Financing Early Childhood Care and Education in New Mexico Presentation by: Kelly O’Donnell, PhD September 16, 2014

Presentation Overview Core principles Revenue strategies for ECCE Using state tax credits to promote quality in ECCE Possible New Mexico Tax Credits 5/1/2019

Principles for Revenue Enhancement Adequate Stable Diversified Phased in . 5/1/2019

NMECDP Principles for Investment in High Quality ECCE Increase access to high-quality early childhood education and care for low- and moderate-income families Maximize resources by supporting parent’s work and children’s development and education simultaneously Recognize and support ECE professionals   Incentivize quality Advance learning & development benchmarks Foster partnerships to support access to high-quality services Focus on program evaluation and return on investment 5/1/2019

Revenue Options for ECCE   Revenue Source $ Millions Likelihood of Enactment Increase TANF transfer to Child Care Assistance Program $2.2 High Equalize Emergency School Tax Rates for Oil and Gas $40 Moderate Redirect Severance Tax from Bonding Fund $114 Moderate/Low Increase the Liquor Excise Tax $45 Increase the Cigarette and Tobacco Products Taxes Enact State “Junk Food” or Soda Tax $20-$50 Social Impact Bonds Up to $10 Moderate/High Include ECCE as “Public Infrastructure” for TIDDS Uncertain Increase Federal Royalties $156 Low State Land Office Proposal to Increase Land Endowment Increase Land Grant Permanent Fund Distribution $100 Local Children’s Trusts $1 or more Dedicate a Percentage of New General Fund Revenue $217 5/1/2019

Diverse revenue strategies State funding – severance taxes, excise taxes, “new” general fund revenue Local funding – Children’s trusts Federal funding – TANF transfer, royalties Private funding – Social Impact Bonds 5/1/2019

TANF Funds for Child Care Assistance Increase TANF Transfer to CCDBG Potential Revenue for ECCE: $2.2 Million Pros Cons Increase in child care assistance funding Diverts money from the TANF program, which provides a variety of other supports to low income families Uses federal rather than state or local funds Provides a relatively small and finite amount of revenue.   Child care subsidies funded by TANF directly are subject to different rules than CCDBG 5/1/2019

Equalize Emergency School Tax Rates for Oil and Gas Redirect Severance Tax Revenue to the State General Fund Potential Revenue for ECCE: $114 million Pros Cons Does not increase the total tax burden on oil and gas producers The real value of the Severance Tax Permanent Fund (STPF) has declined in recent years and the STPF will not grow if deposits do not increase Large investments in public school construction over the last 12 years have greatly improved the condition of the capital stock so spending in this area can now be scaled back and redirected to other uses Less revenue to the bonding fund decreases funds available for capital improvements, including public school construction 5/1/2019

Junk food or “soda tax” Increase state excise taxes on potentially harmful commodities such as liquor, tobacco ,or “junk food” A “10 cents per drink” increase in New Mexico’s Liquor Excise Tax would increase revenue to the state general fund by approximately $45 million annually Pros Cons Generates substantial revenue without diverting funding from other programs Makes the tax system more regressive Discourages harmful behaviors that impose costs on taxpayers and society Implementing a new “junk food” tax could impose costs on food retailers Benefits children and youth because young people are more likely than adults to reduce their consumption in response to a tax increase Increases tax system complexity and administrative cost. 5/1/2019

Royalty rate for on-shore production of oil and gas on federal lands States receive 50 % of federal royalty revenue Federal rate is 12.5%, most western states charge 16.5 to 18.5% Increase the royalty rate paid for production of oil and gas on federal lands Potential Revenue for ECCE: $156 to $233 million annually Pros Cons Substantial revenue increase at no cost to the state Requires federal action, not under the control of state policymakers 5/1/2019

Land Grant Endowment Obtain a federal grant to increase the size of New Mexico’s land grant endowment Potential ECCE Revenue Impact: Uncertain Pros Cons Could generate substantial revenue without diverting funding from other programs No modern precedent, would require major change to federal law Increases state land endowment Revenue is highly uncertain   Would take at least 7 years to implement Increased land maintenance costs to the state 5/1/2019

Social Impact Bonds Social Impact Bonds Potential Revenue for ECCE: $10 million Pros Cons Innovative mechanism for public-private partnerships Unproven, even the European programs have yet to reach the point at which success can be measured and investors compensated. Increases awareness of ECCE and engages new and non-traditional allies Complex to administer Rewards good corporate citizenship   5/1/2019

Land Grant Permanent Fund Example: Increasing the distribution from 5 % to 6.5 % and earmark 66 % of the new revenue for ECCE. Increase the Land Grant Permanent Fund Distribution Potential Revenue for ECCE: $100 million Pros Cons Generates substantial revenue without diverting funding from other programs in the near term Reduces Permanent Fund earnings, which will ultimately result in smaller distributions to all beneficiaries Stable revenue source Current proposal lacks a transparent spending plan Voter approval of constitutional amendment ensures buy-in from Legislature and electorate Requires constitutional amendment and possibly Congressional approval 5/1/2019

Local Young Children’s Trusts Children’s trusts are independent local entities that support ECCE and fund children’s programs in specific communities. They are created as voter-approved special districts and funded with a voter-approved local revenue source such as a dedicated property tax levy or sales tax increment. Local Young Children’s Trusts Potential Revenue for ECCE: $100 million Pros Cons Enables local jurisdictions to identify and fund priority projects Location specific Educates communities about the value of ECCE Difficult to accomplish in rural and/or low income communities Children’s trusts are independent local entities that support ECCE and fund children’s programs in specific communities. They are created as voter-approved special districts and funded with a voter-approved local revenue source such as a dedicated property tax levy or sales tax increment. 5/1/2019

Tax Increment Financing Include ECCE in the Definition of “Public Infrastructure” for Purposes of Tax Increment Financing Potential Revenue for ECCE: $100 million Pros Cons Addresses community-specific demand for quality ECCE Location specific Emphasizes the economic significance of ECCE Limited scope 5/1/2019

General Fund Revenue Dedicate a percentage of new state general fund revenue to ECCE for each of the next several years Revenue for ECCE: $217 Million Pros Cons Provides a large increase in funding for ECCE Reduces the funds available for other general fund priorities Embeds ECCE in the general fund budget with other core state services Creates a large recurring appropriation that must be sustained over time 5/1/2019

Example: 25% of Surplus for 5 years 5/1/2019

Incentives Quality bonuses Scholarships -- TEACH® Wage subsidy INCENTIVES® Tax credits 5/1/2019

Quality Bonuses Link funding to a common set of quality standards Administered through the Quality Rating Improvement System (QRIS) Tiered reimbursement rates that partially offset the higher costs of quality programs Additional grant opportunities Improves access to quality care for low income families Less effective for programs with relatively few subsidy kids 5/1/2019

Scholarship -- Teacher Education and Compensation Helps (T.E.A.C.H®) Scholarships to educators taking college courses employed in ECE Teachers working in private centers, family child care homes, Head Start Centers and NM PreK A three way partnership Supports scholars to stay in school Fluctuating funding Currently serves more than 700 scholars statewide 168 degrees completed since 2010 5/1/2019

Direct Subsidy -- INCENTIVES ® Education-based salary supplements encourage ECC educators to attend college and remain in early childhood after graduation Income supplements every six months if they remain with their current employer Higher education levels = larger supplements 2013 average annual payment = $1,600 Santa Fe pilot – first 2 years - no turnover and more than half completed additional college classes Albuquerque South Valley Expansion in 2013 2014 -- $300,000 state appropriation to support expansion of the two existing programs and initiation of one additional statewide program 5/1/2019

ECCE Tax Credits New Mexico Dependent Care Tax Credit Federal Dependent Care Tax Credit Types of Credits Credit programs in other states: Louisiana Oregon Colorado 5/1/2019

NM Child Day Care Tax Credit Available to households (of any size) with income (from all sources) that is below 2x federal minimum wage ($7.25*2*2080 = $30,160) 40% of amount paid to caregiver Maximum $8/dependent/day Maximum credit is $480/child and $1,200/family The average credit is about $350 Roughly 4,000 claims for the credit totaling about $1.4 million are made annually 5/1/2019

Federal Child and Dependent Care Credit Maximum is 35% of expenses for Adjusted Gross Income (AGI) under $15k Maximum expenses: $3,000 for one dependent & $6,000 for two. Maximum per person credit is 35% of $3,000 = $1,050 Credit percentage declines by 1% point for every $2,000 in AGI to a floor of 20% for all AGI above $43,000 Non-refundable People who qualify for the NMDCC on the basis of income would qualify for a 27%-35% federal credit BUT Households with children pay no federal income tax until their income exceeds $32,000 for a single person with one child and $38,000 for a married couple with two children. 5/1/2019

Types of Tax Credit Consumers/Parents Charitable contributions to ECCE organizations Providers -- to offset operations costs for quality programs Providers -- to encourage investment in facilities, equipment and training Educators – to retain highly qualified teachers and directors by augmenting their wages 5/1/2019

Thank You 5/1/2019