Funding of Services – Childcarepolicy.net

October 31, 2024October 31, 2024

ONTARIO’S NEW FUNDING FORMULA – AN EVALUATION

Ontario’s new funding formula is, of course, new. To be implemented in January 2025. So, everyone is feeling around it like the proverbial seven blind men around the elephant. There are different opinions depending upon which part you are touching.

What we do know for sure is that this is a cost-based funding formula, seeking to take into account the different cost situations facing different child care centres. It will replace the revenue-replacement model which began in March 2022, which was based only on what parent fees were charged by a centre, not on their costs. For many centres, the revenue-replacement model failed to cover true costs, driving centres into debt as a result, or forcing them to close rooms.

This evaluation is based only on the funding formula for child care centres, not for home child care.

THE FUNDING FORMULA – A THUMBNAIL SKETCH

Ontario’s new funding formula will deliver operational funding to centres that are in the $10 a day program (CWELCC). Each centre will have to come up with a projected operating budget that identifies how many licensed spaces they have in each age group, how many of these spaces will be operational in the coming year, whether the centre is located in a community space or a school, the location of the centre, and the number of days of operation for each age group per year. These data will be fed into a funding formula to determine how much revenue the centre will receive for operations in the coming year (to cover wages, salaries and benefits of program staff and supervisors, food, accommodations, administration, materials and so on).

The calculated numbers will be affected by the geographic location of the centre, with centres in Toronto getting a boost and many others having their calculated allocation reduced a bit. This is intended to reflect differences in the costs of operation in different locations around the province.

If the spaces are existing spaces (part of the CWELCC $10 a day program as of August 14^th, 2024) and the calculated revenues do not cover their projected costs, they will be eligible for a Legacy Top-Up to revenues. As long as the centre can show that its projected costs reflect the (relatively high) legitimate historical costs of operating this centre, it will receive this extra revenue through a Legacy Top-Up. New spaces are not eligible for a Legacy Top-Up, but they will get a Growth Top-Up. A Growth Top-Up boosts up the amount calculated by the funding formula for new spaces, by different amounts based on geography.

A centre can spend its allocation on any eligible cost, and nearly all costs that are clearly related to the provision of quality child care for children will likely be eligible.

On top of this, there is an allocation for profit or surplus. It’s called an “allocation in lieu of profit or surplus”. It’s about an 8.5% markup on top of other revenues. For-profit centres will take this as profit. Non-profits will take it as a surplus to be used to cover emergency shortfalls in the future or to cover expected repairs and maintenance, or to improve compensation and quality.

Service System Managers (SSMs) are the gatekeepers of the system. They hand out funding according to submitted budget plans for the coming year. They will adjudicate issues related to the “eligibility” of certain expenditures. They will assess the reasonableness of expenditures in an annual cost-review process. They will also continue to administer the child care subsidy system. There will no longer be operating grants and wage enhancement grants for spaces that are part of the $10 a day system, but there will continue to be such grants for child care for children 6-12.

For more details about how the new funding formula works, see my blog from September 23^rd, 2024.

OK, on to the evaluation:

POSITIVES OF THE FUNDING FORMULA

Let’s emphasize the positives first. The Ministry of Education has made a serious attempt to develop a cost-based funding formula – a funding formula that will cover the legitimate costs of operators seeking to provide quality services for children. It begins the process of developing public management of child care operations with financial accountability for the money spent. It is not perfect, as you will see below; there are some serious problems that remain. But first, here are some of the positives:

Finally, we are getting rid of the stopgap “revenue-replacement” funding model which was not based on the true costs of operating a child care facility, but was based on whatever your parent fees for children 0-5 happened to be on March 27, 2022. For some centres – those who had kept fees low, or those who used higher school age fees to cross-subsidize parent fees for younger children, or those seeking to attract more staff – revenue-replacement was extremely unfair. These centres went into deficit and many shut down rooms. So, having a funding model which purports to be based on costs is a big step forward.

2. For those centres seeking to expand and licensees seeking to set up new centres, it is now possible to forecast what your annual revenues will be. This is indispensable to support growth.

3. For centres that have historically had costs of operation that are higher than the Benchmark Allocation (what the Ministry believes the underlying costs of operation truly are), there is a Legacy Top-Up. That means that these centres, for their existing spaces, will not go out of business. Their costs (for existing spaces, but not new ones) will, apparently, be covered at their current level going forward.

4. For centres that have operating costs that are lower than the province’s Benchmark Allocation (apparently 50% of the centres in the province), they will have revenues that are greater than their costs (i.e., they will receive the Benchmark Allocation). So, these centres could and should spend additional revenues on improving quality, including wages and benefits to attract and retain staff. If they don’t fully spend their allocation, the surplus will be taken back at the end of the year.

5. There are important measures of financial accountability built into the new funding system – standardized financial reporting, audited financial statements, a cost review process at the SSM level for selected centres and agencies and an external compliance assessment process for a 5% sample of centres/agencies. Financial accountability is a key aspect of public management. If 90% of revenues are coming from government, we need to know that these revenues are being spent sensibly improving the lives of children and parents.

6. The new funding formula determines the total amount of revenue a centre will get, but gives a very large measure of flexibility to the centre on how it spends this money. Instead of having multiple different spending envelopes generated by multiple different granting programs, nearly all centre operating revenues will be in one envelope. This is positive, because we want centres to have the capability to tailor their programs to the character of their community and the needs of their children and families. Centres should not have cookie-cutter programs – the same for everyone. This funding formula enables diversity.

7. There is some limitation on the amount of revenues that can be taken out “in lieu of profit”. There is a formula for the amount “in lieu of profit/surplus”. This guarantees operators a minimum amount of profit or surplus but this is also a maximum. I will have more to say about this below.

NEGATIVES

8. The funding formula is not based on a wage grid. Instead, there is a wage floor for RECEs – currently $23.86 per hour. A wage grid would establish wages to be paid to all certification levels of staff, including untrained staff, cooks, supervisors, etc., with increases in this hourly wage based on experience and qualification level. Many Canadian jurisdictions now have wage grids.

A wage grid is designed to attract and retain educators and other staff. The absence of a wage grid means that paying low wages is an attractive competitive strategy for some operators – low wages will potentially leave them surplus revenue to spend in other ways. For instance, for-profit operators could use these freed-up revenues to pay accelerated mortgage costs so that they end up owning child care assets sooner.

9. Geographic Adjustment Factors (GAFs) and Growth Multipliers (GMs) play a very large role in determining how much annual revenue any centre will get. And yet the justification for the GAFs and GMs is clouded in mystery. Geographic Adjustment Factors vary from 0.79 (Kingston, Lennox and Addington, Hastings, Renfrew) to 1.07 (City of Toronto). In other words, for the same size of centre, a child care centre in Kingston will receive a Benchmark Allocation that is about 74% of the Benchmark Allocation in Toronto ((i.e., (0.79/1.07)*100). Since wages and benefits are the lion’s share of child care costs, we have to ask whether compensation is that much lower in Kingston than in Toronto. And if it is, should it be?

For new centres, a Growth Multiplier builds new revenue variation on top of the Benchmark Allocation. Growth Multipliers are sometimes very small, for instance between 0.00 and 0.03 in City of Cornwall, Lennox and Addington, and Cochrane DSSAB, and sometimes much larger (for example, the multiplier is 0.30 in County of Lanark, United Counties of Prescott and Russell, County of Renfrew). Lanark and Lennox and Addington are very close to each other. It’s hard to believe that a centre in Lanark deserves a 30% supplement to its allocation in order to fund new growth, whereas a new centre established in Lennox and Addington has to get by with only a supplement of 2% to the regular Benchmark Allocation. If you do a bit of math, you can figure that the amount of revenue available to a new centre in Toronto will be over 50% higher than to a new centre in Lennox and Addington. That seems oddly disproportionate.

10. In the market economy, profit is a reward to the successful entrepreneur. In other words, it is a reward to the entrepreneur who takes a risk, starts a business, and is successful in selling a product or service that people want to buy. Not all entrepreneurs will make a profit, but the desire to earn a profit encourages entrepreneurs to spend time figuring out what people want and how to design and produce it for a price that consumers can afford. That’s the theory, anyway. And we put up with some producers earning big profits because we believe that profit encourages (some) entrepreneurs to try to satisfy consumer demand.

However, in this funding formula, profit has very little to do with desirable behaviours. Every provider will earn a profit of something like 8% of revenues as an automatic result of the funding formula. And that will be true for providers who work hard on improving quality and those who do not know much or care much about quality.

11. I said above, under the list of positives, that the funding formula limits the amount of profit that can be earned (actually called the allocation “in lieu of profit/surplus”). Formally, that’s true, but there appear to be other ways that unscrupulous for-profit operators could increase their takings. For instance, operators that own their own facilities can lease them back to themselves as the centre owner. And, a centre owner can do management and supervisory work in her own centre and get paid for it. The financial accountability measures in the funding plan are supposed to ensure that the amount of lease payments and the amount of owner’s compensation are reasonable, but that will be a difficult thing to do.

12. The allocation for wages and benefits of supervisory staff does not depend on the size of the centre. However, large centres need more supervisory staff than small ones do. A centre with 150 children will need both a supervisor and an assistant supervisor, at least. Therefore the new funding rules, that base the revenues for supervisor compensation only on the number of days of service operation rather than on the number of children, will encourage the licensing of many smaller centres which may not make sense. It might actually be a more efficient use of resources to encourage larger centres, within reason.

13. The most general and perhaps most serious critique of the funding formula is that it does not effectively incentivize quality improvements by operators. PEI’s funding formula encourages centres to hire staff with higher levels of qualifications – a centre’s funding gets multiplied when they hire better paid staff. Quebec’s funding formula gives supplementary funding to centres that have higher costs because staff have greater amounts of experience or higher qualifications. Ontario’s funding formula ensures that an extra dollar spent on quality or staff wages is a dollar taken away from something else. As point 4 above notes, there is some encouragement to spend on quality for centres that have costs less than their Benchmark Allocation. But, there is no encouragement to spend on quality for the 50% of centres that have costs higher than this.

BAD BITS

14. The revenue allocation for children of kindergarten age appears to be too low. I’ve done calculations of the amount of revenue (including parent fees) that the formula allows for kindergarten-age child care. If you have a centre with 78 kindergarten children, located in a school, the formula gives an average revenue per child per day, from all sources, of only $26.66. This would need to cover wages and benefits of staff and supervisor and all operational costs. This figure then gets multiplied by the Geographic Adjustment Factor. So in Toronto, multiplying by 1.07, the revenue for kindergarten-age children would average $28.53 per child. In Kingston, multiplying by .79, the revenue for kindergarten-age children would average only $21.06 per child. All other locations will be somewhere in between.

And this daily revenue allocation is the same for the (approximately) 191 days per year when a centre has to pay the costs of part-day care (before-and-after school care) and for the (approximately) 71 days when a centre has to pay the costs of full-day care required on professional development days, March and Winter Breaks, during summer school holidays, and for some statutory holidays. But clearly, there are many more hours of staff time required for full-day care than for before-and-after school care. How can it make sense to get the same revenue allocation for both? Centres will have incentives to shut down any summer programming for sure. Creating more service shortages.

15. The kindergarten problem with “hours” is also a problem across the system. The funding formula does not take into account the daily number of hours of service a centre provides. A preschool that operates only 2 ½ hours per day will get the same revenue allocation as a full-day centre open 11 hours per day. If a centre cuts its hours to provide 9 hours a day instead of 11 or 12, the funding formula will still give it the same daily revenue. The funding formula incentivizes cutting hours of care, for no obvious purpose.

This will be particularly problematic for any centre that seeks to provide non-standard-hours care, such as staying open in the evenings, or opening early in the mornings. The extra hours of service will not deliver any additional revenue to the centre, so centres providing non-standard-hours care will be incentivized to close.

16. The funding formula is silent about what is happening with the child care subsidy system. As we know, the subsidy system, reduces or eliminates parent fees for families with particularly low levels of income. Apparently, the Ministry intends to provide sufficient funds to Service System Managers to at least keep the number of subsidized families at current levels, but it would be good to have assurances of this (or better) within the funding formula document itself.

17. The funding formula is similarly silent about the funding of services for children with special needs. Funding and provision of services to children with special needs is an essential part of a publicly-managed child care system, but it is unclear how this will happen.

18. The funding formula is also silent about funding for professional development of staff. Professional development is central to maintaining and enhancing quality of services, but is professional development now to be an optional activity for centres that have extra funding available, and not for others?

OVERALL EVALUATION

Designing a funding formula in a complicated province like Ontario is not easy. And the near complete absence of cost data before the 2023 data collection process did not help. The Ministry of Education has made a serious attempt to produce a cost-based funding formula that will permit Service System Managers to publicly manage child care centres and family child care agencies in their areas. Service System Managers have many new roles – providing interpretation of new funding guidelines, judging the appropriateness and reasonableness of expenditures, managing processes of financial accountability, etc. – and will require additional resources to carry them out.

The speed of implementation of this funding formula is causing significant upset and chaos. Technical documents that explain how benchmarks, adjustment factors and growth top-ups were calculated are not yet available, nor are standardized reporting forms. Centres are having to plan next year’s budget without sufficient time to understand the new revenue rules. This is unfortunate and increases the cacophony of criticism of the program, some of which could have been avoided. However, the revenue-replacement model this replaces was even worse for centres, so we do not want to pause or reverse the transition to a new cost-based formula for centre revenues. In 2025 we will have to do the best we can to implement this new funding system. There will be mistakes and inconsistencies this year. There will be, and have been, different interpretations of what costs are eligible from different SSMs. The Ministry will have to provide enhanced resources to help and to solve problems.

The funding formula would be much better if based on a compulsory wage grid – there would be much less variation in expenditure levels from centre to centre and compensation would be mostly removed as a form of competition between centres.

Revenue amounts for care of kindergarten-age children are too low and will incentivize dropping or reducing these programs.

Failure to take hours of service into account in determining revenue allocations is highly problematic and will incentivize shortening the daily hours of service provided.

We need information about the funding of subsidies, special needs and professional development.

Many centres have run deficits in the last couple of years due to the shortfalls of the revenue-replacement model. Is there going to be a special funding program through the SSMs to wipe out these debts, or are they somehow handled by Legacy Top-Up funding? This is unclear.

The new funding formula is based on providing revenues for individual centres, not for groups of centres. However, there are a significant number of multi-site providers in Ontario, particularly not-for-profits or municipal providers. There is no provision in the new funding formula for multi-site planning and operation. A multi-site agency cannot use surplus revenues in one centre to cover shortfalls or emergency repairs in another. Going forward, the funding formula will need to be amended to encourage and facilitate multi-site operation rather than to discourage it.

Legacy Top-Ups will allow all current child care centre providers to fund all eligible costs at current levels, which is a way of avoiding immediate crises that would threaten the whole system. This is a smart feature of the funding formula. No existing centre will have to go out of business because the funding formula will not cover its current legitimate costs.

I haven’t yet looked at the funding formula as it applies to family child care agencies and family child care homes. Reportedly, this is a mess, but I can’t know that yet for sure.

The biggest question going forward will be whether there is sufficient funding from this formula to support new spaces. I have done some modelling that gives me approximate numbers. What I have done is to look at centres that only have children from one age group and estimate the revenue per child that would be available through the Unadjusted Benchmark Allocation. The Unadjusted Benchmark Allocation is the calculated revenue available to the centre before Geographic Adjustment Factors are included. This Unadjusted Benchmark Allocation is different for a centre in a community compared to those centres that are school-based.

When I do these calculations, I find that for infants the total average daily revenue per child is between about $130 and $137 per day (lower for school-based than for community-based). For toddlers, the total average daily revenue per child is between $87 and $95. For children of preschool-age, the total average daily revenue is between $65 and $73. For children of kindergarten-age, the daily revenue is between $26 and $39. To know for your centre how much funding would be available, these numbers would have to be multiplied by the relevant Geographic Adjustment Factor and, for new spaces, by the relevant Growth Multiplier. Is this enough funding to support growth of new spaces? The jury is still out. We need to compare these revenue figures to expected costs of good quality programs.

If the new funding formula does not support the operating costs of new centres, it is a failure, so this is a central issue. I am happy to hear from you about whether the funding formula will support expansion in your community. And, let us not forget that expansion also requires capital funding, which is in very short supply from this government.

September 23, 2024October 21, 2024

HALLELUJAH! ONTARIO FINALLY HAS A NEW FUNDING FORMULA

Hallelujah! As of August 14^th, 2024, there finally is a funding formula to provide some revenue-certainty for child care providers in Ontario. Not a moment too soon, in fact, a year or two too late. As of January 2025, this formula for the provision of operational funding to providers will be implemented to replace the inequitable revenue-replacement model that has existed since April 2022. As the new funding guidelines admit “[w]hile a revenue replacement approach is transparent and simple to implement, it is not responsive to the true cost of providing child care in Ontario.” (p. 7). Revenue replacement was not equitable and it did not facilitate growth of capacity, so we will not mourn its passing.

This marks a new stage of development of the $10 a day child care program in Ontario. And, I am sure that other provinces will be looking closely at this example to see if they should model their funding formulas on this one. Together, we need to assess whether the funding formula is any good and what its strengths and weaknesses are. As with any funding formula, there are many details and understanding how the system will work is not easy. This blog post is a start. In this post, there is a lot of description and only a small amount of opinion. More opinion will follow soon.

I think a question and answer format will be best. And, I will, in this blog post, only describe funding for centres, not for home child care agencies. I will get to family child care in a later post.

B2C2 and others have called for a funding formula similar to the one in Prince Edward Island; is Ontario’s new funding formula like PEI’s?

Ontario’s funding formula is not like PEI’s. The allowed costs in PEI are based on the provincial wage grid for child care staff with wages varying by qualification level and experience. PEI’s formula encourages hiring of staff with higher qualifications because operating funding is increased to cover actual wage costs. Then, PEI has an allowance of 20% for benefits and there is a provincially-funded pension plan. And PEI’s formula provides the same revenues across the Island for similar centres.

In contrast, Ontario does not have a wage grid for child care staff. Ontario’s new funding formula gives flexibility to a centre to spend its allocation in different ways, but does not, in particular, reward the hiring of more staff who are fully qualified RECEs. Ontario’s benchmark for benefits is only 13.4% for staff and 16.2% for Supervisors and there is no provincially-funded pension plan. And operational funding for centres under the new funding formula in Ontario will be highly variable across different locations.

2. How is the Funding Formula structured?

The structure of the new Ontario child care funding formula is relatively simple, getting more complex as you get into the details. The funding formula is based on calculation of what is called a “Benchmark Allocation”. A Benchmark Allocation, as the Ministry of Education’s funding rules make clear, is supposed to represent “the typical costs of providing quality child care in a geographic region, based on planned operating spaces.” (p. 9) . One of the Ministry’s goals with the new funding and accountability processes is “to gradually shift the overall cost of providing child care … towards more standardized costs, as represented by the benchmark allocations.” (p. 48). On top of the Benchmark Allocation, there is also an allocation for profit or surplus.

Benchmark Allocations, which vary across the province, are designed so that about 50% of existing licensees will have their expected eligible costs fully covered. The other 50% of licensees will not have their costs covered by the regular (benchmark) funding allocation, but legacy centres (those currently and continuously in CWELCC) with higher costs will be eligible for a Legacy Top-Up to this funding. This top-up formula evaluates the 2023 cost structure of centres, along with 2025 evidence of some fixed costs such as rent, insurance and property tax. There is also a provision for cost increases since 2023.

Calculation of the Benchmark Allocation for a centre involves two parts:

Calculation of the Unadjusted Benchmark Allocation (total of four components)
This is multiplied by a Geographic Adjustment Factor (GAF) which can move the total up or down.

Once adjusted in this way, our calculation is called the “Benchmark Allocation” for your centre.

3. What About Top-Ups?

That’s not the end of it, though. When the Ministry canvassed existing centres about their actual costs, they found lots of variation. To account for this cost variation, the Ontario funding formula includes a Legacy Top-Up to provide additional revenue for legacy centres with costs higher than their Benchmark Allocation.

In addition, there is another revenue top-up that applies only to new spaces or new centres. This is called a Growth Top-Up and recognizes that the Benchmark Allocation will not necessarily be sufficient to cover operational funding of new capacity. The Growth Top-Up will provide some increased operating revenues to most centres that are new or growing in capacity.

Details on the Top-Ups

Legacy Top-Up – If you are a legacy centre (you were signed up to CWELCC when this funding formula was born and still are) and your proven costs (according to a formula) are higher than that Benchmark Allocation, your SSM will provide a Legacy Top-Up to cover these supplementary costs.
Growth Top-Up – In the first year of any expansion, you will be eligible for a Growth Top-Up which recognizes the (higher than benchmark) program costs associated with new spaces that come on stream during the year.
In years after 2025, a centre that received either of these two top-ups will receive a “Rolling Top-Up” based on the calculated top-ups that were received in 2025. In other words, these top-ups will become permanent in revenue calculations after 2025.

The “Program Cost Allocation” is the name the new funding system will use to describe the sum of your Benchmark Allocation plus any top-ups for which you are eligible

All of the above calculations are based on an annual operating plan for the coming year that each centre submits to its SSM. Funding is determined based on the plans for each centre.

Amongst other things, the operating plan will specify the planned number of operating service days for each age group and the planned number of operating spaces for each age group. In order to calculate the amount of operating money the SSM will give you, the SSM must then subtract the amount of fee revenue (adjusted for enrollment shortfalls) you expect to receive from parents, or on behalf of parents who receive Child Care Subsidy.

It is important to note that funding is not aggregated across centres that have the same licence-holder, so that the funding allocation for a centre has to be spent on the costs of that specific centre. This will, no doubt, cause problems for multi-site operations who are used to planning and funding activities across the group of centres, rather than treating each centre separately.

4. More details about Top-Ups

The funding guidelines describe Legacy Costs this way: “Legacy costs are costs that are consistent with legacy centres’/agencies’ 2023 cost structures, adjusted for eligibility, cost escalation, and changes to operating practices and fixed costs.” Legacy Top-Ups are designed to ensure that Legacy Costs are covered going forward. In applying for a legacy top-up, centres would provide an audited 2023 Statement of Operations and other financial information to their SSMs to calculate the cost of eligible services (e.g., for children 0-5 rather than 6-12) at the level of an individual licence. From these costs, ongoing costs would be scaled up to reflect cost increases between 2023 and 2025. This would allow the calculation of the amount by which Program Cost revenues need to be scaled up to cover higher costs. This is the Legacy Top-Up. The Legacy Top-Up will take account of changes in spaces, days and hours of service over this period.

There is also a Growth Top-Up for all centres that are adding new spaces. Before the calendar year begins, the annual revenues of each centre are determined by their SSM based on operational plans filed with the SSM. For centres that expand licensed capacity during the year, an adjustment needs to be made. This is the Growth Top-Up. The calculation of revenues for these new spaces is largely similar to the calculation of the Benchmark Allocation, but applied only to the new spaces and with the allocation raised by a Growth Multiplier. Importantly, there is no Legacy Top-Up on new spaces, even if other centres operated by the same licensee receive Legacy Top-Ups because of elevated costs. The new Benchmark Allocation is multiplied by a Growth Multiplier. This Growth Multiplier may add as little as 0% to the funding for these new space (City of Cornwall) or as much as 30% (County of Lanark, United Counties of Prescott and Russell, County of Renfrew, Rainy River DSSAB), based on geography. The typical value of the Growth Multipliers is about 15%.

Once these top-ups are added to the Benchmark Allocation for an eligible centre, the total is called the Program Cost Allocation.

5. What about Profit or Surplus?

The new Ontario funding formula has one more major component. It builds in a separate allocation which goes as profit for owners or as surplus for non-profit or public child care centres. Profit/surplus therefore does not depend on good performance, but is a guaranteed payment. On the other hand, the formula provides a limitation on the amount of profit that can be earned in any year out of the government portion of revenues.

There are three parts to the calculation of profit/surplus (which the Ministry guidelines call “allocation in lieu of profit/surplus”). There is a base amount, a part that is 3.5% times the amount of the Benchmark Allocation and a part that is 4.25% times the Program Cost Allocation (which is the sum of the Benchmark Allocation and the top-ups). These three parts are added together to get the total Profit/Surplus allocation. Both the Benchmark Allocation and the Program Cost Allocation are influenced by the Geographic Adjustment Factor. That means that the amount of Profit/Surplus is also affected by this GAF.

6. How are the individual parts calculated that make up the Benchmark Allocation?

There are four components that are summed together to get the Unadjusted Benchmark Allocation: the Program Staffing Component (related to the wages and benefits of program staff), the Supervisor Component (related to the wages and benefits of the Supervisor), the Accommodation Component, and the Operations Component (related to all other costs, including wages and benefits of non-program staff). These are calculated based on the number of licensed spaces for different age groups, the operating capacity this year for different age groups, the proportion of staff in your centre that are delivering CWELCC-eligible services, the number of service-days of child care you provide to each age group over the year and a few other things. All of these calculations are based on your plans for your child care program in the coming year, not on past numbers.

In effect, each of the four components is adjusted according to a Geographic Adjustment Factor, although this calculation is done at the end after the four components are summed together. In other words, if you are in what the Ministry’s data says is a high cost area, the amounts for each element of this allocation will be boosted. If you are in what the Ministry’s data says is a lower cost area, the amounts for each element of the allocation will be lowered.

For example, centres in Toronto have a Geographic Adjustment Factor of 1.07; centres in Kingston have a Geographic Adjustment Factor of 0.79. So, the benchmark revenue allocation in a Toronto centre will be boosted by 7%. The benchmark revenue allocation in Kingston will be reduced by 21%. These Geographic Adjustment Factors are said to represent differences in the costs of providing child care services in different parts of the province.

7. Can you provide a simple example of how the Benchmark Allocation is calculated?

(There are some helpful worked-out examples from page 55 onwards in Schedule D of the Funding Guidelines. But, the example below provides some additional words of explanation).

As an example, think of a child care centre in a community setting in Toronto that has 48 preschoolers and no other children, just to make calculations simple. We will assume that the licensed capacity and actual operating capacity of the centre is 48 children. The per-diem benchmark allowed in the funding formula for 2025 for preschoolers (full day child care for children over 2.5 years) is $39.23. Assume the centre will be in operation 261 days per year.

To get the amount of the Program Staffing component, we multiply 48 preschoolers X 261 service-days per year X a per-diem of $39.23. X an ancillary costs multiplier (13.4% to cover mandatory benefits like CPP/EI/EHT/WSIB). In the case of our example, that gives us an amount of $557,330.88.

To get the Supervisor component of the Program Costs, we multiply 261 service-days per year X a Supervisor per-diem of $301.38 X a Supervisor ancillary costs multiplier (16.2% to cover mandatory benefits). That gives us a total of $91,403.13.

The allowance for Accommodation costs is based on the number of licensed spaces, independent of current operating capacity. In our example, there are 48 licensed spaces. The annual per-space benchmark varies according to the age category of these licensed spaces, but also by whether the centre is in a community setting or is located in a public school. For preschool spaces in a community setting, the benchmark is $1,735.54 per space. For this centre, the Accommodation costs component would be 48 X $1,735.54 = $83,305.92.

The Operations Costs component has both a fixed and a variable part to the calculations, and varies according to whether the centre is in a community setting or a public school. The fixed part is based on the number of licensed spaces and the annual number of days of service and this varies by age category of children. The variable part is based on the planned operating capacity and the number of days of service and this also varies by age category of children. The community-setting benchmark for fixed operations costs for preschoolers is $15.09 per licensed space-day. The community-setting benchmark for variable operations costs for preschoolers is $1.64 per operating space-day. So, for our example, the fixed part of operations costs would be 48 X 261 X $15.09 = $189,047.52. The variable part of operations costs would be 48 X 261 X $1.64 = $20,545.92. The total allocation for operations costs would be $209,593.44.

If we sum the allocations for the four components in our example, we get $557,330.88 + $91,403.13 + $83,305.92 + $209,593.44 = $941,633.37. This is the Unadjusted Benchmark Allocation.

This calculation would be the same for any centre with 48 preschoolers anywhere in the province. However, the Geographic Adjustment Factor (GAF) will change this allocation in every location. Toronto has a Geographic Adjustment Factor of 1.07 (i.e., relatively high typical costs) so multiply the Program Costs number by 1.07 to get $1,007,547.71. With the GAF applied this is called the “Benchmark Allocation”. To see the importance of this Geographic Adjustment Factor: if this same centre was in Kingston, the Benchmark Allocation would be $743,890.36.

It is important to note that this allocation can be spent in any way the centre thinks best to provide services for children. It can pay lower or higher wages, more or less in benefits, more or less to the Supervisor, more or less in mortgage or rental costs, more or less in the costs of operations, as long as these expenditures are judged to be eligible expenditures. The flexibility in spending is potentially positive, but without a wage grid (there is only a wage floor for RECEs), it means that unscrupulous operators could cut corners on compensation and quality in order to spend money in other ways. That would be undesirable, of course.

8. What about the calculation of profit/surplus for this centre?

The base amount of profit/surplus is $6,000 annually. For our example centre of 48 preschoolers in Toronto, the part based on the Benchmark Allocation would be 0.035 X $1,007,547.71 = $35,264.17. Because we are assuming no Legacy or Growth Top-Ups for this centre, the Program Cost Allocation is the same as the Benchmark Allocation. Therefore, the part of profit/surplus based on the Program Cost Allocation is 0.0425 X $1,007,547.71= $42,820.78. The sum of these three parts is the allocation in lieu of Profit/Surplus, which is $84,084.95.

The total revenue of this centre during the year would be the Benchmark Allocation of $1,007,547.71 plus the Profit/Surplus allocation of $84,084.95, which equals $1,091,632.66. Profit/Surplus would be 7.7% of total revenue. Another way of thinking of it: profit in this example is a markup of 8.3% over the Benchmark Cost Allocation.

Not all of this revenue would come from the SSMs of course. The planned amount to be received from parents or on behalf of parents (adjusted for enrollment) would be subtracted from this total revenue calculation to get the annual funds received from the SSM.

9. Does the new funding formula provide enough funding?

This, of course, is the big question. I need you to help me answer this. I have some examples in the table below and they give calculations of the total amount of revenue centres will have, based on their size and location in the province. The examples are simple and do not include provision of before-and-after school care for kindergarten children. There are three centre sizes:

49 children: 10 infants, 15 toddlers, 24 preschoolers
73 children: 10 infants, 15 toddlers, 48 preschoolers
88 children: 10 infants, 30 toddlers, 48 preschoolers

These centres are located in Toronto, Ottawa and Windsor. Toronto has a Geographic Adjustment Factor (GAF) of 1.07. Ottawa has a GAF of 0.94. Windsor has a GAF of 0.80. These Geographic Adjustment Factors play a big role in the revenue totals that centres will receive and these examples are a good indication of the range of revenue values that will affect centres across Ontario, urban and rural, north and south. The other factor that affects funding is whether the centre is located in a community or in a publicly-funded school. This affects funding allocations for Accommodation and for Operations.

This table calculates the total annual revenue of these centres. Total revenue includes both the amount to cover costs and the amount to cover profit or surplus. Some of total revenue will come in funding from the SSM and some will come from parent revenue (or child care subsidy revenues provided on behalf of parents). As parent fees go down, a greater percentage of revenues will come from government and a smaller percentage from parents, but the total revenue would remain the same (unless benchmarks are changed).

Table 1: Total Annual Revenues of Centres of Different Sizes and Locations

Under Ontario’s New Funding Formula – Community-Based and School-Based Centres

	Toronto	Ottawa	Windsor
Community-based or School-based centre	Community	Community	Community
Geographic Adjustment Factor - GAF	1.07	0.94	0.8
Total Revenue – 49 space centre	$1.394m	$1.226m	$1.044m
Total Revenue – 73 space centre	$1.884m	$1.656m	$1.410m
Total Revenue – 88 space centre	$2.283m	$2.006m	$1.709m

	Toronto	Ottawa	Windsor
Community-based or School-based centre	School	School	School
Geographic Adjustment Factor - GAF	1.07	0.94	0.8
Total Revenue – 49 space centre	$1.291m	$1.135m	$0.967m
Total Revenue – 73 space centre	$1.731m	$1.522m	$1.296m
Total Revenue – 88 space centre	$2.098m	$1.844m	$1.570m

Notes:

Total Revenue figures in the table are in millions of dollars of revenue annually, including both operating funding from governments and parent fees.
49 space centre has 10 infants, 15 toddlers, 24 preschoolers, all full-day
73 space centre has 10 infants, 15 toddlers, 48 preschoolers, all full-day
88 space centre has 10 infants, 30 toddlers, 48 preschoolers, all full-day

Notice that for the same sized centre, a location in Toronto will get revenues which are hundreds of thousands of dollars higher than a location in Windsor (or many other places across the province). Are true underlying costs that different in different locations?

And, are these amounts of total revenue enough to operate centres and provide good quality child care? I don’t have enough evidence yet to draw a conclusion, but I’m happy to hear from centre directors about your example and experience.

These calculations are based on Ontario’s 2025 benchmarks. Benchmarks can change in future years. Current centres will be potentially eligible for Legacy Top-Ups. And, allocations for new centres will be affected by Growth Multipliers (but not Legacy Top-Ups).

10. What is the role of the SSMs?

The SSMs have many roles in relation to planning and operationalizing growth plans and assisting and communicating with child care providers in a range of different ways.

If we focus specifically on their role in relation to funding in 2025, the SSMs have to:

Receive operational plans from each operator/each centre. Operating plans will include planned operating spaces for each age group, planned number of service days for each age group, number of hours of service for each age group, copy of parent handbook.
Collect legacy data from those operators claiming a Legacy Top-Up. Legacy data in 2025 will include specific evidence of any fixed costs (especially accommodation costs), the operating budget for 2025, 2023 audited financial statements and any related financial reports to support claim.
Calculate the Program Cost Allocations for each centre including the Legacy Top-Ups, the Growth Top-Ups and the Profit/Surplus for each centre.
Schedule advance payments for each centre based on these calculated Allocations
Select centres that will have their reported costs reviewed in a cost review (not the same as the Direct Engagements on Compliance) and carry out cost reviews
Accept and process applications for in-year changes in funding
Collect spending attestations and standardized financial reports from each centre
Compare Allocations to Actual Costs/Spending and promptly recover overpayments to centres and refund these to Ministry.

11. What are the key issues with this new funding formula?

The biggest issue with the funding formula is one that is not yet answered. In new centres and new spaces, will there be enough funding available for providers to fund the provision of good quality care with educators and other staff that are fairly and reasonably compensated?

The Legacy Top-Ups in the funding formula are designed to ensure that existing centres with costs that are higher than the median will not have to close their doors; their costs will apparently be compensated by revenue supplements that become permanent through Rolling Top-Ups. That’s obviously a good thing, but Legacy Top-Ups are not available to new centres or even to new spaces in existing centres.

So, in judging the adequacy of revenues provided by this funding formula going forward, we need to ignore Legacy Top-Ups. They exist for Legacy centres (i.e., current centres), but not for new centres. The real question is “for new spaces (growth), will the revenues be adequate to provide good child care?”. At this point, we don’t have a clear answer. What we do know is that new spaces will only be eligible for the Benchmark Allocation plus the Growth Top-Up plus the Allocation in Lieu of Profit/Surplus.

As for the rest of the key issues with this new funding formula, that’s a topic for another blog. Coming soon.