How Can State Funding Models Incentivize Equity?

Funding public colleges and universities based on outcome or performance metrics has its share of critics who think the policies are ineffective or harmful -- especially for institutions that serve a large number of minority and low-income students. But experts at one equity-focused think tank say outcome-based funding models are worth trying to redeem.

More than 30 states currently use outcome- or performance-based funding models to tie at least some public higher education funding to institutional performance metrics like enrollment, retention and graduation rates. Years of research have shown that these models often fail to achieve their goals. A recent report looking at two decades' worth of performance-based funding model studies revealed that most models result in null or modest improvements to institutional outcomes. A pair of academic research papers published in 2017 found that outcomes-based funding models result in a slew of unintended consequences, including that minority-serving institutions lose significant funding compared with other institutions.

These criticisms are warranted, said Kayla Elliott, who is assistant director for higher education policy at the Education Trust and the lead author of a new report on outcome-based funding models titled “Re-Imagining Outcomes-Based Funding.”

The report argues that through better design and implementation, outcomes-based funding can equip states and institutions with the tools and accountability systems necessary to improve equitable outcomes in public higher education.

“Outcomes-based funding offers an opportunity to address equity in targeted ways that haven’t been done before, with strategies that are based largely on enrollment,” Elliott said. “OBF offers an opportunity to really focus in and target resources to the institutions that are serving students of color and students of low-income backgrounds.”

The report identifies five key metrics already included in some states’ funding models that could be adopted more broadly to build better models across the country: enrollment of students of color, enrollment of students from low-income backgrounds, success of students of color, success of low-income students and campus racial climate.

The enrollment and success metrics are fairly straightforward and can be easily quantified. For example, institutions can count the number of students of color enrolled in a specific program, or the number of low-income students who receive a degree each year.

Some states incentivize enrollment of students from specific ethnic or racial backgrounds. Wisconsin’s outcome-based funding system for four-year institutions prioritizes enrolling students of Southeast Asian descent, while Montana prioritizes Native American students, and Hawaii prioritizes Native Hawaiian students.

Fewer states have metrics related to race than to income status. There are a few reasons for this, but Elliott pointed to affirmative action bans as one complication.

“We can’t discount the role of affirmative action bans in the nine states that have them,” Elliott said. “We know that our partners in the work in California have named Proposition 209 as the hurdle that they couldn’t cross to get race implemented in their outcomes-based funding policy for two-year institutions.”

Proposition 209 is a California constitutional amendment that says the state cannot discriminate against or grant preferential treatment on the basis of race, sex, color, ethnicity or national origin in public employment, education or contracting. The proposition effectively banned affirmative action in the state. The proposition was passed in 1996, and California voters turned down an effort to repeal the measure in November.

Very few states have metrics to measure campus racial climate. To evaluate which state metrics fell into the campus racial climate category, Elliott and her co-authors looked for states that incentivized campus climate surveys, faculty and staff diversity, and a number of other metrics.

Rhode Island and Pennsylvania assess campus racial climate by measuring faculty diversity, but only Rhode Island’s metric is mandatory. Kansas and Tennessee are the only other states with metrics related to campus racial climate.

Despite their scarcity, these metrics are important, Elliott said. Institutions should be required to improve equity throughout a student’s education, not only at the beginning and end.

“I think states have a responsibility to hold institutions accountable not just for what happens at entry and exit, or enrollment and completion, but also the experiences that students have while they’re on campus and while they’re actively enrolled and taking courses,” Elliott said.

She suggested that states could also hold institutions accountable for the number of hate or bias crimes, assaults or other incidents reported on campus, based on Clery Act criteria. The Clery Act requires colleges and universities that participate in federal financial aid programs to disclose information about crime on their campuses. States could also evaluate colleges based on the number of courses and academic centers dedicated to the study of Black or Chicano history and issues, or the existence of extracurricular groups and student centers that support students of color.

To improve states’ funding models, the Education Trust report lists 10 steps for model design and five steps for implementation. One of the most important steps is making the metrics mandatory, Elliott said.

“It is absolutely imperative that states make equity metrics mandatory, that states make those metrics that involve enrollment and success of students of color and students from low-income backgrounds a mandatory and integral part of the outcomes-based funding system,” Elliott said.

It’s also essential to tie enough public higher education funding to outcomes-based funding formulas so that institutions are incentivized to meet the metrics, the report argues.

Tennessee and Ohio tie most of their higher education funding to outcomes-based metrics. In Illinois, the funding tied to outcomes-based metrics is far from large enough to motivate many institutions. More than half of higher education institutions in Illinois received less than $10,000 in outcomes-based funding in 2019, and three institutions received less than $1,000.

The report also encourages states to reward institutions for incremental progress instead of an all-or-nothing system that can result in steep one-year funding declines.

“OBF policies should avoid harmful tactics that prevent institutions from being rewarded for incremental growth, such as absolute rankings, which unfairly pit institutions against one another; one-size-fits-all metrics, which ignore institutional demographics and resources; and punitive practices like rescinding an institution’s recurring funds,” the report said.