This issues note provides background information on subsidy contracts, which states are using contracts, some of the pros and cons of contracts, and resources for finding out more about how contracts work in each particular state. Since 1992, states have been required by federal law to offer all parents the opportunity to receive a voucher. Prior to this change, many states relied on contracts for most child care subsidy payments. Other states have long-standing voucher programs. These contracts can provide an important source of guaranteed income to providers because the provider receives payment for each eligible enrolled child, regardless of the child's attendance on any given day.
States pay providers for a number of slots, which are available to eligible children.
States give vouchers to parents to be used for care of their choice. The money for contracts usually comes directly from federal Child Care and Development Fund money, but is occasionally funded through TANF, state funds, or tobacco settlement funds in order to increase capacity or quality. The primary advantage of contracts is the stability they allow providers. In low-income communities, the need for stability in public financing is especially crucial because child care providers have difficulty attracting private fee paying families. Financial instability is one of the reasons why child care programs are less prevalent in low-income communities, resulting in a limited supply of care and insufficient choices available for those families.