5 billion. Against this backdrop, California is struggling to make headway in updating the state’s woefully outdated reimbursement rates to child care providers. Last year, California convened an expert Rate and Quality Reform Workgroup, which recommended discarding the state’s formula for compensating early care and education (ECE) providers for subsidized care. While the recommendations of the Workgroup require a multi-year implementation, the first among them calls for action in the budget: “Increase reimbursement rates immediately.” 

What does the 2023-2024 Budget actually include? There are multiple cost of living adjustment (COLA) proposals circulating: the Governor proposes a statutory COLA of 8.22% for programs that contract with the state; the State Assembly proposes an increase of 25.44% for programs in the subsidy system, totaling over $1 billion; the State Senate also calls for over $1 billion in increases. The Assembly’s COLA aligns with the increase in inflation since 2016, the last year the subsidy rate was reassessed. Ultimately, no matter which COLA proposal makes its way into the final budget, the proposed increase must be the first of many in order to stabilize and grow the ECE mixed delivery system. 

On the surface, a 8.22% COLA sounds like a noble start and 25.44% sounds astronomical. Unfortunately, neither interpretation is true when you look at the COLA increases at the provider level. Consider two fictional child care programs: one center, and one family child care (FCC) program, both in Kings County in central California, where the average median income is $63,267 and the poverty rate is nearly 18%. The center has two preschool classrooms, serving up to 48 children when fully enrolled. With the Governor’s COLA of 8.22%, the entire center would bring in around $3,000 in increased revenue per month. The center director sees her teachers as her most important investment, so she decides to allocate the entire amount to wages. Unfortunately, the center will still be nearly $6,000 short of its financial position in 2016 due to inflation. With a 25.44% COLA investment, the same center could reset wages to 2016 levels (accounting for inflation)–but it would not be feasible to increase them to a living wage that will stem turnover in the field.

Now let’s turn to our FCC provider. She is both business owner and teacher, and she enrolls four children. Her doors have been open for years, even through the ups and downs of the pandemic–but this meant she accrued $10,000 in credit card debt since 2020. Before she can start raising her own pay to keep up with inflation, she will need to pay down her debt which nationally accrues an average interest rate of 24.14%. The Governor’s COLA of 8.22% would net her less than $250 per month in increased revenue, so she would likely need to allocate the full amount towards her debt. With a 25.44% COLA, she would be in a stronger financial position, but she would still have to choose between catching up with inflation and paying down her debt.

The Assembly’s proposal characterizes their 25.44% COLA as a “down payment” to help stabilize the sector, in line with the first steps proposed in the Rate and Quality Reform Workgroup. However, their COLA will not be able to “move the child care industry away from the poverty wages” as they propose. Even in 2016, California’s reimbursement rate did not cover the true cost of providing ECE; instead, it was pegged to the market price parents could afford. As long as our subsidy system anchors on this approach, wages for early educators will remain low by default as program directors make difficult tradeoffs in order to stay open and serve children and families. Additionally, disparities in pay by program type, job role, funding source, and even the teacher’s racial or ethnic identity will likely persist. 

So while neither the Senate nor the Assembly Budget proposals can remedy the state’s broken rate structure, a COLA of 25.44% is a critical first step in helping to incrementally stabilize child care providers and stave off further closures. To truly address the child care crisis, decision makers must follow through with planned rate reform efforts that define the structural changes necessary to progress toward funding levels that support the true cost of quality early care and education which includes living wages for early educators. It’s also important to note that all the proposed investments discussed here would only reach a subset of child care programs: those operating within the subsidy system. We estimate that 45% of centers, 46% of large family child care homes, and 61% of small family child care homes receive no public funding; as a result, reimbursement rate reform will not benefit them. Without a more universal approach to the way the state supports early care and education, investments like these ones will continue to pour water into a leaking bucket while exacerbating deeply embedded inequities among educators and programs. Rate increases for providers who contract with the state must be a starting point for broader reforms that aim to benefit all of California’s early educators.