Half of Minnesota child care providers unsure how long they'll remain in business

It’s been a rough couple of years for one southeast Minnesota child care provider, and it seems things haven’t gotten much better.

Earlier in the pandemic, she said, she coped with very low enrollment. Now, she said, she’s coping with unpredictable enrollment, which means never having a steady paycheck, and inflation, which means sometimes not having much left over after paying the bills to pay herself.

“The cost to run my daycare keeps going up, but I can’t continue to put the extra cost on my daycare families; they can’t afford child care the way it is,” she said. “I’m hardly breaking even. I love my job but I’m not sure how long I can afford to stay open.”

She’s one of more than 1,000 Minnesota child care providers surveyed in April by the Minneapolis Fed and First Children’s Finance (FCF), and her struggle is a common one. The anonymous survey found enrollment is no longer declining for most providers, but a majority found it unpredictable. Most struggled with higher expenses; many described high levels of stress and fear.

When asked how long they could remain in business under current conditions, 1 in 5 said a year or less, and half said they didn’t know (Chart 1).

“That’s a concerning level of insecurity across the sector,” Suzanne Pearl, FCF’s Minnesota director, said in a recent webinar on the survey. “The child care sector for years has been losing family child care providers in particular, with not nearly enough new providers starting up to replace that capacity.”

Child care providers play an important role, she said, “not only for the families they serve, and the children they care for, but that they are a foundational and critical component of our state’s economy.”

The survey was not randomized and may not be a full representation of the child care industry. However, the sample size was large, encompassing 1 in 10 licensed providers in the state, and the breakdown by provider types and locations in the survey is similar to actual breakdowns.

Paradox of high demand for care, low enrollment

The demand for child care appears to be very high throughout Minnesota, with providers from all corners of the state often reporting daily calls from parents asking about openings.

Yet providers also aren’t reporting a surge in enrollment (Chart 2). A significant number say enrollment is lower than it was a year ago, especially among family child care providers, typically home-based providers licensed for 14 or fewer children. Family providers have been in decline for years prior to the pandemic, with fewer children cared for in these settings compared to child care centers, which typically care for larger groups of children in institutional settings.

Pearl saw some signs of improvement in the enrollment data but warned that even those saying enrollment is unchanged may not be in a good position because the comparison is with 2021 when many more providers reported declining enrollment. In March 2021, half of providers surveyed by the Minneapolis Fed and FCF said enrollment had declined during the pandemic.

The April 2022 survey offers some clues as to why high demand has not translated into higher enrollments for most.

One common explanation for declining enrollment is the inability to hire enough teachers, despite offers of higher wages from most providers.

The state requires providers to maintain a certain teacher-child ratio, so a shortage of teachers limits enrollment growth, Pearl said. “These difficulties in hiring or retaining staff have a real tangible impact on the availability of child care for Minnesota families.”

Not every provider employs staff, but among those that do nearly half said being short staffed prevented them from increasing enrollment. If they could hire, they said, they could increase current enrollment by nearly a quarter. Unfortunately, 60 percent of providers who have employees or are planning to hire said they found hiring “very difficult” and another 22 percent said it was “difficult.” A year ago, only 47 percent said hiring was “very difficult.”

“There is no shortage of children for all of the programs in the area,” a central Minnesota child care center manager said in the survey. “However, there is a real problem finding staff, especially staff that are qualified to be an assistant teacher. Usually when we have a staff member leave, it takes us a minimum of four months to find their replacement.”

Demand is high but mostly for costly infant care

The teacher shortage especially affects infant care, which many providers said was in very high demand compared to care for preschool and older children. But infants require more staff than older children. The state requires a teacher-child ratio of 1 to 4 for infants. Ratios are larger for older children. For school-age children, the ratio is 1 to 15.

Several providers said they earn very little caring for infants. They can’t charge the full cost of care because most parents simply can’t afford it. One provider said she just stopped accepting infants because she always lost money caring for them and being short staffed made it less worthwhile. Older children, because they don’t require as many teachers, are more profitable to care for. Most providers still accept infants because infants tend to stay with the same provider as they age, and they sometimes have older siblings.

The pandemic has upset this loss-leader strategy somewhat, with more parents working from home. Providers said these parents tend to keep children old enough to not require constant attention at home with them, saving on tuition and reducing the risk of COVID-19 infection.

“Come summer, several kids will leave and stay with older siblings that really aren’t old enough to be caring for young children, but families are hurting too,” a Twin Cities family provider said. “Others can work from home now, so [they] work from their cabins in the summer months and no longer need care for those months.”

More than half of providers also reported unpredictable enrollment. By this, some meant changes in attendance. Families would keep children at home if they may have contracted COVID-19 or if schools shift to online learning during outbreaks of the disease. This can affect providers’ bottom lines if they don’t bill parents for days children are absent. Many unpredictable changes are more permanent, providers said, such as when parents lose jobs, shift to remote work, or even pull their children out after disagreeing with their providers’ COVID-19 policies.

Providers squeezed by tight labor market, inflation

While enrollment has not grown for most providers, operating costs have.

Higher wages or bonuses were paid by 85 percent of providers with staff. And nearly 70 percent have had to pay more to cover for staff absences due to illness, such as COVID-19. Inflation has driven up other expenses as well, with many, especially family providers, reporting significant increases in the cost of food, pandemic supplies such as face masks, and transportation (Chart 3).

“Absolutely everything costs more currently. Buying groceries. Paying for gas. Paying liability insurance,” one Twin Cities family provider said. “Cutting corners does not always work, especially when working with children. They deserve my best, even when I am depleted.”

But she and many others did have to cut costs. They spared the essentials, such as utility bills, rent, staff wages, and food, but deferred maintenance, and even paid themselves less.

One family provider in southeast Minnesota lamented: “I have a B.A. in early childhood [education] and cannot afford to pay myself $13 an hour.”

A Twin Cities child care center director who reported increasing wages and offering bonuses to ensure adequate staffing said, “I don’t have enough money to pay myself what I pay everyone else.”

For Pearl, the most poignant choices providers had to make was between feeding their children and providing them a stimulating learning environment. “There were just a lot of comments about choices that providers were making. ‘I’m cutting back on toys.’ ‘I’m cutting back on curriculum.’ ‘I’m cutting back on activities in order to afford food.’ That was tough.”

State aid eases financial pressure on providers, but there are limits

On the revenue side, many providers are constrained by what families can afford. This is especially true of family providers—the typically smaller home-based providers—with just 1 in 5 reporting they had increased tuition in the past year. For child care centers—the typically larger institutional providers—a little more than half did raise tuition but that left a fairly large number that didn’t.

“I wish I could raise my rates but with gas prices and food going up I know how it would go,” a family provider in central Minnesota said. “I have been doing this for years. Parents will pull kids from day care to pay the bills.”

Family providers are more hesitant to raise tuition even when in financial distress, in part because they serve far fewer families and the loss of even one can mean a big loss of revenue, according to Pearl. Family providers in the survey reported an average enrollment of 10 compared to 73 for child care centers. Family providers also tend to know their families very well.

“They’re trying to do what they can to both meet the needs of the families, who they know are going to have a hard time paying more, but also keep those kids in their business,” Pearl said.

To fill in the financial gap, a quarter of providers said they dipped into emergency funds and 1 in 10 ran up credit card debt and other high-interest financing. Many said they know it’s not sustainable, but they often cannot get a bank loan.

One central Minnesota family provider said she wished there were a low-interest option for providers like her “who don’t look good on paper.” “This is why we use credit cards. A lot of times, it is our only option to make sure we cover our miscellaneous expenses.”

What’s kept a lot of providers afloat is government aid such as food subsidies, which providers said have helped but aren’t keeping up with inflation, and grants. The Minnesota Child Care Stabilization Base Grant—federal pandemic funds set aside to help providers remain open—was especially important, with most surveyed providers saying they had received it. They used that grant to offer higher wages or bonuses to retain employees and maintain their teacher-child ratios. Unfortunately, the stabilization grant expires in June 2023, and many providers wondered how they could retain employees without help from the state.

“We are about breaking even thanks to the [stabilization grant],” the director of a southwest Minnesota child care center said. “When that goes away, I’m not sure what will happen. These past two years have been so stressful. Staff is burnt out and no one wants to work for the pay most child care centers can pay.”

Untenable situation

For many providers, their current situation seems untenable, even those who reported that they could remain open “indefinitely.” Many reported high levels of stress balancing financial pressures and their feelings of responsibility toward families.

A Twin Cities family provider who reported a “large increase” in enrollment also reported high operating costs that she was only able to partially cover.

“It has been so stressful not knowing what is coming next and dealing with families who simply cannot miss another day of work due to pandemic health protocols, which leaves us providers having to have sick kids in our programs and getting sick ourselves,” she said. “Providers need to continue to be helped with grants as that’s the only thing that gives us security when all of these parents are being put between a rock and a hard place, especially parents of multiples.”

Pearl said that, for many providers, child care isn’t so much a business as a calling. “[Minnesota Gov. Tim] Walz directly asked child care providers to stay open during the pandemic, and providers took that seriously. They wanted to help. They wanted to contribute. They wanted to be part of the solution. And so we just see people are going to do whatever they can to keep their business open with the faith that it’s going to get better at some point.”