The Growing Strain on the Child Care Business Model

Economic Impacts and Opportunities for Improving Affordability and Access (Full Report)

 

ABOUT THE AUTHORS

Chris Brown is the Vice President of Policy and Research with CSI where he leads the research efforts of CSI to provide insightful, accurate, and actionable information on the implications of public policy issues throughout the state of Colorado.

Alexa Eastburg is a Research Analyst with Common Sense Institute. Her experience covers analyzing workforce, crime, and education issues in the state of Colorado.

Alethea Gomez is the Director of Programs and Initiatives at Executives Partnering to Invest in Children (EPIC). She has extensive experience overseeing large educational institutions in both leadership and administrative capacities, working privately and professionally with families, and creating vision, structure, and growth in the departments she has led.

Nicole Riehl has served as the President and CEO of Executives Partnering to Invest in Children (EPIC) since September of 2019. Her leadership experience spans across the private and non-profit sectors, with her career beginning as an early childhood teacher at Storagetek’s on-site employee child care program.

TEAMS & FELLOWS STATEMENT

CSI is committed to independent, in-depth research that examines the impacts of policies, initiatives, and proposed laws so that Coloradans are educated and informed on issues impacting their lives. CSI’s commitment to institutional independence is rooted in the individual independence of our researchers, economists, and fellows.

At the core of CSI’s mission is a belief in the power of the free enterprise system.  Our work explores ideas that protect and promote jobs and the economy, and the CSI team and fellows take part in this pursuit with academic freedom. Our team’s work is driven by data-driven research and evidence. The views and opinions of fellows do not reflect institutional views of CSI. CSI operates independently of any political party and does not take positions.

ABOUT COMMON SENSE INSTITUTE

Common Sense Institute is a non-partisan research organization dedicated to the protection and promotion of Colorado’s economy. CSI is at the forefront of important discussions concerning the future of free enterprise in Colorado and aims to have an impact on the issues that matter most to Coloradans.

CSI’s mission is to examine the fiscal impacts of policies, initiatives, and proposed laws so that Coloradans are educated and informed on issues impacting their lives. CSI employs rigorous research techniques and dynamic modeling to evaluate the potential impact of these measures on the Colorado economy and individual opportunity.

Common Sense Institute was founded in 2010 originally as Common Sense Policy Roundtable. CSI’s founders were a concerned group of business and community leaders who observed that divisive partisanship was overwhelming policymaking and believed that sound economic analysis could help Coloradans make fact-based and common sense decisions.

ABOUT EXECUTIVES PARTNERING TO INVEST IN CHILDREN

Executives Partnering to Invest in Children (EPIC) is a group of prestigious business executives partnering to serve as the business community’s non-partisan voice for early childhood. As leaders in their companies and industries, EPIC Members are leaving a legacy of true impact and lasting change by leading efforts to build infrastructure and advance policies that support the workforce of today while developing the workforce of tomorrow.

The EPIC membership of business leaders is committed to a future where access to affordable child care and workforce preparedness are not roadblocks to business success and economic growth. Together, they are initiating change and shaping the future of Colorado through nonpartisan policy solutions, innovative partnership work with employers, and action-oriented conversations with business associations, government leaders, and other organizations to raise awareness and increase business engagement in early childhood.

Executive Summary

Colorado’s Child Care Business Model

The success of a flourishing economy, community, and workforce is dependent upon child care that is both accessible and affordable. But in Colorado, the business model for providing child care services have been strained for years. The COVID-19 pandemic has exacerbated the issue and brought to light how crucial it is for an economy to have access to affordable child care. The high-cost drivers of the child care business model keep profit margins low and leave many operating with bare minimum requirements and quality standards. In addition, the industry’s talent pipeline suffers, as child care businesses struggle to find, hire, and retain workers for a multitude of reasons.

On average, a Colorado family spends about 18% of its annual household income on child care. However, the Department of Health and Human Services has stated that the affordable amount of household income a family should be allocating to child care is only 7% annually. The average annual cost of full-time infant care in Colorado is about $15,325, however, the actual costs of offering care for very young infants who require a great deal of one-on-one attention often exceeds $20,000 annually. Compared to other states, Colorado ranks eighth for the most expensive cost of early child care. The lack of supply of child care slots and the inaccessibility to affordable child care is a significant issue for Colorado families and the economy.

Why Does Fixing the Child Care Business Model Matter?

• The large economic impacts that effect Coloradan families and the economy.
• Unattractive hours and pay for teachers which has a compounding effect.
• Increased public spending to help child care businesses stay afloat.

If the challenges plaguing the business model are not addressed, the current system that provides child care in Colorado communities will quickly lead to less access for fewer children and families. Access to child care in Colorado is getting worse and the public cost of subsidizing the issue is only increasing. This analysis highlights how the model is already causing a financial burden for Coloradan families and impacting all facets of the child care business. Parents will continue to pay more and more as tuition rates continue to increase given they are the primary source of revenue for most child care operators. At the same time, qualified educators will continue to opt out of careers with low pay, high stress environments, and limited opportunities for advancement. Household expenditures on child care consume an unsustainably large share of each household’s budget. As the monthly child care expenditure continues to grow, spending in other areas of the economy will be crowded out. The result of the potential increase will put further demands on taxpayers.

Key Findings

The success of a flourishing economy, community, and workforce is dependent upon child care that is both accessible and affordable. Yet, the business model for providing child care services in Colorado has been strained for years and both supply and access have been declining. To become sustainable, the regulatory environment governing the child care business model needs to be overhauled. EPIC’s Child Care Design Lab Financial Model takes a deep dive into the total revenue and expenses for a child care business and incorporates the regulatory requirements they face. In using EPIC’s model, it is clear that the child care business model is strained and unsustainable. It is leaving most child care programs in Colorado unable to provide high quality services, pay wages that attract and retain qualified educators, and charge tuition that is affordable for parents without incurring major financial losses or receiving financial support from the government.

• The Child Care Gap Is Growing: As of the most recent data, Colorado has a child care gap of 94,887 children, meaning about 38% of children need child care but their families cannot reasonably access it.
• Providers Are Struggling to Get Started and Stay Open: From April 2018 to April 2021, a total of 913 child care programs permanently closed while only 486 programs opened in Colorado. Child care operators face higher occupancy costs, little to no flexibility in revenue generation, and logistical challenges many parallel industries do not face in a free enterprise environment.
• Families Are Still Paying Too Much: Colorado has the 8th most expensive child care in the nation. The Department of Health and Human Services recommends affordable child care should cost no more than 7% of a family’s annual income. But Colorado families are spending closer to 18% of their total income on child care. That’s equivalent to a family of four’s groceries for a year and a half, at a weekly cost of $191.30. The sample child care models demonstrated in this study will show how targeted investments in the business model itself will help to close that gap of affordability for Colorado families and significantly impact the viability of child care as a business, increasing access across the state.
• The High Cost is Impacting the Workforce: A family in Colorado with an infant and a 4-year-old on average would spend 37.9% of their household income on child care, topping what most spend on a mortgage. That would make child care the #1 household expense, which has driven many women out the workforce, especially mothers. According to Common Sense Institute’s (CSI) June report on “Colorado Jobs and Labor Force Update: May 2022,” there are 43,581 fewer women in the workforce than there would be if Colorado’s May labor force participation rate of women was the same as it was before the pandemic.
• Comprehensive Operational and Regulatory Reform Are Needed: While strides have been taken at the state and national level to address direct costs to families and expand the care spectrum, policy must be leveraged in order to streamline regulatory requirements in the industry, address barriers to entry, and reduce the significant operational costs providers are facing. Rather than creating additional government and public funding streams, targeted policy, and regulatory reform should be utilized to address the operating gaps in the child care business model, such as cost of care differentials for younger children, regulatory compliance, rent, and state/local taxes. This, in turn, will reduce the amount of additional public investment required.

Opportunities to Improve the Child Care Business Model

• Commercial property taxes, rent, and debt are the largest cost drivers in the child care business model that are primary areas for reform and do not sacrifice the quality of care the children receive.
• There is a glaring gap in data and a need for improved industry survey and analysis efforts related to the demographics, start-up barriers to entry, operations, financial health, and overall business needs for child care programs.
• Policymakers need to help support child care industry partners in collecting, analyzing, and reporting child care industry data so achievable solutions can be created, and success can be built upon.
• Opportunities to reduce ongoing facility expenses and taxes being paid to the state and local governments should be considered.
• The exploration of new methods to offer a co-signing or guarantee program could be beneficial to the child care industry as the financial barriers to entry are significant.
• State and local regulatory partners should explore ways to streamline application, review, and approval processes for child care businesses and provide a single point of contact who can serve as a navigator and liaison throughout the child care business process.

 

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