Abstract

We propose a new approach to funding early childhood education. We do not propose a specific system, but instead outline here the key features we think should form the basis of a redesigned funding mechanism for early childhood education. Current funding mechanisms are complex, and this is frustrating for governments seeking to manage early childhood education funding commitments, as well as difficult for services and parents to understand and navigate. The major feature of our proposal is to focus payments on meeting the early childhood education needs of the individual child. Payments would no longer be based on licensed numbers. The amount of subsidy would be calculated and paid through a formula-based funding mechanism that recognises the needs of individual children. We describe this as the per child-hour subsidy, to be paid for a specified number of hours participation per week. We remain committed to a universal subsidy for 20 hours of early childhood education per week, and retain this principle in our model. But we also recognise the need for fiscal constraint from our terms of reference. Our proposed model can be configured to be fiscally neutral. As the design and implementation of funding mechanisms can be complex and have many significant impacts on services and parents, we propose that the detail of the new system be designed and implemented in partnership with the sector and with appropriate trials. The recommended new approach to early childhood education funding would make government payments to the sector more transparent; impose fewer administrative costs on Government; and reduce compliance costs on services. The new approach to funding would make future funding allocation decisions more straight-forward. Finally, access to early childhood education should improve when centres can charge transparent fees to parents, and thus be able to remove certain enrolment rules they may have designed to protect their revenue – such as requiring attendance or payment for minimum hours.

Recommendations

The ECE Taskforce recommends that:

14. as part of our proposed new funding system, a new model of early childhood education funding is developed to meet two broad purposes:

• subsidising delivery of services that are customised to meet the early
  childhood education needs and circumstances of individual children; and
• developing the capacity and improving the quality of early childhood
  education services

15. the development and implementation of the new funding system is undertaken in partnership with the early childhood education sector

16. the new funding mechanism is trialled and is implemented in phases

17. the new funding mechanism is implemented within four years.

Introduction

This essay focuses on changing how government funding is allocated and paid to early childhood education service providers. The issue of how much funding should be available for early childhood education is dealt with separately in Essay 2: Reprioritising Government Expenditure. The Government should be investing in quality services as described in Essay 1: Aiming for High-Quality Services and linked to Essay 9: Improving Licensing Processes and Performance Reporting.

Suitably designed funding mechanisms can produce improvements to the design, delivery and utilisation of early childhood education services.

Better ways of calculating and making payments can encourage early childhood education services to provide the kinds of services that are most valued. For example, by enrolling more children from disadvantaged groups; by being more accommodating to parents engaged in paid work; and more generally, by making their operations more efficient and effective.

The current early childhood education funding system for subsidy payments is complex and works on a ‘low trust’ relationship with services. It comprises many different payment rates; complicated compliance requirements; and a high level of administrative checks. These features impose higher-than needed levels of compliance and transaction costs on services and families, and on the Ministry of Education in administering the regime. By diverting early childhood education service resources onto administrative tasks, such
system requirements can affect the quality of the service that is provided to children.

Relevant Policy Design Principles

The Taskforce considers that new funding mechanisms should:

• respect fiscal constraints
• ensure efficient use of government funds
• promote fairness both of access to services and educational outcomes
• create a predictable environment for service providers, and
• promote administrative simplicity and help achieve low compliance costs.

Background

Below, we identify major funding-related themes running through this report and that are also reflected in some submissions. We also set out current Ministry of Education arrangements for delivering funding to early childhood education services under the Education Act 1989.

We do not discuss funding paid to services under other legislation or from other agencies such as the Childcare Subsidy paid by the Ministry of Social Development or tax deductions for childcare managed by the Inland Revenue Department.

Finally, we remain committed to the principle of a universal subsidy for 20 hours early childhood education a week for each child, along with (where appropriate) suitable parental contributions towards costs.

The current system

The existing system for funding licensed early childhood education services was first introduced in 2005. As it has evolved with policy changes, it now comprises eight service-specific rate schedules comprising about 70 different rates. The variety of payment rates and qualifying conditions contributes to the overall complexity of the current system.The system uses a cost-drivers approach to rate setting. Rates are determined through Ministry of Education assessments of the costs of delivering different types of services. The types of costs recognised in setting rates include teacher salaries (based on the Kindergarten Teachers, Head Teachers and Senior Teachers’ Collective Agreement (KTCA settlement) – which are generally the major operational costs for early childhood education service providers – plus other selected operating and capital costs.

The system bases payments to services on two different, but related, items: per child place (which is essentially a proxy measure of the capacity of a service) and per child hour (a measure of actual use). There are funding rules relating to enrolment and actual attendance which can cause conflict where a service is trying to encourage participation but is penalised through losing chargeable hours if children do not attend on a consistent basis. If services approach these families about keeping up their hours of attendance, or they lose funding, the families may feel pressured and withdraw.

There are three main types of rate paid to servicees to provide minimum levels of quality:

• Two-years-and-over subsidy – pays part of the cost of providing early childhood education and is paid per child place. It is paid per hour for up to 30 hours per week (when that place is filled)[1].
• Under-two-years subsidy – pays part of the cost of providing early childhood education and is paid per child place. It is, however, a significantly higher rate of funding (usually around double that for two-and-over), which recognises the additional cost of the higher regulated adult:child ratios for children under two.
• 20 Hours ECE – a per-child-hour payment for providing early childhood education to children of three, four and five years of age. This rate is based on the national average cost to provide minimum quality standards. For each child, early childhood education services can claim up to six hours per day and 20 hours per week. Services cannot make additional charges to parents for hours claimed as 20 Hours ECE, but may request payment of an optional charge for some specific extra services or purposes.

We note that the Ministry of Education is currently investing in the establishment of informal playgroups and other initiatives, with very low hours of participation expected.

ECE price and charges

The price of early childhood education, and therefore the net charges to be shared by the Government and parents, is very strongly influenced by the staff costs of providing services, in particular by the proportion of registered teachers on the payroll.Graduated government funding rates recognise the increased costs of employing registered teachers; thus different rates are paid for the following proportions of registered teachers: 80%+; 50-79%, 25-50%, and 0-24%. The home-based sector is recognised as teacher-led, with one registered teacher to up to 80 children. This apparent anomaly in levels of registered teacher involvement is addressed in Essay 2: Reprioritising Government Expenditure.

For teacher-led services, funding rates are divided into lower rates for services where children attend for a maximum of four hours a day (sessional services), and higher rates for all-day services. The higher all-day rates recognise the additional costs of maintaining a regulated 1:10 adult:child ratio in an all-day service (compared to 1:15 in a sessional service).

The current ability of parents to refuse to pay the optional component has led some services to respond tactically. For example, some require a minimum number of hours for enrolment, and make up the shortfall in funding (not covered by 20 Hours ECE payments) through spreading this across the hours above 20 hours that the child is enrolled for. Our proposed per-child-hour payment will be a part-subsidy. The fact that the payment is not necessarily made in full satisfaction of the total early childhood education price payable would be made very clear. Accordingly, services would know they are free to set their total charge in an open and transparent way, and thus charge parents the residual (net) fee. A more open and upfront approach to charging will enable parents to see how the net charge is calculated.

Submissions Summary

While many submissions canvassed various aspects of funding, particularly the total amount paid for early childhood education, few commented specifically on the mechanics of funding. Common issues relevant to considering new approaches to funding that emerged in submissions were:

• Equity issues – Several submissions noted the importance of reducing financial barriers to promote more equitable access to early childhood education, one submission noting “for our low decile communities, the accessibility to affordable early childhood education is imperative for continued participation of our Māori and Polynesian children.”
• Targeted versus universal funding – Five submissions mentioned this issue and supported universal funding, supplemented as required with some equity funding.
• More flexible funding model – A majority of submissions wanted the current funding and operational model to be more flexible in response to the difficulty some families have in ensuring their children regularly attend prescribed hours and days. This was further reflected in submissions that considered families were stressed where payments were based on attendances.
• Accountability for public money – Various suggestions were made concerning the allocation, distribution or misuse of funds. Tax incentives were both supported and criticised. Some submissions supported increased funding for early childhood education immersion services and varying funding bands according to a child’s age.
• Private and community service – Strong criticism of private centres was reflected in certain submissions, particularly in standard form submissions. The most commonly repeated message within these submissions was that “ECE should be a public good not a private enterprise”.

Proposed Policy Direction

Government funding should encourage and support the early childhood education sector, and alongside this, parents and employers should step up and take appropriate responsibility for early childhood education.

Below we outline the principles, features, and methods of calculation and distribution for our new approach to funding early childhood education. We emphasise again that this is the blueprint for a system that achieves our recommended aims. We recommend significant further work and close involvement by the early childhood education sector, before a new system is implemented.

In outlining this mechanism, we recognise specifically the need for fiscal constraint. We deliberately do not recommend a dollar rate – the system can be configured a number of ways, to balance universal subsidies with our recommendations for closer targeting. This balance should only be struck following the further work we recommend. But within this system, a range of options are available under which Government incurs no extra cost.

Key design principles of a new system

To achieve improvements in the direction we envisage, the new funding mechanism we recommend should:

• retain universal eligibility for at least 20 hours of subsidy per week
• use published, transparent formulae
• recognise relevant and fair costs of delivering early childhood education services when setting the benchmark rate
• seek to share these costs in a fair and transparent way with parents, where they can afford to contribute
• be flexible to adjust to changing demographics and societal needs
• incorporate additional subsidy payments (add-on percentages to a base rate) for priority purposes – to provide greater financial support to those who need it.<.li>

Differentiation between services

For both funding and wider purposes, we agree the early childhood education sector comprises two component groups:

• licensed centre-based, teacher-led services
• licensed other services.

We make this fundamental distinction because we consider that high-quality, teacher-led services should be encouraged and supported by the new funding system. We consider that ‘other’ services, (for example, parent-led services) should qualify for some financial support, but should not be the main focus of the new system.

Key design features

The key design features of our proposed system are summarised in the following table. These set a blueprint for features we believe are key to a new funding system, together with the supporting rationale and a comparison with existing features.

 

Methods for calculating and distributing funding under the new approach

Under our model, we propose setting up four funding streams; two are child-focused and two focus on improving the quality of service that is provided, through building service delivery capacity.

The Core per-child-hour subsidy and the Non-Core per-child-hour subsidy are the most significant of these streams, both in terms of their share of total early childhood education expenditure and in meeting quality and equity objectives. Both are directly child-focused. Under the proposed ‘supply side’ funding mechanism, the per-child-hour rate of payment offered to services would represent the amount the Government has determined is a fair contribution in terms of operating costs, quality of service and the early childhood education needs and other specified attributes of the child.

We propose that the base rate (i.e. the benchmark on which other per-child-hour subsidy rates are calculated), should be the rate applicable to a child aged two or over. This base rate of Core per-child-hour subsidy, together with any additional subsidy rates, will be set following an assessment process which includes consideration of services’ actual costs in producing a service of a particular nature and to children with particular needs or attributes.

Core per-child-hour subsidy
This subsidy is paid per child hour, and would be calculated according to certain parameters:

a. age of child (this recognises the level of basic early childhood education service needed)

• The applicable age ranges of children are zero to less than two years, and two years and over. We propose that children under two will attract a higher subsidy per hour than children aged two and over. This difference should be expressed in percentage terms, e.g. the subsidy for under two year olds could be 125% of the two-and-above subsidy.

b. the $ amount of per-child-hour subsidy (this recognises service type needs)

• The per-child-hour subsidy will be augmented through targeted supplements:– additional subsidy per hour if the service is of a higher quality– additional subsidy per child hour if a child has a disability or special education need– additional subsidy to reflect the importance of enrolling disadvantaged groups – Māori, Pasifika, refugee and low socio-economic-status children – into teacher-led services.

c. number of subsidised hours per child per week (this recognises amount of service needed)

• The maximum allowable hours per week may be set at a higher level, for example, where the parent is a beneficiary, or where parents are in full employment.

Non-Core per-child-hour subsidy
We propose that this subsidy would be set at a single standard rate payable for all children in licensed early childhood education services; apply to all child ages; and be payable for a maximum of 40 hours per week. This would be set at a much lower amount than the Core per-child-hour subsidy; say, one third of the benchmark rate. This will ensure some level of subsidy for all hours a child could be attending early childhood education, and will help support parents wishing to engage in paid work.

Figure 2 illustrates how the different subsidies interact and vary on a per-child basis.

Figure 2: Core and non-core subsidies

Funding to Support Services
The following two funding streams are focused on developing various elements of the capacity of a service to provide quality early childhood education. Capacity covers all the resources needed to deliver quality care – such as people, relationships, facilities, equipment and programmes.

These proposed funding streams are:

a. Service Grants
These subsidies should be smaller dollar amounts provided generally on a one-off basis for specified purposes, for example:

• establishing a service where there is well-documented need
• improving the infrastructure associated with a service
• creating a network that joins centre-based, teacher-led services with other
  services (such as those that link Kindergartens with home-based services)
• innovation grants, awarded competitively, as discussed in Essay 11: Promoting an Innovative, Continuously Improving Sector
• support with governance and/or management structures for areas of identified risk.

b. Centre subsidies
These subsidies are intended to support the general operations of a centre and may be increased on the basis of centre criteria that include:

• location in a low-socio-economic-status area
• provisions made for children with disabilities
• provisions for specific languages and cultures – i.e. emphasis on appropriate outcomes for Māori or Pasifika children
• encouragement for services that increase their percentage of qualified teaching staff above 80%.

Figure 3: Proposed subsidy streams and the relevant funding recipients

Anticipated Outcomes of the Policy Change

The proposed new funding mechanisms would:

• respect fiscal constraints by enabling co-payments by parents; also through rates being graduated according to children’s needs and parental ability to pay; and based on an assessment of the actual costs of producing early childhood education services
• ensure efficient use of government funds through setting transparent and formula-based funding mechanisms that will improve accountability and reporting
• promote fairness both of access to services and educational outcomes through explicitly recognising and acknowledging the provision of enhanced and more customised early childhood education services to children with different abilities and from differing, and disadvantaged, circumstances
• create a predictable environment for service providers by making funding mechanisms simpler and more understandable; and allowing services to charge fees to parents
• promote administrative simplicity and help achieve low compliance costs by making the system easier to work with. The administrative costs to Government and the compliance costs of centres should be reduced.

The major desired impacts sought – in terms of changes to early childhood education service delivery – through the changed funding approach are:

• greater early childhood education use by currently disadvantaged groups such as children with disabilities; children from low socio-economic environments; Māori and Pasifika children; children of refugees
• increased supply of employment-friendly early childhood education, and
• a funding process that is easier to understand, for services to work with.

Cost Considerations

Estimates of the gross Vote: Education expenditure that would result from use of the mechanisms depend on assumptions about the base rate; the premiums payable (i.e. the add-on percentages paid for particular purposes) and levels of uptake (numbers of children and qualifying hours). Funding mechanisms based on our model are, with appropriate calibration, intended to make the move from the existing funding regime to the proposed one, fiscally neutral. Of course, our general view is that strong grounds exist for increasing the funding going to high-quality early childhood education through this new mechanism. Our proposals will increase transparency, lower Government’s administrative costs and reduce compliance costs for services.

The Change Process

A more detailed discussion of the phases and rationale for phasing referred to in this section can be found in Part One, under Leading Change Processes.

The Taskforce recognises the critical importance of changing the current approach to sector funding. The aim is to support the financial viability and growth of the sector and set suitable incentives for providing high-quality early childhood education that meets specific needs. This means supporting services that are responsive to the needs of children; increasing participation by disadvantaged groups; and encouraging the delivery of early childhood education services that are employment-friendly.

The early childhood education sector is made up of many diverse private and not-for-profit entities that collectively have a large investment in capital and human resources. All services seek to sustain their business viability and solvency and to work according to various service and management models that rely on receiving expected levels of resourcing.

To plan their delivery of early childhood education services, providers need confidence about their likely future income. The key component of expected income is the revenue that will be derived from government subsidies – the main source of services’ income. Any future changes to government funding for early childhood education will need to take account of reasonable expectations by services about the amount of subsidies they are eligible to receive for the children currently enrolled.

However, the majority of children only attend early childhood education for two years, between the ages of three and five. Accordingly we note the possibility that, alongside any funding changes and to assist transition processes, existing subsidies payable for children already enrolled could be maintained at pre-existing rates for those specific children.

We are also acutely aware of the damage that ‘getting it wrong’ – in designing and implementing new funding mechanisms – could cause to the viability of individual early childhood education services.

The key parties (such as services themselves but also parents, local authorities, employers, other agencies, etc) need to be confident that the proposed changes will achieve their stated aims and that early childhood education services can work with the new system. We therefore propose that changes are introduced through a process of consultation with the sector and appropriate trialling of new mechanisms.

It is for this reason that we have made the reform of the funding mechanism a core recommendation, and a project that stretches across all three phases of the change process. We consider that the critical phase one design activities should be followed by trialling, and, latterly, training and introduction of the system to early childhood education services. This will be vital to its successful introduction. The proposed system will be introduced in phase three, alongside other complementary changes required, such as to the 80% teacher regulation.

References

1. Each early childhood education service is licensed to provide early childhood education to a maximum number of children at any one time. This is called the number of child places. A child place may only be used by one child at a time, but may be used by more than one child during the course of a day.

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