Budget Constraints Necessitate Changes to the PEF Formula and Structure

Office of the State Superintendent of Education (OSSE) and members of the Early Childhood Educator Equitable Compensation Task Force (Task Force), thank you for the opportunity to testify. My name is Anne Gunderson, and I am a Senior Policy Analyst at the DC Fiscal Policy Institute (DCFPI), which is a member of the Under 3 DC Coalition (U3DC). DCFPI is a non-profit organization that shapes racially-just tax, budget, and policy decisions by centering Black and brown communities in our research and analysis, community partnerships, and advocacy efforts to advance an antiracist, equitable future.

DC Council reconvened the Task Force to create recommendations to scale back the Pay Equity Fund’s (PEF) compensation program due to the Council-approved budget for fiscal year (FY) 2025, which is significantly lower than funding available in FY 2024. The $70 million budget can neither sustain the existing structure of the program nor accommodate any future growth from increased participation in the PEF among child development facilities (CDFs), credential attainment among educators, or a compensation scale that rewards years of experience.^[1]

DCFPI commends the Task Force for their efforts to accomplish the Council’s difficult charge, which is to identify cuts and adjustments to the funding formula that do the least damage to educators and maintain the spirit of the PEF—that is, to increase compensation for early educators and achieve pay parity with DC Public Schools (DCPS).^[2] DCFPI reviewed the policy options that the Task Force has considered at its public meetings and recommends the following changes to the PEF formula and structure (solely due to budget constraints):

Changes to Salary Minimums

• Eliminate the PEF award and minimum salary requirements for assistant teachers and associate home caregivers with less than a Child Development Associate (CDA) certificate, as the DC Council approved in the FY 2025 budget. These educators do not currently meet the minimum credential requirement for their role.³ This change would harm 625 educators whose employers would lose their $2,329 annual award, saving nearly $1.5 million (Table 1). To each educator harmed by this change, the Division of Early Learning should provide resources on DC Leads and other tuition assistance programs to support their ability to gain a CDA.
• Reduce the PEF award and minimum salary requirements for lead teachers and expanded home caregivers with only a CDA to equal that of assistant teachers and associate home caregivers with only a CDA. This would reduce their annual award to $51,006 from $54,262. DC law requires lead teachers in child care centers and expanded home caregivers to have a minimum of an Associate’s degree to qualify for their role.^[3] Although home caregivers fall into the same category as lead teachers in the PEF formula, OSSE only requires home caregivers to have a CDA, and they should be exempt from this award reduction.^[4] This reduction would allow these educators to still receive a wage supplement and encourage them to gain an Associate’s degree to qualify for the higher pay. This would harm up to 915 educators whose employers would see a $3,256 annual reduction to their awards, saving nearly $3 million.

Other Reductions

• Pro-rate funding for part-time staff and programs. OSSE has data that identifies educators who work part-time and for programs that only operate during the school year. This would align the PEF subsidy to hours worked, increasing efficiency. OSSE estimates that this would save about $1.1 million.
• Reduce awards by 10 percent for CDFs with private tuition rates in the 90^th percentile. While there are many factors that drive the tuition that facilities charge, DCFPI believes those charging the most in tuition are best suited to have the revenues needed to pay higher salaries, thus requiring smaller PEF awards to meet the required minimum salaries for their educators. OSSE estimates that this 10 percent reduction to the base award would save about $1 million.
• Reduce the administrative adjustment from 15 percent of the base award to 12 percent. Over the past year, U3DC has heard from some providers that the 15 percent administrative adjustment was insufficient to cover the costs of implementing the PEF while others have reported having excess funds from this adjustment that they redistributed elsewhere. More information is needed to fully understand what the true costs are to implement the PEF and to set the administrative adjustment rate accordingly. However, given current budget constraints and lack of information, DCFPI recommends reducing the administrative adjustment to 12 percent for a cost savings of just over $1 million.
• Reduce OSSE’s administrative allocation from $3.5 million to $2.5 million. OSSE stated that they require a minimum of $2.5 million annually to continue implementing the program.^[5] In the spirit of shared sacrifice, this would allow the Division of Early learning to redirect $1 million to educator salaries.

Formula Improvements

• Increase base awards to CDFs based on the share of children receiving a child care subsidy. In the current PEF funding formula, the equity adjustment provides a boost to base awards for facilities based on the share of children receiving subsidy. Yet, the equity adjustment only amounts to 5 percent of the PEF. To strengthen equity and incentivize more participation in affordable child care, DCFPI recommends increasing this adjustment from a factor of 0.6 to a factor of 0.65 to provide a greater boost to subsidy providers, as proposed by the Task Force.^[6] This would cost $224,000.
• Increase base awards to CDFs based on proportion of capacity for infants and toddlers. DCFPI also recommends creating an additional boost to awards based on the proportion of infant and toddler capacity at a participating facility. The adjustment would help offset the higher cost of care for infants and toddlers compared to older children. It could also incentivize more CDFs to open infant and toddler classrooms, which would help address DC’s shortage of those seats.^[7] Increasing awards by a factor of 0.2 of a facility’s infant and toddler capacity would cost $4.7 million. If the data is available, OSSE and the Task Force should consider refining this adjustment to base it on the proportion of infant and toddler enrollment, rather than capacity, to align with the subsidy adjustment and to encourage increased recruitment of families seeking care for infants and toddlers.
• Increase base awards for child development homes and expanded homes. These facilities operate on tighter margins and, thus, may have a harder time meeting the minimum salary requirements than CDFs.^[8] Wards 7 and 8 have more homes and expanded homes that accept subsidy than all other wards combined, according to OSSE oversight responses.^[9] Therefore, increasing funding to programs that operate in these wards would be an investment in Black and brown families and families experiencing poverty. DCFPI recommends increasing the base awards for child development homes and expanded homes by 25 percent, as proposed by the Task Force, at a cost of $447,000.^[10]

Taken together, DCFPI’s recommendations would cost $65.8 million in FY 2025. These recommendations do not fix the underlying flaws in the funding formula, meaning there still may be CDFs whose award levels remain too low for them to afford the minimum requirements, as was the case in FY 2024. As these changes roll out, OSSE should create a flexible fund with the $4.2 million available in the FY 2025 budget, and they should tap it to supplement awards for facilities that are still unable to meet the minimum required salaries, maintain award levels for those with continuous service waivers, and cover any unexpected growth in program costs, such as growth resulting from more educators gaining new credentials.^[11] Any cost savings should be saved for future years or to maintain necessary funding for HealthCare4ChildCare.

Lawmakers’ decision to approve an inadequate PEF budget is eroding the efficacy of the program. In the previous fiscal year, OSSE added more than $16 million to awards as a supplement to ensure that all facilities can participate.^[12] Reducing funding available for the PEF not only means kicking more than 600 educators out of the program and reducing the awards for another 900, as outlined above, but it also chips away at the supplemental funding that was necessary to help many facilities meet the salary minimums and maintain participation in the program.

While these changes may be necessary in the short term, OSSE, Task Force members, and other stakeholders must advocate for greater investments into the PEF to successfully implement the program in the long term. The process of further refining the formula also requires OSSE to collect better data on the share of the total award payments dedicated to higher pay for eligible roles, higher pay for non-eligible roles (if applicable), administrative costs, and other expenditures by facility type and status of subsidy participation. This will help lawmakers assess how well the funding formula is meeting its intended goals and what changes are needed to improve outcomes.

Thank you for the opportunity to testify, and I am happy to answer any questions.