Funding public higher education is an ongoing challenge. State budgets feel the strain of limited tax revenues and rising expenses. At the same time, state governments have economic interests and evolving goals in which higher education should play a key role. The time has come for state governments and state higher education systems to build a more efficient partnership through smarter funding approaches, such as performance-based funding.
More than 70% of U.S. students who attend college do so at public higher education institutions, which are funded primarily by a combination of state appropriations and tuition. Historically, appropriations have been based almost entirely on student enrollment levels. The amount per full time student equivalent varies state by state, as well as with changes in state revenues and the educational philosophies of the state leadership in office. Additionally, appropriations for education are made within the context of overall state expenses and the reality of mandatory or high priority spending on infrastructure and medical costs.
State appropriation accounted for $88.5 billion of public college and university funding in 2010 (Zumeta, 2012, p. 16), making it the largest revenue source for public higher education. Nevertheless, appropriations as a percentage of overall state expenditures peaked thirty years ago and have been declining since (Zumeta, 2012, pg. 72). The recession of the last few years has only accelerated the trend of state appropriations reduction.
Limited state funds for education should be allocated wisely and with key state goals in mind. While historically appropriations provided helpful incentives toward increased college access, today the focus in the U.S. is shifting toward improvements in completion. A changing goal calls for changing incentives.
Performance Funding as an alternative
While today’s state appropriations approach is based on full time equivalent student enrollment numbers, an alternative involves funding based on outcomes. So-called performance-based funding involves associating some portion of state funding for public higher education with desired outcomes such as improvements in degree completion numbers. In this way, the states do more to provide incentives for public colleges and universities to make decisions and operate in ways that lead directly to student success, not just student enrollment.
Performance metrics can be general, such as a count of all graduates, or more specific, such as numbers of graduates with particular degrees that may be important to the state economy. A common example is “STEM” degrees (degrees in Science, Technology, Engineering and Mathematics), which are in demand in many states. The performance metrics can also be more granular, recognizing student progress towards degrees as measured in credits or credits within their major. As more students reach specified credit milestones, more state funding goes to the institution. In this way, the states can more clearly communicate their goals directly within the funding program, and public colleges and universities can maximize funding by working toward student success and helping to meet the goals of their state.
This is not a new concept. Heller (2011) notes examples around the world such as in Denmark, England, and Israel where funding for higher education is allocated based on the numbers of graduates. In the United States there is a history of performance-based funding, but not all of it has been successful.
Tennessee was among states that tried performance-based funding in the 1980s and 1990s. A small portion of the state funding for public higher education was based on metrics such as graduation rates or controlling the costs per student (Heller, 2011). While today Tennessee has moved the majority of their education funding from base allocation to course completion and other outcomes, they are in the minority. Recent progress has been made in Ohio and also in Indiana, each of which gained attention for comprehensive performance-based funding initiatives in the last few years, but the National Conference of State Legislatures reports that only 10 states currently have performance-based funding programs in place, with 6 other states in a transition stage (NCSL, 2012). That still leaves the majority of states to begin to seriously pursue this approach. Though several states experimented with performance based funding in the past, most backed away from these programs because of “a number of fatal design flaws” (Miao 2012).
Learning form the Past
Lessons have been learned from some of the past efforts at performance-based funding. Jones (2011) discusses a set of design and implementation principles that are informed by failed state programs and that can guide thoughtful current and future efforts.
First, states should begin by designing programs with the input of a broad range of stakeholders. Within each state, the state governments and state higher education systems can start to build a more efficient partnership by carefully designing their program to recognize their unique situation. Input from business leaders in the state may be helpful. Demographics, key industries, and the educational goals of the mix of colleges and universities within the state are among the major considerations.
With key stakeholders at the table early on, the program design can recognize practical state challenges and focus on state goals. Some states will choose to emphasize degree completion within certain fields while others will want to provide more incentives for adult learner re-training efforts. Still others will want to emphasize structures designed to recognize progress in closing persistent racial or ethnic performance gaps.
Another lesson learned from past programs is that if the performance-based funding is not a large enough portion of overall funding, it likely will not motivate changes. While abrupt funding changes could be problematic and needlessly disruptive, the eventual percentage of funding that is performance based needs to be high enough to have impact. States should choose a relatively high target and phase it in over time. For instance, a state that chooses to reach 40% performance-based funding might choose to phase it in 5% per year over 8 years. This avoids disruptively large funding swings and also allows schools to adjust their programs to the new realities. It also allows time for the measurement approaches to become more refined.
To promote early success, programs should measure progress toward goals as well as achievement of the goals themselves. A performance-based funding approach that sets milestones, as was done in Indiana recently (Kiley, 2011; Miao, 2012), rewards student progress towards goals. This is important since college completion goals may often take years to reach, but progress can be measured and rewarded year to year.
Some failed programs in the past may have been overly simplistic in not fully considering the roles that the various state colleges and universities play when developing goals and metrics for performance-based funding. A state with research universities, comprehensive universities and a system of community colleges is providing educational opportunities to a diverse community of students. Performance-based funding needs to recognize this and be designed such that each segment can “win” by playing their own role well. For example, a four-year university may be rewarded for increases in degree completion while a community college may be recognized for improvements achieved in educating underserved populations or for the numbers of students who progress into state four-year programs.
States that are already studying performance-based funding and taking the first steps with a small percentage of their overall funding should be encouraged to move more aggressively, shifting more of their total higher education funding to performance-based approaches. Those states which haven’t yet moved to performance funding can make a strong start by convening the stakeholders that represent all segments of public higher education and the relevant state government offices to begin to design a program that makes sense for their state.
By getting programs up and running in more states, more data will quickly become available on performance-based programs that work well, so that leading states can show the way to states that lag.
When state governments see higher education as an investment rather than simply an expense, they can communicate what they want as a return on that investment directly through their funding for higher education. The states have an economic interest in an effective system of higher education so that graduates can fuel the economic engine of the state. When graduates reside in the state as taxpayers, and are the employees of local businesses (which also pay taxes), the state benefits.
Performance-based funding is an approach that, when done carefully, can help to build a more efficient partnership between state governments and their state higher education systems.
Lessons from past efforts and the analyses that have been undertaken since position us to make the most of performance-based funding. The time is now to act, with each state moving more strongly to design and implement programs of performance-based funding using very significant portions of their state funding for higher education.
- Heller, D. (2011), The States and Public Higher Education Policy: Affordability, Access, and Accountability, Baltimore, MD: Johns Hopkins University Press
- Jones, D. (2011) Performance Funding: From Idea to Action, Retrieved from: http://www.nchems.org/pubs/detail.php?id=147
- Kiley, K. (2011) Performance Anxiety, Inside Higher Ed, Retrieved from: http://www.insidehighered.com/news/2011/12/16/indiana-revamps-performance-funding-focusing-first-year-completion
- Miao, K. (2012) Performance-Based Funding of Higher Education: A Detailed Look at Best Practices in 6 States, Center for American Progress, Retrieved from: http://www.americanprogress.org/issues/higher-education/report/2012/08/07/12036/performance-based-funding-of-higher-education/
- NCSL (2012), Performance Funding for Higher Education, Retrieved from: http://www.ncsl.org/issues-research/educ/performance-funding.aspx
- Zumeta, W., Breneman, D., Callan, P., & Finney, J. (2012), Financing American Higher Education in the Era of Globalization, Cambridge, MA.: Harvard Education Press