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

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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. 157
CONTACT Fund Management and Technical Assistance: Victoria Bok, Program Manager Child Care Capital Investment Fund c/o CEDAC 18 Tremont Street, Suite 1020 Boston, MA 02108 Phone (617) 727 5944 E–mail vbok@cedac.org Program and Policy Development: Carl Sussman Sussman & Associates 294 Washington Street, Suite 330 Boston, MA 02108 Phone (617) 728 3028 E–mail carl@suss–assoc.com COMMUNITY DEVELOPMENT FINANCING (NORTH CAROLINA) DESCRIPTION The community development financing approach used by the Center for Community Self–Help (Self–Help) in North Carolina includes lending to child care programs. The lending effort is supported with funds from three primary sources: 1) deposits to the Self–Help credit union; 2) grants (from foundations, individuals, government and others) for capital financing, and 3) program–related investments (PRIs). PRIs are zero– or low–interest investments or loans made by organizations or individuals that are used as capital and reloaned to community– based enterprises such as child care organizations. Self–Help makes loans of as little as $500 to help finance the cost of building a child care center. For most business loans, the interest rates charged are at or slightly above the prime lending rate. There also is a lower interest loan fund (5 percent) for some child care programs, which Self–Help manages for the Division of Child Development. These loans cannot be used to buy or build, but can be used for equipment, working capital, etc. WHEN ESTABLISHED Self–Help—a statewide community development financial institution with six regional offices—was established in 1980. Although the organization had always financed child care under its small–business lending, in 1993 it decided to specifically target the child care industry. ANNUAL AMOUNT To date, Self–Help has made more than $10 million in loans to child care programs, and their lending in this area has grown rapidly. A new effort to generate funds for lending is the Child Care Certificate of Deposit, which enables depositors to directly support Self–Help’s lending in this area. These 12–month Certificates of Deposit begin with a minimum deposit of $1,000. SERVICES FUNDED Self–Help makes short–and long–term (up to 20–year) loans to early childhood programs throughout North Carolina. Unlike most commercial lenders, Self–Help is willing to consider “risky” loans and provides technical assistance to potential borrowers. Technical assistance may include helping a family child care provider create a first budget, helping an organization seeking to build or expand a child care center put together a comprehensive financing package and making sure that child care programs that apply for loans know about the U.S. Department of Agriculture (USDA) child care food program and other public subsidies. Self–Help has produced a detailed reference manual entitled The Business Side of Child Care, which discusses a wide 158
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FINANCING CHILD CARE IN THE UNITED
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ABOUT THE GRANTEE PHILADELPHIA CITI
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HOW TO USE THIS CATALOG This catalo
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This revised, expanded edition of F
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DIFFERENT EXPECTATIONS The expectat
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03 LONG-TERM THINKING Successful st
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LEVERAGING Matching and leveraging
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TAXES Income taxes are the major so
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EMPLOYER INCOME TAXES Twenty-five s
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LOCAL PROPERTY TAXES CHILDREN’S S
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GENERATING PUBLIC REVENUE LOTTERIES
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EDUCATION Education is a powerful r
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EDUCATION STATE INVESTMENTS IN PREK
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ALLOCATING PUBLIC REVENUES LOCAL GO
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