Performance-Based Funding in Higher Education: An Emerging State-Based Approach

by Collin Ruud / Mar 1, 2013

Performance-based funding has become a buzzword in American higher education, particularly among foundations and state policy makers. State legislators, anticipating significant reductions in budgets, have reduced budgets for higher education, often across the board, regardless of institution type. Often cited as a means for maximizing the investment into institutions of higher education, this funding mechanism keeps funding at a set level but requires institutions to meet certain benchmarks in order to receive full funding.

What is performance-based funding?

Performance-based funding consists of an established formula by which an institution operates in order to receive funding, largely based on “the output-side of universities and colleges. Funding then is tied to the ‘products’ of the teaching and research activities of higher education institutions.” Outputs typically consist of variables such as credits awarded, retention and graduation rates, employment outcomes of graduates, and research production of institutions. Most prominently, it is the production of credentials that drives recent discussions on performance-based funding, as states, funding agencies, and even the federal government emphasize a ‘completion agenda’ fixated on credentialing more students, and reducing the time-to-degree. (Note: the links provided are only a few examples. There are many others.)

Although performance-based funding is nothing new, it has been emerging as an alternative method for funding institutions, particularly within higher education, compared to a more traditional model of funding. Jongbloed and Vossensteyn describe the traditional approach as “a negotiations-based approach, in which a budget request drawn up by an institution is decided upon after negotiations between the budget authorities and the higher education institution.” Typically at the fore of these negotiations are the inputs of higher education institutions: enrollments, demographics, and academic preparation. While an institution’s performance may be cited during the negotiation process, the funding is decided based on an institution’s budget and the negotiated funding. In recent years, this has presented an issue, as some states have struggled to come up with promised funding. My state, Illinois, is no exception. There are several times the state underpaid its agreed-upon funding.

Where is performance-based funding being used and discussed?

According to the National Conference of State Legislatures (NCSL), 10 states have some sort of performance-based funding in place, with five more states in the process of transitioning to that sort of funding mechanism. 18 states have had formal legislative discussions around the use of performance-based funding in higher education, though no formal policies have yet been developed. Many of the 10 states with current performance-based funding measures have done so only recently, having passed legislation or implemented policies in 2011 or later.

One thing that seems prominent among most of these states is that performance-based funding accounts for a small percentage of total funding to institutions. In Tennessee, where performance-based funding can be traced back to the 1970s, having such a small level of funding contingent upon institutions’ production goals had no discernible impact. As a result, the state began moving toward using a much larger proportion of funding as part of the performance-based metrics. Kysie Miao, from the Center for American Progress, also emphasized that “enough of an institution’s funding should be determined by performance to compel actions that would significantly change institutional behavior.” Jobs for the Future (JFF) published a report in April 2012 to highlight the changing trend toward performance-based funding through the case of Ohio’s implementation. In their executive report, they suggest a number of recommendations for those considering changes to their funding structure, including: consideration of both educational progress in addition to college completion, taking into account the institutions that focus on nontraditional students, and ensuring the appropriate level of buy-in from key stakeholders.

It is no surprise that discussions of performance-based funding have come in OCCRL’s research, as two of the projects I work on revolve around institutional and state policies that encourage production of more credentials and helping students receive degrees in a timely way. In one such project, where OCCRL provides the research component to the Credit When It’s Due (CWID) initiative, funded by several foundations, states have received support to produce reverse transfer degrees, wherein students who have transferred may transfer credits back to a two-year institution in order to fulfill requirements of an associate degree. Several of the states funded by this initiative have indicated already-existing systems of performance-based funding that could be further informed and refined using CWID policies.

There is little doubt that performance-based funding will become one standard means in which state policy bodies encourage growth and policy change of higher education institutions in the future. The overarching suggestions from multiple reports and sources seem to suggest that performance-based funding may be an effective means for encouraging the appropriate priorities and foci in higher education, provided they are executed in a deliberate and meaningful way. What is yet to be seen is how effective such funding mechanisms can be, in large-scale implementation.

This blog post was cross posted with a policy blog by The Forum on the Future of Public Education. Dr. Ruud is a Forum Fellow.