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The
Next Stage in Childcare Facilities Development
by
Noni Ramos, Director of Child Development and Education, Low Income Investment
Fund and Chief Credit Officer of Community Facilities, ABCD Fund
"One of the
charges of the district Fed banks is to provide analysis and insight
into regional
economic development.
State and local governments
have been debating how to best use public funds to encourage economic
growth, and research has shown that early childhood development
programs should be viewed as economic development.”
What’s At Stake?
 The socioeconomic impact of inadequate child care, in terms of lost potential
to promote healthy growth and development, cannot be underestimated.
According to the Chicago Longtitudinal Study (2000), quantitative savings
in terms of crime, welfare dependency, and special education will result
in a return of more than $7 for every $1 invested in quality early-intervention
child care. The study calculated a potential savings of $2.6 billion
for every 100,000 children participating in the programs.
Limited Supply
Lack of facilities is probably the greatest challenge facing early childhood
programs. In California, the supply of licensed child care, estimated
at nearly 900,000 spaces in more than 40,000 child care businesses, meets
only 22 percent of spaces needed. The child care needs of the estimated
2.3 million California children in poverty are particularly acute with
more than 200,000 low-income children on waiting lists for subsidized
child care. The alarming shortage of affordable, high-quality child care
is a significant barrier to families aiming for economic self-sufficiency.
Child care is frequently financially out of reach for low-income families,
and there simply are not enough child care spaces to meet the demand
for children of any income. The problem is not prevalent just in California,
but nationwide.
The need for a stable and efficient source of
capital to finance the development of child care facilities across the
nation is critical. Without sufficient
funding for high-quality facilities, low-income families are forced either
to refrain from working in order to care for their children, or place their
children in unlicensed and perhaps unsafe child care environments. Ultimately,
the critical need and value of child care spaces, particularly for low-income
families, is clear, as is the necessity for a well-developed financing
system to support the continued development of high-quality child care
facilities throughout the nation. Seeking to address this shortage, the
David and Lucile Packard Foundation, and its partners, launched the Affordable
Buildings for Children’s Development (ABCD) initiative in 2002.
Addressing the Need
The overarching goal of the ABCD initiative is to build a comprehensive
and sustainable financing system for high-quality child care facility
development with the objective of creating 15,000 spaces in five years
with a particular focus on low-income communities. The initiative adopts
a four-pronged approach of finance, technical assistance, construction
advice and advocacy to achieve this goal. The Low Income
Investment Fund (LIIF), a community development financial institution,
was chosen to assume leadership of the initiative in 2003 (see box
1).
The ABCD initiative adapts a proven model drawn
from the affordable housing financing system of using private capital
to leverage public funds. Even
in good economic times, it is doubtful that the public sector could sufficiently
supply the capital investment to support construction of the number of
child care facilities required. As such, ways must be found to attract
and sustain new sources of private investments, including loans. The ABCD
initiative operates from the hypothesis that increased involvement of private
capital will expand public dollars and increase the commitment of lenders
and investors who have historically been involved in other areas of community
development such as housing and small business. As the financial industry
increases their commitment, their overall support and interest in children
and child care will become not simply philanthropy but “good business.” In
other words, just as private investors have joined government funders for
today’s affordable housing initiatives, the private sector will come
to value the investment potential in child care facilities development
through ABCD.
Since its inception in January 2003, ABCD has made solid progress, including:
- committing approximately $4 million in grants and loans that will support
development of nearly 1,800 child care spaces;
- raising $10 million from a consortium of insurance companies for the
ABCD Fund, through the New Markets Tax Credit program; and
- receiving a $3 million grant over three years from the First 5 California
Commission for ABCD Constructing Connections (see box
2).
Getting Involved
In order for the ABCD Initiative to be successful, LIIF will require the
participation of financial institutions in the following ways:
- lending the ABCD Fund, low cost, flexible capital to be used to make
child care center loans;
- providing grants to LIIF for re-granting to child care centers for
planning facility projects; and
- providing grants to LIIF for the operations of the ABCD Fund.
The ABCD Fund is currently capitalized at $10 million
with an additional $10 million currently being closed with a consortium
of insurance
companies. LIIF’s goal is to grow the Fund to between $30 and
$40 million in capital available for lending.
Because traditional financial institutions do
not typically have experience in making loans for the development of
child care centers, LIIF can play
a critical role in serving as the intermediary between the financial institutions
that have the capital to lend and the borrowers developing child care centers.
In most instances, the borrowers are first time borrowers, unfamiliar with
the loan underwriting process. Over the years, LIIF has developed an expertise
in lending for the purpose of child care center facilities development
and by lending to LIIF --an established CDFI with a strong track record--
rather than to individual child care center, financial institutions can
take advantage of this experience and expertise. Additionally, such characteristics
as often being unsecured, having high loan-to-value ratios when secured
by real estate, lower than typical debt service coverage ratios, and cash
flow that is dependent on annual appropriations of child care subsidies
tend to make them weaker than usual borrowers from a financial perspective.
By lending to LIIF, many of these risks can be mitigated because of LIIF’s
expertise in lending to this field.
The ABCD Initiative as a Model for Other States
The ABCD initiative is most concerned with putting into place key elements
that will ensure a sustainable system for child care facility financing
and serve as the underpinning of affordable child care facilities development
for years to come. These elements include:
- enlisting new and diverse partners such as employers, health care providers,
and housing owners to provide support such as sites or other resources;
- working to ensure that investors see childcare center financing as
an attractive community development opportunity;
- mobilizing substantial new public and private dollars for facility
development and organizational support of the child care sector; and,
- increasing financing options for childcare providers.
The four components of the ABCD Initiative summarized in Box 2 are an
attempt to address the elements that are believed to be critical to the
system building that we have identified as being necessary for accomplishing
the overall goals of the ABCD Initiative.
Box 1
Who is
LIIF?
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| Since its inception in
1984, LIIF has provided capital and technical assistance totaling
over $353 million in 35 states across the nation to hundreds of community
organizations serving the nation's hardest-to-reach populations.
LIIF's assistance, in turn, has leveraged investments in poor communities
of more than $3.2 billion.
LIIF, which operates nationally, has developed
expertise in lending to borrowers with unconventional revenue streams
and provides financing for all phases of a development project
(including permanent mortgages), as well as operating lines of
credit for nonprofit organizations. A prominent board of directors,
drawn nationally from the banking industry and the national housing
development and policy fields, governs LIIF.
To learn more about LIIF’s role
in facilitating community development finance and investments,
visit their website at www.liif.org
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Box 2
The Four Components
of the ABCD Initiative |
Experience has shown that it takes more than just funding to accomplish
these goals. That is why the ABCD Initiative utilizes the expertise
and capacity of existing community organizations while employing
four interrelated strategies:
ABCD Fund – Provides technical assistance, grants and loans
for child care centers, feasibility planning, acquisition, and construction
costs, and long-term real estate financing needs.
ABCD Development Assistance – Utilizes the expertise of regional
community developers to increase statewide the construction of child
care facilities within educational, health, and housing facilities.
Partners include Bridge Housing, Los Angeles Community Design Center
(LACDC), Mercy Housing California and Child Development, Inc. (CDI).
ABCD Constructing Connections – Strengthens the facilities development
expertise of child care center operators and intermediaries, and improves
the regulatory and funding environment to support child care facilities
as a priority.
ABCD Campaign to Sustain Child Care – Brings together new coalitions
of representatives of a variety of sectors to advocate for increased
child care program operating subsidies from state and local governments.
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Link to proceedings from the The Economics of
Early Childhood Development: Lessons for Economic Policy conference.
(http://www.mcknight.org/cfc/news_detail.aspx?itemID=
355&catID=55&typeID=2)
The Chicago Longitudinal Study (CLS), a report completed by the University of
Wisconsin and published in August of 2000, investigates the educational and social
development of 1,539 low-income children who grew up in high-poverty areas in
Chicago. (http://www.waisman.wisc.edu/cls/index.html)
Child Care Portfolio, 2001; a bi-annual report analyzing the supply and demand
for child care by county in the state of California created by the California
Child Care Resource and Referral Network. (http://www.rrnetwork.org/rrnet/index.htm)
For more information, you may contact Noni
Ramos at the ABCD Fund, 510-893-3811,
ext. 319, or via email.
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