To understand why, you have to understand how the system actually works. The state does not simply write checks to parents. A low-income family qualifies for a subsidy, selects a licensed provider, and the state reimburses that provider directly on the family’s behalf through a network of Alternative Payment Program agencies. The provider gets paid. The family gets care. That is how it is supposed to work.
The problem is what triggers the payment. California has been reimbursing many providers based on enrollment, meaning the number of children listed on a provider’s roster, rather than verified attendance on any given day. The Biden administration formalized this approach in 2024, allowing states to pay based on enrollment and even advance payments to providers before services were rendered. The reasoning was practical: low-income families have unpredictable schedules, children get sick, and attendance fluctuates. That reasoning makes sense on paper, but when public money flows based on names on a roster rather than children in a room, the system depends almost entirely on honest self-reporting and occasional inspections to catch abuse.
California’s own inspection records show what that produces. CDSS publishes inspection reports for every licensed childcare facility in the state. Those reports show a pattern that is hard to ignore. Multiple facilities with 14, 21, or even 28 children listed as enrolled were found to have zero children present during unannounced inspections conducted during normal operating hours. Some of those same facilities had missing enrollment records, incomplete vaccination documentation, and no infant sleep logs. Several were visited more than once within days of each other with the same result. The paperwork said the rooms were full, but the rooms were empty.
The fraud is not theoretical. In 2024, the president of UMI Learning Center in San Diego County was sentenced to 27 months in federal prison and ordered to repay $3.7 million. UMI falsely verified that parents were working or attending school at its vocational center. Based on those verifications, childcare providers submitted false attendance forms and split the benefit payments with parents, while UMI collected $200 a month per family for the false paperwork. The fraud totaled $3.7 million across 150 households. It was not uncovered by California’s welfare fraud investigators or CDSS. It was uncovered by Homeland Security Investigations and the U.S. Attorney’s Office for the Southern District of California. The federal government caught it. The state did not.
That gap, between what California pays for and what it can confirm, is where fraud lives. When you pay based on enrollment without consistently verifying attendance, you are depending on bad actors to self-report their own wrongdoing. They do not.
California Health and Human Services Secretary Kim Johnson responded to evidence of ghost daycares by posting a video titled “False Claims About So-Called Ghost Daycares,” offering explanations for why inspectors might find empty rooms: children could be at school, at a park, or facilities might serve families who work evenings and weekends. Those explanations do not account for facilities showing zero children across multiple unannounced inspections during normal hours, with missing records and no documentation of regular care. The inspection data is California’s own. The secretary’s explanation does not fit with it.
The policy response at the federal level is already moving. In January 2026, HHS announced it was rescinding the Biden-era enrollment-based payment rule and restoring attendance-based billing, requiring providers to document verified attendance before receiving payment. The administration also froze roughly $10 billion in childcare and social services funding for California and four other states pending stronger evidence that public dollars are tied to real children receiving care. In the Senate, the Payment Integrity Act introduced by Senators Cruz, Lee, and Scott would codify attendance-based billing into federal law and prohibit advance payments to providers entirely.
At the state level, California should follow the model Minnesota enacted in January 2026 requiring real-time electronic attendance records at every state-supported daycare. Technology already exists to make this practical. Wonderschool’s oversight platform cross-references enrollment, attendance, billing, and licensing data in real time, flagging patterns that warrant review. It is already in use in Florida, Michigan, and several other states. When a facility shows repeated empty-room inspections and missing records, payments should be paused automatically and flagged for investigation. The burden should shift to the provider to demonstrate compliance, not to the state to build a lengthy fraud case before acting.
California has the inspection data. It has confirmed prosecutions. It has a secretary on record defending a system that its own records indict. Every month the enrollment-based payment model remains in place, the state is choosing to keep writing checks it cannot verify. That is not an administrative oversight. It is a policy decision, and Sacramento owns it.
Anthony Velasquez, MBA, is Pacific Research Institute’s Communications Specialist.