July | August 2017

Funding Success in Higher Education

States Link Dollars to Outcomes, Not Just Enrollment

by Jennifer Burnett, CSG Program Manager, Research Service and Special Projects
In Indiana, the number of students enrolling in institutions of higher education has grown steadily for decades. But less than one-third of four-year college students graduate on time, and only slightly more than half graduate after six years.
“In the past, our objective was just getting people to school,” said Sen. Luke Kenley, chair of the Senate Appropriations Committee. “We needed a much more rigorous model that focused more on outcomes like on-time graduation rates, and that’s what we developed.”
Indiana has been slowly moving toward a performance-based funding model. The plan allocates a certain portion of the money universities receive from the state based on a set of outcome-driven metrics like graduation rates.
According to Jason Bearce, associate commissioner for strategic communications and initiatives for the Indiana Commission for Higher Education, the state started small: It began its transition in 2003 with only one metric.
“We realized it would take time to move the ship,” he said.
Now, the state apportions some of its funding based on a refined set of metrics centered on three key areas: completion, progression and productivity. Metrics range from degree completion and on-time graduation rates to students at two-year institutions completing remedial courses.
“We’ve constructed a formula that provides incentives for our universities to more closely focus on outcomes,” said Kenley. “I really think it will help both students and the state get more value for their money.”
Indiana has allocated 5 percent, or $61 million, of overall state support for higher education to performance funding for the upcoming budget cycle.
Kenley believes basing even a small percentage of funds on a performance-based model can encourage universities to focus on outcomes.
“You don’t have to dedicate all of your funding to performance-based funding to get the results you want,” said Kenley. “Transitioning even a small portion of funding provides the kind of accountability from our universities we want to see as legislators.”

A Growing Trend

While Indiana is a relative newcomer to performance-based budgeting in higher education, the idea itself isn’t a new one.
According to Russ Whitehurst, director of the Brown Center on Education Policy at the Brookings Institution and former director of the Institute of Education Sciences in the U.S. Department of Education, higher education performance funding became popular in the 1970s.
“But as state budgets were squeezed over the next 20 years, most of those programs were cancelled or cut back significantly,” he said.
While the concept has seen a resurgence in recent years, many states are taking a different approach.
“When the idea first emerged, it was primarily related to bonuses given for meeting certain goals,” said Whitehurst.
Now, states are applying criteria to existing funding, rather than creating new dollars for universities or colleges hitting their marks. That means states don’t have to come up with additional funds in already strapped budgets to explore using performance funding.
“The fiscal crunch has forced policymakers to make tough choices, but that has also led them to begin exploring new and more effective ways to approach higher education, like performance-based funding,” said Pam Goins, CSG’s director of education policy.
According to Whitehurst’s research, 19 states are currently involved in performance-based budgeting in some way.
“But there is a lot of variation across states in their approach,” said Whitehurst. “While a few states—like Ohio, Tennessee and Indiana—are pushing to move toward a more outcome-focused approach in a significant way, others have linked only a minimal amount of funding to performance.”
West Virginia, for example, has begun to test the waters with this strategy. Legislators have convened the Select Committee on Outcome-Based Funding to explore how performance-based funding might be used to better allocate the $322 million the state budgets for its public colleges and universities each year.
“National data indicate that West Virginia needs to provide 20,000 additional degrees, above and beyond what is currently produced, by 2018 in order to maintain its current workforce,” said Rob Anderson, executive vice chancellor for administration for the West Virginia Higher Education Policy Commission. “So we are now examining performance-based funding as a potential policy lever in order to achieve these needed outcomes.”
Less than a quarter of full-time students at four-year public universities in West Virginia graduated on time in 2010, and only 47.4 percent graduated within six years; that’s nearly 10 percent less than the national average.
When deciding whether to implement a performance-based approach, the state is doing its homework. Ashley Schumaker, senior director of board and public relations at the West Virginia Higher Education Policy Commission, said the committee will base its formal recommendations to the legislature on several factors.
“Models currently utilized in other states are being examined and will be taken into consideration by the Select Committee, in addition to feedback from budget and higher education officials, as well as prioritization of statewide goals and objectives,” she said.
For states considering moving to an outcome-focused funding model, Kenley stressed the importance of working closely with higher education institutions.
“You have to get buy-in from the universities,” he said. “That kind of joint exercise will definitely be more successful in the long run.”