Performance Funding 2.0

As higher ed productivity project unveils new grants, several aim to help states more closely tie colleges' funding to their success in getting students through.
December 17, 2008

One of the underlying premises of the Making Opportunity Affordable project -- that colleges and universities will need to become more productive if the country is to meet the widely recognized goal of significantly increasing the number of Americans with a postsecondary credential -- just got underscored by the economic downturn rippling across the states.

As stock markets have tumbled and state revenues evaporated, the possibility that the higher education system would have to accomplish whatever gains it can without a significant infusion of new funds just became a likelihood if not a certainty.

"The fiscal reality is that there's just not going to be enough money to fund the 800,000 more degrees this country needs a year without major improvements in the academy's efficiency," said Kristin Conklin, a partner at HCM Strategists, which provides technical assistance to states for Making Opportunity Affordable.

The initiative, which (like seemingly every second project in higher education) is sponsored by the Lumina Foundation for Education, announced about a year ago that it would award grants to encourage coalitions of colleges, policy makers, and other leaders in states to find innovative ways to educate more students without spending more money and without sacrificing quality.

The project's leaders on Tuesday identified the 11 states that will receive one-year, $150,000 planning grants for a "learning year"; up to five of these states will eventually receive $2 million grants to carry out their plans. The work to be done by the grants' recipients falls into three major categories: increasing the efficiency and cost effectiveness of academic and administrative programs and operations, creating or expanding access to higher education by encouraging enrollment and success at lower-cost institutions, and reassessing how states finance their colleges in ways that would reward institutions for graduating students, rather than merely enrolling them.

The last of the three will resonate significantly with anyone who was paying attention to state higher education policy matters two decades ago, when performance-based budgeting -- the idea of tying colleges' financial support to how well they met their states' needs -- last had its heyday. Although states such as South Carolina, Tennessee and others in the late 1980s and early 1990s began allocating some of their funds for colleges through new metrics based on performance rather than traditional enrollment-based formulas, the idea did not catch on widely, and was seen as having relatively limited impact in most states that experimented with it.

There are several reasons why. Because the data available to policy makers about the performance of colleges and students were relatively sparse then, many states used crude measures such as, for example, graduation rates, which penalize institutions that enroll at-risk students, such as community colleges and urban public universities, drawing objections from those institutions. When state money was tight, colleges balked at any attempt to put precious funds at risk, and when economies improved, many states started spending freely again rather than putting into practice the lessons they had learned from the performance-based experiments.

Performance-based approaches "have often fallen by the wayside, victims of funding cutbacks and
resistance from universities that would rather have all of their funding guaranteed," Education Sector, a Washington policy group, said in a report released Tuesday about state governance. "Today, only a handful of states base funding on performance, and those that do make only a small fraction of available dollars contingent on results."

To judge from the grants awarded Tuesday, officials affiliated with Making Opportunity Affordable believe the time may be right for what Conklin calls "performance funding 2.0," specifically aimed at finding innovative ways to reward states and colleges based on how many students they actually educate, rather than how many they simply let in the door. The time may be especially right given the economic downturn that may hasten experimentation from colleges and states that are often loathe to mess around with what they think works (and intimidated by the fear of the unknown).

"The data systems are more sophisticated, and the will is greater," said Conklin. "The current economy creates urgency and opportunity to try different ways to encourage and reward completion. There is no right or wrong way. This grant program is really a lab to see what kind of breakthroughs in productivity we can get."

The four labs for the new iterations of performance funding to be funded by Lumina will be the states of Colorado, Indiana, Ohio and Tennessee, all of which will aim in some way to experiment with new or revised methods of awarding funds based on colleges' success in educating students:

  • Colorado will use some of its Making Opportunity Affordable funds to explore (with college officials in the state) possible changes in the measures that are built into its unusual system of fee-for-service and performance contracts with public college systems. The idea would be to institute metrics that would reward colleges for improvements in student learning outcomes or year-to-year retention, for instance, said David Skaggs, commissioner of higher education there. "Some things on the table," he said, might be rewarding institutions for improvement on the Collegiate Learning Assessment or another measure of student learning, as a "way of demonstrating to the public and to students and parents that something actually happens during college"; or rewarding them for first- to second-year retention, particularly for at-risk students.
  • Indiana will focus in its planning year on implementing, expanding and analyzing a new funding formula that includes financial incentives for degree completion, course completion, time to degree and other outcomes measures.
  • Ohio, which has a history of performance-based higher education funding, plans to continue its work on new formulas for financing its various public postsecondary institutions that heavily count course and degree completion, which are part of a much larger overhaul of the state's higher education system, said Rich Petrick, vice chancellor for finance at the Ohio Board of Regents. (The community college segment of Ohio's plan is based on Washington State's system of "momentum points," which rewards two-year colleges when their students pass key landmarks on the way to a degree.)
  • Tennessee, another pioneer in performance funding, is contemplating emphasizing student success more sharply, not only as it revises its system for allocating 5 percent of state funds based on colleges' performance, but even in the enrollment-based formula by which it allots the vast majority of state operating funds, said David Wright, associate executive director of the Tennessee Higher Education Commission. Right now colleges receive formula funds based on the number of students who are enrolled on the 14th day of class in a given semester. How different would it be, Wright wondered, if institutions instead received funds based on how many students were enrolled at the end of that first semester. "One of the most powerful things we could do is to build productivity into our processes as organically as possible," Wright said. "This would be building that into our most basic funding formula."

Officials in the various states said they all saw an opportunity (shared in many cases by college officials) to change the incentives for institutions, to "shift the conversation more in the direction of completion" as opposed to enrollment, said Wright of Tennessee.

"In a way the economy has done for us what couldn't be done otherwise: to help even somebody who's teaching freshman comp at an institution see why this matters," he said. "To someone like that, this grant project might seem like an activity 'you folks in Nashville' care about. [The economic downturn] has driven home the reality of the situation and the need for productivity enhancement."


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