Part 5: How early childhood education services are funded

Education sector: Results of the 2010/11 audits.

5.1
The Ministry of Education (the Ministry) is responsible for licensing early childhood education services and setting the maximum number of places for children attending that service.

5.2
The funding the Ministry gives to each early childhood education service is directly based on the information that each service gives to the Ministry about the rates they are eligible to claim and children's hours of attendance.

5.3
The funding for early childhood education is significant. The introduction of the "20 Hours ECE" early childhood education policy in 2007/08 has led to an increase in overall funding for early childhood education from about $0.584 billion in 2006/0720 to about $1.325 billion in 2010/11.21

Our review of the process used to fund the providers of early childhood education

5.4
We reviewed publicly available documentation that describes the process the Ministry uses to administer early childhood education funding. We also reviewed internal material that Ministry staff use to apply the Ministry's funding rules, and spoke with staff in the Ministry.

5.5
Our document review and discussions were supported by detailed analysis using data taken from the Ministry's primary funding system (EDUMIS). Our analysis assessed the degree to which funding payments met our expectations. Payments are based on information that the services supply about children's attendance and contact hours with registered teachers.

5.6
We assessed the processes the Ministry used to fund early childhood education services. Specifically, we reviewed whether the Ministry ensured that services were funded at the appropriate rates, and whether the Ministry's monitoring of information submitted by services about child attendance and teacher contact hours was adequate.

5.7
Based on our work, we are satisfied that the Ministry has, in almost all instances, funded services at the appropriate rates.

5.8
The Ministry's monitoring arrangements enable it to identify when services submit inaccurate information. The procedures, described in paragraph 5.20, are designed to be sensitive to factors that increase the risk of inaccurate information.

5.9
The Ministry is currently considering changes to its monitoring approach to take account of changes in the composition of the early childhood education market.

5.10
We encourage the Ministry to monitor changes in how services are structured, so that its monitoring arrangements can respond appropriately to changes in the risk a particular service presents.

Background

5.11
The overall government priority for early childhood education is to increase the opportunity "for children to participate in high-quality early childhood education". The specific impact sought by the Ministry is improved participation rates for Māori and Pasifika children, and children from lower socio-economic communities.22 These children are less likely to participate in early childhood education than other groups. Participation also varies significantly between and within regions.

5.12
The Government is investing in intensive, community-led participation projects in high-priority areas, parent engagement programmes, supported playgroups, and support for early childhood education services to work more effectively with Māori and Pasifika families and families from lower socio-economic backgrounds.23

5.13
Appropriations targeted at early childhood education subsidise services for children under six years of age. Those education services are provided by licensed and chartered early childhood education service providers. Total appropriations for the 2010/11 financial year were about $1.264 billion (see Figure 14).

Figure 14
Analysis of total early childhood education appropriations for 2010/11

Components of appropriation $million
Licensed early childhood education (for children under two) 243.97
Licensed early childhood education (for children two and over) 281.76
Licence-exempt early childhood education 3.52
20 hours early childhood education 696.73
Targeted funding pool 37.93
Total 1,263.91

Source: The Treasury (2010), "Performance Information for Appropriations, Vote Education", Education and Science Sector – Information Supporting the Estimates 2010/11, Vol. 2, page 108.

5.14
About 11.4% of the spending in Vote Education in 2010/11 was allocated to early childhood education. The allocations for schooling and tertiary education were about 65.1% and 23.5% respectively.24

Early childhood education services

5.15
The providers of early childhood education services are primarily private organisations, with a mix of for-profit and not-for-profit services. During 2010/11, there were 5152 early childhood education services. Of these, 4321 were licensed and 831 were licence-exempt or certified playgroups.25

The process for funding early childhood education

5.16
The Ministry funds early childhood education services at rates approved by Cabinet. Early childhood services are required to submit student attendance returns three times each year, and they are funded based on these returns.

5.17
The Ministry carries out a range of quality assurance checks on the returns submitted by services, including checking the licence to make sure that the maximum number of children under that licence is not exceeded, before the funding is provided.

Rules and guidelines

5.18
The Ministry's website sets out its full funding rules and eligibility criteria for early childhood education services. We reviewed a sample of the material available on the Ministry's website. In our view, it is generally clearly written, with useful explanations of situations where funding will and will not apply. Each category contains a "frequently asked questions" section.

5.19
As well as the information provided on the Ministry's website, each early childhood education service receives periodic memoranda that describe any changes to the funding rates or eligibility criteria and provide additional guidance.

Monitoring

5.20
The Ministry has a dedicated monitoring team responsible for auditing early childhood education services' adherence to the funding conditions and any specific licensing requirements. All services are subject to audit based on:

  • service-specific risk indicators;
  • random selection;
  • results of any previous audits;
  • requests for an audit; and
  • the time elapsed since the last audit.

5.21
According to the Ministry, most (about 60%) of the audits of early childhood education services are carried out based on risk indicators specific to a service. The Ministry produces these indicators using information obtained about individual early childhood services and their operations. The remaining 40% of audits are carried out based on the other criteria.

5.22
During 2010/11, the monitoring team carried out 583 audits. This represents about 14% of all early childhood education services.

5.23
For those 583 audits, 497 funding returns (85.2%) needed some adjustment that resulted in the Ministry recovering money from the early childhood education service. The results indicate that aspects of the funding rules, criteria, and regulations are not well understood.

5.24
Through these audits, the Ministry recovered $2.06 million for 2010/11. Figure 15 sets out the main types of errors that early childhood education services made.

Figure 15
Types of errors leading to recoveries of funding in 2010/11

Type of error leading to recovery of funding Total recovery
$000
Inaccurate claim for child hours 1,592
Incorrect funding rate claimed 383
Inappropriate claims for support grants 89
Total recovery 2,064

Source: Ministry of Education.

Causes of the funding errors

5.25
"20 Hours ECE" funding errors were mainly caused by errors in "attestation" by parents to the services. These errors relate to situations where the service was unable to provide evidence of an attestation from the parents that the child for whom funding was being claimed was not also claiming free hours at another service (or if they were, disclosing the split of the 20 hours between services). This situation accounted for 43% of the errors that resulted in an adjustment and subsequent recovery by the Ministry.

5.26
Incorrect use of the "absence" rules has also resulted in a large number of services having to repay funding. The absence rules are explained in detail within the Handbook and guidelines. This guidance includes examples on how to continue to claim funding where a child is absent from the service, and when this is not permitted.

5.27
We considered the frequency and number of errors identified by the Ministry's monitoring processes. On average, each audit identified $3,540 in recoveries, or about 1.2% of the average funding paid to services. In our view, the number and value of the errors identified through the monitoring process is not a cause for concern.

5.28
The Ministry plans to address the apparent gaps in understanding by updating the Funding Handbook. The Ministry has also provided all centres where a funding recovery was made with tailored advice on how the service can best meet the funding guidelines.

5.29
The Ministry regularly receives a range of intelligence. This information is used to ensure that the monitoring regime responds to emerging issues associated with the quality of information submitted from services in support of their funding claims. Recent allegations of inappropriate filing behaviours have included:

  • allegations of fraud using roll and teacher contact hour returns;
  • charging contact hours for employees not normally in contact with children;
  • falsifying the registered teacher hours;
  • individual managers claiming to be working at two separate services at the same times;
  • pressure applied to staff to record all time as being contact time (which means the service reaches a threshold for higher funding); and
  • claiming funding during the Christmas break when the service had been closed during that period.

5.30
The Ministry is considering adopting measures specifically designed to address these behaviours. It is considering obtaining more detailed information from services about the systems and processes providers commit to putting in place to prevent inflated claims and ensure that funding claims are accurate.

5.31
The Ministry's future audits will be used to ensure that assurances made by services can be relied on. The Ministry is also planning to audit providers with multiple services on a regional or national basis. We support the introduction of these measures to strengthen the Ministry's monitoring of funding claims made by services.

Funding rate error

5.32
In April 2009, the Ministry identified that early childhood education services had been over-funded since February 2008. The over-funding was the result of an error in the application of an early childhood teacher collective agreement settlement to the calculation of the rate at which services were funded for each claimable hour.

5.33
After the Ministry identified this, it disclosed the error and carried out a comprehensive internal investigation. The investigation reported to the Secretary for Education in June 2009. The report concluded that, overall, the error was originally the result of an inappropriate determination of funding rates that the Ministry's review procedures did not detect. Further, the report identified:

  • The setting of rates is fairly complex. The process for setting rates was not documented in a way that facilitated the process being re-performed in a consistent manner. This documentation should have included reference to all files and documents used and readily available for review.
  • The Central Forecasting and Monitoring Unit (CFMU) maintains a documented process for forecasting; there was no such rigour applied to costing of policy initiatives. Without documentation, the Ministry's process relied too heavily on an individual reviewing the work to identify errors.
  • Lack of clear accountabilities. The report identified an absence of a clear understanding of the roles and responsibilities between the CFMU and the Early Childhood Policy group.

5.34
The report also highlighted contributing factors that included staff turnover, time pressures, multiple papers being prepared for Cabinet and the Minister, and that collective agreement settlements were not the primary focus of the CFMU review of the funding rates.

5.35
The Ministry did not seek to recover the additional funding provided to early childhood education services as a result of the error.

Subsequent changes

5.36
During the course of our 2010/11 annual audit, we specifically asked the Ministry about the progress it had made to address the factors that contributed to the error.

5.37
At a high level, the Ministry has:

  • clarified responsibilities for the steps involved in setting funding rates for early childhood education, including the various quality assurance procedures and the sign-offs required within each group, with ultimate responsibility held by the Deputy Secretary - Early Childhood and Regional Education; and
  • implemented a policy and procedures that include:
    • accountabilities for policy costing and early childhood funding rate setting; and
    • standard templates to be used throughout the Ministry where staff are costing policy initiatives and seeking approval for any consequential impact on funding rates.26

5.38
The Ministry's investigation identified a number of control failures that led to the funding error occurring. It concluded that implementing strong quality assurance processes over the rates-setting process was critical to reducing the risk of this type of error.

5.39
We have considered the controls implemented after the error was identified. In particular, we considered whether the steps taken to improve the understanding of people's roles and responsibilities, and the introduction of additional review processes, minimise the risk of similar errors recurring.

5.40
We are satisfied that the steps taken by the Ministry have addressed the cause of the previous error.

Detailed funding analysis

5.41
As part of our annual audit, we reviewed whether the Ministry's processes were effective in ensuring that early childhood education services were funded appropriately.

5.42
For teacher-led services,27 the funding rate is based on the hours the service operates (part of the day or all day) and the percentage of hours that children spend with registered teachers. Generally, services are funded at higher rates when the percentage of registered teachers increases. The current target is for 80% of the teachers in early childhood education services to be registered, by 2012.

5.43
We assessed the Ministry's payments to services for the four categories that account for the most funding:

  • early childhood education centres where 80 to 100% of the teachers are fully qualified and registered;
  • early childhood education centres where 100% of the teachers are fully qualified and registered;
  • early childhood education centres where 80 to 99% of the teachers are fully qualified and registered; and
  • early childhood education centres where 50 to 79% of the teachers are fully qualified and registered.

5.44
There are overlaps in the percentages covered because, from 1 February 2011, the "100%" category and the "80 to 99%" categories were replaced by the "80%" category. This is to bring the funding categories in line with the target to have 80% (rather than 100%) of the teachers in early childhood education centres registered.

5.45
The results of our analysis indicate that the Ministry is funding services at the appropriate rates. The following regression analysis charts compare the payments the Ministry made to early childhood education centres against the data the centres submitted about children's attendance and time with qualified and registered teachers. The closer the results are to a perfect line, the more accurately the funding paid matched the amount expected to be paid.28

Figure 16
Accuracy of "20 Hours ECE" payments to teacher-led centres where 80-100% of the teachers are fully qualified and registered

Figure 16: Accuracy of "20 Hours ECE" payments to teacher-led centres where 80-100% of the teachers are fully qualified and registered.

5.46
Between 1 July 2010 and 31 May 2011, the Ministry paid out $231.1 million in the category of early childhood education funding shown in Figure 16.

Figure 17
Accuracy of "20 Hours ECE" payments to teacher-led centres where 100% of the teachers are fully qualified and registered

Figure 17: Accuracy of "20 Hours ECE" payments to teacher-led centres where 100% of the teachers are fully qualified and registered.

5.47
Between 1 July 2010 and 31 May 2011, the Ministry paid out $130.2m in the category of early childhood education funding shown in Figure 17.

5.48
The Ministry needed to adjust the funding of a small number of centres, and these adjustments were processed during the period that we examined. The adjustments are shown as the "outliers" in Figure 17. The total value of the adjustments was $0.06 million.

Figure 18
Accuracy of "20 Hours ECE" payments to teacher-led centres where 80-99% of the teachers are fully qualified and registered

Figure 18: Accuracy of "20 Hours ECE" payments to teacher-led centres where 80-99% of the teachers are fully qualified and registered.

5.49
Between 1 July 2010 and 31 May 2011, the Ministry paid out $189.1 million in the category of early childhood education funding shown in Figure 18.

5.50
Again, there were a small number of early childhood education centres that had their funding adjusted during the period that we examined. The total value of the adjustments was $0.24 million.

Figure 19
Accuracy of "20 Hours ECE" payments to teacher-led centres where 50-79% of the teachers are fully qualified and registered

Figure 19: Accuracy of "20 Hours ECE" payments to teacher-led centres where 50-79% of the teachers are fully qualified and registered.

5.51
Between 1 July 2010 and 31 May 2011, the Ministry paid out $105.3 million in the category of early childhood education funding shown in Figure 19. Again, the Ministry adjusted some funding payments during the period, and they are the "outliers" in Figure 19. The total value of the adjustments was $0.08 million.

5.52
The results of our analysis for all other categories of early childhood education funding also show strong relationships between the amount of funding paid to early childhood education services and the attendance data submitted by the services.

20: Ministry of Education (2007), Annual Report 2006/07, page 142.

21: Ministry of Education (2011), Annual Report 2010/11, page 120.

22: See the strategic direction section in the Ministry of Education's Statement of Intent 2011/12-2016/17.

23: See "ECE participation" on the Ministry of Education's website (in the Budget 2010 factsheets section).

24: Ministry of Education (2011), Annual Report 2010/11, Wellington.

25: Ministry of Education (2011), Annual Report 2010/11, Wellington, page 13.

26: See the Ministry's Policy Costing and Rate Setting Corporate Policy, dated September 2010.

27: An early childhood education service is called "teacher-led" when at least half of the adults who educate and care for children are qualified and registered early childhood education teachers. Teacher-led services include early childhood education centres, kindergartens, and care services. In home-based services, all the co-ordinators must be qualified and registered. Parent-led services are where parents and family or caregivers educate and care for their children.

28: These results rely on the accuracy of information that centres submit to the Ministry. As noted, the Ministry has monitoring processes to help ensure that data from centres is accurate. A result of R2 =1 shows a perfect relationship between actual funding paid to the early childhood education centre and funding claimed by that centre.

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