Reducing Barriers to Providing Child Care  in Colorado

Executive Summary

The availability of quality child care is critical to family stability, the economy, and the educational success of our youth. Unfortunately, the demand for child care exceeds the supply, which elevates the importance of expanding capacity, access, and availability, and eliminating unnecessary barriers to increasing child care supply. This report examines the barriers facing employers and organizations that want to open and operate child care facilities and proposes policy recommendations to help overcome those barriers. Operators of child care facilities and stakeholders in the industry provided input for this report.

The largest structural barriers in the commercial child care setting are the cost to renovate or build and personnel expenses. For home-based child care, providers face lower initial and ongoing capital expenses, but a larger operational burden relative to funding. Based on input from a broad spectrum of child care industry stakeholders, common concerns include a lack of comprehensive and clear guidance to the process of opening a child care facility and subjectivity in how rules and regulations are applied.

The State of Colorado has made efforts in the past several years to address the child care shortage through direct aid to child care providers, technical support, family and employer assistance, workforce training, and wage subsidies for child care workers.

To build on these steps, the Institute recommends:

  • standardizing the application of rules and regulations.

  • modifying or eliminating rules or requirements that may be non-essential (e.g., the requirement of a plumbed sink when a portable sink would suffice).

  • providing a one-stop shop for comprehensive information each type of provider needs.

  • establishing preapproval of certain designs or layouts (with specific examples provided).

  • reducing liability for landlords who accommodate a tenant’s child care facility.

  • identifying state-owned property for potential conversion to child care facilities (using certifications of participation [COPs] to finance renovations).

  • creating more access to capital paired with technical assistance (leveraging the Unclaimed Property Trust Fund to create a revolving loan fund).

  • providing technical and business development assistance along with funding (e.g., by partnering with Community Development Financial Institutions or the Small Business Administration).

  • Offering a property tax exemption for property owners that allow the use of their space at a below-market rate.

Overview

The child care supply shortage existed for decades prior to the COVID-19 pandemic and was exacerbated by the shift away from in-person work that began during the pandemic restrictions. This phenomenon is not unique to Colorado. The top driver of child care costs is provider labor, including their wages and benefits.[1] One aspect of this cost of child care is the time providers spend navigating regulatory barriers.

Advocates, policymakers, and administrators across the country have been working to close the supply-demand gap for years and are becoming more innovative in their solutions. Child care supply includes a wide range of factors such as facilities, workforce, and family affordability. In addition, true supply includes the availability of quality child care – safe, reliable, developmentally appropriate, and educationally stimulating. To comprehensively increase child care supply, it is essential to ensure the expansion of several key models. Each has their own challenges:

  • Home-based child care: Low start-up costs if the provider owns their home already but high levels of burnout, low average capacity and provider income, and potentially difficult if renting; this care can be at a lower cost to families.

  • Center-based child care: Higher start-up costs, little access to capital for independent operators, and higher costs for families, especially for infant and toddler care, but higher capacity and moderate cost for children older than three.

  • Employer-based child care: High start-up costs but easier access to capital, higher capacity, lower to no cost to families, possible spots for the community.

This initial report on child care includes input from various industry stakeholders on barriers in starting child care centers, examines the policies Colorado has implemented, and provides policy recommendations for how to address the challenges. This is a first step in evaluating ways to increase the child care supply and additional research can be done to provide evidence-based best practices.

Barriers to Increasing Child Care Supply

There are three primary types of child care programs: commercial (both for- and non-profit), home-based, and employer-based. Employer-based child care centers are typically run by a nonprofit or commercial child care provider. For commercial child care centers, structural barriers exist that prevent the child care industry from growing to meet market demand. These structural constraints stem from the misalignment between the cost to safely operate a child care center and the cost families can reasonably afford to pay for the service. The primary structural start-up cost drivers of operating in a commercial space are the capital cost to renovate or build and personnel costs.

Operational barriers exist that make child care difficult to provide . Regulatory hurdles, lack of clear and concise information, poor access to capital and investment, and time spent on administrative duties all contribute to these barriers. A study by the Minneapolis Federal Reserve Bank found that regulatory barriers may result in up to 20 percent of potential providers not following through on their applications.[2]

A few key differences exist for home-based child care providers compared to center programs. Although the initial and ongoing capital investments for home-based providers are lower, the operational burden can be higher. Depending on their clients’ hours, home-based providers could be working long days without much time to complete administrative tasks and few, if any, breaks. Additionally, weekly rates charged by home-based providers are generally lower than what a center would charge, leaving home-based providers with less income, especially if they have children at home that reduce the total number of paid spots in their homes. Typically, the provider needs to own their home, as many landlords will not allow home-based child care programs.

Industry Input

To better understand the challenges of operating in the industry, various industry representatives were consulted for the report. Below is a list of these industry stakeholders. Their input informed the recommendations described below:

  • nonprofit organizations that provide:

    • technical assistance to employers and small and home-based operators,

    • workforce and entrepreneurial training, and

    • low-cost access to capital

  • child care center owners or directors

  • employers who have built child care centers on site

  • commercial real estate developers and brokers, and

  • economic development organizations.

Common conclusions were identified in the input gathered about running child care centers in Colorado. Interviewees expressed concerns with the inflexibility of rules and regulations and apparent subjectivity in how the rules are applied. The primary concern was the lack of a clear process. This is complicated by local regulations and inspections, and lack of clarity from the state.

Providers who have gone through the process for the first time recount an order of operations that should be followed but is not laid out in the materials or licensing process. Even working with a child care consultant and being proactive about working with Early Childhood Councils and licensing specialists has not prevented operators from costly changes and delays. Despite the many resources that exist for child care providers that are starting a center through the Colorado Department of Early Childhood, Early Childhood Councils, consultants, and a range of nonprofit organizations, providers are still unaware of guides, grants, and other types of assistance available to them at low to no cost.

Although not within the purview of the state, funding to start a child care center was a consistent concern, especially if an existing building or facility needed to be retrofitted. Additional input includes:

Converting an existing space to a child care center that meets current rules and regulations is generally cost prohibitive.

  • Operators that have converted their own space to a child care center have noted the high cost of conversion, indicating it would be easier and more cost effective to build a center from the ground up. A commercial office broker for downtown Denver quoted at least $200 per square foot to do an empty office space conversion; however, employers who have gone through the process have spent significantly more – anywhere between $350 and $700 per square foot in total capital outlays.

  • A provider that was seeking space in a church to start a center could not afford most church spaces available due to the high cost of converting the space to the specifications laid out in the regulations. The provider found space in a church that had previously been a school but needed variances to operate. The provider still had to borrow $100,000, which she noted was difficult to find, and ended up working with a Community Development Financial Institution

It is difficult to find financing to start a child care center, either home-based or for a center.

  • Because the margins are so thin on child care centers, private banks do not typically provide funding. The Colorado Small Business Development Center (SBDC) has worked with the Office of Economic Development and International Trade on a program to train child care providers in entrepreneurship to incentivize them to start their own centers, but the program did not have much success and was discontinued. The Community Development Financial Institution that funded the church-based center above does not typically fund child care businesses. The CDFI noted how difficult it is to finance and work with potential child care providers due to the low margins and potential operators not having confidence in their ability to repay a large loan.

  • The process to start a child care facility depends on both the state and local governments, but providers have noted there is insufficient coordination between the two. It is often the confluence of the two sets of regulations that confound providers.

Policies Enacted by the State

As shown in the table below, Colorado has enacted dozens of bills over the past several years to address the child care shortage, in addition to the creation of the Colorado Department of Early Childhood (CDEC). These bills fall into the following categories:

  • Direct aid to child care providers through grants or tax credits

  • Technical assistance

  • Family assistance in the form of subsidies or tax credits

  • Employer assistance through tax credits

  • Workforce training and education

  • Wage subsidies for child care workers

  • Planning and policies

In addition to legislation, state lawmakers have significantly increased funding with state and federal dollars, and state administrators have changed child care regulations to ease administrative burdens. Furthermore, CDEC has made available a significant number of resources on their website that address many of the concerns providers have, including:

  • Colorado Early Childhood Compensation & Benefits Task Force report

  • Colorado Early Care and Education Workforce Data Dashboard (with the DU Evaluation and Action Lab)

  • Employer-Based Child Care Feasibility & Assessment Guide

  • Business Guide for Family Child Care Homes

  • Business Guide for Child Care Centers

  • Staffed Family Child Care Network Pilots

 

Colorado Legislation Passed Since 2019

Bill Description
24-1387 Creates a reserve in the Preschool Programs Cash Fund and allows CDEC to use remaining money appropriated in the fund for additional preschool services for certain low-income families and for Universal Pre-Kindergarten (UPK).
24-1312 Creates a state income tax credit for early childhood program workers, home providers, or a Family, Friend or Neighbor (FFN) child care worker that earns less than $75,000 for single filers or $100,000 for joint filers of $1,200 or $2,400 per year for single and joint filers, respectively.
24-1237 Child Care Facility Development Toolkit and Technical Assistance Program: The Department of Local Affairs must develop a toolkit for the development of child care facilities and provide technical assistance to child care providers, developers, employers, local governments, public schools, and higher education institutions to help in understanding the technical aspects of developing child care facilities.
24-1223 Changes to the Colorado Child Care Assistance Program (CCCAP) per federal requirements, some of which are subject to available federal funds for implementation. Simplify the CCCAP application by 8/1/26. Family copayments capped at 7% of family income and allows employers to cover copayments by 8/1/26.
  • Allows CDEC and counties to use grants and contracts to provide care to underserved populations and those needing non-traditional care to improve access to the program (subject to fed funds)
  • Requires counties to pay providers a weekly rate for each child in advance of service provision based on a child’s enrollment in CCCAP instead of post service payments (subject to federal funds)
  • Expands eligibility to those in a substance use disorder treatment program
  • Adjusts income requirements to align with UPK program and counties must exclude state and federal assistance from income in determining eligibility
  • CDEC to create pilot program for unlicensed providers to seek license-exempt status and be an eligible provider through CCCAP; starts 7/1/25 and operate in one urban and one rural county
24-1134 Expands the state Earned Income Tax Credit (EITC); modifies and expands the child care expenses tax credit.
24-1009 Creates the Bilingual Licensing Unit at CDEC to ensure there are resources and services for licensing in prevalent languages.
23-1246 Covers the educational expenses and tuition to complete in-demand short-term credential programs like early childhood education at community colleges, technical colleges, and Colorado Mesa University.
23-1091 Extends the child care contribution tax credit through tax year 2027. Credit is equal to the lesser of 50% of the total contribution up to $100,000 per taxpayer per year or the taxpayer’s actual income tax liability. Qualifying contributions include those to facilities, schools, or programs that provide child care, programs that train child care providers, and grant or loan programs for parents requiring financial assistance for child care purposes.
23-269 Provides one-time bonus payments to child care providers that participate in UPK for the first time, expand their capacity to serve infants and toddlers, or are in low-capacity preschool areas.
22-213 Provides funding for early childhood programs including the Child Care Sustainability Grant Program, the Emerging and Expanding Child Care Grant Program, the Employer-Based Child Care Facility Grant Program, the home visiting grant program, and the Early Care Recruitment and Retention Grant and Scholarship program. It also created the FFN advisory group and the FFN training and support program to support community-based and non-profit organizations that provide information, materials, training programs, and technical assistance accessing state programs to FFN providers.
22-1295 Establishes the Colorado Department of Early Childhood (CDEC), transfers the early childhood programs from CDHS and CDE to the newly created CDEC, and establishes the universal preschool program.
22-1070 Allows an early childhood development service district to include a portion of a special district, city, county, or other taxing district. Allows the districts to accept gifts, grants, and donations.
22-1010 Creates a refundable income tax credit for early childhood educators who have an AGI of less than or equal to $75k for single filers or $150k for joint filers and have been licensed and worked at or operated an eligible early child care program for at least six months. Credit is available during tax years 2022 through 2026.
22-1006 Expands the property tax exemption on child care centers to allow leased or rented properties to be included.
21-1304 Establishes a unified state early childhood system, and, in connection therewith, creating the state department of early childhood and making an appropriation.
21-1274 Requires the Colorado Department of Personnel and Administration (DPA) to maintain an inventory of unused, state-owned properties and determine if the property could be used for child care, among other uses. DPA can also enter into contracts for projects with the approval of the Capital Development Committee.
21-1222 Requires local governments to treat family child care homes as residential property when it comes to zoning, land use, fire and life safety, sanitation, and building code regulations. Local governments cannot impose regulations on family child care homes unless the regulations apply to all residential properties. The law also requires the Department of Human Services (DHS) to seek advice and assistance from the Department of Public Safety (DPS) and councils and associations representing fire marshals and building code officials when promulgating rules related to fire protection and prevention standards for child care agencies or facilities.
21-236 Creates new early childhood care and education grant programs:
  • Employer-based child care facility grant program
  • Early Care Education Recruitment and Retention Grant and Scholarship Program – to provide scholarships or cover costs of early childhood courses
  • Child Care Teacher Salary Grant Program – to increase teach pay
  • CIRCLE Program (Community Innovation and Resilience for Care and Learning Equity – to address child care issues arising out of the pandemic
21-217 Reduces frequency of market rate study of provider rates for CCCAP.
21-201 Changes requirements and penalties for child care facilities that are required to be licensed or that are exempt from licensure to make them stricter.
21-199 Repeals the provision that lawful presence in the US is required to receive state and local benefits, including licensure of child care providers.
20-126 Requires family child care homes to be allowed in Home Owner Association (HOA) communities.
20-1427 Referred to the ballot an increase in state tobacco taxes, establishment of a state nicotine product tax, and establishment of a state preschool fund to support universal preschool in Colorado.
19-1052 Allows for the creation of an Early Childhood Development Service District to provide both direct and indirect early childhood developmental services (0-8 years old). Must adhere to the Special District Act and is subject to local approval.
19-1013 Provides a child care expenses tax credit for families with AGI under $25,000.
19-63 Requires DHS and the state Early Childhood Leadership Commission to develop a strategic action plan to address the decline of family child care homes and availability of child care throughout the state.

Policy Recommendations

Significant efforts have been made in recent years to address many of the issues providers and the industry have raised about streamlining the process to open a child care facility. Some of these efforts have yet to be felt, but gaps remain. Decreasing the cost for families and increasing the revenue/pay for providers is very expensive. Operational barriers are easier to address but may not have as large an impact. Many industry representatives argued that supply would increase if the economics of child care were more favorable.

The policy recommendations that follow do not distinguish between types of providers (center versus home).

  • Review CDEC rules and regulations governing all types of child care centers to identify opportunities to ensure the safety and wellbeing of children while not prohibiting growth. Potential changes include:

    • Standardizing the application of rules and regulations.

    • Providing justification of non-essential rules – i.e. a 0- to 6-month-old will not be using a slide in the playground and thus the slide does not need to be rated for 0- to 6-month-olds.

    • Allowing for portable sinks when they suffice instead of requiring plumbed sinks.

    • Reviewing infant outdoor play area requirements to ensure they align with age-appropriate activities.

    • Addressing which teacher certifications are needed before entering the classroom versus which can be acquired while working.

  • Provide a one-stop shop for all of the information each type of provider needs to know to get started and to continue to run their center.

    • Consolidate the resources that exist and create a workflow for getting licensed

    • Include information on the inspection processes of local governments

  • Support innovative solutions to child care spaces and preapprove certain designs or layouts that meet the rules and regulations. Examples could include:

    • Prefabricated homes designed to child care specifications for a certain number of children,

    • Accessory dwelling unit designs built to provide child care, and/or

    • Impermanent finishes that allow for flexibility in a space that would be too costly to convert to a child care space (demountable walls like Låda Cube).

  • Reduce the liability for landlords if renters want to start a child care facility out of their rented home or apartment. Exemptions for property owners of ski and equestrian centers to reduce liability could be used as a model for the child care industry.

  • Work with the Department of Personnel & Administration (DPA) to identify state-owned property that could be converted to child care facilities. This action would fully implement the law enacted several years ago requiring DPA to do this (HB 21-1274).

    • This could allow the state to use certificates of participation (COPs) to finance renovations in state buildings for child care facilities with future child care center revenue.

    • Offer state employees discounted child care focusing on infant and toddler care.

    • Use the existing network of Early Childhood Councils to divide the state into regions and identify those areas with the highest need for additional child care spots to divert resources there. Projects can be prioritized similar to the way the Colorado Department of Transportation prioritizes transportation projects across the state.

  • Create more access to capital and pair it with technical assistance.

    • Leverage state funds to provide low- to no-cost access to capital:

      • Leverage the Unclaimed Property Trust Fund, or the interest earned on that fund, to create a revolving loan fund similar to CLIMBER loans (Colorado Loans to Increase Mainstreet Business Economic Resiliency) but targeted at the child care industry. The state could also partner with Community Development Financial Institutions (CDFIs) to administer the funds and provide technical assistance.

      • The FAMLI fund is currently undersubscribed and has a large reserve. If the fund remains underutilized, run a referred measure to divert a portion of those funds to a child care trust fund to expand CCCAP eligibility and help raise educator pay.

    • Provide technical and business development assistance along with funding

      • The state could partner with CDFIs or the Small Business Administration to pair financial assistance with technical assistance, ensuring providers are building sound business plans to ensure their sustainability.

      • Nonprofit organizations or early childhood councils could provide additional business coaching once providers are operating, including with budgeting, and adding additional revenue streams that have heavy administrative start-up costs like Head Start or the Child and Adult Care Food Program (CACFP).

    • Add a property tax exemption for property owners that allow the use of their space for little to no rent.

Next Steps for Research

As this report relied on interviews with child care industry practitioners and stakeholders, it helps to identify what they see as the biggest barriers to operating a child care center in the state, aside from the fundamental cost drivers. Additional research could build on this initial report to:

  1. identify evidence-based best practices on child care industry operation,

  2. understand what other states are doing to increase child care supply, and

  3. review the regulatory environment in more detail.

Conclusion

Virtually every aspect of the child care industry has been improved by the state or by nonprofit organizations. Free guides and business assistance, coaching through Early Learning Councils, low-cost operational software to simplify administration, and grants from nonprofit organizations and various levels of government are all available to potential and current child care providers.

Despite these efforts, it is still not attractive for many child care providers or businesses to start their own center or home-based child care facility. Employer efforts to create new child care spots help fill the gap, but it is usually only possible for larger, well-resourced companies. CDEC in partnership with EPIC has made significant strides towards educating and consulting with employers who are committed to providing their employees with on-site child care, and the state provides a robust tax credit to support their efforts.

It is currently difficult for an independent operator to convert empty office space, churches, or other general spaces into child care facilities without a large external investment, as access to capital for these projects is scant. There is also a negative externality to borrowing the capital needed for child care centers, as many who have done so note they are unable to pay their employees as well as centers that operate in low-cost spaces.

Home-based child care programs offer more flexible child care options for working families, particularly those who work non-traditional hours. The start-up costs are low, although the number of spots home-based providers can accommodate is much smaller than what a center can accommodate. To fill the current child care gap, the state would need to add roughly 10,000 additional home-based providers, doubling the number of currently registered home-based providers.

Streamlining the licensing and regulation process is one way to facilitate the operating process for providers and would benefit from comprehensive input from the industry and a partnership between regulators and operators to succeed.

Appendix

Policies Implemented in Colorado

Industry Input Policy Recommendation
Licensing specialists apply the rules and regulations subjectively, making the process to get licensed confusing and difficult. Review Colorado Department of Early Childhood (CDEC) child care rules and regulations and related licensing and enforcement decisions with a cohort of child care providers from around the state, as well as experts in early childhood care and education practices.
The process to establish a child care center is unclear. Require CDEC to provide clear, concise and thorough public information about starting up new programs, which could include the creation of an app or other IT solution so each type of provider knows how to establish and continue to run their center.
Converting an existing space to a child care center that meets current rules and regulations is generally cost prohibitive. Develop and design innovative solutions to child care spaces and preapprove certain designs or layouts that meet the rules and regulations.
Build on existing state law to identify state-owned and locally-owned property that could be converted to child care facilities.
Encourage companies relocating to Colorado and receiving job creation tax credits to build child care into their planning for their employees.
Ensure the work the Colorado Office of Economic Development and International Trade (OEDIT) and the Colorado Department of Local Affairs (DOLA) are engaging in with Executives Partnering to Invest in Children (EPIC) around the developer toolkits for HB 24-1237 helps to engage the development community, because it is easier to build child care centers into buildings from the ground up as opposed to converting existing spaces.
It is difficult to find financing to start a child care center, either home-based or for a center. Create more access to capital with state funds - Unclaimed Property Trust Fund and the Paid Family and Medical Leave Program (FAMLI,) including establishing formal and informal public-private partnerships, such as community development financing initiatives based on successful models in other states and municipalities.
Little coordination exists between the various government and nonprofit entities working to sustain and grow the child care industry. Use the existing network of Early Childhood Councils and Local Coordinating Organizations to identify those areas with the highest need for additional child care spots to focus resources there. Projects can be prioritized similar to the way the Colorado Department of Transportation (CDOT) prioritizes transportation projects across the state.

Case Study: Minnesota’s Child Care Regulation Modernization

Minnesota undertook what has become a five-year process to modernize its child care regulation and licensing system for both family- and center-based child care providers. Bills were passed in 2019 and 2021 to formalize the process and provide funding to support the modernization efforts. The outcomes of the respective processes are summarized below.

2019 Task Force

The Minnesota legislature created a Family Child Care Task Force in 2019 to comprehensively review child care regulations for licensed family providers, as well as their child care quality rating and improvement system, Parent Aware. The Task Force surveyed over two hundred former family child care providers to understand the regulatory barriers that impacted their decisions to stop operating. The final report provided recommendations in a 2021 report involving:

  • shifting to a risk-based violation system similar to what has been done in Ohio, Oklahoma, Florida, Texas, and Utah;

  • the variance process and authority counties hold, including who is held liable for noncompliance;

  • business development and technical assistance, as well as training and credential requirements for providers;

  • improved access to and understanding of information about rules and regulations; and

  • how providers are supported and understand the pathway to ratings in the state’s QRIS program.

2021 Center- and Family-Provider Regulation Modernization

The broad-based regulation modernization project built off the work of the 2019 task force primarily by adopting a framework presented by Dr. Richard Fiene. The framework he developed is now used by the National Association for Regulatory Administration (NARA) and includes various methods of regulation:

  1. Differential Monitoring – helps determine the frequency and depth of licensing inspections based on previous compliance with state regulations

  2. Full and Abbreviated Compliance Reviews – an inspection based on the full rules or a smaller set of rules (often the Key Indicators)

  3. Risk Assessments – puts emphasis on the rules that endanger children if violations occur

  4. Key Indicators – identifies and monitors the rules that statistically predict compliance with all rules[3]

This framework aims to simplify the licensing process by identifying the highest risk rules and providers to focus inspection efforts there, allowing historically compliant providers a less burdensome process. According to a 2017 NARA survey of child care providers, 35 states use abbreviated inspections, 10 use a key indicator system, 33 conduct risk assessments, and 33 have a differential frequency monitoring system.[4] Of those policies, Colorado only uses abbreviated inspections.

Minnesota engaged stakeholders and surveyed providers for each aspect of the licensing streamlining process, as well as working with consultants from NARA to provide the technical analysis on each policy. The process began in 2022 and is ongoing in 2024, with legislation to implement many of these policies on the docket for the next legislative session.

In addition to these regulatory and licensing processes, the state is creating a new, one-stop-shop IT solution for child care providers with the aim of streamlining and digitizing interactions between providers and state agency employees.[5] The initial licensing component launched in April 2023. Phased development will continue through 2025 and will include CCAP, scholarships, submit variances, and communicate with licensors, among other capabilities.

Despite engaging the industry and stakeholders, many industry actors felt their input was not heard. As a result, the Department of Human Services postponed legislation until 2026 so additional input can be solicited and proposals updated.[6] Providers’ concerns center around what they feel are stricter, more nuanced rules that providers will be subject to that will increase time spent on activities other than caretaking.[7] This delay in and discontent with the outcome of years’ worth of work highlights how difficult changing child care regulations is even with most stakeholders agreeing that changes need to be made.