Financing Child Care in the United States - Ewing Marion Kauffman ...

PUBLIC–PRIVATE PARTNERSHIPS CAPITAL INVESTMENT PARTNERSHIPS
(CEDAC). Staff and consultants to the Fund spent a good
deal of time thinking about how much debt child care
providers could afford to carry. Initially, the Fund offered
term loans of up to $120,000, which worked out to a
monthly loan payment of approximately $1,500. Recently,
the Fund increased this amount to $300,000, which
translates into a monthly loan payment of approximately
$3,500. Loans are currently being offered at 7.5 percent
interest rate and are available for one to ten year terms,
depending on the project. So far, the Fund has awarded
only one $300,000 loan. In reviewing loan applications,
Fund staff members consider a provider’s overall
operations budget to determine what kind of debt it can
afford. Many child care providers have limited knowledge
about the amount of debt that would be reasonable for
their program. Fund staff are available to provide
technical assistance to help providers complete a loan
application that fits the capital needs of their program.
POPULATION SERVED
A potential borrower must (1) be a nonprofit provider with
a 501(c)(3) status or designation; (2) be licensed by the
Massachusetts Office of Child Care Services or be in the
process of securing a license; and (3) serve a population
that includes at least 30 percent low–income persons.
Providers receiving Fund loans in the past have tended to
be small, urban centers serving a high percentage of
low–income children (overall, 70 percent of the children
served by the providers in the Fund’s portfolio are
low–income). This may change somewhat as the Fund
expands beyond the Boston area to the rest of the state.
STRATEGIC CONSIDERATIONS
• Child care providers often feel uncomfortable about the
idea of carrying debt. In the beginning, the Fund had a
difficult time attracting providers because most did not
believe they could afford loan payments. Convincing
child care providers to take on debt took a long time,
and required developing creative repayment strategies,
such as balloon payments (e.g., one–time payments
that could be timed to coincide with annual
fundraisers). Critical to making this happen was the
assistance of Fund staff who worked with providers to
determine how much debt they could afford and to
complete the paperwork necessary to obtain Fund
loans.
• Banks and other private investors are more likely to
invest in loan capital pools if there is a history of
successful lending to child care providers. Here, the
Fund used a portfolio of almost 50 loans made from
government and foundation funds to leverage private
capital from local banks and insurance companies. The
good news is that child care loan funds can start small,
building a portfolio of successful loans from small pots
of foundation or government money that can be used
in the future to attract other private lenders.
• Banks and other private lenders are often
uncomfortable about making child care loans. It was
difficult for the Fund to negotiate its first private bank
loan, since the Fund’s only collateral was its existing
loan portfolio (a “weak” piece of collateral to bankers
who prefer to secure loans with collateral such as
houses or cars) and since the banks would definitely
lose money because the interest rate being offered
was below market. Fortunately, the Federal Home Loan
Bank of Boston, a privately capitalized
government–sponsored bank, was able to provide
favorable loan terms to the participation banks, which
in turn allowed them to make the loan to the Fund at
several points below market rate.
• Critical to motivating banks to make loans to entities
like the Fund are the requirements of the Community
Reinvestment Act (CRA). In fact, many banks have
CRA officers and/or departments that support their
CRA lending activities. Enacted by Congress in 1977
to help meet the credit needs of low—and moderate—
income communities by deterring banks from redlining
(i.e. drawing on a map with a red pen and denying
credit to certain neighborhoods), the CRA requires
banks to meet the “credit needs of [their] entire
community.” Banks receive CRA ratings from federal
banking regulatory agencies, which are reviewed when
banks apply to make any substantial business changes
or expand their operations, e.g., when two banks decide
to merge. Given the increase in interstate banking,
banks have found it increasingly important to develop
their CRA activities.
• One drawback to using private sector capital to make
child care loans is that the terms are not as attractive
as the terms offered when the loan is made from
foundation or government funds (e.g., 7.5 percent
interest rate over ten years rather than a 5 to 6
percent interest rate). After five years as a pilot
program of the United Way, the Fund had loaned out all
of its capital pool. Although the Fund saw this as a
measure of success (i.e. it loaned out all the foundation
and government money it had), the Fund needed to
attract loan capital from other sources, such as banks
and insurance companies, to continue operating. So far,
higher interest rates have not prevented any providers
from obtaining Fund loans.
OTHER SITES WITH SIMILAR STRATEGIES
A number of other states have child care loan programs
administered by the state or administered by or through
nonprofit intermediaries such as Community Development
Corporations (e.g., First Children’s Finance in Michigan,
the Development Corporation for Children in Minnesota
and Coastal Enterprises CDC in Maine). Most funds,
whether they are state administered or administered
through intermediaries, attempt to use a mixture of
government, foundation and other private funds (e.g.,
bank loans) for their loan capital pools.
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