Overcoming Financial Barriers to Expanding High-Quality Early Care and Education in Southeastern Pennsylvania

© 2015, Nonprofit Finance Fund® • nonprofitfinancefund.org 1Overcoming Financial Barriers to Expanding High-Quality Early Care & Education in Southeastern PennsylvaniaBy Nonprofit Finance Fund:Kristine AlvarezAlex EppsSonia MontoyaSupported by the William Penn Foundation®ECE Report06.25.15.crw1.indd 16/29/15 5:01 PM 2 © 2015, Nonprofit Finance Fund® • nonprofitfinancefund.orgNFF Production / DesignAnjali DeshmukhNFF ContributorsAlice AntonelliAntony Bugg-LevineAngela FrancisRebekah CatonKristin GiantrisSherr LoSandi Clement McKinleyTrishna NathMichelle ObertFrancine StewartSpecial thanks to Mary Graham, Executive Director of Children’s Village, for sharing deep insight resulting from her decades of support for the ECE sector. Disclaimer: The opinions expressed in this report are those of the authors and do not necessarily reflect the views of the William Penn Foundation.Published July 2015ECE Report06.25.15.crw1.indd 26/29/15 5:01 PM © 2015, Nonprofit Finance Fund® • nonprofitfinancefund.org 3Table of ContentsExecutive Summary................................................................................. 4The First 2,000 Days: Infancy to Age 5................................................... 7Understanding High-Quality Care.......................................................... 8Financial Barriers to Achieving High-Quality ECE.................................. 9Barriers to Providing High-Quality Care for Low-Income Children........ 15Moving Forward..................................................................................... 20A Paradigm Shift is Needed in ECE....................................................... 24Endnotes................................................................................................ 25ECE Report06.25.15.crw1.indd 36/29/15 5:01 PM 4 © 2015, Nonprofit Finance Fund® • nonprofitfinancefund.orgHigh-quality early care and education (ECE) programs have been proven to create positive learning outcomes among children—especially among those living in poverty. Yet many low-income children have a hard time accessing quality child care settings and miss the critical developmental growth and foundation needed for academic and life success. According to Pennsylvania Partnerships for Children, only 23% of children who receive public child care subsidies attend a “high-quality” ECE program, as defined by the Commonwealth of Pennsylvania as quality designation “STAR 3” and “STAR 4.”In 2013, NFF embarked on a multi-pronged study of 147 ECE providers to assess the financial challenges of operating high-quality ECE programs. In this report, NFF highlights the key financial, business, and systemic barriers to delivering high-quality programs—with a focus on nonprofit ECE programs serving the Philadelphia Region’s most vulnerable children.Key FindingsECE programs operate very close to the financial edge with little margin for error. Regardless of the quality of care and who is being served, providers operated very close to the break-even point (post-depreciation margin of 1%) and had limited cash reserves to weather the volatility of the ECE business model (year-end cash balances could cover only one month’s worth of operating expenses).For many ECE operators, the decision to provide high-quality programs creates more financial and programmatic demands, without the promise of commensurate increases in financial revenue. ECE providers participating in Pennsylvania’s Quality Rating and Improvement System (“Keystone STARS”) achieved comparable financial metrics to those that did not participate. This finding highlights the absence of financial incentives for providers to pursue quality: There are few barriers to operating a child care business that meets minimal standards for health and safety and provides little educational content. In comparison, there are relatively significant barriers to operating a high-quality program that results in positive life outcomes for young children (e.g. greater costs for more credentialed, experienced teachers and substantial programmatic requirements and administrative compliance burdens associated with maintaining STARS designations).There is little understanding of what the “full costs” are for providing high-quality care. NFF estimated an average cost of care of $11,832 per child per year—with the cost per child substantially greater for high-quality providers ($12,789 for STAR 3 and STAR 4 as compared to $10,320 for STAR 1 and STAR 2). When factoring in essential costs beyond this “bare minimum” (such as investments in facilities, payments of debts, and contributions to reserves), these cost of care figures can increase substantially.Existing ECE revenue sources do not allow high-quality programs (particularly those serving low-income children) to cover the relatively high fixed costs of care. Most sources of ECE revenue, including government subsidies for low-income children, are attached to a specific child (i.