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www.prenatal5fiscal.org 10 Indexing Rates to Reflect Changes Under CCDF regulaDons, states must update either their market rate survey or their cost esDmaDon model at least every three years. The survey must also be aligned with their CCDF plan submission. However, states may update their rates at any Dme and can analyze data annually to assess any necessary changes to ensure rates conDnue to meet the states' goals. ConducDng a market rate survey can be a burden for providers, so states do not usually conduct this survey on an annual basis, although states like Vermont who collect data through a data system have access to more current data which they could use to updated rates annually, rather than on the three-year cycle. Under the cost-based approach to rate senng, o1en the first Dme a cost model is developed significant input is sought from providers to ensure the model reflects the realiDes of providing high-quality child care, including sharing data related to program finances and giving insight into program operaDons. It is not necessary to repeat this full provider engagement on an annual basis, but rather this can be repeated if changes are made to state regulaDons or quality standards that may have a fiscal impact.

Understanding the need to update the model on an annual basis could be informed by indexing increases against markers such as inflaDon or changes in living wage values for the communiDes. One of the simplest ways to understand a potenDal increase in child care costs that could inform subsidy rate increases is to annually assess regional and state-level inflaDon values. These values can be applied to the subsidy rates, whether a market rate survey or a cost model is used to inform rate senng.

When rate senng is informed by a cost model, there is the opportunity for a more nuanced applicaDon of inflaDon amounts. For instance, a state could use informaDon on the cost-of-living increases that have occurred from one year to the next, or the percentage increase in the minimum wage floor, if applicable, and apply these only to the salary variables in the cost model. A1er this change in the cost model, new cost outputs compared to those from the previous year use of the cost model would then demonstrate the percentage increase to the subsidy rates. Increases in the cost of discreDonary benefits, such as health insurance costs to the employer, could be applied to the cost model. AddiDonally, all non- personnel values used in the cost model can be increased for inflaDon. With a cost model tool used to inform subsidy rate senngs, there are more opDons to approach the increases to rates with annual cost increases experienced in states, rather than a simple percentage increase to a market rate. Impact of Different Methodologies Regardless of whether the market rate survey is used, or a cost esDmaDon model is developed, CCDF Lead Agencies must make decisions about how the results of each approach are used to inform subsidy rate senng. Under the market-based approach decisions include: • At what percenDle of the market rate each rate will be set • Any variaDons in that percenDle based on child age, program type, geographic locaDon, hours of care (e.g. part-Dme, or extended day). • How to account for any gaps in data, such as insufficient market data from rural locaDons or for part-Dme care

When determining rates informed by a cost-of-care model, the state can use the cost model to generate results that beFer represent the variaDons in costs that exist across the system. There is no single answer to the quesDon of what the cost of care is. It will depend on many different factors. The power of a cost esDmaDon model used for alternaDve methodology is that it can provide answers based on these different factors. Therefore, the first step in using the model to inform rate senng is to run different