Aiming higher: States look for ways to produce more-educated populations to feed economic demand for skills

Stateline Midwest ~ December 2012

Under a new set of recommendations in Ohio, half of the state’s funding for higher-education institutions would be based on how well they contribute to a key economic goal: boosting the number of college graduates in the workforce.

In late November, Ohio Gov. John Kasich and a state panel released a higher-education finance framework designed to give greater weight to degree completion in determining funding for the state’s public colleges and universities.

Under the plan, 50 percent of the state’s funding for higher education will be determined by degree completion — up from the current 18 percent allocated on the basis of performance measures.

And while the details will not be laid out until the governor releases his budget early next year, this shift is part of an ongoing effort in Ohio to graduate more citizens with postsecondary degrees and credentials. It also is part of a growing trend within almost every state in the nation.
“College completion has really come to the forefront in terms of state policy,” says Larry Isaak, president of the Midwestern Higher Education Compact, a 12-state regional organization established to assist states in advancing higher education through interstate cooperation and resource sharing. “And people are framing the conversation in the context of what can be done to ensure that we have an educated workforce that can drive a successful economy.”
Sometimes referred to as the “completion agenda,” efforts to increase educational attainment levels of Americans have been linked to the need to maintain the nation’s economic competitiveness, to provide the skilled workers needed by businesses, and to drive personal and national economic growth. 
“The issue that we are facing as a country — and particularly here in the Midwest — is that the societal demand for talent is increasing quite rapidly,” says Jamie P. Merisotis, president and CEO of Lumina Foundation. Lumina, whose mission is to increase students’ access to and success in postsecondary education, has been a leader in advancing the completion agenda with its Goal 2025 — to increase the percentage of Americans who hold high-quality degrees and credentials to 60 percent by 2025.
“Talent is the currency of the modern economy, and our ability to develop and employ that talent is going to become increasingly important,” he says. “The labor market is hungry for people with skills, and those skills are demonstrated by those with [higher education] credentials.” 
For the first time in U.S. history, the current generation of young adults is projected to be less educated than its parents. Because a highly educated and skilled workforce is fundamental to national economic competitiveness, this slowing in educational attainment has significant implications.
By 2018, the nation will have a shortage of at least 3 million workers who possess the postsecondary degrees or credentials to meet employers’ demands, according to the Georgetown University Center on Education and the Workforce. And two-thirds of U.S. jobs will require some form of postsecondary education.
Today, about 38 percent of workers hold college degrees or credentials. Without corrective action, this skills shortage will compromise the economic competitiveness of the United States, experts warn.
And at the individual level, the benefits of a college education have long been documented: higher wages and less risk of unemployment, even during economic downturns. During the most recent recession and the current recovery, college-educated workers were less likely to be unemployed, reports the Georgetown University Center. Nearly all the jobs gained in the recovery went to those with degrees and credentials beyond high school.
With the link between educational attainment and economic competitiveness so clearly established, it’s no wonder that state policymakers have made it a priority to help students complete postsecondary degrees. 
The Midwest, with a history of strong public support for higher education, is no exception.
“It’s not surprising that we’ve seen so many of the Midwestern states focusing so clearly on completion,” Merisotis says. He cites the shift in state economies away from traditional manufacturing and agriculture to a more knowledge-based economy, including advanced manufacturing and scientific approaches to agriculture that require higher levels of skills and education.
Reforms focus on completion rates
Improving access to educational opportunities beyond high school has received a lot of attention in recent years. As a result, college enrollment has been steadily increasing for the past decade. But degree attainment and college completion rates have not.
Nationwide, 50 percent of students who start at a four-year institution do not complete a degree; the dropout rate is even higher at two-year institutions.
According to Isaak, the problem with higher-education attainment in the Midwest does not lie in access to education. The bigger challenge is college readiness and success.
“Alongside the importance of getting more people into college is making sure they get through successfully,” Isaak says. “I think we are in a good position to reach those [completion] goals. We have a solid higher-education enterprise when you look at the entire Midwest for access.”
That goal has been a key part of reforms in Indiana, where less than one-third of four-year college students graduate on time. Only slightly more than half graduate after six years.
“The imperative to increase the education level of Hoosiers has never been more important than it is now,” says Teresa Lubbers, commissioner of the Indiana Commission for Higher Education and a former Indiana state senator. 
Indiana is the most manufacturing-intensive state in the nation, and not long ago a worker with only a high school diploma could find a job to support a comfortable middle-class lifestyle. That is no longer realistic, she says. 
“For many reasons, we are focused on evolving our ‘access’ agenda in higher education to a ‘success’ agenda,” Lubbers says. “The worst possible scenario for our students is that they begin the college experience, [but] they aren’t successful — and they have no credential and significant debt.”
Indiana uses new funding model
Indiana is trying to align how the state funds higher education with what the state needs and values. “What we value is more students completing postsecondary education, especially those [degrees] tied to workforce needs,” Lubbers says.
The idea of paying for what the state values most is a driving motive behind the shift in higher-education funding to one that rewards the state’s colleges and universities for student success.
Most states traditionally have based funding decisions on prior appropriations and a measure of current enrollment. Under performance-based funding, money once distributed based on enrollment is instead based on graduating students. 
Indiana has had some form of performance-based funding since 2003, and its proportion of the higher-education budget has been on the rise; allocations are now based on a more refined set of metrics.
In the current budget cycle, Indiana is basing 5 percent of its higher-education budget — or $61 million — on the performance metrics, Lubbers says. That allocation will increase to 6 percent in fiscal year 2014 and 7 percent in fiscal year 2015.
“It’s still a relatively small amount of money, but we no longer reward schools based on enrollment,” Lubbers says. “... If you ask any university president or leadership if performance funding matters to them, you get a resounding ‘yes’. They know that their dollars are now based on these metrics, so it is guiding what they do.”
The two basic measures that now determine the performance-based funding to Indiana’s higher-education institutions are degree completion and on-time completion. Based on the individual institution’s mission, metrics such as STEM degree production (at research institutions), student progress toward degrees (at regional campuses) and remediation (at community colleges) also are included in the funding allocation. 
State allocations based on success
In the Midwest, Indiana is surrounded by states that have moved to performance-funding formulas, including Illinois, Ohio and, most recently, Michigan. Like Indiana, Ohio’s performance-funding formula focuses on course and degree completion, and also differentiates based on institutional mission. 
In 2011, Illinois established a new funding formula that allocated less than 1 percent of the state’s higher-education budget to performance funding in fiscal year 2013. The allocation formula looks at a number of factors, including degree completion and the amount of money spent on each degree produced.
Indiana’s neighbors to the north have also moved the completion agenda to the forefront of higher-education funding. When lawmakers in Michigan approved funding for the state’s public universities in the 2012-13 budget earlier this year, they included performance measures.
The final budget bill boosts funding for the state’s 15 public universities a total of 3 percent, or an additional $36 million. The new funding formula, which is tied to graduation rates, also includes incentives to conduct more research and development and to improve degree completion in critical skills areas such as science, technology, engineering and math. 
“For too long, government has operated under a model where we measure inputs and not outcomes,” says Michigan Sen. Tonya Schuitmaker, chair of the Higher Education Appropriations Committee. “Before, the discussion always centered on how much money [an institution] received, not on how well it produced. We have tried to change that philosophy. All across the state, we have begun measuring results.”
The plan also includes $9 million to be distributed to those universities that keep tuition increases below 4 percent. According to Schuitmaker, this is part of larger efforts in the state to encourage the state’s universities to hold down the cost of higher education.
“The long-term needs of the state include an economy that is growing and producing,” Schuitmaker explains. “The performance metrics allow us to see how well our money is being put to use in the higher-education community. It also incentivizes universities to examine their operations costs and look for any opportunities to realize efficiencies.”
This year, the South Dakota Legislature approved $3 million for a performance-based funding pilot program and required the money to be matched by the state universities. Allocation will be based on degree completion and the graduation of students in high-priority fields.
A call to action for policymakers
Regardless of the method for reform, Merisotis points out that when the current economic realities are taken into account — international competitors with soaring educational rates, the growing disconnect between what employers need and the skills possessed by workers, and a rising demand for talent — the need to transform the system is apparent.
But Schuitmaker adds that state government can only do so much. “We desperately need students to understand the importance of education,” she says.
Lubbers agrees that the responsibility for improving education rates must be shared. She says that the state has an obligation to adequately fund higher education. The institutions must foster student success, remove obstacles and embrace innovative models. And students have to do everything they can to stay on target to graduate.
“The consequences of the failure to achieve [educational attainment goals] obviously are pretty troubling for the country,” Merisotis adds. “It means a lower quality of life, less economic capacity, and certainly a less productive economy going forward.”