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On-site daycare: the competitive advantage.

The South Florida Water Management District's three-way partnership with a developer and a daycare operator paved the way for the creative financing of on-site daycare for children of its employees.

Editor's note: Each year the Government Finance Officers Association awards its prestigious Awards for Excellence to recognize outstanding contributions in the field of government finance. The awards stress practical, documented work that offers leadership to the profession and promotes improved public finance. This article describes the 1992 winning entry in the financial management category.

In the mid-1980s the South Florida Water Management District (SFWMD) recognized the need to make available child daycare to be able to continue to attract and retain high-quality employees. The number of households with both spouses working outside the home had grown to a point where child daycare was becoming a necessity for employees during the first half of their working career.

In today's workplace, greater emphasis is being placed on employee benefits and a quality work environment than ever before: pay alone may not be enough to succeed in attracting top candidates. Child daycare can be a significant part of a comprehensive compensation package, providing the employee with additional disposable income through pretax deductions and/or lower costs. It can reduce anxiety by providing more frequent interaction between parent, child and care giver and can increase employee morale, which favorably impacts on productivity. Most importantly, it conveys an attitude of caring, a feeling of "family" within an organization.

The SFWMD is a unit of regional government. Its jurisdiction encompasses approximately 18,000 square miles, serving a population of five million citizens. The SFWMD is a 40-year-young organization which has grown into a total workforce of 1,500 employees. Its missions involve all aspects of growth management relating to water supply and protection and environmental protection and enhancement, as well as continuing to perform its originally established role of flood control protection, principally related to hurricanes and other storm events. Having recognized the need to make available child daycare in order to continue to attract and retain quality employees, the SFWMD decided in the mid-1980s to make on-site daycare a reality at its headquarters in West Palm Beach, Florida.

It took seven years of research, planning, negotiating and problem solving to bring this project to fruition with the opening of a new daycare center in the fall of 1991. The investment provided an immediate yield, but the real payoff will be reaped many times over in the future. The cost/benefit ratio on this project is virtually incalculable. Many of the benefits are intangible and would be difficult to quantify, while the out-of-pocket cost to the SFWMD is easily counted on no hands -- zero dollars.

Planning for Child Daycare

The concept of employer-provided daycare services is not a new one. What made this project unique was the initiative of providing on-site daycare without the expenditure of taxpayers' dollars. The path of least resistance would have been to appropriate budgeted funds; but SFWMD pursued more innovative financing for the construction and operation of the child care facility to serve its employees.

A committee of interested SFWMD employees was impaneled to gather the information necessary to effectively plan and implement this project. The committee was composed of representatives from senior management and many departments: human resources, research, regulation, legal, risk management and administration. A zero-dollar budget was established, and four simple guidelines were instituted; the project was to

* provide quality care and a learning environment for children,

* minimize of SFWMD involvement and investment,

* establish an extremely competitive fee schedule and

* document activities so as to transfer lessons learned to others.

The first step was to determine the existing need for child care. The human resources department records provided demographic information on the existing workforce and projected trends. The data showed that the overwhelming majority of headquarters staff were married and within child-rearing ages. It also was evident that the number of females joining the staff was increasing rapidly. The risk management department reviewed its records to estimate the number of children that were potential candidates for child care. Their review indicated that less than 10 percent of dependent children were candidates for child care, or approximately 100 preschool-aged children.

A survey of daycare facilities within a five-mile radius identified 12 existing centers; this led the SFWMD planning group to think that the market might not support an additional facility. Site visits to each facility revealed that nearly all centers were at or near capacity and many had a waiting list for admissions. Facility designs ranged from the predominant renovated residential structures to the more traditional schoolhouse classroom setting. Curriculum, activities and staffing varied from highly structured learning centers to rambunctious play centers.

The SFWMD's demographic data combined with the survey of existing nearby centers suggested that the market could accommodate another facility. To validate this assumption and to provide some basic information on the child care needs, wants and expectations of staff, a needs survey was distributed to the headquarters employees. The correspondence with the survey questionnaire communicated SFWMD's desire to provide daycare services, if desirable and feasible, and the fact that it could not underwrite the construction or operation of a facility nor subsidize fees for those employees choosing to participate.

The survey results made it clear that daycare was desired and needed: virtually every employee with preschool children was interested in on-site care and was committed to placing his or her child in the facility, depending on the quality of care and the cost. A few respondents were very much in favor of the idea but could not commit to moving their children from their present daycare situation. The survey indicated that the center could expect up to 75 staff children; however, national averages project that not more than five children per 100 employees will utilize daycare services. With SFWMD headquarters staff fluctuating between 900 and 1,000 employees, planners expected 40 to 45 children of employees would be enrolled after the center opened.

The survey also indicated that more than 25 percent of initially enrolled children would be infants. Research stressed the need for a flexible building design to accommodate the changing age groups in daycare. Despite a strong need for afterschool care for elementary children, this feature was not considered feasible due to the difficulty and costs of transporting children from the schools to the child-care facility. It did seem feasible, however, to provide day camp services for elementary children during holidays and summers. The planners became convinced that the daycare project could succeed if SFWMD staff could structure a proper solicitation instrument and handle all of the business considerations.

Information solicited from other governmental entities having some experience with child care and from state and local regulatory bodies was quite enlightening. Several governments had opened a child care facility by renovating excess space, some had rented space, and some had built a facility. The centers were either operated by the organization or by contracted staff. One organization had contracted for an operator to build and operate a center but became unhappy with the operation, having to buy out the operator in order to correct problems at the center. All of the governmental child-care centers surveyed were either constructed, operated or subsidized with tax dollars.

Regulatory bodies provided applicable laws, rules, regulations and guidelines. They also provided lists of all licensed and certified operators. Further, they augmented the information gathered during the market review and suggested that a typical successful center consisted of not less than 1/2-acre of land and was licensed for between 100 and 150 children. They cautioned that a proper daycare operation is a special blend of education, nurturing care and fun--best handled by trained and experienced professionals.

Considering that most successful daycare centers have an average enrollment of between 100 and 150 children and that the SFWMD could anticipate only about 50 children, a strategy was developed to attract the balance of needed enrollment. Discussions with other governmental entities in close proximity to SFWMD headquarters assessed their interest in making the daycare center available to their staffs. The Palm Beach County Sheriff's Office and the Fire Rescue Department recognized the benefits of this project and committed to offer available spots to their employees. In developing enrollment agreements with these groups, SFWMD reserved the first right of refusal for any available spots and also reserved bumping rights upon expiration of annual registrations for non-SFWMD children, with the exception that initial enrolles were guaranteed renewals upon request. With the SFWMD estimating a need for approximately 50 spots and other neighboring governmental entities estimating a need for another 50 spots, the remaining could be made available to the general public. Through these arrangements it appeared that the SFWMD could stay consistent with national averages and fill its center within 18 months.

Three-party Negotiations

All of the information was reviewed with the SFWMD executives, and the following recommendations were approved:

* a new daycare center shall be constructed on existing vacant headquarters property;

* a daycare operator would be competitively solicited and allowed the option to recommend a developer to construct the center;

* if the selected daycare operator was unable to identify an acceptable developer, the SFWMD would solicit for one;

* the selected operator would lease the daycare center from the developer;

* a 1/2-acre parcel of land could be leased to a developer for nominal consideration to construct and build daycare centers to satisfy the selected operator;

* the SFWMD would not subordinate its interest in the land; and

* the land lease term would be for 25 years, at which time the building would become the property of the SFWMD.

These decisions effectively established a three-party relationship. The SFWMD would enter into an operating agreement with the selected operator and would enter into a separate land lease with the selected developer. The operator would be allowed to recommend a developer so as to encourage a harmonious landlord/tenant relationship. A timeline detailing the steps from the issuance of a request for proposal to the opening of the daycare center is shown in Exhibit 1.

A request for proposal was developed to solicit competitive proposals from qualified daycare operators. The solicitation document, incorporating information gained from several years of research, required proposers to provide detailed operational plans, guidelines and standards with emphasis on experience qualifications, staffing, training, health and safety, communications, curriculum and activities, equipment and materials, and fiscal accountability. Pro forma start-up and operating budgets were required, including scheduled fees. Financial statements from principals, letter of interest/commitment from banking institutions and evidence of bonding capability were further requirements.

A vendor galley for direct mailing of the solicitation notice was generated utilizing the listing of certified operators provided by regulatory bodies, as well as placement of ads in general circulation newspapers. A total of 15 solicitation packages were requested, but only two responsive proposals were tendered.

Negotiating the daycare operating agreement was a relatively simple task, as the request for proposal and the responses tendered were sufficiently specific. The period of performance was set at five years with renewal options at the discretion of the SFWMD based on performance by the operator. The agreement included a six-month termination provision in the event of nonremedy of unsatisfactory performance and an immediate termination provision in the event of default or wrongdoing. To ensure uninterrupted operation in the event of default, the operator agreed to transfer all daycare center assets and materials to any operator selected by the SFWMD at the unamortized cost of original acquisition.

Development and Financing

Negotiating the daycare development agreement was an extremely difficult task and required determined creativity by both parties. The agreement capped the total cost of construction at $425,000 and allowed up to $50,000 for associated development costs, including architectural, TABULAR DATA OMITTED engineering and legal costs, for a cumulative total development cost not-to-exceed $475,000. The SFWMD wanted a buy-out formula which would allow the center to be purchased at a predetermined rate at any point in time over the life of the 25-year nominal-consideration land lease. The SFWMD was agreeable to providing the developer with several of the elements that any investor or venture capitalist seeks: a positive cash flow from the leasing relationship, the tax advantages of a depreciable asset and a low-risk return on investment in the event of a buy-out. The SFWMD did not offer appreciation of the value of the asset but rather wanted the building cost to be fully amortized over the 25 years of the lease, at which time it would become the SFWMD's property.

The buy-out formula evolved into two variations: a buy-out for cause and a buy-out for no cause. The buy-out for cause formula allowed the SFWMD to satisfy the unamortized portion of the original construction loan capped at $425,000 and the unamortized portion of the associated development costs capped at $50,000. The buy-out for no cause formula was identical except that it allowed a return on investment which decreased over the term of the lease. Further, the SFWMD agreed not to exercise a buy-out for no cause within the first two years. The amortization schedule was computed on a straight-line basis on the 25-year lease term.

The buy-out for no cause formula, a standard safeguard in the event of breach of contract or default, was important to the SFWMD in the event a decision was made to terminate the on-site daycare operation for any reason.

Other components of the developer's contract involved the SFWMD executing a nondisturbance and attornment agreement and a cross-parking agreement in order for the developer to secure financing. Also the SFWMD agreed to assume mortgage payments after three months if the operator vacated the premise or was evicted but only after the developer made a good-faith effort to locate a new operator acceptable to the SFWMD.

Both contracts provided the SFWMD the ability to sever the relationship and remove from the project any of the principals or offices of the operator or developer in the event of wrongdoing as determined by a court of competent authority. This provision mitigated against any adverse publicity for the project in the event any of the parties involved got into any negative legal situations.

The final step in the developer's securing financing for construction of the facility was the lease agreement between the operator and developer. Although the SFWMD was not a party to this lease, it did participate in the negotiations to ensure that lease provisions were not in conflict with the operator or developer contracts.

The building consists of 6,200 square feet of conditional space which can accommodate up to 133 children. Separate infant, toddler and two classrooms were constructed, as well as an office, kitchen and media room, which also can function as a sick-child care room. The center of the facility is a great room for inside play, a separate area for arts and crafts, motor skills, science and nature. Three separate outside play areas provide sunlit and shaded recreation for toddlers and preschoolers. Bright enamel colors were utilized inside and out for color stimulation and ease of care. The facility design incorporated resource conservation features: existing trees on the site were saved, and energy-efficiency and water-conservation technologies and equipment were utilized. The landscaping was designed to be low maintenance.

During the construction period, the operator established an office at SFWMD headquarters for marketing, preregistration and daycare staff hiring and training. The operator gave presentations on the center's design, programs and activities to SFWMD staff and other interested governmental entities. Private sessions also were scheduled with all staff who had indicated an interest in child care during the preliminary needs survey.

The fee schedule was 10 percent below the average market rate in the area. The favorable rates, new facility and high-quality care were attractive to parents, but enrollment was slow prior to the opening of the center. As an incentive prior to opening and for the first three months of operation, a 10 percent discount was offered for annual contracts, and another discount was offered for multiple enrollments for the same family.

Up and Running

The facility opened in the fall of 1991, and enrollment has steadily increased to more than 90 children. A parents advisory committee was formed to serve as a liaison between the SFWMD and the daycare center and to enhance communications between participants and the operator.

As is the case with any pilot project, numerous unanticipated difficulties surfaced but each situation proved to be an opportunity for creative problem solving and learning. The SFWMD takes great satisfaction from having successfully structured a creative on-site child daycare project which benefits its most important asset, its employees. This project serves as an example of the age-old adage, "Good things come to those who wait -- as long as they work hard while they wait." The SFWMD daycare center also demonstrates that not having budgeted funds is not a valid excuse for not providing daycare for children of employees.

C. THOMAS THAYER is director of procurement and contract administration for the South Florida Water Management District. Readers wishing additional information on the SFWMD daycare center can contact him at the SFWMD, 3301 Gun Club Road, West Palm Beach, FL 33406 (407/687-6401).
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Title Annotation:South Florida Water Management District's social program
Author:Thayer, C. Thomas
Publication:Government Finance Review
Article Type:Evaluation
Date:Jun 1, 1993
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