After a series of reports and revelations about fraud in Minnesota’s child care program for low-income families earlier this year, state lawmakers chose not to increase subsidies that Gov. Tim Walz and House Democrats had proposed.

But the intense debate over the Child Care Assistance Program is certain to be rekindled next year, perhaps with a new incentive. The state’s reimbursement payments for families on CCAP are so low that the state is not compliant with federal requirements. As a result, Minnesota could be penalized and lose millions in federal grants.

“We should not hold kids accountable for the bad decisions of grownups,” said Lt. Gov. Peggy Flanagan during a tour last week of a New Horizon Academy child care center in North Minneapolis. “There’s too much at risk for funding, for folks losing access to child care, at a time when we are in crisis and losing spots all over the state.”

As Minnesota faces a lack of affordable child care, Democrats and other advocates for an increase in CCAP payments say a hike in the subsidy can lower costs for parents and raise pay for workers. They’re using the threat of punishment from the feds to lobby for their cause in St. Paul.

But Republicans in control of the state Senate say they aren’t yet convinced the state Department of Human Services can be trusted with more money given the anti-fraud measures they championed were only recently implemented. 

Lawmakers are also only planning to consider tweaks to the two-year budget passed in 2019, and meeting the federal government’s bar could require a flood of cash — one proposal made by Walz last year had the state spending roughly $62 million over four years for the fix. 

“Sixty-million dollars will be a lot of money to find next session,” said Sen. Jim Abeler, a Republican from Anoka who chairs the Human Services Reform Finance and Policy Committee. “Republicans and Democrats alike are reticent to simply dump more money into Human Services.”

Out of compliance — and facing punishment

About 30,000 Minnesota children are served by CCAP each month, and the program cost $254 million last year. That money is split almost entirely between state and federal government, with county governments also paying for a sliver.

Yet maximum CCAP rates only cover the full tuition charged at 16.3 percent of family child care providers in Minnesota, and 23 percent of larger child care centers, according to budget documents prepared by Gov. Tim Walz’s administration earlier this year.

The federal government recommends states set reimbursement rates at the 75th percentile of a regular market-rate survey for tuition costs, which means roughly three in four child care providers would have their full tuition costs covered by the CCAP payments. For now, Minnesota is only required to meet the 25th percentile. Currently, the state’s reimbursement rates are set based on the 25th percentile of an outdated 2011 market-rate survey.

The state is likely facing a penalty worth 4 percent of a child care block grant it gets from the federal government to help with CCAP costs, to be levied after October 2020. The grant was worth $68 million in 2019, so if the grant was the same for 2021, the government fine would be $2.72 million. Even if the state comes into compliance, however, Minnesota could lose federal money since the state hadn’t met market rates by the government’s deadline.

But there could be even more on the line. Shannon Christian, director of the federal Office of Child Care, said in a July letter to the Minnesota Child Care Association (MCCA) that her office also has the power to “withhold all funding, disallow misused funds, disqualify the state from future assistance, or any combination of these options.”

The state also has time limits to spend its child care grant funds, meaning unused money can be returned to the federal government. Clare Sanford, director of government and community relations for the MCCA, said it’s difficult for the state to use all of its grant unless lawmakers vote to spend money from the grant to raise reimbursement rates.

Christian also made a point to say the 25th percentile mark was only a start. Rates will likely go up by the next market survey and the Child Care office “expects to see payment rates continue to move up in future plan cycles,” Christian said.

In his budget plan, Walz proposed spending $61.8 million in state money over four years — and using another $59.8 million from the federal child care block grant — to bring Minnesota into minimum compliance.

Legislators have proposed rate increases in each of the last five years, none of which were approved. In 2018, lawmakers agreed to use block grant money to raise reimbursements, but the measure was vetoed as part of a larger unrelated budget battle with then-Gov. Mark Dayton. That popular plan, which would use federal dollars to hike reimbursement rates but avoid state payments, would not increase reimbursement rates enough to meet federal standards, Christian said.

In the 2019 session, the Legislature did vote to spend $659,000 in state money to help with some of its federal compliance issues that aren’t related to reimbursement rates. The state will also draw down $7.5 million from its block grant for those program improvements. But it remains out of line with the reimbursement requirements and for certain training requirements for family child care providers.

The case for funding the program

While a $2.7 million penalty isn’t massive, the MCCA has been using Christian’s warning of escalating penalties to argue for investment now. Minnesota will eventually have to catch up to federal requirements, and it may only become more expensive the longer it waits. 

Rhian Evans Allvin, CEO of the National Association for the Education of Young Children, joined the tour of New Horizons last week and said higher reimbursement rates are the only way to ensure child care workers can make money in an industry with a broken economic model. Tuition is ultra-expensive for parents, yet providers and workers often struggle to make money because of small child-to-staff ratios, strict regulations and long work hours.

“The supply and demand of the marketplace don’t match,” Allvin said. “So the way you invest in early childhood educators is you pay current market rates for reimbursement. And then point you have the resources to make the investments in the workforce that match the science of early learning.”

Lack of child care has been a frustration for businesses around the state looking to hire in Minnesota’s tight labor market. Walz’s administration noted more than 67 percent of children served by CCAP are people of color. The government has focused recently on reducing economic disparities and meeting worker demands through spending on workforce training since people of color face higher unemployment rates than whites and historically have been left out of Minnesota’s prosperity.

Flanagan said it’s important to invest in child development, but that spending “is also good for employers” because it ensures “parents can have access to a good job.”

Trust issues at DHS

Abeler, one of the top Republican senators working on child care issues, said he is not strictly against updating reimbursement rates, but added the state has often faced federal warnings to shape up and was skeptical it would be severely penalized. He also said it may not make sense next year to spend tens of millions of dollars to avoid what could be a small fine in the scale of the larger state budget.

But Abeler’s overriding concern was fraud in CCAP. A report by the Office of the Legislative Auditor in March found it was tough to root out fraud, and likely more common than what prosecutors have been able to prove in court.

Lawmakers eventually implemented a sweeping set of anti-fraud measures and the state’s top child care fraud investigator, Carolyn Ham, was reassigned by an interim DHS commissioner. Senate Republicans also successfully fought efforts to increase reimbursement rates, saying fraud issues were too significant to justify spending more money on CCAP. The GOP’s strategy for helping increase access to affordable child care has focused mainly on cutting regulations for providers.

The agency also revealed it overpaid the Leech Lake Band of Ojibwe and the White Earth Nation nearly $30 million for addiction therapy programs supported by Medicaid, and a federal audit released last week found DHS paid $3.7 million in Medicaid money for people who had died.

“They have a real issue with their credibility,” Abeler said. “I’m optimistic that (new commissioner) Jodi Harpstead is there and she’s going to sort out what she can. But if you remember Humpty Dumpty — all the king’s horses and all the king’s men couldn’t put Humpty back together again. And so there’s a long ways to go for whatever she actually gets done and what people see and what they begin to trust.”

Abeler said lawmakers are expecting to hold a hearing in October about changes at the Inspector General’s office of DHS, which investigates fraud. He said the office “sounds like it actually could function now, which is a story about something that turned out good.”

“If the program integrity can be run in a decent way, then it’s a good time to talk about that,” Abeler said of raising reimbursement rates.