Are State Trust Funds an Answer to Rising Child Care Costs?
New Mexico channels oil and gas windfalls into such an account as states seek sustainable funding for enduring programs
New Mexico made national headlines in the fall by announcing that it would become the first state to provide no-cost child care for all families. The state is expanding eligibility even as others are scaling back their child care ambitions and broader spending initiatives in the face of mounting budget pressures.
Efforts to increase access to and boost the affordability of early childhood care have gained significant momentum in recent years. But as pandemic-era aid fades and tax revenue growth stagnates, there are concerns that recent gains will be lost. There are already signs that states are reducing child care spending as they look for budget savings. In some instances, they have increased revenue to try to sustain their programs.
Instead of raising new revenue, New Mexico is identifying and directing surplus oil and gas tax revenue into its Early Childhood Education and Care Fund (ECECF), created in 2020 by lawmakers with bipartisan support. That has helped to build a dedicated funding stream that provides the majority of the funding for the state’s Universal Child Care program and tackles one of the biggest obstacles to child care expansion: cost.
The ECECF now totals around $11 billion, and advocates say the state’s achievements are a landmark win for child care. Still, some critics warn that the state may be overpromising. They question whether the program can truly be considered “universal” when there are not yet enough child care spots available for families that want them, particularly in rural areas and for infants and toddlers.
Although New Mexico has made significant strides addressing financing, Linda Smith, executive director at the Child Care Trust, a new national effort supported by Arlington, Va.-based Child Care Aware of America, cautioned that substantial implementation work lies ahead.
“It is going to be challenging in New Mexico for probably a good two to three years,” she said.
What’s more, new fiscal pressures may test child care funding plans—not only in New Mexico, but in other states that are also investing in expanded access. These rollouts are unfolding amid a constrained budget picture driven by sluggish state revenues and federal funding changes, raising concerns that recent gains could be erased.
A system under strain
The child care industry is characterized by a persistent imbalance: high prices for families, low wages for care professionals, and providers struggling to stay afloat. In 38 states, the average annual cost of child care exceeds the cost of college tuition. Despite the high prices, child care workers are paid less than people in almost all other occupations—which contributes to high turnover across the sector. Meanwhile, providers operate on thin profit margins, and in many communities parents cannot find care, even when they can afford it.
The COVID-19 pandemic intensified certain pressures but also reshaped the policy conversation.
“There was a sudden recognition that child care is critical infrastructure,” said Susan Gale Perry, chief executive officer of Child Care Aware of America, a national advocacy organization. “Child care [workers are] the workforce behind the workforce. Without child care, nurses can’t be at hospitals, first responders can’t be on the job. The economy can’t function as it should.”
An infusion of nearly $53 billion in federal pandemic relief funding helped to stabilize the system nationally. These dollars, combined with a record-setting surge in state tax revenue collections, fueled a wave of state-level initiatives that modestly expanded access and eligibility. But as those funds were winding down, advocates who wanted to maintain expanded services faced a new challenge: finding sustainable revenue sources. Some states chose to bank on new or existing taxes, such as the expanded collection of gambling, cannabis, and other sin tax revenues; Washington, meanwhile, passed a capital gains tax; and Vermont dedicated a payroll tax increase to child care spending.
Surplus and volatile revenue
New Mexico proved to be the first to try to capture temporary surpluses and volatile revenue sources for this purpose. Its $11 billion child care trust reflects years of fiscal planning toward an ambitious goal of universal care. The state’s tax revenues are highly dependent on oil and gas prices and production, which help to generate substantial surpluses during boom years but also creates significant volatility.
Understanding this dynamic, fiscal analysts regularly conduct budget stress tests and long-term analyses to ensure that state finances are on a sustainable path. This process has helped lawmakers identify temporary surpluses and direct them to endowments and trust funds, where investment returns can generate ongoing revenue.
The state seeded the newly created ECECF in 2020 with a one-time general fund appropriation of $320 million. The fund grows when revenue from the oil and gas emergency school tax exceeds the average of the last five years, that is after the state’s rainy day fund is at its statutory limit, and when investment gains occur. In 2022, voters approved a constitutional amendment dedicating additional funding to child care expansion from the state’s Land Grant Permanent Fund, starting with an estimated $126.9 million in fiscal year 2023.
The ECECF and LGPF distributions, combined with federal dollars and new general funds, have brought total annual support for early childhood care and education to around $1 billion. Annual distributions from the trust fund have increased from $20 million in fiscal 2022 to at least $500 million in fiscal 2026.
Connecticut and Montana are taking similar approaches. In 2025, Connecticut deposited $300 million from its general fund surplus to a newly created Early Childhood Education Endowment. Policymakers are using up to $36 million in the first year (fiscal 2026), with the goal of allowing the endowment to grow over time to support access to child care, higher wages for educators, and improvements to child care facilities. They have been deliberate about how they identify and preserve surplus revenues, helping Connecticut make such investments.
Montana also established a permanent funding mechanism through its Early Childhood Special Revenue Account within the state’s Growth and Opportunity Trust. Lawmakers seeded the account with $10 million in late 2025. The account will receive a share of the trust’s earned annual interest, creating a recurring revenue source from one-time funds.
Montana advocates counted the $10 million account as a win, although it falls well short of the $150 million endowment proposed earlier in last year’s legislative session. Still, Alex DuBois, a program director at Zero to Five Montana, said this initial investment will help to build momentum for additional funding and represents a positive step toward establishing long-term infrastructure for programs and services.
How much do states ultimately need?
Even with trust funds in place, these states continue to face implementation challenges. Workforce challenges remain acute, and expanding supply takes time—factors that can push up annual costs. Such factors raise questions around how large a trust should be so that its earnings can support rising costs.
“You do have to think strategically about how you're using your funding to build capacity,” said Elizabeth Groginsky, secretary of New Mexico’s Early Childhood Education and Care Department (ECECD). Eligibility does not automatically translate to access.
In New Mexico, distributions from the ECECF are expected to contribute at least $500 million annually toward early childhood funding. But in her 2027 budget, Governor Michelle Lujan Grisham (D) also asked lawmakers to raise general fund support for the ECECD, which will manage the universal child care program, to more than $465 million. That would have been a 54% increase from the previous year. Ultimately, the Legislature approved an 8% increase in general funding for a total of $326 million. The process suggests that, despite having a trust fund balance equivalent to the state’s operating budget, lawmakers still face trade-offs to fully fund the program.
In addition, when passing the legislation that codifies no-cost child care, lawmakers added budget guardrails: If inflation rises, the price of oil falls below a certain threshold, or demand for child care exceeds the availability of funds, the state will have the option of adding co-pays for families making over 600% of the federal poverty level.
As budgets tighten, lawmakers may be tempted to dip into the dedicated pots of funds to help pay for other priorities. Montana’s Growth and Opportunity Trust Fund legislation allows the governor to reduce or suspend transfers when facing a budget deficit. And New Mexico statute permits appropriation from the ECECF to the general fund to “avoid an unconstitutional deficit”—though only after other contingency funds have been exhausted.
Such provisions are designed as last-resort safeguards. Still, they underscore a reality: Trust funds can provide stability but are not immune to broader budget stress.
Final thoughts
Not all states are pursuing large, dedicated funds. Some are focusing instead on expanding supply gradually, hoping to limit expenditure growth. Iowa, for example, used pandemic funds to build a real-time data system that helps identify regional shortages and target workforce and infrastructure investments accordingly. The state paired this initiative with other pilots and targeted programs that aim to expand capacity through employer involvement and efficiency gains while limiting long-term obligations.
Different approaches also reflect differing fiscal realities. States vary in revenue structures, economic volatility, and capacity constraints, which shape how they design and sequence policy expansion. There is no easy solution to the nation’s child care challenges, but long-term planning, data tracking, and a clear understanding of how funding mechanisms will perform across economic cycles can improve sustainability.
For many states, the question is no longer whether to invest in child care but how to structure those investments to endure.
Alexandre Fall is a principal associate with The Pew Charitable Trusts’ Fiscal 50 project, and Sariah Toze is a senior associate with Pew’s state fiscal policy project.
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