Demand performance: States consider changes in college funding that focus less on enrollment, more on student completion

Stateline Midwest, Volume 19, No. 11- December 2010

Late last year, higher-education officials in Indiana got word that they would have to find $150 million in cuts in order to help balance the state’s biennial budget.

What they did — and didn’t do — tells a lot about the commitment in that state to fund higher education in a different way.

As Teresa Lubbers explains, the state’s performance-based funding formula — a relatively small, but not insignificant, portion of the larger formula for postsecondary institutions — was kept intact.

“Our recommendation was to hold true to the performance funding formula even when you have cuts,” says Lubbers, the Indiana commissioner of higher education and a former state senator. “We decided we did not want to walk away from the performance funding formula in a time of taking money away.”

Interest in this performance-based model is taking hold not only in Indiana, but in other states in the Midwest and the nation as well.

“In the past, the vast majority of states have funded [based on] enrollments because we believed giving people college access was the most important thing,” says Kevin Corcoran, program director at the Lumina Foundation for Education.

“In recent years,” he adds, “the focus has shifted to what happens after they get there. We believe giving access is only the start.”

Lumina lists performance pay as one option for policymakers to pursue in order to increase productivity in higher education — a critical goal for all states considering current fiscal conditions and economic trends pointing to the need for more people with postsecondary degrees and certificates.

Currently, dollars are most often allocated to colleges and universities based upon the number of students who enroll at the beginning of a semester. What becomes of those students — whether they stay in their classes and whether they graduate — is usually not taken into consideration.

Performance-based funding fundamentally changes the way states provide money for higher education: Either all or part of an institution’s funding is based upon how well it performs in areas such as credits completed by students, degrees earned or, in the case of two-year colleges, the number of students who transfer to four-year institutions.

“For us, it just seems like commonsense,” says Corcoran, adding that it “does us no good” to have people go to college and leave with “debts and no degree.”

According to the Southern Regional Education Board, fewer than one-third of freshmen entering a four-year university actually graduate in four years in this country. Only 55 percent of freshmen have graduated within six years.

Improving those numbers — by giving higher-education institutions a financial incentive to do better — is a central goal of performance-based funding.

An old funding idea revisited

This isn’t the first time that performance-based funding in higher education has caught the attention of policymakers.

According to a study from the Community College Research Center at Columbia University, 26 states enacted some form of performance-based funding between 1979 and 2007, but 14 of them later dropped it. Factors causing states to abandon this approach have included declines in higher-education funding, a lack of institutional support and/or the loss of key proponents, and little support from the business community. In some states, too, the way the performance-based formula was established made it easier to abandon: Rather than being placed in statute, the formula was a budget proviso.

According to the center, the fact that so many state attempts at performance-based funding have been short in duration or limited in scope have made it difficult to measure the impact of this approach.

Opposition to performance-based funding has often centered on concerns about the cost of compliance as well as the pressure it could put on colleges to lower academic standards and/or narrow student access.

But with states facing record deficits, the demand for accountability and performance is high; as a result, legislators and education leaders are again taking a close look at new approaches to higher-education funding.

Indiana’s efforts date back to 2003, while Ohio is in the second year of a new funding system. Illinois, which used performance funding from 1998 to 2002, is considering this model once again.

Incentives for colleges to perform

Earlier this year, Illinois lawmakers passed a resolution (SJR 88) establishing the Higher Education Finance Study Commission. Made up of legislators, finance experts, and education, business, labor and nonprofit leaders, the commission was tasked with, among other responsibilities, “analyzing best practices implemented in other states, such as Ohio and Indiana, for incentivizing certificate and degree completion, including incentives for students and for institutions.”

Donald Sevener, interim executive director of the Illinois Board of Higher Education, says his state’s fiscal and economic problems are at least partly the reason for the renewed interest in performance funding.

“When you have a state unable to make its payments to institutions and lots of vendors on time, when you have resources dwindling year by year, it might be the most opportune time to evaluate what dollars we get and target them to state goals,” Sevener explains.

He adds the state’s colleges might welcome the opportunity to prove to legislators that what they’re doing is valuable and that it is working.

“With more students completing courses, more students graduating, increasing numbers of minority and low-income students in college and succeeding, when we can show results like that ... we can show the dollars you’re giving us are having positive outcomes,” he says.

Michael Frerichs, vice chair of the Illinois Senate Higher Education Committee, says performance funding hasn’t been high on the committee’s to-do list, but he wants to learn more.

“I’m interested in taking a look at the recommendations of the commission [which were due by Dec. 1],” Sen. Frerichs says. “I think we definitely have a problem funding higher education, and we ought to be looking at different mechanisms.”

Indiana has begun to do just that over the past seven years, as part of an effort to improve college completion and success rates.

Lubbers says her state’s performance-based approach has been more of “an evolutionary process than a revolutionary process.”

It started out with state incentives for universities that receive federal research funding. In 2007, the Indiana Commission on Higher Education added other factors, such as the number of degrees awarded, changes in the on-time graduation rate, and an incentive for community colleges to increase the rate of students transferring to four-year institutions.

During the 2009-11 budget cycle, Lubbers says, the state added another performance-based factor: course completion.

Colleges receive 90 percent of their usual funding for the number of students enrolled in courses, while 10 percent is based on students completing the courses. Another incentive encourages colleges to successfully serve low-income students.

“Through the course of this time period, we’ve had no new dollars really,” Lubbers says. “We’ve had to carve out a portion of the base [funding] to do this, which makes it a little more challenging. We only have a little less than 7 percent of the higher-education budget which is performance-based.”

Plans in Ohio are for performance funding to cover 100 percent of state funding for undergraduate education.

Ohio Board of Regents chancellor Eric Fingerhut says the state’s performance funding system currently only applies to universities, but that community colleges will be brought into the system.

To help prevent schools from losing large amounts of funding while working to improve performance, stopgap measures have been built into Ohio’s new formula.

Currently, a university cannot lose more than 2 percent of its previous funding due to poor performance.

“We will accelerate that pace,” Fingerhut says. “At some point in the near future, that floor will go away completely.”

Among the indicators being used in Ohio to gauge the performance of colleges and universities are course and degree completion. Community colleges will use “success points,” which are major accomplishments for a student (such as completing the first 15 credit hours) that indicate he or she is on the right academic path.

“Everything we do is driven by our strategic plan for higher education, a plan which was required by the governor and General Assembly in statute [in 2008],” says Fingerhut, a former state legislator.

The goal of that plan, he adds, “is to leverage the assets of higher education to drive Ohio’s future economic prosperity.”

And that, in turn, has put less of a focus on student enrollment numbers and more of an emphasis on student outcomes.

“Only graduations and completions change the educational attainment of Ohio,” he says. “It’s necessary to align your funding, which is the principal incentive structure you have for your institutions, to your goal, which is graduation, not enrollment.”

Fingerhut says Ohio’s universities have generally supported this move toward performance-based funding because they were involved in its creation. He adds, too, that this model can help institutions point to the value that higher education brings to a state’s economy.

“When you think about a state budget, everybody thinks about the bottom line, what has to be cut,” Fingerhut says. “We are a top-line revenue generator. As long as we’re demonstrating our commitment to be a top-line revenue generator, then we will continue to get support [from legislators].”