State lawmaker seeks study of child care costs and unused subsidies

By: - January 24, 2024 7:00 am
Sen. Tim Reed, R-Brookings, listens to testimony during a Senate Education Committee meeting on Jan. 16, 2024. (Makenzie Huber/South Dakota Searchlight)

Sen. Tim Reed, R-Brookings, listens to testimony during a state Senate Education Committee meeting on Jan. 16, 2024. (Makenzie Huber/South Dakota Searchlight)

The families of roughly 27,000 infants and toddlers qualify for income-based child care assistance in South Dakota, but only 7% actually receive the subsidy, according to a study from South Dakota Kids Count. Another 31,000 school-age children are eligible, yet only 5% receive the subsidy.

The majority of child care providers in South Dakota are unregulated by the state – either because they don’t meet qualifications to be state licensed or choose not to be, meaning they don’t have access to subsidy dollars. Of those who are state licensed, some opt out of the child care assistance program.

There isn’t a financial incentive for providers to participate in the program, because the subsidy doesn’t always cover their costs, said Kayla Klein, director of Early Learner South Dakota.

Child care providers already struggle to keep their doors open, Klein added, often not charging families enough to cover the full cost of care, leading to closures, or not charging enough to retain employees, leading to heavy turnover in the industry.

Sen. Tim Reed, R-Brookings, has introduced a bill to require a statewide study analyzing the cost of child care and developing a new payment model for the subsidy program. He hopes those efforts will improve the participation rate for the state’s child care assistance program, which is primarily funded through federal grants. 

The most children participating in the state's child care assistance program are in Minnehaha County, with 1,238 children receiving assistance, according to estimates from SD Kids Count. The next highest county is Pennington with 409 children receiving assistance. (Courtesy of SD Kids Count)
The county with the highest number of children participating in the state’s child care assistance program is Minnehaha, with 1,238 children receiving assistance, according to estimates from SD Kids Count. The next highest county is Pennington with 409 children receiving assistance. (Courtesy of SD Kids Count)

South Dakota’s child care subsidies are currently based on a market rate analysis every two years. But if child care providers are already keeping tuition prices too low, then the market rate may not be an accurate indicator of what it actually costs to successfully run a child care business.

“We need to understand this,” Reed said. “Today’s child care costs too much for parents. We still can’t be sustainable. So what will it cost to be sustainable and increase capacity?”

Switching to a “true cost” model for subsidies can stabilize child care providers’ bottom lines and keep increases in cost from being shouldered by non-subsidized families, Klein added.

All states in the country set subsidy rates on a market analysis except for New Mexico, which switched to a cost model in 2022. Other states, such as Nebraska, Michigan and Washington, have explored cost modeling studies to inform reimbursement rates.

A representative with the state Department of Social Services told lawmakers at a budget meeting last week that there are several factors leading to South Dakota having a lower participation rate compared to surrounding states and the national average.

“The department recognizes there is a need to get more providers and enable those providers to be willing to take up subsidies,” said Alex Mayer, chief of the department’s Division of Children and Family Services. “We’re well on our way toward a solution to help child care providers and families.”

The department recently changed its child care assistance program from an attendance-based policy to enrollment-based, which child care advocates say will better support providers by paying them for a full day of caring for a child even if a parent picks up the child early.

Reed said he’s in the process of discussing his bill with the department.

A report shows that South Dakota's Child Care Assistance Program participation rate is significantly lower compared to surrounding states. (Courtesy of SD Kids Count)
A report shows that South Dakota’s Child Care Assistance Program participation rate is significantly lower compared to surrounding states. (Courtesy of SD Kids Count)

The study required by the bill would include the cost of keeping and retaining workers alongside the impacts of inflation, population growth and business growth on child care providers. The study would also require the department to develop a cost estimation model for the child care assistance program.

The bill would provide $250,000 for the study and require a report to the Legislature by the end of October, so lawmakers will have information on hand for possible policy decisions during the 2025 legislative session.

South Dakota suffers an estimated $329 million loss in productivity due to its inadequate child care landscape, according to a study from ReadyNation, a nonprofit organization focused on business and economic development across the country. South Dakota businesses aren’t “producing what they want to produce” because of child care limitations, Reed said.

The focus for Reed, who leads the Brookings Economic Development Corporation, is on strengthening South Dakota’s workforce – both for the child care industry and for working families.

A report from the Low Income Investment Fund explored economics and child care in South Dakota, highlighting that child care is both “too expensive, and not expensive enough” in the state. The report found that in Pennington County, providers were reimbursed at a higher amount than the cost of care for preschoolers, while providers were reimbursed at a lower-than-cost rate for infants and toddlers.

Understanding the cost of child care will open opportunities for public-private partnerships in South Dakota, Reed said, pointing to the John T. Vucurevich Foundation’s tri-share pilot program in Rapid City where the cost of child care tuition is split between parents, the provider and the nonprofit.

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“We know we’re going to have businesses involved in this, so we have to be able to tell them what it costs,” Reed said. “We have to have this information to drive some ideas on how we can bring businesses, the state and parents into this.”

Additionally, some legislators are working to create a funding assessment through the Department of Social Services, so lawmakers can understand what sources of funding, both federal and state dollars, there are for child care and how they’re handled. The assessment, through the Hunt Institute, is planned to be completed by March, said Rep. Taylor Rehfeldt, R-Sioux Falls.

“We want to identify gaps and opportunities to be able to create a plan for the future,” Rehfeldt said. “The assessment is complimentary to the DSS cost analysis bill.”

Overall, a change to the subsidy program might not make a significant difference in stabilizing the state’s child care landscape right away, Reed said. The subsidy program makes up a small portion of children enrolled in child care. 

“A lot of times the child care industry keeps talking about turnover: ‘we have so much turnover’ and ‘what are we going to do about turnover?’ It’s pay. That’s what it is,” Reed said. “I don’t think there’s really other things we can do. We have to figure out how to pay more or you’re just not going to get the capacity from them.”

The push for improved state involvement comes after a pandemic-era influx of federal funding for child care providers ended last year, creating “a cliff effect,” Klein said.

“These funds were helping providers to keep their doors open and now that funding is totally gone,” Klein said. “So we will continue to see closures happening more and more.”

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Makenzie Huber
Makenzie Huber

Makenzie Huber is a lifelong South Dakotan whose work has won national and regional awards. She's spent five years as a journalist with experience reporting on workforce, development and business issues within the state.

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