Can Creative Capital Solutions Safeguard Child Care?

This story is part of LIIF’s 2020 Annual Impact Report.

Up on a hill, east of the Anacostia River in Washington, D.C., a new, brightly colored child care facility with a distant view of the Capitol building is preparing to open its doors. Kidspace is a success story amid a year of early care and education (ECE) small businesses facing permanent closure en masse. The center is owned and operated by House of Ruth, a nonprofit that supports families dealing with domestic violence and other trauma such as housing insecurity and will provide 88 free and sliding-scale slots to infants, toddlers and pre-K students at full capacity.

The state-of-the-art facility represents what’s possible when public dollars are leveraged for greater impact, when racial equity and need are centered in investment practice and when those with financing power respond during crises to sustain essential jobs and services. Kidspace was supported by LIIF and the Office of the State Superintendent of Education (OSSE) through a D.C. Access to Quality Child Care Expansion (A2Q) grant of $320,000 in 2018, and again in 2020 with an A2Q Relief Grant of $89,000 to help close the fundraising gap after a funder pulled out as a result of COVID-19.

Ward 7, where Kidspace is located, is a primarily Black neighborhood and has one of the largest shortages of child care in the city. Following a three-month, city-mandated shutdown, Kidspace opened a temporary location. “It was a relief for parents because many had not been able to work during that time, including essential workers and hospital employees,” said Sandra Jackson, president & CEO of House of Ruth.

Over the past year, LIIF has partnered to support ECE small businesses struggling to make ends meet amid pandemic shutdowns, ever-changing health regulations and already slim profit margins. On the ground, there were success stories like Kidspace and large grant and technical assistance initiatives that helped to cover mortgages and payroll and to sustain some businesses through the year.

This patchwork of support and trickle of public investment made survival possible for many, but 4.5 million ECE spaces are still at risk of permanent closure. Though nearly 12 million children under age five are enrolled in child care, it has been among the least invested-in sector in the U.S., receiving less than 5% of total lending through the Paycheck Protection Program (PPP), which provided $500 million for large, public companies, including many that bring in tens of millions in annual revenue.

Further, it is mostly women of color entrepreneurs running child care businesses, providing jobs, enabling parents to work and supporting our nation’s essential workers. Despite leading the field, Black and Latina women are also most likely to struggle to secure access to care for their own children, leading to women leaving the workforce. In fact, in December 2020 alone, women accounted for 100% of the 140,000 jobs lost in the U.S. economy.

Early care and education is a matter of race and gender equity and a smart investment in our economic stability and long-term social success, worth substantial and sustainable financing and support, and thus a top priority in LIIF’s four-year strategic plan. Below, we explore the impact of ECE projects made possible by innovative lending and public support and explore leading strategies for strengthening the field.

“We now have an opportunity to reimagine the way early care and education is financed,” LIIF’s CEO Daniel A. Nissenbaum wrote recently.

ECE has a 13% return in higher incomes over a child’s lifetime and lower utilization of social supports, employs nearly a half of a million people and allows 13 million parents to participate in the workforce.

“That is a strong “return on equity” that investors should appreciate,” writes Nissenbaum. “It is also an essential “return to equity” because these benefits are most profound for low-income children and children of color.”  But a large upfront investment is required to see a widescale payoff.

Federal policymakers must invest in early care and education as a vital public good, just like K-12 education, because the prosperity of our country relies on it. In December 2020, Congress allotted $10 billion to the child care sector as part of a COVID-19 relief bill, and in January, then President-elect Biden proposed $40 billion earmarked for ECE in his American Rescue Plan.

These investments represent a solid down payment to save and sustain the industry. Direct spending like this can help cover business expenses like payroll, rent, mortgages, safety upgrades and sanitation supplies. For families, expanding the Child and Dependent Care Tax Credits would help offset out-of-pocket child care expenses.

We must also consider infrastructure needs to provide safe, quality learning environments. In a recent transition memo to the Biden-Harris administration, the National Children’s Facilities Network (NCFN), which LIIF co-chairs, recommended providing dedicated resources for the acquisition, construction, development and renovation of ECE facilities to close the gap of millions of slots needed to serve all children. Representative Katherine Clark’s (D-MA) Child Care is Infrastructure Act (H.R. 7201) provides an effective blueprint to invest an initial $10 billion in ECE facility infrastructure.

“For me, the rescue of my child care business came on two fronts,” said Angelica Guererro, the director and founder of Billygoats/Las Cabritas family child care in San Francisco, CA. “The PPP loan helped pay my mortgage the month that I closed at the start of COVID, and LIIF’s emergency renovation grant allowed me to comply with safety regulations and reopen.” Guerrero is an example of how public and private funding can be woven together to stabilize a child care business. 

For success stories like Guererro, LIIF’s ECE advocacy continues, built on more than 20 years of grant making, lending and capacity building alongside professionals in the field. Our recommendations are borne of robust coalition building and knowledge sharing networks like NCFN. At the public level, LIIF and other experts were selected by California Governor Gavin Newsom to develop a Master Plan for Early Learning and Care to expand equitable access to high quality ECE from birth to five within the state. The work is funded by $500 million in federal funding and $2.9 million in public-philanthropic support to date and aims to close the opportunity and achievement gap―particularly for children with disabilities, children living in poverty, children of color, children experiencing trauma and children who speak a language other than English at home.

At the grassroots level, LIIF has taken a leadership role in advancing Build Up California, a statewide network of local leaders in ECE, housing, planning, community development, the public sector, business and philanthropy dedicated to the equitable sustainability, improvement and expansion of ECE facilities. The network helps bridge the knowledge gap between ECE professionals and public officials, hosting convenings so that policymakers understand the needs of those working on-the-ground and legislative briefings to make policies plain to those it affects.

In the wake of the COVID-19 outbreak, LIIF’s child care team reached out to center operators and ECE small business owners to better understand their challenges. We heard that the biggest concerns were having the money to pay rent and mortgages, payroll and PPE costs, managing compliance with new state and local regulations and applying for grant and loan opportunities like the Payroll Protection Program (PPP).

LIIF moved quickly, securing new funding and partnerships to provide relief to the sector. To date, LIIF has partnered to marshal $26 million and deployed grants and technical assistance to more than 1,300 businesses and counting. The COVID-19 Child Care Relief Effort (in Washington, D.C., New York City and the San Francisco Bay Area) and City of Los Angeles COVID-19 Child Care Provider Grant Program brought together public and philanthropic partners to respond to the need.

Until sustained federal funding is established, saving child care requires the expansion of creative funding among public, private and philanthropic investors as well as building out support systems that help providers navigate the complexities of running a business.

One example of innovative financing to address the child care shortage is the construction of an early care and education center on the bustling Mission Street in San Francisco. The new facility, opening in the spring, will provide 42 full-day ECE slots for kids from birth to five years old, co-located with 157 affordable housing units. The facility is leased by Mission Neighborhood Centers (MNC), a Head Start and Early Head Start grantee, mostly serving families who are low-income and many children who have experienced homelessness, foster care or who have disabilities or developmental challenges. MNC’s two-generational approach incorporates family support and social services with early care and education.

LIIF partnered with the San Francisco Office of Early Care and Education to provide $2.44 million in New Markets Tax Credits (NMTCs) allocation and a $1.7 million leverage loan for the child care portion of a multi-use building. While most NMTC allocations are for larger-scale projects, this financing structure permitted loans for smaller scale projects that met a great neighborhood need. In San Francisco, 85% of infants and toddlers (approximately 20,000 children) are left without access to quality, licensed care. 

It also allowed the facility operator, Mission Neighborhood Centers, to obtain $1.1 million in additional grants from the City of San Francisco (beyond the City’s $1 million standard limit) and $700,000 in permanent subsidy from U.S. Bank in addition to philanthropic funding. These additional subsidies will go towards strengthening MNC’s balance sheet and will allow them to use additional resources for other areas of their programming, such as youth and senior care.

At the end of the seven-year NMTC term, the equity is expected to stay with Mission Neighborhood Centers, greatly enhancing their financial well-being. Building a new facility in one of the nation’s least affordable cities would be impossible without this flexible, affordable debt, attracting public and philanthropic support.

As our country faces both a homelessness crisis and shortage of child care, the co-location of housing and ECE has emerged as a win-win strategy. LIIF and First 5 California have been advocating for this solution in Sonoma County, where the wildfires of 2017 destroyed 2,800 homes and 400,000 square feet of commercial space, including many child care centers and homes. The paper, “Housing Development and Child Care Facilities: Strategies and Financing” is the result of a year-long effort.

Though the research focuses on wildfire recovery, it is equally applicable to the equitable economic recovery the nation needs now. Equitable recovery can’t happen without equitable access to child care.

Just as the nationwide shortage of affordable housing isn’t going to be resolved without building new homes, the shortage of child care slots won’t resolve without continued construction of child care facilities. Building ECE facilities within affordable housing developments is one step toward resolving both of these issues, and there are established funding paths to make this feasible.

NCFN has provided recommendations to the Biden-Harris Administration on opportunities to co-locate child care facilities with affordable housing and other community amenities. For example, affordable housing developers can extend Low Income Housing Tax Credits (LIHTC) to build the structure of an ECE facility co-located with a housing development. Funding for the interior build-out may come from Community Development Block Grants, Head Start Facility Development Funds or loans from Community Development Financial Institutions (CDFIs), like LIIF, which often weave together complex cross-sector financing and offer resources like bridge funding and start-up loans.

“LIIF and many of our CDFI partners are well-positioned to help federal, state and local governments quickly disperse ECE funding, connect providers with critical resources and provide loans where possible, said LIIF President, Kimberly Latimer-Nelligan in a recent blog.

“It will be a long time before we understand COVID-19’s impact on our nation’s health and economy, but in any scenario, we know that ECE will be an essential service and critical to ensuring our economic recovery. LIIF is committed to supporting ECE providers to survive the crisis and reopen strong programs. We will continue to advocate for public ECE resources at a scale that meets the immense need and increases provider resilience in the face of future disasters. Our families and economy depend on our shared ability to achieve these goals together.”