This is Part 4 of our series on “Preparing for Your CCDF State Plan.” For more information, see the other briefs in the series:

• Part 1: Preparing for Your CCDF State Plan: An Introduction
• Part 2: What is Alternative Methodology, and Should We Do It?
• Part 3: Connecting the Dots from Field Input to Costs

What’s changed since your last cost analysis?

Regardless of whether your state uses an Alternative Methodology or Narrow Cost Analysis (see Part 2 of this series for more on the difference), your cost analysis must be updated ahead of next year’s CCDF state plan. This is an important opportunity to check in and make sure that your understanding of costs in the field match the realities on the ground.

So what has changed? Every community has different nuances, but there are three big trends that affect nearly every child care provider in the country:

Inflation

We’re all feeling it, and child care providers aren’t immune to rising costs. At the most basic level, food and supplies are getting more expensive. If the provider offers transportation, gas prices are hitting them too. These cost of living changes affect both home- and center-based programs, especially those that were already operating on thin margins.

Some specific costs are rising even faster. Liability insurance is a major concern for providers. A 2024 national survey found that 80% of providers reported an increase in liability insurance costs, often by thousands of dollars. One provider in the Twin Cities reported: “The cost of insurance went up 16% in 2023, 27% in 2024, 51% in 2025… We shopped around for different policy providers with a broker and there were none.”

Health insurance premiums are also climbing faster than general inflation, with employer-sponsored premiums projected to rise 6.5% in 2026. Child care providers may also be affected by rising costs on the Affordable Care Act exchanges, with subsidies for middle-income households expiring. Home-based providers, in particular, may struggle to afford care on the exchanges if they earn too much to qualify for Medicaid.

Labor Market Changes

The labor market for child care providers has changed substantially in the post-pandemic era. As state minimum wages and hourly rates at large retail and food service employers have climbed, child care providers have been force to raise wages to be competitive. As of May 2024, child care workers earned a median hourly wage of $15.41, up nearly 20% from their median wage of $12.88 in May 2020. Any cost analysis must take into account these rapid changes in workforce compensation.

At the same time, child care providers still struggle to earn a living wage. Current pay falls far short of the costs of supporting a family and affording housing, food, and other essential costs, contributing to high turnover and vacancies. Research has found that higher pay supports retention, higher quality care, and job satisfaction. Although most states currently lack the resources to invest in increased compensation systematically, cost modeling offers an opportunity to quantify the costs and impact of higher pay that would better meet providers’ and families’ needs.

As models are updated, it is worth asking not just what staff are paid today, but also what rates are needed to attract and retain staff in the current labor market. One way to understand this is to track where staff who leave child care programs are going. Are providers primarily competing for staff with retail jobs, school districts, hospital systems? Knowing what the market for talent looks like today can help identify appropriate benchmarks for competitive compensation.

The Funding Cliff

The COVID pandemic laid bare how essential child care is to American families. Understanding the critical need, Congress poured more than $50 billion in relief aid into child care programs across the country, allowing them to offer staff higher pay and bonuses, sustain smaller enrollments, invest in deferred costs, and stabilize their budgets.

That is over now. The last COVID relief money was distributed last year; now many programs are back to thin margins and relying on tuition that is as high as parents can afford. Combined with higher costs and a changed labor market, many providers are struggling to make ends meet. A 2024 survey of child care providers found that they were caught between rising costs, staffing shortages, and families who can afford less tuition – and that more than half had seen programs in their area close.

The good news is that some states have stepped up to close the gap. For example, Illinois, DC, and Massachusetts have invested in workforce compensation and provider stabilization through direct funding. There is much to learn from the pandemic experience, including the importance of predictable, stable, flexible funds that are not tied to individual children’s enrollment. States that have made these investments are revisiting their cost models to consider the full picture of resources.

In most states, though, pandemic relief funding has not been backfilled, and this year’s cost analysis may reveal major gaps. Many providers have raised tuition to try to make ends meet: don’t be surprised if this year’s Market Rate Survey shows big jumps in tuition prices.

What Should You Do About It?

What does this mean for states’ CCDF plans? Understanding the extent of these changes is the first step toward addressing them. To make the most of this year’s cost analysis, states should:

Listen to the field. What are providers in your state feeling most acutely? What are they doing to attract and retain staff? What is different about your community’s context (demographically, economically, or culturally) and how does that intersect with these national trends? This year’s cost analysis is an opportunity to tune into what providers in your area are experiencing, which builds credibility for the results. (See Part 3 of this series for more on best practices for engagement and translating input into costs.)

Update your underlying cost data. If possible, conduct a survey to collect the most recent and relevant data from the field. If that is not feasible, use sector-specific inflation factors (e.g. a health care-specific factor for health care costs) and the most recent data available.

Embrace transparency. It can feel daunting to be honest about the costs that providers are facing, and the gaps between costs and revenue, when state budgets are already tight and there is no easy solution in sight. But transparency about the challenges is the first step toward building the case for public investment. Many providers have told us that they are grateful to see their shared challenges named, publicly, in detail – it validates their experiences and shows them they are not alone.

We’ve helped states across the country navigate these exact shifts. If you’re working through your own update, reach out.