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The higher education equivalent of the proverb “A journey of 1,000 miles begins with a single step,” might look something like this: To increase the proportion of Americans with degrees and credentials to 60 percent by 2025, you have to start by turning freshmen into sophomores.

Indiana’s Commission on Higher Education lent credence to that idea last week when it adopted the newest iteration of its performance-funding formula. In addition to rewarding overall degree completion as previous versions had, the new formula will reward colleges and universities for shepherding students to certain credit-level thresholds: 15, 30, and 45 credit hours at two-year institutions, and 30 and 60 credit hours at four-year, non-research institutions.

As numerous states look to adopt or refine performance-funding systems in the wake of budget cuts and a push to increase college completion rates, Indiana’s new metrics could indicate a shift in such policies, where states reward not just certificate and degree attainment, but particular steps on the road to those outcomes.

The new formula also pushes colleges and universities to increase several other output measures, including the number of low-income students to obtain degrees; the number of science, technology, engineering, and math degrees produced at research universities; the number of students who successfully complete remediation programs at community colleges; and the percentage of students who graduate on time.

“It’s a conscious decision as a state to pay for what we value,” said Teresa Lubbers, commissioner of higher education. “We need more quality. more volume, more at-risk degree completion, and we’re placing a premium on some high-impact degrees.”

But the new formula, like its predecessor, raises concerns for some campuses. Because degree production and student persistence are measured as the change in real numbers and not percentages, those institutions that currently perform at high levels and who say they are not in a position to increase enrollment -- particularly research institutions -- have failed to get financial rewards for some of the metrics in the past and will probably miss out on some funding this time around as well. “There’s a big focus on quantity, and we want to always remind folks that there’s a big quality component to this as well,” said Randy Howard, vice president for business affairs at Ball State University.

Those universities that are growing, however, will likely benefit even more from the formula. “Given that the push is to get more students to complete, this is entirely aligned with what we’re trying to do,” said Tom Snyder, president of Ivy Tech Community College, the statewide community college system. From a headcount of 61,160 in 1992-93, Ivy Tech has almost tripled in size, enrolling 174,806 students for the 2010-11 school year.

Lubbers denied the idea that the performance metrics preclude quality. "Nothing about metrics creates a situation where completion and learning are antithetical," she said. She noted that goals such as increasing retention are focused on improving the quality of programs, since campuses aren't rewarded unless students pass the course that follows the remediation program. Campuses also have their own prerogatives to improve quality, and their own policies in place to prevent a diminution of academic rigor.

France A. Córdova, president of Purdue University, said her institution had numerous structures in place to improve the institutions quality while it tries to meet the commission's goals. "Quality is absolutely paramount to our identity as an institution," she said. "The commission is focused on the right things, because the common denominator is simply to create more graduates. It's up to each of us to make sure we provide a good, high-quality education."

New Ways to Perform

According to a report produced by HCM Strategists for the Indiana commission, 26 states adopted some form of performance funding system for higher education between 1979 and 2007. Some of these have been eliminated and some have undergone major revisions. Currently, about 20 states have some form of performance funding in place.

Indiana’s system has been highlighted frequently. The state first adopted a performance funding system in 2003 that offered incentives to state universities that seek federal research grants. Completion metrics were subsequently added to the formula. By 2007, the state distributed 65 percent of the increase in state appropriations from the year before based on performance. For the 2010-11 biennium, with no additional revenues, the state’s higher education commission recommended allocating a portion of institutions’ base funding on the basis of performance, and that policy has been maintained through the 2012-13 biennial state budget.

Incorporating performance funding into base appropriations is a big step for colleges and universities, which is why most states until this point have limited performance funding to bonuses that are added to continued levels of base funding. The problem is that when state revenues decrease, as they did in the past few years, bonuses are some of the easiest budget items to cut.

Including performance in base funding could result in colleges and universities getting less money the next year, a scary prospect for some institutions. Ball State did not make up much of the cuts it faced in the current budget cycle through the performance funding process, and as a result had its budget cut by $11.8 million. "The current funding formula fails to recognize efficiency in areas such as staffing, health care, and utilities, and the continued high performance of institutions such as Ball State and Indiana University that have stable enrollments," Ball State's president, Jo Ann Gora, wrote in a statement in May.

But the willingness to incorporate such metrics into base budgets earned Indiana respect among policy researchers in 2009.

Performance funding currently composes 5 percent of the state’s $1.2 billion higher education budget, or about $61 million. Lubbers said that for the 2014 fiscal year, the first year the new metrics will be considered, performance funding will make up 6 percent of the state allocation, rising to 7 percent for the 2015 fiscal year.

Inclusion of the new incentives for getting students to certain credit levels is in part due to a HCM Strategists report about other states’ performance-funding models. Several other states have already adopted persistence metrics, particularly at the community college level. Ohio, Tennessee, and Washington all reward students for meeting certain credit levels. It is also a method pushed by the Lumina Foundation for Education.

In Ohio, the amount of state money allocated to each campus is partially determined by how many students at each campus hit six “success points,” including completing remediation, 15 credit hours, 30 credit hours, and graduating or transferring.

Ronald E. Abrams, president of the Ohio Association of Community Colleges, said that the program is only in its second year and that it is too early to tell whether colleges have changed their policies to respond to the new incentives. But performance funding has changed the tone of conversation, he said. “Institutions are talking about these issues in ways we haven’t seen them in the past.” Abrams also said the willingness to adopt performance funding has gained the community colleges goodwill among lawmakers. “We were able to protect more of what we’ve been able to keep because we can point to the notion that we’re responding to performance criteria that align with the state’s goals,” he said.

The emergence of such metrics could mark a big shift for the performance-funding world, the HCM report states. “Many recent models differ from the typical earlier versions of performance-based funding in that they often are focused on a smaller set of outcomes, have more refined metrics (a result of advances in state data systems), and are a part of institutional base funding rather than exclusively bonus ‘add-ons,’ which are often the first to go in tight fiscal environments,” the report states.

An Even Playing Field?

Because there is a substantial amount of money on the table, the new metrics have been heavily scrutinized by Indiana’s colleges and universities.

Under previous iterations of the funding formula, all institutions were graded on similar criteria, including credit hour completion, dual-enrollment completion, change in degree completion by low-income students, and research funding.

One of the goals of the revision was to maintain mission differentiation among the institutions, which is why some of the priorities are awarded only on certain campuses. For example, remediation will be measured only for the two two-year institutions, Ivy Tech Community College and Vincennes University, and STEM degree completion will be awarded only to research campuses. Only two-year campuses and the non-research-oriented four-year campuses will be measured on persistence.

But priorities such as overall degree completion will be measured in the change in total numbers, not percentages. Some of the four-year institutions, particularly the research universities, say that the emphasis on increasing output gives the growing community college system an unfair advantage. In the past decade, state funding for the community college has increased more than 60 percent, while the budgets for some of the research universities have fallen in real dollars.

“The overarching concern here is whether each institution has an equitable chance to compete for limited dollars,” said Howard, Ball State's vice president for finance. Ball State’s strategic plan, which was approved by the commission, focuses on improving the quality of undergraduate education, not the output. But under the performance funding metrics, quality of degree is not considered. Administrators also worry that Ball State’s lack of an engineering school will make it difficult to meet the “high-impact degree” goal, also measured in total output, not percentages.

The Indiana University at Bloomington chapter of the American Association of University Professors also came out against the previous iteration of the funding formula. “If IUB is already a high performer, is it not reasonable to believe that raising its graduation rate will be difficult, much more difficult than for a campus whose actual graduation rate is below expectations?” the report states.

Lubbers said the commission has discussed including metrics that would reward high-performing universities such as Bloomington for meeting and maintaining certain performance levels. But she said that while some of the campuses might be getting close on metrics such as four-year graduation rates, all still have room to improve.

The formula change also removes the research component, which could hurt research universities, which derived much of their funding from that metric in the past few cycles. For the 2011-13 biennium, Indiana University at Bloomington received $1,167,569 in performance funding, 95 percent of which came from the research incentive. The commission and state lawmakers said they still plan to promote the pursuit of research funding, but have not made clear how that will be done.

In addition to the mission differentiation component, other additions to the new formula seek to alleviate some of the campuses’ concerns. For example, the new formula allows each campus to establish an efficiency metric that fits with its strategic plan.

In total, Lubbers said, the combination of different metrics for different institution types, the diversity of metrics, the individual campus efficiency metric, and the fact that institutions are measured against themselves, not other institutions, creates a level playing field.

The major question for most of the institutions is how each metric will be weighted, and until that happens, campuses are reluctant to say whether they are in favor of the new reforms. “We look forward to working with commission on this,” Howard said. “This is only one part of a long legislative process to finalize the state’s higher education budget.”

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