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TUESDAY, JUNE 16, 1998
U.S. House of Representatives,
Subcommittee on Capital Markets, Securities and Government Sponsored Enterprises,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 2:05 p.m., in room 2128, Rayburn House Office Building, Hon. Richard Baker, [chairman of the subcommittee], presiding.

    Present: Chairman Baker; Representatives Lazio, Kanjorski, Vento, Barrett and Kilpatrick.

    Also Present: Representative C. Maloney of New York.

    Chairman BAKER. I would like to call this meeting of the Capital Markets Subcommittee to order and make the announcement that our opening panel of Senator Herbert Kohl and Senator Alfonse D'Amato have notified us they will be unable to participate this afternoon, although both have submitted written statements in support of H.R. 3637—The Children's Development Commission Act, and would like to have their statements entered into the record, and without objection, they certainly will be.

    The purpose of this hearing today is to receive comment and testimony from those who have perspectives on the need of enhancing access to quality child care within the country. It is clear that, as small business operators, many owners of child care facilities find it difficult at times, if not outright impossible, to get access to credit to provide either enhancements to the existing facilities to meet health and safety standards or to have access to capital to acquire facilities to provide safe and decent child care services.
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    In addition, lenders who rightfully would like to engage in these enterprises find, all too often, market risk unacceptable when viewing the capital or assets that are available to them to secure such loans.

    We will also listen to and discuss the importance of some reinsurance programs that would enable the small bank lender to have greater confidence in the repayment of obligations made in relation to providing child care.

    I wish to commend both Ranking Member Kanjorski and Member Carolyn Maloney for their hard work on this subject as Mrs. Maloney is the principal author of this legislation. As we move forward, I am certain we will find ways to improve on the basic concepts but, ultimately, ensure passage of an act which will greatly facilitate the providing of child care throughout this country.

    Mr. Kanjorski, do you have opening remarks?

    Mr. KANJORSKI. Thank you, Mr. Chairman.

    As an original cosponsor of H.R. 3637—The Children's Development Commission Act, I commend Congresswoman Maloney of New York for having the insight to develop and introduce this legislation, and Chairman Baker for having the foresight to sponsor it and to schedule such a prompt hearing on it.

    One of the most significant changes our society has undergone in the last two decades is the dramatic increase in both the number of two-wage-earner families and single-parent families. In some families, two jobs are a necessity to make ends meet. In others, the change reflects the growing opportunities available to women in today's society. All of these trends are likely to continue. The passage of the Welfare Reform Act in the last Congress will further accelerate the need for additional child care facilities.
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    While there have been a number of child care initiatives introduced in this Congress to deal with the demand side of child care problems, this is one of, if not the first, bill to deal with the supply side of child care problems.

    Our witnesses today will offer clear and convincing evidence that, despite the increasing demand for child care services, obtaining financing for new child care facilities and upgrading the existing facilities is not easy. Financing is particularly difficult for nonprofit and startup entities to obtain.

    The Children's Development Commission Act addresses this problem by providing mortgage insurance for buildings or upgrading child care development facilities. It also facilitates the acquisition of fire and liability insurance. It establishes a program to provide loans of up to $50,000 for reconstruction and renovation of existing facilities, and it creates a foundation to support research and fund pilot projects to test innovative methods for improving child care.

    None of these concepts are new. The Department of Housing and Urban Development, for example, has had a similar guaranty program for senior citizen housing projects for many years. Thus, this legislation simply applies tried and tested programs to an emerging problem.

    The Children's Development Commission Act will not solve all of our Nation's child care problems, but it is an important building block in any comprehensive effort to address this pressing problem.
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    We have an extremely distinguished group of witnesses today who will provide clear and convincing evidence that child care is a problem from New Hampshire to California, from big cities in New York to small towns in Wisconsin. Chairman Baker and I would not be here today if it was not also a serious problem in Louisiana and Pennsylvania as well.

    I ask unanimous consent, Mr. Chairman, to include in the record of today two recent articles from the Wilkes-Barre, Pennsylvania Times Leader on how kids generally, and day care centers specifically, need our help.

    I commend all the witnesses for their leadership in this field and for caring for those that are too young to vote and sometimes even too young to articulate their needs, but who are the future of our Nation. I looked forward to the witnesses, Senator D'Amato and Senator Kohl; but, in their absence, I know we have a very competent second panel and look forward to their testimony today.

    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Kanjorski. Without objection, the additional studies you cited will be included in the record.

    Mrs. Maloney.

    Mrs. MALONEY. Thank you very much, Mr. Baker, for holding this hearing and really for your leadership on this bill and this legislation, along with Mr. Kanjorski.
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    In the interest of time, I would just like to ask my opening statement be put in the record so we can hear the testimony of our second panel.

    I do want to compliment Senator Kohl, with whom I worked on several child care proposals, and Senator D'Amato, from the great State of New York, who is Chairman of the Senate Banking Committee. I hope their sponsorship means that we will be moving toward hearings in the Senate very soon.

    Very quickly, the facts speak for themselves. There is really a tremendous need for child care. With the welfare reform package in New York City alone, the controller estimates we will need 61,000 new slots for children as mothers go back to work, and we do not have those slots. As we move toward universal pre-K such as the States as California and Georgia have, again, we need more child care slots. And now more than 75 percent of women are in the work force, 60 percent of whom have young children. I was in that case myself as a working mother. I know the problems that many mothers face across America.

    I would like to note that last week—and I have not had a chance to tell Chairman Baker this—the Democrats put forward their Democratic child care proposal, which included many of the problems that the President tried to attack, such as child care block grants, dependent care tax credit, after school programs, but included in this total bill was Kiddie Mac, and I would like to put this in the record.

    Kiddie Mac does not solve all of the problems, but it is an important building block, that of building the infrastructure for child care. The bill authorizes HUD to issue guarantees to private lenders for loans for the construction, rehabilitation or long-term mortgages for child care facilities, but only after they have been certified by the newly created Children's Development Commission or Kiddie Mac.
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    The Commission will make certain the proposed loans are up to standards and are viable; and it will guarantee up to 90 percent of the loan, 95 percent for nonprofit organizations. It is flexible. It would cover not only new construction but modernization, even helping to certify family day care network homesites. And I hope that it will follow the model of Fannie Mae and Freddie Mac, which literally revolutionized home ownership in our country. I hope that Kiddie Mac will have the same effect of having more child care facilities available in our country.

    In closing, I would like to request that we put in the record an article that was in the Washington Post recently on Kiddie Mac. The Washington Post calls it a ''sure-fire winner, one that is cost-effective and will do a great deal to provide affordable child care in our country.''

    I yield back the balance of my time, and I request unanimous consent to put into the record these two items.

    Chairman BAKER. Thank you, Congresswoman Maloney, and certainly without objection, those items will be included in the record.

    Congressman Lazio has joined us. Welcome.

    Mr. LAZIO. Thank you, Mr. Chairman. Am I recognized?

    Chairman BAKER. Yes, sir.
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    Mr. LAZIO. Thank you.

    Mr. Chairman, this is graduation week at the Lazio household. My oldest graduates from kindergarten, my younger from pre-K, and so I know for the next three or four months we are going to have a very hectic life, having full responsibility for supervision during the day and evening.

    Like many women across America, my wife works, yet she has the flexibility of working part time. Many people do not have that option, so the peace of mind of knowing that someone is in a properly staffed, quality child care facility is of growing importance, incredibly important right now, but of growing importance throughout America.

    I can think of few parts of family life that are more stressful than moms being unsure of the quality of care when they leave their young ones because they have to be part of the work force or have other commitments, and I want to congratulate you for your efforts in trying to help with capital improvements to child care.

    I know that you know that one of the greatest issues facing child care is the low wages that are paid to child care providers. The average wage is far less than you would pay to somebody who was watching your pet or a mechanic for your car, or any number of other seemingly ridiculous comparisons to what is important to one's life. But it is of exceptional importance.

    I know you are aware that the day care legislation I introduced was adopted as part of a Higher Education Amendments Act last month that would allow for loan forgiveness for those people who were educated in childhood development and education who chose to devote their lives to child care. So I share your goals, very much so.
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    This is one of many different facets of child care that needs to be addressed. We want to make sure as this effort goes forward, that we do this. I know we walk arm in arm on this in a responsible way to ensure we do not run into the problem we have had in some of our other guarantee programs, including 100 percent guarantees that put the Federal Government in a situation of having complete responsibility for default, while not encouraging diligence on the part of the private sector. That is exactly what we want to avoid and I think this is a very good start.

    I want to, again, thank you. We are looking forward to working with you on the legislation.

    Chairman BAKER. Thank you, Chairman Lazio.

    Let me also say I certainly appreciate the courtesies you extended. Although we are, as the Capital Markets Subcommittee, in the jurisdiction of GSEs, clearly this child care legislation could easily have been heard in the Housing Subcommittee. And when I discussed it with you, you were most kind in allowing us to proceed in this subcommittee without any type of sequential referral issue, and I certainly appreciate your courtesies in that, as well as your work on the Higher Education Amendments Act last month.

    So thank you for your cooperative work on this subject; and I know, working together, we can, in fact, make some progress.

    Mr. LAZIO. Mr. Chairman, if you would yield back.
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    Chairman BAKER. Certainly.

    Mr. LAZIO. I just want to thank you for the respect that you have brought to this. Back in Louisiana, I had the pleasure of being down there to see how well received you are back home, how hard you work for your district, how much in touch you are with the folks back home, and the fact is that you are really one of the true doers here in Congress, so I am happy to partner with you on this.

    I know you are expecting to have this hearing and one more, perhaps a field hearing, and then just hope and expect that when we have any type of legislative activity, that we will be back in the Housing Subcommittee, of which you are a Member, and we will be working on that together.

    Chairman BAKER. Your kind remarks will probably wind up at a crawfish dinner somewhere. Thank you.

    Mrs. MALONEY. If the Chairman will yield for two seconds.

    Chairman BAKER. Certainly.

    Mrs. MALONEY. I would like to join the Chairman in thanking Representative Lazio from the great State of New York and for his support of Kiddie Mac, which he pointed out is one piece in a large puzzle, and part of that large puzzle is the need for more qualified people in child care.
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    And I want to publicly compliment Representative Lazio for his amendment that recently passed the House that will encourage more qualified college graduates to enter the child care field. I support him in that effort, and I look forward to working with him, along with the Chairman.

    Thank you.

    Chairman BAKER. Thank you very much, Mrs. Maloney.

    At this time, I would like to recognize our first witness, who is here from the National Black Child Development Institute, Ms. Melinda Green.

    Welcome. Please pull the mike down to you. It won't pick up very well.


    Ms. GREEN. Thank you.

    I am Melinda Green, Director of the African American Early Childhood Resource Center at the National Black Childhood Development Institute, with headquarters right here in Washington. I am very pleased to provide testimony on the Children's Development Commission Act on behalf of the National Black Child Development Institute.
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    For the past 27 years, NBCDI and our nationwide affiliate network have worked to improve and protect the lives of African American children and families by focusing on the areas of early care and education, health, child welfare and education. NBCDI and our affiliates provide our constituents with direct services, public education campaigns, programs, leadership training and research.

    I would like to say, first of all, NBCDI supports the objective of the Children's Development Commission Act, H.R. 3637, to increase the availability of quality child care. This is a critical need when one considers the developmental needs of young children and the demand for child care among working parents, exacerbated by the work requirements of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. And in 1994, the most recent year for which we have statistics from the Census Bureau, more than half of children under the age of five, 10.3 million, were in need of child care while their mothers worked. The labor force participation rate of women with children under six increased from 39 percent in 1975 to 65 percent in 1997. Parents need access to affordable, high-quality child care in order to stay in the work force.

    H.R. 3637 would expand the availability of quality child care by making loans more readily available to child care providers for the construction, expansion and improvement of child care and development facilities. In addition, the legislation offers reasonably priced liability insurance to child care providers to prevent the cost of insurance from becoming a barrier to starting a child care facility.

    NBCDI is pleased that the legislation provides four mechanisms for improving the quality of child care:
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    One, the establishment of Federal standards and requirements by the Department of Housing and Urban Development regarding child care and development facilities, designed to ensure that mortgage insurance is provided only for high-quality facilities;

    Two, the requirement that the Children's Development Commission must certify that child care facilities are in compliance, or will be within 12 months, with local, State and Federal child care standards as a condition for HUD to ensure mortgages;

    Three, the provision of small purpose loans to help child care facilities improve the quality of their care; and

    Four, the establishment of a foundation to support research relating to child care and development facilities, to fund pilot programs to test innovative methods for improving child care, and to engage in public education activities and publish materials to guide those interested in mortgage insurance and other assistance provided by the Commission.

    These provisions begin to respond to the pressing need to improve the quality of child care. Lack of quality child care has been well documented by research, and this is particularly troubling within the context of the brain development research that we hear so much about. The first three years of life are critical to the healthy development of children. Lack of a stimulating environment during these early years can have a long-lasting impact on children's development.

    The quality and safety of child care varies widely between States. Research indicates that States with more demanding licensing standards have fewer poor-quality centers. Centers that comply with additional standards beyond those required for basic licensing, such as those for accreditation, provide higher-quality services.
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    Therefore, NBCDI recommends the Department of Housing and Urban Development adopt the accreditation system of the National Association for the Education of Young Children. This is a professionally sponsored national, voluntary system that represents the consensus of the early childhood profession regarding the definition of high-quality programs for young children.

    In addition, NBCDI recommends that the Department of Housing and Urban Development also establish standards regarding family day care that reflect a national, voluntary accreditation system, such as the one currently being developed by the National Association for Family Child Care and the National Family Child Care Accreditation Project at Wheelock College.

    NBCDI's second recommendation is to expand the function of small purpose loans to include helping facilities comply with local and State licensing and registration standards and Federal standards. Additionally, this subsection should be amended to state that loans shall be made only for such facilities that will comply with local, State and Federal standards of quality no later than 12 months after certification of compliance by the Children's Development Commission. These changes, combined with the current language of the subsection, will ensure that small purpose loans will function to improve the quality of child care.

    NBCDI's third recommendation is to provide a mechanism in H.R. 3637 for the provision of technical assistance to child care providers seeking loans. The importance of providing technical assistance is an integral part of child care financing and has been supported by my own experience in the child care field, as well as by research based on financial strategies for child care facilities.
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    Equally important as providing loans to child care facilities is providing technical assistance to help providers qualify for loans and to use the loans to effectively manage child care and development facilities and increase the quality of their child care.

    As a former executive director of Child Care Connection, which is a State-wide child care resource and referral agency in New Jersey, I led the organization in a collaboration with several other organizations to expand the number of child care slots serving low-income families and to strengthen the management capability of existing centers. This was a project that was funded by funds not only from foundations, but some Government funding as well, and the project is called ''Building Stronger Centers.'' It is an ongoing project that provides technical assistance and training to centers so that they may qualify for low-interest loans through a revolving loan fund to child care centers.

    It is important to note although the Child Care Collaboration focuses on centers serving primarily low-income populations, NBCDI recommends adopting this technical assistance model in H.R. 3637 for centers and family day care serving moderate-income families as well.

    Centers served by the Collaboration receive technical assistance prior to the disbursement of loans to promote effective use of those loans. NBCDI strongly recommends this technical assistance model be adopted by H.R. 3637.

    The value of technical assistance lies in its ability to accomplish two objectives: one, strengthen child care facilities financially through the development of a sound business plan; and, two, improve the quality of child care through staff development and training.
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    NBCDI recommends that this technical assistance be provided via some form of stakeholders in the community in which the child care facilities are located. Looking at this at a State level, it would look for people and organizations who have expertise in early childhood education as well as the fiscal and legal aspects of child care.

    In the case of the project that I was involved in, those entities included a community development financial institution, a child care organization, my own, as well as expertise in legal and marketing aspects.

    In conclusion, H.R. 3637 takes an important step toward increasing the Federal Government and private sector roles in child care financing. However, additional legislation is needed to create other financing mechanisms for child care facilities' financing, such as grants. In addition, legislation is needed to substantially increase mandatory funding for the Child Care and Development Block Grant to increase the availability of child care subsidies for low-income families.

    The Department of Health and Human Services estimates only one out of ten children eligible for the child care subsidies gets them. And due to an insufficient Child Care and Development Block Grant funding level, many eligible families do not receive subsidies and many families who are not eligible still need help meeting the cost of care. For example, in as many as 37 States, a family of three with an income of $28,000 is not even eligible for a child care subsidy. That is from the Child Care Bureau, 1998.

    Finally, I would like to say thank you to the House Committee on Banking and Financial Services for the opportunity to testify on this important legislation. The National Black Child Development Institute looks forward to working with the subcommittee to strengthen the Children's Development Commission Act so that it is able to improve the quality and availability of child care.
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    Thank you.

    Chairman BAKER. Thank you, Ms. Green. We appreciate your testimony.

    The next witness is the Vice President of Corporate Affairs for Providian Financial Corporation, Mr. Jim Wunderman. Welcome, Mr. Wunderman.


    Mr. WUNDERMAN. Thank you very much. Good afternoon to you.

    Mr. Chairman, Representative Maloney, Representative Kanjorski, on behalf of Providian Financial Corporation and our CEO, Shailesh Mehta, I would like to thank you for inviting Providian to come before you today to present our views on this important legislation, H.R. 3637.

    Let me start off by telling you a little bit about Providian. Our primary business is consumer lending, and our major products are Visa and MasterCard credit cards, home equity loans and lines of credit. We also provide high-yield deposit products. We are headquartered in San Francisco and have operations in Northern California, Utah, Kentucky and New Hampshire. We are a public company traded on the New York Stock Exchange. We currently employ over 4,000 people and are among the ten largest bank credit card issuers in the United States.
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    Significantly, Providian is the largest provider of credit cards to persons who are new to credit, or who have problems with their credit histories and thus experience difficulties getting the credit they need in today's financial marketplace.

    Providian Financial recognizes the importance of affordable, safe and quality child care. We believe our success has been generated by the commitment and contributions of our employees, many of whom were dependent upon their child care providers.

    As a concerned corporate citizen, we are encouraged by the welfare-to-work initiatives undertaken by this Congress. We are keenly aware that, for these initiatives to succeed, those of us in both the public and private sectors must commit to increasing child care capacity and improving quality, both for preschool and afterschool needs. And as a company that specializes in providing financing to an underserved market, we take special interest in the needs of child care providers who face tremendous difficulties when they seek financing to expand or improve their operations.

    At Providian, our business philosophy is to recognize unmet needs and engineer practical ways to meet these needs. Operating under that philosophy, we have dedicated ourselves to making a real difference in the efforts of our communities to tackle their child care issues. At Providian, we care about child care.

    In October of 1997, Providian committed $5 million to improve the quality and availability of child care in the State of New Hampshire. Our $1.8 million grant to the New Hampshire Community Loan Fund already has secured space for hundreds of children State-wide, and thousands more are due to benefit. The first State-wide fund of its kind in the country, the loan fund makes loans to nonprofit organizations like child care centers that meet community needs.
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    Providian's commitment is enabling the loan fund to help centers stay open and create more space where it is most needed. Providian is also working closely with Governor Jeanne Shaheen and is serving as co-chair for the Business Commission on Child Care.

    In San Francisco, Providian recently contributed $400,000 to the city's Child Care Facilities Fund. The fund is a unique public/private partnership geared to improving access to and the quality of child care in San Francisco by providing zero or low-cost financing opportunities to child care providers in order to meet one-time capital expenditures.

    Providian is also becoming increasingly active on the child care front in the State of Utah, where we recently sponsored a State-wide conference put on by the organization Utah Children, which brought together policymakers, providers and advocates to help develop Utah's plans for addressing child care needs in the State.

    I would like to discuss for a moment why child care providers need access to capital resources and why banks are often reluctant to lend to them. Most typically, a child care provider's loan application depicts a small organization that is labor intensive, yet pays extremely low wages that result in close to 50 percent turnover annually. These centers are dependent on modest parent fees and, very often, fund-raising activities to meet their basic operating expenses.

    Child care providers generally are not strong candidates for traditional loans because they offer, at best, a single-use building as collateral with a high loan-to-value ratio and projected cash flow that is barely sufficient to support the debt. This is not a safe and sound investment for a regulated financial institution.
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    Lenders need concrete assurance that today's loan to a child care lender will be repaid and, very importantly, communities and working parents need the reassurance that the infusion of new capital will not generate a debt burden that ultimately could lead to the closing of a desperately needed resource.

    I would like to discuss the benefits of Kiddie Mac and explain why it is important that Congress moves forward with the legislation. First and foremost, the loan guarantee provided in the legislation will open doors for child care centers to approach banking institutions to discuss their financial needs. By providing a Federal guarantee, Kiddie Mac will help make banks a little more comfortable with child care providers as borrowers, and we are confident that the new dialogue between banks and centers will lead to creative financing opportunities that otherwise would never have been realized.

    Second, we think it is a particularly important step for the Government to provide a loan guarantee program that will affect nonprofit institutions like child care centers, since Small Business Administration loans haven't been available to that sector.

    Third, the low-cost fire and liability insurance will help protect the centers and will do so at an affordable price; and, by reducing insurance costs, resources are freed up for debt repayment.

    Finally, the legislation allows privately funded programs like our own to focus our efforts away from guarantees and into other areas like interest rate buy-downs and technical assistance, which can be crucial to the success of child care center financing.
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    Clearly, and as the subcommittee certainly is aware and as we are discussing today, Kiddie Mac is only one piece of the child care puzzle. It will go a long way toward addressing one of the major unmet needs of the child care industry, access to capital. As we all know, there are other needs to be considered, including child care centers' ability to generate revenues and the critical need for business and technical assistance.

    But the legislation you have before you is a great start. It will result in child care centers getting started which otherwise never would have gotten off the ground. It will mean expansions that serve more children and their working parents and will provide improved facilities, better play equipment and a safer environment for our children. We urge your support for Kiddie Mac. We appreciate the leadership that you have taken, and you have our commitment to work with you to make it all succeed.

    Thank you very much.

    Chairman BAKER. Thank you, Mr. Wunderman, for your comments.

    Our next witness is the President of the Illinois Facilities Fund, Trinita Logue. Welcome, Ms. Logue.


    Ms. LOGUE. Thank you. I am the President of the Illinois Facilities Fund, based in Chicago; and I am pleased to be here today to talk about the Children's Development Commission Act and its importance as the first truly organized response to the crisis in child care facility finance and development that exists in many parts of the country. Such a Commission will be able to help support a coherent system of early childhood development in the United States, even while supporting States in their individual efforts to respond to the needs of children and families.
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    The Illinois Facilities Fund is a State-wide, nonprofit, community development financial institution, created ten years ago to make below-market loans to nonprofits unable to obtain conventional financing. The IFF also undertakes real estate development for nonprofits.

    While we work with nonprofit agencies in many fields, we have an expertise in the economics of operating and building child care centers. In addition to lending and consulting on real estate projects, we have financed, constructed and own seven large child care centers in five Illinois cities, through a program we designed in partnership with the State of Illinois. We are managing the financing and construction of two additional child care centers in Chicago now, which will break ground this summer, partly funded with Empowerment Zone funds and focused on supporting the goals of welfare reform. We have three other buildings in the planning stage.

    We work extensively with banks as we put these financial packages together. We have a large number of bank partnerships. Our total investment program is about $30 million and growing at the rate of between $6 and $7 million a year.

    The majority of our work is in disinvested or low-income neighborhoods because these are the communities in which banks are more hesitant to lend, generally due to low real estate values.

    Child care has recently become a visible and integral part of American life as women of all ages and incomes continue to seek full-time and part-time employment. In addition, there is a growing realization that appropriate early childhood development is absolutely critical in every child's life. For these reasons, there is tremendous pressure on the child care field to grow.
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    While many families have little or no financial constraint in their child care choices, parent behavior shows that there is a limit to the amount that will be paid for this care, no matter what the family income. Studies show that 32 percent of all parents using out-of-home care for their preschoolers choose or want to choose child care centers. Further, studies show that a majority of parents using out-of-home care for children older than age two choose or want to choose child care centers, because it is believed that centers provide socialization and education more consistently and with greater accountability than other providers.

    It is no surprise that child care programs for middle- and low-income families are experiencing even greater pressure as a result of the repeal of welfare. In the communities where this urgency exists, we do not have the supply of quality early childhood programs that middle- and upper-income communities take for granted. Federal policy over the past several years has dramatically increased the demand for child care for low-income families but has done nothing to increase supply.

    H.R. 3637 is the first effort to create an incentive to bring all child care into an organized financing program and support an adequate supply of quality options for all parents. In Illinois, we project that 39,000 children will need full day child care within the next two years as a result of welfare reform; and conservative estimates are 13,000 of them will want to be in child care centers. Illinois does not currently have child care programs to accommodate this projected demand.

    Few independent child care providers can make the necessary capital investment to meet this demand, whether they are for-profit or nonprofit, for reasons that are common to many small businesses and many nonprofit agencies, including a lack of collateral, low real estate values and, most importantly, constrained revenues.
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    Child care as a business cannot increase revenues to cover increased expenses without a very careful and prudent analysis of parent income and the other choices that are available to parents. As a rule, child care providers work very, very hard to keep costs low, as low as possible. This revenue limitation creates three distinct barriers to adequate market response to growth of the child care field, particularly in lower-income communities.

    First, while Government subsidies have increased overall, the per child's revenue has not increased; and these revenues are inadequate to spur investment or even to cover the true cost of quality care.

    Second, when child care providers want to respond to new demands, they still need to make an equity investment. If successful in raising the equity, the low margins available for debt service determine the amount that they can borrow.

    And, finally, child care center buildings are special-use buildings, decreasing their value to conventional lenders. As a result, lenders often require higher interest rates and greater debt coverage and greater loan-to-value ratios. H.R. 3637 will be able to address this problem directly.

    Many banks are interested in community development lending, but in our experience in Illinois, even if debt service coverage requirements can be met through revenues, in most cases, banks still require equity contributions of 20 percent and loan-to-value ratios based on appraisals.

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    A sensible companion to H.R. 3637 would be an authorization to allow the States to use the Child Care Block Grant to provide equity grants to child care centers, particularly in underserved communities. A consistent source of equity would enable projects to make use of bank lending, assuming they can generate enough revenue to cover debt.

    In general, I believe the guarantee amount proposed in H.R. 3637 should be used as a mechanism to stretch banks further in their loans to child care centers. I urge the subcommittee to provide guarantees only based on the terms proposed by banks, adjusting the level based on concessionary interest rates on the part of the bank.

    I also propose that special consideration be given to banks that work hard to make loans in lower-income neighborhoods, and we have many banks that do this, so that H.R. 3637 is used to direct investment much more equally throughout our communities.

    Despite wide recognition of child care today as a valued service to parents and children, this field faces a constant lack of adequate resources to meet demand. This is largely because the costs of quality child care are more than what most parents will pay or are able to pay. The economics of the current child care field are built on keeping costs low. This is a field struggling to deliver an expensive service to a market with tight family and public sector budgets. While I don't have time now to discuss the relationship between cost affordability and quality, I would be more than happy to answer questions on that subject if time permits later.

    Thank you very much for this opportunity.

    Chairman BAKER. Thank you very much, Ms. Logue. We appreciate your testimony.
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    Our next witness is the Director of Worklife Initiatives for Marriott International, Donna Klein. Welcome, Ms. Klein.


    Ms. KLEIN. Thank you. It is a pleasure to be here today on behalf of Marriott International to speak to the need for a bill such as the one recently introduced by Congresswoman Maloney and Chairman Baker, the Children's Development Commission Act.

    The private sector has been struggling with the issues of child care financing for a decade, but much more needs to be done in order for the country to be able to truthfully proclaim we believe in child care partnerships and we act on that belief.

    First, some background. The field of work and family and child care over the last two decades has been dominated by two working paradigms. The family paradigm was driven by the demographic changes in the work force which occurred when increasing percentages of women, including those with young children, entered the work force.

    There initially was a strongly held perception it was the individual family's responsibility to address independently whatever challenges arose from these women entering the work force. The issue of child care and balance were viewed as private concerns. Despite my use of the past tense, you certainly understand the prevalence of this thinking even today.
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    It became clear to many, however, a number of systemic problems made it difficult for families to handle these child care and work family balance issues independently. A few of the systemic issues being the lack of quality child care on a daily basis and the nonexistence of evening and weekend child care. The workplace paradigm began to emerge when unresolved issues above began to surface at the work site. From subtle, covert impacts on productivity, which we initially intuited, companies began to develop work-based programs, policies and practices from on-site child care to flexible scheduling. There was a growing recognition that work family initiatives which support quality of life for families also support quality of work and could produce a win-win benefit for both employee and employer.

    From these initial programs and policies, we can now provide well-funded and well-publicized research about the impact of child care and personal life issues on work. Many industries are able to document significant morale improvements, reductions in turnover, and declining absenteeism and improvements in work product due to work life supports.

    Up to this point, work, life and child care issues were driven by business issues, predominately by business issues wrapped around a highly paid work force. In other words, the corporate investment could be justified if you offset it against turnover costs.

    During the last two years, however, there has emerged a recognition that that model is still too exclusive. It does not take into account the need of small and midsized businesses and certainly doesn't impact that huge segment of the Nation's work force that is dependent on the less highly compensated work force.

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    The need to build a business case for investing in child care only works if offset against a substantial salary. We now think that although the workplace paradigm has facilitated the responsiveness to work life issues from some types of businesses, mostly very large businesses, a great majority of the working population remains inadequately supported. We have been unable to justify the cost or create a business case for the investment.

    Because of this inadequacy, the emergence of a community paradigm is now evolving. The community paradigm would move the debate into a context promoting a society which recognizes the increased probability of being populated by working families.

    A community paradigm, of course, is dependent on public and private partnerships. I am pleased that House Bill 3637 in concept will facilitate such public/private partnerships.

    The need for this type of Federal loan guarantee is illustrated by the following projects championed by Marriott. Atlanta's Inn for Children is a hybrid of a public/private partnership providing 250 slots of child care for community children of low-income families in downtown Atlanta.

    Let me share just a short list of issues encountered in Atlanta in the four years it took us to get the project going.

    First, we were not able to identify any tax incentives in the city or redevelopment programs in Atlanta to assist financially in the razing of a vacant building and the associated $5 million investment into the redevelopment of the subsequent vacant lot. While we were promised financing from major banking institutions in Atlanta, the promises never materialized because the project was labeled a start-up operation and one with risks.
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    Traditional banking practices did not allow for such risky projects. They wanted a Marriott guarantee, which we weren't willing to provide at the time. We had already provided a guarantee on the land purchase. Our business is to build hotels, not community-based projects.

    Also, the IRS did not understand how four private industry companies—Marriott, Hyatt, Omni and the Hilton—could possibly create a nonprofit, tax-exempt entity to serve low-income families in the Atlanta community. The IRS barrier alone took 18 months to resolve.

    The financing challenge in Atlanta was not resolved and led us to the only option left open, identifying a private investor to purchase municipal bonds induced by the City of Atlanta. The interest rates charged by private investors exceed traditional bank financing, of course, and drove the project from a $4 million price tag to a $5 million price tag overnight.

    In Washington, DC., we are currently working on a similar project. We also marketed the Washington proposal similar in that it will provide child care for lower income community families, to major banking institutions in Washington, DC. After much verbal encouragement, we discovered they, too, were very interested in loaning the capital, but only if it was a Marriott-guaranteed loan. We are of the belief that a public/private partnership implies shared risk, not just risk to the corporation.

    If we accept American economic dependence on female labor and accept that childbearing is a mainstream female issue, that it makes sense that we engage in mutual problem-solving for today's children and tomorrow's work force. If we are not moved by the morality of it, we must be moved by the economics.
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    If the family paradigm and workplace paradigm have both been only marginally successful, the community paradigm of public/private partnerships is our next best hope, and it is filled with possibilities. Your proposed legislation to guarantee loans for child care facilities would go a long way to facilitate that support.

    Thank you.

    Chairman BAKER. Thank you, Ms. Klein, for your insights.

    The next witness is the Director of Public Policy for Girls Incorporated, Mildred Wurf. Welcome, Ms. Wurf.


    Ms. WURF. Thank you, Mr. Chairman and Members of the subcommittee. I am very pleased to have the chance today to share with you some of our views on the need for child care in this country.

    Girls Incorporated serves 350,000 school-age children at over a thousand program sites around the Nation. I am also here on behalf of the National Collaboration for Youth, which includes 27 of the Nation's leading youth development organizations. Those organizations include Girls Incorporated, the YMCA of the USA, Campfire Boys and Girls, the YWCA, Boys and Girls Clubs of America, who are probably the major providers of school-age child care in this country, as well as certainly the major providers of afterschool activities. Collectively, the organizations in the Collaboration serve 40 million young people with six million volunteers and over 100,000 full-time staff.
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    We have been addressing the issue of child care and have a number of points of view about it. I particularly want to focus on the needs of school-age children and the importance of using the full resources of the community in addressing this need, that is to use community-based organizations and particularly youth development organizations in both planning at the community level and in providing services. We have also some views on roles that the Federal Government might assume in helping us address this question.

    It is important to know that each week, five million school-age children are left with unstructured and unsupervised time in their out-of-school hours. These children spend most of their time watching television, more than any other single activity, and even a cursory look at today's programming reveals there is considerable emphasis on violence, sexuality and impulsive behavior. Many adults remember their out-of-school time as a time to play and remember feeling very safe, but today, school-age children do not feel safe in their neighborhoods or maybe even in their homes.

    Moreover, the after-school hours are a prime time for unsupervised children to experiment with drugs, alcohol, sexual activity, vandalism, truancy. The FBI reports that juvenile crime peaks during the hours of 3:00 p.m. to 8:00 p.m.

    All of the risks that children face are pressing social problems, and the empty hours are wasted opportunities. This has been very well described in the Carnegie Council on Adolescent Development's major report, ''A Matter of Time.''

    We recognize, as does that report, there is a rich opportunity for out-of-school hours to provide school-age children with the opportunity to gain new interests, to support their emotional growth, to improve their academic performance, to build and maintain healthy bodies, to develop healthy relationships with their peers and with caring adults. But the major message of ''A Matter of Time'' is that there are not enough opportunities available and that millions of school-age children are on their own or in unproductive custodial care.
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    Researchers have found that school-age children who are engaged in organized activities during nonschool hours are less likely to drop out of school, to smoke cigarettes, to use other drugs or to become a teenage parent. Common sense tells us also that these children are also safe when trained and caring adults are close by and are responsible for their safety.

    The need for and the lack of affordable organized school-age programs during nonschool hours present a problem that cuts across economic, racial and regional lines. Many parents face great difficulty in finding child care options that they can afford and in which they feel good about leaving their children. Others have discussed this in a little more detail.

    Private, community-based organizations now play an integral role in providing child care services and supervised out-of-school programming. They must be recognized and tapped as a resource as the Nation struggles with this issue.

    Youth development agencies offer expertise and experience in training youth workers, in providing quality programs, in working with school-age children, and often provide appropriate facilities for out-of-school care, such as the YWCA, YMCA, Girls Incorporated or Boys and Girls Clubs, all of which have buildings. Such agencies typically have established relationships with community leadership and with funding agencies. They have volunteers, board members and generally have a recognized role to play in the community. They are valuable resources and must be included in community-wide planning.

    National efforts to increase the supply of this kind of care should emphasize an expansion of existing programs that have been shown to be effective. The public school systems should be fully utilized, but simply having the schools stay open after 3 o'clock is not a quick fix. Programs must be available on days when the schools are closed—summers, vacations, teacher training days, parent-teacher days and other times when the school is not in session.
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    School buildings do offer a substantial potential, but they present many challenges. Typically, school insurance policies may not cover programs and activities during the nonschool hours, which may require an additional policy. Some of our affiliates report those policies are more expensive than the policies they carry on their own facilities.

    Schools are also cutting academic classes due to budgetary concerns, and they may be reluctant to open their doors for extended care. To do so may mean paying custodial staff time-and-a-half, and it may mean bringing in additional security. Many school buildings are not air conditioned because they aren't customarily used during the summer. And for some children to stay in the same environment where, in fact, they have failed all day may not be the best experience for that child.

    I think you can see there are issues that communities face in providing school-age child care, and there is not a quick fix.

    The setting for out-of-school programs could be a school or a community center or the facility of a community-based organization, but whatever it is, parents need to know that their child is safe and well supervised and engaged in stimulating activity, and they have to be able to afford it.

    I wanted to mention just two examples of the kind of programs these agencies run. The Girls Incorporated of Central Alabama works with parents to provide care. A few schools in Birmingham adopted a ''continuous calendar,'' which meant going to school year round, and working parents had no idea how they would manage because there would be two-week breaks in October, December and April, which was quite a different policy than had existed before. The Girls Incorporated of Central Alabama quickly opened their doors and expanded enrollment during all these times and offered age-appropriate activities.
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    The executive director points out that many local funders are eager to fund programs and activities, but not ''keeping the lights on'' and other operational costs, nor the costs of renovating facilities to be appropriate for extended care. At all times, that affiliate of ours has a waiting list of roughly 10 percent of their enrollment, and during the summer months they turn away parents and girls in droves due to lack of space and lack of staff.

    The YWCA of Kansas City began offering programs in three schools during nonschool hours. They moved their programs to schools to avoid transportation obstacles, but they realized they must pay additional maintenance, janitorial and security costs to keep the schools open extended hours. They do have Government funding and foundation funding, but it is a struggle to find those additional funds.

    The YWCA offers structured activities until 7:30 every evening, and the children come from low-income homes. Larger fees cannot be charged for the services because the children would be unable to participate.

    These are just brief examples of how community-based organizations are essential resources for school-age children.

    We believe that the Federal Government can play a significant role in addressing these problems and that there are numbers of things that ought to be considered in any overall child care legislation. There should be guidelines for a meaningful collaboration between the schools and community-based organizations. The diverse needs of families in that community should be met by using the full resources of the communities because one thing doesn't work for every kind of family. There must be funding provided for schools to stay open during nonschool hours, and schools must designate appropriate and consistently available space for programs. The kids cannot be moved from point to point to fill in the spaces around other school activities, not if it is going to be a positive experience. There need to be funding opportunities provided to renovate existing facilities as necessary for such school care, and H.R. 3637 certainly speaks to that.
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    We feel that there should be assurance that school-age child care programs are designed around normal working hours of the parents and are available during all those times when schools are closed. We believe there must be incentives to private employers, including private, not-for-profit employers, to increase employees' access to quality and affordable child care. We believe there should be funds for transportation, particularly in rural areas.

    Finally, there is a great need for what we call ''glue'' money to establish community-wide systems which link new and existing programs together to provide choice and support for families, rather than leaving parents alone to sort out a tangle of programs that operate independently of each other and to make any judgments about what is best for their children.

    H.R. 3637 is one piece of legislation that can certainly contribute to finding new ways to meet the enormous need for child care. We, of course, believe it is essential that these funds be available to community-based organizations as well as public agencies and profit-making entities and that H.R. 3637 should be aimed at making funds available in low-income communities.

    American parents need expanded opportunities for school-age child care, and community-based organizations stand ready to offer expertise, training, programs and resources to provide opportunities for young people.

    We would be pleased to work with you as you develop this legislation to expand child care, and we stand ready to be part of the answer to this enormous social problem.
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    Thank you very much.

    Chairman BAKER. Thank you very much, Ms. Wurf and all the panelists for your testimony.

    I will start with some questions and respond to Ms. Logue's invitation, when you were speaking to the issue of cost and health care—excuse me, safety and decent standards for child care and perhaps relating those two factors to one another.

    Just by way of background, I am told that within the congressional child care facility program here, that if you have a youngster that is under three years of age, the monthly fee for that service, which is full-time work day care, is about $900 per month. When the child moves to age three or older, it drops to $700 per month. That is a cost that I found rather troubling for most families in Federal employment, if they were to try to avail themselves of this service.

    What, in your view, is the relationship between the cost to a typical working family and yet, at the same time, providing what would be safe, decent standards for child care facilities to operate within?

    Ms. LOGUE. To give you a comparison, in Illinois, the Government subsidy for a 3-year-old is $86 a week. So that is the amount of money a low-income mother has to take to a child care provider. So compare it to what the Government is charging in its own child care centers for people who can afford it—and we assume they can afford it or they wouldn't be there.
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    Chairman BAKER. What would be the comparable market rate for services in Illinois where you get the $86?

    Ms. LOGUE. About twice that, between $150 and $170.

    Chairman BAKER. So you find the typical child care cost in Illinois to be somewhere between $600 and $700 a month then?

    Ms. LOGUE. Yes. That is not too far off. And you can shop around and there are ways you can get it reduced and there are a number of factors that go into it. It is different, in some cases. Community by community, there are differences. Good home care providers charge less. Some schools are much more desirable, and they can charge a little bit more.

    A lot of people say in the same breath, ''What can we do about the affordability of child care and what can we do to increase quality?'' Those two things don't go together. They are the opposite. Quality and salaries are the same thing. If we want quality, we have to pay more; and so the cost of quality child care system should actually be higher than the child care system that essentially is in operation for lower income families, which is the one that is supported by Government subsidies, the $86 a week system. We need to actually increase the cost of that system.

    The cost is the cost. Affordability is a different matter. We can deal with affordability through things like tax credits and subsidies, and that is what we do. And it does work, except that the subsidy doesn't increase when the cost increases. So we have to have a more responsive public system in order to keep up with quality. We have a system in child care which is not unlike what we have in a lot of other fields.
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    There was an interesting article in the New York Times this morning about what has happened in low-income housing. The disparities are widening, and the system that we have for lower-income families is not keeping up with the system that we have for higher-income families. So I think that is the first thing.

    In terms of the other comment or question that you had, I believe it is generally agreed among child care professionals and child care advocates no family should pay more than about 10 percent of its income for child care. And, once again, we do see lower-income families paying a much higher amount for child care and higher-income families paying 2, 3, 5, 6 percent for child care. So there are huge disparities. And the unequal distribution of supply, of course, also feeds into that, and that is what we need to all address together.

    Chairman BAKER. Thank you.

    Mr. Wunderman, you spoke briefly to the question of the banks' willingness to make loans to child care operators. Is there any other element—and let me say that the bill that we have before us, prior to introduction, went through a lot of discussion and debate about what avenue to pursue as the most effective, and I am certain there would be a willingness to consider other elements through legislation.

    From a financial perspective, is there anything else that could be provided in the legislation beyond basically the reinsurance program that would enable a higher level of comfort among traditional lenders to child care providers?

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    Mr. WUNDERMAN. Yes. Well, the lenders are aware of the problems in the industry. Those who do lending in child care know some of the factors that have been discussed before the subcommittee today. So areas like training and technical assistance are important areas because the banks understand that unless the child care provider can maintain a consistent and quality service, operating on a thin margin, they have the potential to lose some of the folks who utilize the center and throw off their economy and could potentially go out of business.

    So the banks, I think, would probably welcome, in addition to the guarantees, supporting the other elements of the system we all understand that are really critical and take a real holistic look at child care, as I believe we are trying to do in the Congress, and make sure that child care centers have all of the kinds of supports they need that are currently missing today. I think that would add tremendous comfort.

    Chairman BAKER. Thank you. My time has expired.

    Mr. Kanjorski.

    Mr. KANJORSKI. Listening to everyone's analysis, it seems to me it would be reasonable to assume there is no profit in child care, is that correct?

    Ms. LOGUE. Correct.

    Ms. KLEIN. Correct.

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    Mr. KANJORSKI. So it is a question of how will you finance it and to what degree, and I suppose that poses the biggest problem.

    The one comment Mr. Lazio made—I was impressed with a program I watched on either Public Broadcasting the other night or one of those, where the issue was posed that in our society we do two things that are rather strange, inconsistent with societies of the past, and that is that people who prepare our food and people who care for our children are the lowest paid in our society, which is an interesting lack of respect we seem to have for our own body, our own posterity.

    Where does the private and public sector—because someone mentioned the partnership. It would seem to me, I think it was Ms. Klein, the partnership is only to facilitate the private sector's need for employees who have an obligation to raise children. You are not talking about a private or public partnership to be able to privatize the child care system. Is that a reasonable conclusion?

    Ms. KLEIN. We have no desire to privatize the child care system. What we have been looking for are ways to subsidize lower-income child care, and the public/private partnership that seems to have some possibilities involve some financial obligation and expertise on the part of private industries and, also, some financial guarantees on the part of the public sector. That is where we find to be most difficult but probably most effective.

    Mr. KANJORSKI. But, in a way, we are asking the whole society to underwrite the cost of cheaper labor to business. I mean, if the private sector market were really working, we wouldn't be hiring care providers at a rate that they could not afford to provide for the care of their children. So, in some way, we are reaching up and down the age group and across the financial group to identify a lot of people who do not have a child care problem.
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    But saying that now that we have impacted the work force so heavily with childbearing-age mothers we have to do something and it is our responsibility, how do we get our friends on the other side to agree with that proposition or the members of the Chamber of Commerce to agree with the proposition? In most instances, they make the argument that they want the private market to handle the problem. Except, when it is too big, they want the Government to impose a subsidy to the private market to everyone. How do you reconcile those questions?

    Ms. KLEIN. I think all of those are answers that need to be put in place, just to different degrees.

    If you look at the work force, people who work for large corporations are a very, very small percentage of the national work force. Regardless of what the private sector does in terms of child care, there is still going to be a large majority of children in the country that do not have access to quality child care.

    I think it is a philosophical point in terms of how you regard the raising of the future generation and the future work force. Is it a private industry? Is it a corporate responsibility or a social responsibility?

    We certainly look at capitalism as being an economic system, but we also recognize it has social responsibilities, such as a social system as well. I think corporations in general are ready to do their part, but they clearly cannot do it alone. If, for instance, you look at an industry such as the service industry, a lodging industry, such as Marriott, we estimate our employee base are paying up to 35 percent of their disposable income on child care. If we doubled——
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    Mr. KANJORSKI. But stop at that point. Now the question is, should the corporation that benefits from that show a profit or should the average person who has no children have to pay that?

    Ms. KLEIN. You have to understand what the profit margins are of the business. For every dollar of sales we have, we make a profit of about three cents.

    Mr. KANJORSKI. I understand you could not individually undertake that. I recognize that. I am probably addressing the issue of a fine inequity here. It is going to be very difficult. I mean, I hear an argument on the other side that they want a flat tax because Bill Gates' protection he derives from the Army is no greater in percentage than the protection I derive. I find that hard to accept, but that is the argument he makes for a flat tax.

    And then we have other people who say, if they are nondrivers, they don't want to have to contribute to the highway system, so we should tax drivers only through gasoline.

    In my area, senior citizens don't want to pay for education because they don't have any children. And the argument is, it is always the other guy.

    And in listening to the testimony, hearing all the testimony, I was trying to do some calculations; and it seems to me I am coming up with a need for probably $50 to $75 billion a year to really address the problem of somewhere between $6,000 and $10,000 of child care.

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    So it is a simple problem if it is only a matter of mathematics. But where are we willing to take the $50 to $75 billion from? I will volunteer some of my senior citizens without children for a small percentage, but then is the Chamber of Commerce going to throw in a larger percentage? You know, how are we going to balance this out?

    Because, basically, we are talking about dollars. And although I am very much supportive of Mrs. Maloney's bill, I could readily say, in listening to the testimony, this is a very small demonstration project of trying to stimulate financing facilities, and it really isn't getting to the quality of care.

    I know my time is up, Mr. Chairman. I do want to ask you, Ms. Klein, particularly, what effort has the private sector in your corporation been involved with, say, with community colleges and other colleges in fostering programs of adequate preparation for child care providers, licensing quality providers? Have you been involved in that at all?

    Ms. KLEIN. We do community-based funding for child care providers, for family day care providers.

    I can't answer the question of whether or not we give directly to community colleges for early childhood education, but we are very involved in our communities throughout the country in providing child care education to providers themselves.

    Mr. KANJORSKI. Are there any colleges or universities in countries that are specializing in this area?

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    Ms. KLEIN. An awful large percentage of colleges have early childhood education programs and train child care providers, as far as I know.

    Mr. KANJORSKI. But the problem is the low pay. A person gets in the field and says, ''This is ridiculous. Why work for $16,000 a year when you can go out and teach school at $35,000?''

    Ms. KLEIN. It is really the value we place on the care of our children in this country. If you look at the country's economic dependence on female labor, which is over 50 percent at this point in time, and the fact we as a country have not provided for the care of children of the female labor——

    Mr. KANJORSKI. What if we brought the female wage rate up to the average rate in the country, how much would that fill that gap? Has anyone done a study on that? I think they are about 60 percent of the male income.

    Ms. KLEIN. I think the latest research says it is 73 cents on every dollar.

    Mr. KANJORSKI. So if we closed the gap of 27 cents, how much of a hole would that fill?

    Ms. KLEIN. I think it would help. But the fact is there is no silver bullet. It is going to take a lot of very small solutions, one of which is this bill, to, I think, resolve the situation for the country overall.
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    Mr. KANJORSKI. Very good. Thank you.

    Chairman BAKER. Thank you, Mr. Kanjorski.

    Mrs. Maloney.

    Mrs. MALONEY. I would really like to thank all of the panelists for their testimony.

    And just to respond with your comment, Ms. Wurf, it does apply—the bill does apply to not-for-profits also, which was a question you raised.

    And Ms. Klein and Mr. Wunderman, you really raised examples of barriers to getting child care facilities built, even when there was a tremendous effort on the private sector to try to build one and make allocations for it, not being able to get the cooperation from the banks to guarantee it. And I just want to know, when the banks hesitate to lend to child care providers, are they really bad risks? Is there evidence that child care providers are bad risks to loan to? Or are they just unfamiliar with it? Why is there such a barrier for the private sector to help not-for-profits? Or, in this case, a respected corporation ran up against a wall in trying to help a community, a poor community. Why is there such a resistance to this?

    Ms. LOGUE. There is no revenue. They can't repay the debt.

    Mrs. MALONEY. Can't repay the debt. So they do have a history of defaults?
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    Ms. LOGUE. No, they pay their bills. They can't take on the kind of debt to support the kind of capital investment that needs to be made to construct a special-use building, a special-use building that has a lot of special requirements.

    When we put together financing packages for child care centers that we finance and construct, we drive the debt by—if you look at a typical child care center's operating budget, 80 percent of it is salaries. We try to keep occupancy costs to only another 10 percent; and, of that 10 percent, we want to see the debt service, the mortgage payment actually at about 6 percent. So we drive the debt amount that we can take by saying it has to be 6 percent of the revenues.

    So a typical bank, at just an average interest rate today, even if they would lend that amount based on the appraised value of the property, the payment would have—I mean, the term would have to be 30 or 40 years for the child care center to be able to afford it. So we bring in equity where we can, and we piecemeal these projects and try to bring in equity.

    We have one we are doing now that is a $3 million building and a bank that is getting the first position mortgage on a brand new building on Ogden Avenue in Chicago. The bank is lending 40 percent of the money. We have 60 percent equity. They are lending 40 percent of the money because that is all we can afford to borrow, but it took three years to raise the equity. It is revenue driven. It is all about revenues. And the value of the real estate has a lot to do with what the bank will lend also.

    Mrs. MALONEY. Well, what can be done in creating financial packages for child care providers to reduce the debt load and focus funds on quality and labor?
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    Ms. LOGUE. One of the things that can be done, as a partner to this bill, which is a great start, is to authorize States to allow the block grant to be used for equity and then to match up the availability equity with the banks that are really interested in being in these communities. As a package, that would work beautifully, and then we would reduce the pressure on the child care center's operating budget.

    Mrs. MALONEY. That is a good idea.

    I tell you, child care is such a tremendous problem; and, like many of you talked about today, that this is just like one little block in a huge pattern. But even if we were able to implement the President's package calling for over five years in subsidies, there is really no guarantee that even if we could get the subsidy to the parent that the child care facility is going to be there.

    Looking at the numbers from New York City, they are estimating in New York City alone the need for over 60,000 new slots for child care in the coming years, and they are just not there. So even if the subsidy is there, if we don't have the other block, which is the place for them to go, we confront tremendous problems.

    Ms. LOGUE. That is why the bill is so important, but having the equity piece is important, too.

    Mrs. MALONEY. Well, I thank you very much.

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    I would like to really ask, Ms. Green, if you would elaborate. In your opening statements, you talked about, really, the lack of quality and the problems we confronted. I would like to tell my colleagues that this would improve quality because, in order to get a loan, you have to be certified to be at a certain quality level, so it would have that impact of improving quality. But your statistics about low-quality child care were truly alarming and can you briefly elaborate on these problems and identify the deficiencies which endanger children's health and safety?

    Ms. GREEN. Sure. I would like to say there have been several studies recently that really—one of them was the Cost Quality and Child Outsomes Study that occurred back in 1995. And, basically, they just found that many of the centers were either poor or mediocre and that health and safety was often in danger for those children. And oftentimes this relates to the staff itself, in terms of having qualified staff, in terms of having facilities that are safe but, also, in terms of just having enough in terms of finances to keep those centers up.

    And I want to say, if I could, that the reason I spent a little time talking about the project I had been involved with in New Jersey is because it was an attempt to really look at both supply, developing more supply, as well as quality. And we found the technical assistance piece was a clue to that, that in order to do it, you really did have to work with directors of centers who often, although they might know a lot about early childhood education, may be somewhat unsophisticated about business management skills, and so they needed some very targeted training on financial matters, on legal matters, on marketing, on developing a business plan.

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    So what we did is we did an open RFP, and over 100 centers applied. We only had funding for about 17; but both the State of New Jersey, in terms of the Department of Human Services and the Department of Community Affairs, participated in this, in terms of funding to this, because they saw the technical assistance piece was so critical.

    We are not talking about an awful lot of money in this instance. We were talking about week-long training for directors, one-day training for boards, but really to inform them about how critical it is that the status of the center, if it is financially in very poor shape, that it be corrected and that a plan is developed so they can approach a lending institution with a lot more in the way of possibility of getting that funding.

    In this case, there was always a community development financial institution involved which provided technical assistance from that point of view, as well as technical assistance to help the agencies themselves. Because ''more'' can read ''higher quality'', through accreditation and other similar kinds of attempts to point out the quality indicators.

    Mrs. MALONEY. Thank you.

    Chairman BAKER. Thank you, Mrs. Maloney.

    Mr. Vento.

    Mr. VENTO. Thanks, Mr. Chairman.

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    I have a conflict of interest as a grandfather with three grandsons who look just like me, blond hair, blue eyes. And I think that is one of the issues today. When you are talking about the inequity in terms of women's wages, it also should be noted that more women, a substantial portion in the work force, work at the minimum wage, so there are a lot of disparities that exist.

    But I do think there probably is a case because of the evolving nature of our society with single parents and two-parent families that are working to try and respond to the facilities and, if not, the actual programs that go on as such.

    But here we are talking about two things. I think they are talking about mortgage insurance and liability insurance and, of course, the certification process. Who do you give this to so you are certified? You know, one of the ways we worked in the State of Minnesota through certification was through the nutrition programs, which have been substantially cut. We had 68 percent of our child care providers in-home and, of course, in other more formal settings who were certified, but they were doing it by this small incentive in terms of the nutrition program.

    We also have had problems for child care with regards to the IRS and how they treated individuals providing child care in their homes.

    We have all been through this. I am not going to ask you those questions. The questions I have really relate.

    I noticed the bill only has a tangential reference to liability insurance in the sense they are saying to the Commission, ''You are going to come up with standards with regard to this.'' It is a major part of the descriptive materials, but it only talks about the Commission coming up with these standards for this liability insurance.
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    It also, I think, treads on some other problems, in terms of State powers. We are very familiar on this subcommittee, incidentally, which the witnesses may not be as familiar, with State prerogatives with regard to insurance. This could be a tough area. I don't know. I mean, the question is, you know, just establishing these standards. I expect my State has some standards and so do yours with regards to various types of liability insurance. But insofar as putting this in place, is there really a necessity to do something with the liability side of this? Not the mortgage insurance now but the liability insurance that is referred to here with regard to subsidies?

    Mr. Wunder—I am sorry. I am looking for your name here.

    Mr. WUNDERMAN. It is Wunderman.

    Mr. VENTO. Yes, Wunderman. Pardon me.

    Mr. WUNDERMAN. Well, essentially, I believe the bill requires agents to provide a lower-cost liability insurance, is that correct? And anything that would bring down the operating costs would help. Since the goal of this particular piece of legislation is to assist in capital financing, and where the problem is as has been described—it has been the inability to meet the cost of market rate finance, which is absolutely a problem. So, anything you can do on the operating side of the ledger that brings your cost down would be helpful because it would leave a little bit more room for debt payment. So, of course, that would be helpful.

    Mr. VENTO. We may have wanted to do it, looking at it like Banking Committee Members, saying, if you don't have liability insurance—it is like not having fire insurance. You can't owe money, and if the thing burns down we have a problem or if there is not liability, we have a problem, because there is a good probability that a suit could cause the loss of this.
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    But as I understand this bill, the idea is that you think, at least the mortgage insurance portion, the author presumes that it would be self-sustaining, that you would have so much profit that you could have a foundation that would then inspire all sorts of rather brilliant ideas with regards to meeting child care needs. But I don't know. If it works like our student loan program has worked, it wouldn't work. But if it works like some of the other secondary market programs or GSEs or the FHA single family, we are all right. But the FHA multifamily hasn't worked that way.

    I note in here there doesn't seem to be any size limit in terms of the type of loan. That probably is a technical matter that should be addressed. Is it anticipated that this would also be available for single-family type of homes? Because that is used today. I assume there is some overlap in terms of utilization of FHA where family homes are used for that.

    Anyway, these are most of the questions I have. Most of the questions will be submitted to you so you can respond to them in writing.

    I note that our staff prepared some of the questions that prompted my questions or comments, but I do think, especially the liability issue, which is really only under the Commission, if you are assuming there is some sort of subsidy here, you might want to look more closely at that or we should work that out and the other questions will be there. But anyone who wants to sort of respond to my barrage of questions, I would like to hear from you.

    Ms. LOGUE. My organization owns seven child care centers, and we lease them to nonprofit providers. But we are very involved not in the program but in the monitoring of the business side and the management.
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    I agree with Mr. Wunderman that anything that can keep the costs down is a help. Liability and fire insurance are required in Illinois in order to have a license, to run a child care center, so you wouldn't be in business if you didn't have the insurance. But there have been created insurance pools, and there are programs sponsored by United Way and one sponsored by an insurance company that specifically targets child care centers and other fields and helps them keep those costs down.

    Nonetheless, any effort to reduce those costs would be helpful. And, in general, it would be interesting to walk through some of the numbers, how this would play out in response to your other questions.

    Mr. VENTO. I think, in fairness, you can respond to those in writing. I think all the subcommittee Members would be interested in that.

    I also wondered as I read through this, Mr. Chairman, with your indulgence for a moment, SBA and other types of small business loans are available and why don't they work.

    Ms. LOGUE. They do work. SBA does a lot of lending to child care centers in certain communities, but the SBA has its own qualifications, too. But SBA doesn't lend to nonprofits; and in low-income communities, you typically find nonprofit corporations.

    Mr. VENTO. So this principally would, again, be a different focus. So we barred SBA from lending to nonprofits. I see. Thank you.

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    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Vento.

    Just to follow-up a little bit on his concerns. When I was discussing the part of the liability issue with Congresswoman Maloney; and, frankly, booting it to a Commission is exactly what we intended at this point because there was not a simple resolution of this matter. In my own State, in taking a five-employee, 40-child, child care facility and expecting them to go out and secure liability insurance for a 2,000-square-foot building with a fenced-in backyard and a slide, the slide would get them.

    The likelihood of the Commission authorizing a Louisiana-State-wide insurance pool for an authorized child care provider, which would mean you meet the life, safety, health code requirements as described by the Commission as being appropriate for a Louisiana provider and that you meet certain programmatic guidelines, food quality, whatever, the idea being you raise the quality to access the pool to an insurance fund that the Commission authorizes at the State level, thereby lowering the cost to the individual provider who might have gone out on his own to try to find an independent policy to cover the operations of that facility.

    But that is far too complex for us to work out in this short period from consideration of introduction of this bill and its current form. But I, like Mr. Vento, would very much welcome your thoughts about the insurance aspect of this problem because, in my view, it is equally large as an inhibition to the operation of a successful facility as is the initial capitalization.

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    The proposal is to provide some ability to get initial capitalization or to provide expansion capital to an existing entity which wants to provide broader service or better quality service and, hopefully, induce people to upgrade the quality of their facilities in order to get access to this capital.

    The other side of the coin, though, in my observation, is from the parent attempting to provide quality care for their child. You are looking at a high-cost obligation which has a fixed lifetime to it. By that I mean, from the day in which the child is born until you go to kindergarten is generally a parent that is relatively young, lower-income, not because of capability but new entry into the work force, generally speaking, in broad demographic analysis. So you have young people with low-income wanting to pay for a high-cost, expensive operation, even though it is not profitable. There really isn't a way to drive costs down and keep quality up.

    What about the idea of encouraging loans to the working family? So that rather than paying $600 or $700 a month out of their less-than-disposable income, they might pay perhaps $150 or $200 a month, just like you do for other things you want for the family. You finance it for five or six years, as opposed to paying it all out at one time. Not pay-as-you-go, but pay for the quality and finance the payments. So that not just the child care operator gets access to credit, but the young working parent gets access to credit. And there might be some ways to secure that obligation beyond a mortgage on the home.

I21But my point is, stretching out the payment obligation for a high-cost, apparently fixed-cost requirement, if you are going to provide safe and sound child care, as opposed to having the parent on a pay-as-you-go basis and the center on some limited pay-back period because the private market demands that. If we are going to look at leveraging, we ought to look on both sides of the operation.
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    Does anybody care to comment on that?

    Mr. WUNDERMAN. It is an interesting idea.

    Chairman BAKER. That is a kind way of saying thank you. OK. Well, we will explore it more.

    But please get back to me, if you would, on the insurance side. I know that is a problem worth leveraging in some way. It just seems obvious to me, with so many credit cards floating around to so many people, there ought to be a way to get credit for this.

    Mrs. MALONEY. I am sorry Mr. Vento left. He always has good questions.

    Liability insurance is a huge obstacle whether you are a struggling not-for-profit or well-heeled organization.

    A lot of people are frightened of encountering child care and taking on the whole project, and one of the ideas behind this is we were hopeful that Kiddie Mac would be a center, sort of a one-stop-shopping think tank and service area to help groups move forward with their plans to expand child care, whether it is Marriott facing an IRS problem that lasted a year, hopefully, Kiddie Mac could have solved that for you within a week, or whatever problem that is moving forward.

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    But many corporations—I talk to them in New York. When they build their huge new facilities, I say, ''Why didn't you put child care in?'' And they say, ''It's just daunting. We didn't feel like we could confront it. What about liability? What about meeting standards?''

    But if you had a one-stop center that could help package it and put it together and move it forward, much as Fannie Mae and Freddie Mac have packaged and moved forward home ownership ideas and plans, we are hopeful this would do it for children. I think it is very needed, and it is a very exciting idea, one that has to be seen in the collaboration with many other aspects of the need for affordable and available child care.

    Again, I thank Mr. Kanjorski and Mr. Baker, who have two of the finest banking minds on this Banking Committee in understanding finance and how to make it work. They have put their considerable talents behind this bill, and I am thankful.

    The liability, as we know, from our Glass-Steagall debate, most insurance companies want it determined by the State insurance oversight. Possibly we should have a hearing just on that aspect of it from the insurance companies and see how they feel.

    Anyway, I yield back to the distinguished Chairman.

    Chairman BAKER. Thank you, Mrs. Maloney.

    Mr. Kanjorski.

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    Mr. KANJORSKI. Yes, Mr. Chairman. Thank you.

    Does anyone happen to know the per capita cost of Head Start?

    Ms. LOGUE. What Head Start pays on an annual basis?

    Mr. KANJORSKI. What it costs the system to handle one Head Start.

    Ms. LOGUE. Well, it is negotiated, but it could be—in Illinois, my understanding and experience is that it is between $3,000 and $6,000 a year, but for infants, it is higher.

    Mr. KANJORSKI. Does that pay for all the costs involved, the $3,000 to $6,000?

    Ms. LOGUE. There is a matching requirement.

    Mr. KANJORSKI. From the school district?

    Ms. LOGUE. From the delegate or grantee, which is a private nonprofit corporation, or it could be a school district.

    Mr. KANJORSKI. What I am getting at is the cost you were talking about for child care, it would seem almost to implement 100 percent of Head Start would not be an unwise choice of Congress, funded up entirely. I mean, we seem to be spending somewhere between $5,000 and $10,000 for that child just in ordinary child care.
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    Ms. LOGUE. Are you suggesting you sort of convert the entire system of child care and Head Start together into one program and fund it at the Head Start level? Great idea.

    Mr. KANJORSKI. Or at least to take those people that would qualify for Head Start that are now in child care and determine, we are almost spending the same amount of money in child care; why not just move them into Head Start?

    Ms. LOGUE. I think there are some efforts to do that, as Head Start grows and child care does not.

    Mr. KANJORSKI. I am so much in support of Mrs. Maloney's program, and I don't want to leave the impression I am not. And, as everybody has admitted, it is one part of the building block. I am sort of swept away with the overall cost, not having to address child care for a number of years, and now appreciating what kind of a strain it is, both on industry and the parents and everybody involved.

    Has anybody done any creative analyzing? Most recently, I was impressed with the methodology of handling some of our pollution problems in getting and selling tax credits. And that is, if you have a bad, polluting generating plant, you can sell tax credits to an environmentally sound plant, who then will give you the money to clean up the bad plant.

    Is there anybody who has been playing with the idea of trying to sell credits to wealthy people, to charitable organizations or foundations or corporations?
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    Ms. LOGUE. To pay for the operations or for the capital investment?

    Mr. KANJORSKI. To pay for the operations. Because if we pay for the operations, if the money is there, the bank will lend you the money. Your problem is how cheap of the money we make available is still not enough to pay for the care, and at the level of payment that we share.

    Ms. LOGUE. I am not aware of a program.

    Ms. KLEIN. I am not either. It is a good idea, though.

    Ms. WURF. I am not aware of a program, but I would say when I am speaking of school-age child care provided by community-based organizations. These organizations raise all of their money from the United Way, foundations and individuals. So in a sense, they are able to some extent to subsidize child care services because they raised the money from all of the community resources to run their whole operation. Their provision of child care is done at less cost to the parent.

    Mr. KANJORSKI. Well, I have in mind——

    Ms. WURF. It is not direct.

    Mr. KANJORSKI. You are aware of the fact a charitable contribution can be written off at approximately 40 percent. Well, imagine if we started a program, say, an ''old granny system'' to let the happy granny in Miami Beach get an 80 percent tax credit. If that portion of the money is contributed over, either to pay for the physical structure, and within parameters, not all child care, obviously, not in West Chester Country Club, but say moderate or middle income on down. There is a real need to find those resources out there, isn't there?
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    Ms. LOGUE. That is a great idea. So you would be targeting charitable contributions to certain public priorities for a certain period of time?

    Mr. KANJORSKI. Give them double tax benefits so it really doesn't cost them anything. We are probably reducing the revenue of the Treasury, so we have less of a fight with our brethren on the other side to cut taxes. We can actually channel the money into areas where it is necessary. We are going to have to work on that, in a nonpartisan way.

    Chairman BAKER. We will listen nonpartisanly.

    Any further comments?

    If not, I certainly want to express my appreciation to the panelists for their comments and their time this afternoon. You have been most helpful. Certainly all comments of the panelists will be made a part of the record, as well as other Members of the subcommittee. And the Senators who were unable to participate today, their statements in full will be incorporated into our record.

    And should you have further comment or suggestions to the subcommittee as to actions we might take, we would certainly welcome those at whatever time you make them available.

    Our hearing stands adjourned.

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    [Whereupon, at 3:49 p.m., the hearing was adjourned.]