Because of an increasingly challenging fiscal climate, state lawmakers are faced with making tough financial decisions regarding their early childhood systems. This document describes and examines various funding sources used when making decisions about possible early childhood initiatives combined with policy choices that may be considered in times of fiscal stress. The report highlights a range of funding and policy approaches for legislators and other policymakers to consider when developing a law, policy, or budget action. The report further outlines strategic fiscal and policy questions. The sources of funding for early care and education include: (1) federal funds (Child Care and Development Fund, Temporary Assistance to Needy Families, Head Start, Early Head Start, Child and Adult Care Food Program, Social Services Block Grant, and Individuals with Disabilities Education Act); (2) state funds (general fund appropriations, tobacco settlement revenues, special taxes, family leave revenue sources, business tax credits, loans and grants, lotteries, gaming revenues, and special fees); (3) local sources (financial match or in-kind donations); and (4) philanthropic foundations. Next, policy choices are examined related to selecting a legislative focus; coordinating programs and funds; addressing program quality through teacher education and training, accreditation, or other standards; addressing the supply of early education programs; making choices within the child care subsidy system related to eligibility, copayments, and reimbursement rates; and investing in prekindergarten programs. Issues to consider in early childhood education policy are then delineated. The report concludes with key resource information designed to aid in the development of legislative proposals. (Contains 34 endnotes.) (KB)