Minnesota could be forced to pay millions of dollars in penalties starting this fall for violating federal regulations designed to ensure access to affordable child care for poor families, state officials warn.

After years of underfunding, Minnesota's state subsidies that help more than 15,000 low-income families pay for child-care costs have fallen well short of federal standards and the cost of providing care, forcing some providers to turn away children and leaving working parents scrambling to find arrangements to stay employed. The state's publicly funded child-care assistance program now covers just 16.3% of the full tuition charged by family providers and 23% of prices at larger child-care centers, which is below the federal minimum for reimbursement rates, according to a report issued this week to lawmakers by the state Department of Human Services (DHS).

"We are at a critical point," said Lisa Bayley, deputy assistant commissioner for children and family services at the DHS. "Everything shows that having that consistent, stable, quality child care, day after day, is critical for kids' development and for keeping families together."

Child-care advocates and some lawmakers say Minnesota's low reimbursement rates for publicly funded day-care costs have contributed to a severe and worsening shortage of options for low-income families, particularly in greater Minnesota. Statewide the number of family child-care providers has declined 35% over the past decade, from 12,200 providers in 2009 to less than 8,000 last year. Approximately a quarter of Minnesota families live in "child-care deserts," in which there are more than three times as many children as available spots among licensed providers, according to a recent analysis.

Minnesota's reimbursement rate for its publicly funded child-care program has not increased since 2014, as repeated pleas for additional funding have been drowned out by concerns over fraud and poor oversight of the Child Care Assistance Program (CCAP), a $254 million program funded through state and federal dollars. Unless lawmakers raise the subsidy, the state will lose from $2.75 million to $5.5 million of the $69 million it receives annually through a federal block grant to help with CCAP costs. Minnesota would be subject to penalties as of Oct. 1, according to DHS officials.

The looming possibility of federal fines has fueled bipartisan calls for legislation that would bolster payments under the child-care assistance program. Sen. Karin Housley, R-St. Mary's Point, chairwoman of the Senate Family Care and Aging Committee, has introduced a bill that would set CCAP reimbursement rates at the 25th percentile of a market-rate survey of costs, which would bring Minnesota in line with minimum federal standards. Even with such a change, however, CCAP payments would not come close to covering costs at most day-care providers. Lawmakers have proposed rate increases in each of the past five years, none of which were approved.

The chronically low rates leave day-care providers with just a few options to stay afloat — none of them favorable. They can refuse to serve low-income families using the CCAP program; limit the number of such families they serve, thus restricting access; or charge poorer parents a portion of the difference between the CCAP reimbursement rate and the tuition for child care. Parents who can't afford the difference are often forced to turn to family and friends for help. In some cases, they drop out of the workforce to take care of their children at home, say operators of child-care centers.

Those especially hard-hit are minority families, which make up a majority of the people in the child-care assistance program. As of last year, more than 67% of the 30,000 children served in the program were children of color or American Indian, state data show. The average monthly subsidy for families in the program was $1,356.

"Right now, the economics simply aren't sustainable," said Clare Sanford, director of government and community relations at New Horizon Academy and board member of the Minnesota Child Care Association. "If we can't make child care more accessible for low-income families, then providers won't go into the business and they won't stay in the business."

Karen Devos operates the only child-care center in Norman County in northwestern Minnesota, with the nearest competitor roughly 40 miles away. About a quarter of the 49 children at her center, in the town of Ada, Minn., population 1,700, have a portion of their costs subsidized through the state child-care assistance program.

To avoid turning away low-income families, Devos has dipped into her own income, forfeiting a paycheck for three consecutive years. But with three children and household costs of her own, Devos said she cannot continue to subsidize such losses indefinitely, and she will be forced to set limits on the number of children on CCAP that she can accept if rates do not increase.

"I will do everything in my power to serve a family in need, even if that means taking a pay cut," Devos said. "But something has to give, or else people will either go out of business or quality will fall away."

At the New Horizon Academy child care center on Penn Avenue in north Minneapolis, where more than 90% of the families are receiving public assistance, the financial strain has been even more dire. There currently is a gap of more than $4,000 a year between what the center charges in tuition and what it collects in CCAP subsidies per child. Spread over a classroom of a dozen infants, that gap amounts to more than $50,000 a year.

For now, New Horizon Academy has kept the center in north Minneapolis afloat by spreading its costs among the other 80 centers in its network, Sanford said.

Bayley, the deputy assistant commissioner at DHS, said the low CCAP rates have a "cascading effect" throughout the child-care system, limiting what providers can pay staff and contributing to higher churn among employees. The financial pressures are one reason the industry has been steadily shrinking; last year alone, another 988 family child-care providers shut their doors. "It's just had this one-two punch," Bayley said of the low CCAP rates. "It affects the families themselves who currently need child care, and also the number of child-care providers out there."

The federal Administration for Children and Families first notified the state last April that it was out of compliance with its reimbursement requirements, and it would be subject to financial penalties if rates were not increased. Around the same time, the administration of Gov. Tim Walz recommended increasing rates to bring them in compliance with federal law, at a projected cost of about $100 million through 2023.

But concerns over access to affordable child care were overshadowed last spring by reports of rampant fraud in Minnesota's child-subsidy program. A widely publicized television news report suggested that Minnesota refugee families were defrauding the program and funneling illegally obtained money overseas to fund terrorist groups. That report was never substantiated, but an ensuing report by the Office of the Legislative Auditor, the state's top government watchdog, found that the DHS had inadequate controls to detect and prevent fraud in the CCAP program.

After fierce criticism from lawmakers, the agency has taken steps to shore up its system for tracking and responding to reports of fraud, and it imposed tougher penalties on providers found to have bilked the child-care program.

Chris Serres • 612-673-4308

Twitter: @chrisserres

New Horizon Academy has kept its north Minneapolis center afloat by spreading costs among the 80 centers in its network. (The Minnesota Star Tribune)

Brenda McRoy read a book about a construction site to Kamiyah Henry a preschooler at New Horizon Academy childcare center. (Star Tribune/The Minnesota Star Tribune)

“We are at a critical point,” said Lisa Bayley, deputy assistant commissioner for children and family services at the DHS. (The Minnesota Star Tribune)