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www.prenatal5fiscal.org 7 setting at between $34,000 and $39,000 annually. Meanwhile the most recent market rate study found the 75th percentile to just over $15,000 annually.xxviii

Cost of Care As an alternaDve to the market rate study, states can conduct what is called an alterna0ve methodology, a cost-based approach to subsidy rate senng that can beFer capture what it actually costs providers to deliver child care that meets state standards. Two opDons for this alternaDve methodology are: • A cost study involves collec8ng data from providers about their current costs of opera8ng a program that meets licensing standards and other quality standards, reflec8ng point-in-8me data about provider costs. • A cost es/ma/on model involves building a tool that is informed by provider data and that can run mul8ple scenarios to es8mate the impact of several variables on cost, such as program characteris8cs (e.g., size and age mix), child popula8ons served, program quality, and loca8on in the state.

A cost study can provide accurate data on the costs providers are incurring. However, these costs are constrained by providers’ current resources. If providers access in-kind support, such as volunteers or free or reduced rent, this can be captured in a cost study, but for most provides, their current expenditure is limited by the revenue they can generate so the study does not capture the resources they actually need to meet licensing or quality standards. In addiDon, a cost study generates ‘point-in- Dme’ answers, which limits its use in driving policy. By capturing only the current costs, a cost study cannot demonstrate the impact of future policy or programmaDc changes, such as increased compensaDon.

Developing a cost esDmaDon model can provide a state with a dynamic tool to understand both the current costs and the true cost of care, with increased compensaDon for the workforce.xxix Further, such a model can provide esDmates of the impact on the cost of care of different program characterisDcs, such as program size, age of the child, geographic locaDon, and state standards, including licensing and any quality-related standards. Whichever approach is used, an alternaDve methodology should engage a diverse body of child care consDtuents in all elements of the process. This engagement is essenDal to ensure the assumpDons in the cost model are informed by those providing the service and those making policy decisions that have a fiscal impact. CriDcally, the engagement process is not a one-Dme effort – engagement is needed in the collecDon of data, the interpretaDon of that data, the development of the model, and the scenarios that are used to produce results in the model. In the case of using a cost esDmaDon model, the overall process is informed by data but not constrained by the data alone due to the goal of building a model that represents what it actually costs providers to meet state standards, rather than simply the expenses providers are incurring.

An alternaDve methodology can address many of the inequiDes in the current child care market, including those related to child age, geographic locaDon, or provider type. A cost esDmaDon model can provide transparency into what it costs to provide care for each age group, in different regions of the state, and in different senngs, aligned with the standards providers are required to meet, and based on the compensaDon levels necessary to recruit and retain staff. Not only can this ensure providers are adequately compensated for serving children eligible for child care subsidies, but it can also impact the capacity of child care across a state, especially for populaDons or in geographies where the gap between the cost of care and what families can afford is greatest, changing the economic picture for providers when making decisions about their program. Figure 1 provides an example from the cost