Minnesota is getting $550 million in ARP money to help its child care industry. Here’s how the state is spending that cash.

When Congress approved the massive $1.9 trillion American Rescue Plan in March, it earmarked $40 billion to help bail out the country’s struggling child care system. 

Minnesota, in turn, got more than half a billion dollars for its child care providers.

The influx of cash resulted in a tug-of-war over how to spend the money in Minnesota — and who should spend it. But after months of negotiations, lawmakers in St. Paul settled on a plan that will boost reimbursement rates in the primary subsidy for low-income families and increase pay for child care workers through monthly “stabilization grants” to providers across the state.

Still, as state agencies work to disburse the funds, some child care providers and advocates have mixed feelings — elated about the money they can now spend, but disappointed the state did not provide much of its own funding for the industry and apprehensive that a future without federal cash would leave the industry unstable.

How Minnesota will spend its federal child care money 

When Minnesota was notified it would get roughly $550 million for child care from the ARP, lawmakers, Gov. Tim Walz’s administration and child care interest groups immediately grappled over how to spend it. 

It was unclear if the Walz administration would try and spend some or all of it unilaterally. But lawmakers ultimately directed the federal cash with input from state officials and outside advocates.

In the end, legislators approved $304 million for the stabilization grants, which will be administered by the Minnesota Department of Human Services and run until June of 2023. DHS began doling out the money in June, but the agency is still setting up a larger program. Under the current preliminary system, smaller in-home providers are eligible for $600 a month, while larger child care centers can get $4,250 to $5,500 a month based on the number of kids they serve.

When the larger grant program is up-and-running in September, it will be split into two parts. The first tier will be open to a broader group of providers who will get monthly “base” grants if they meet basic licensing and eligibility requirements. The size of those grants is yet to be determined, though the Legislature dictated that at least 70 percent of those “base” grants must be dedicated to the pay and benefits of workers. Child care workers often have meager salaries and the industry has struggled to recruit employees because of it.

The second tier of stabilization grants will go only to child care providers who can demonstrate significant financial hardship. The amount of money dedicated to each tier of the stabilization program hasn’t been decided yet, said Cindi Yang, director of the child care services division at the Minnesota Department of Human Services.

Clare Sanford, government relations chair of the Minnesota Child Care Association, which represents owners of private centers, said that providers could give workers extra pay in the form of bonuses or higher salaries using the “base” grants, or try to offer better benefits like health care.

The other 30 percent of the monthly grants can go toward a range of things, including sanitation supplies, equipment, or even mental health support for children and employees, Yang said.

The other largest chunk of spending approved by lawmakers — roughly $101.8 million in the next two years and more than $241 million in total — will go to boosting the Child Care Assistance Program, Minnesota’s primary early learning subsidy for low-income families. CCAP served more than 30,700 Minnesota children a month in 2019, at a total cost of $250 million for the year. The state and the federal government typically split the vast majority of that cost, though county governments pick up a small portion.

The bulk of the ARP money for CCAP will raise Minnesota’s low reimbursement rates for providers under the program. The federal government recommends that states set reimbursement rates at the 75th percentile of tuition costs based on a regular market-rate survey, which means roughly three in four child care providers would have their full tuition costs covered by the CCAP payments.

Coming into 2020, Minnesota had been out of compliance with federal standards, forcing lawmakers last summer to boost maximum rates to meet the 25th market price percentile of a 2018 survey of provider rates, which is the lowest minimum required.

Now, Minnesota’s maximum rates will meet the 40th market price percentile for infants and toddlers and the 30th percentile for preschool and school-aged kids, based on a 2021 provider survey. Lawmakers also mandated maximum reimbursement rates be updated to meet the 40th percentile for infants and toddlers starting in 2025 and the 30th percentile for preschool and school-aged children, based on a 2024 survey.

“The increase will cover more of the actual prices charged by providers and then reduces out-of-pocket costs for families,” Yang said. 

The spending on CCAP will also reduce or eliminate subsidy wait lists for families in the Basic Sliding Fee program, one part of CCAP in which there is a capped amount of money available, meaning eligible families sometimes don’t get the subsidy. Another large chunk of spending is $22.5 million in grants for upgrades to child care facilities.

While the state got about $550 million for child care programs in the ARP, the total spending on child care may still be higher thanks to other regular federal funds for the industry. Walz said in a press release that the state approved about $597 in new spending on child care, and a House tally of the stabilization funds and money in a federal child care block grant was roughly $605 million, though even that doesn’t likely account for all child care spending.

What wasn’t done

Despite the relatively prescriptive guidance from the federal government on how the child care money could be used, most involved at the Legislature said the final deal on early learning spending was something they were reasonably happy with.

“You know, we’ve been ready through the whole COVID pandemic working with child care and we’re ready to get out there and build on work that we’ve already been doing, and then increase it,” said Kelly Monson, Associate Director of Child Care Aware of Minnesota, an advocacy organization that works to increase access to care and expand the visibility of programs for children across Minnesota.

Still, there were debates over how the ARP funding should have been spent. Some child care advocates pushed for the state to fund more early learning scholarships, a subsidy program aimed at low-income families that is tied more strictly to higher-quality child care programs than CCAP.

Ericca Maas, executive director of the nonprofit Close Gaps by 5, which aims to reduce Minnesota’s achievement gaps by improving access to early learning, said increasing funds for CCAP was merited. But she also said the money would not result in many additional children getting high-quality child care. DHS says 2,000 families are expected to get new child care help through the Basic Sliding Fee program in CCAP, but Maas said about 35,000 kids from low-income families in Minnesota can’t access high quality child care right now. Minnesota funds about $70 million in scholarships every year, enough typically for about 12,000 kids, Maas said.

While early learning scholarships generally have bipartisan support, DHS said the federal money could not be used for the program because of the regulations governing how ARP money can be spent.

More generally, Pinto, Sanford, Maas and others said they wished the state had dedicated more of its own money to child care spending. Despite the influx of federal cash, they all described the system as vastly underfunded even though early learning is critical for young children to succeed and child care is crucial for the state economy. 

With either state or federal money, “we really had no expansion of early learning,” Pinto said. 

Abeler said Republicans, seeing the huge amount of federal money, didn’t want to use state money, though. He said people can make an argument for more spending on every pressing issue at the Legislature, but funding everything isn’t tenable. “I just really felt that encumbering the general fund with more child care was just an unwise fiscal proposition,” Abeler said.

Turning to the federal government

Monson said the federal money is a chance to prove what the child care sector can do with a huge surge in cash. But just as Minnesota received its half-billion dollars, some child care advocates are again turning to Congress for help after seeing little state money headed to an early learning sector with an economic model many experts view as broken.

“A whole lot of money is getting spent on child care in the next few years,” Sanford said. “But I can’t shake this fear that if the federal money is not there in the future, what will Minnesota do?”

Sanford said that she hopes more permanent child care funding will come from the budget reconciliation bill currently moving through Congress, which will make specific changes to the federal budget for the 2022 fiscal year. Senate Democrats revealed key details of their $3.5 trillion budget proposal in July, creating a starting point for planned investments in what they call “human infrastructure.” 

The budget would enhance federal safety net programs, expand Medicare and take steps to address climate change. It also includes an extension of the child tax credit and separate child and dependent care tax credits. The framework also includes universal pre-K for three- and four-year-olds and universal child care, which would mandate a federal investment to establish and support a network of locally run child care centers as well as in-home child care providers. Universal child care differs from universal pre-K because it provides federal funding to at-home care providers, while pre-k mandates public school pre-K programs that may take away business from those smaller child care centers.

Democratic leaders will need to hold all 50 Senate Democrats together in order to pass the budget framework — reconciliation bills can pass the Senate by a simple majority of 51 votes or 50 votes plus the Vice President as the tie-breaker.