Tennessee’s Higher Ed Funding Plan Rewards Success

E-newsletter Issue #103 | October 25, 2012

Every five years, the Tennessee Higher Education Commission completes a master plan that provides guidance on what universities and colleges should be doing for the state.

There was just one problem with it.

“It wasn’t paid much attention to by the institutions, I think, because there wasn’t much linkage between the state goals and the funding,” said David Wright, chief policy officer for the higher education commission. “The funding was based on (student) enrollment. The formula itself, even for all of its faults, had not been fully funded since the mid ’90s. Nothing was driving institutional behavior other than their own institutional goals or institutional statistics.”

Wright was a featured speaker at a recent CSG South webinar called “Higher Education Finance Reform: Lessons from Tennessee.”

Wright said higher education in the Volunteer State was in a bad position. State appropriations were dropping, inflation was increasing and tuition continued to go up. In addition, the state’s colleges and universities weren’t producing enough graduates to meet the demands of businesses.

“This was not a sustainable situation,” he said. “We could no longer afford to just write the next master plan for higher education and hope for things to change.”

So in 2010, the Tennessee legislature passed the Complete College Tennessee Act. The legislation’s goal is to have Tennessee meet the national average of the number of residents earning college degrees or certificates by 2025. That means the state needs an additional 210,000 degrees or certificates by 2025, which translates into a 4 percent increase each year.

One of the main policy levers the higher education commission is using to reach that goal is a completely revamped funding formula based solely on how well the institutions are serving their students.

“The question of, ‘How does a state government go about making decisions to allocate taxpayer dollars to institutions?’ for decades, every institution answered that question with enrollment,” said Russ Deaton, associate executive director for Fiscal Policy and Administration at the Tennessee Higher Education Commission. “If you can count enrollment to do that (allocate funding), why can’t you count something else?”

How It Works

Deaton said higher education institutions are measured based on student progression. University funding is based on things such as how many students have completed 24, 48 or 72 credit hours, earned degrees, the number earning degrees per 100 full-time equivalent students and the graduation rate. Community college performances are based on how many students have earned 12, 24 or 36 hours, earned associate degrees or succeeded in remedial education, and the amount of workforce training the school has done.

Deaton said each outcome is weighted based on the mission of that particular school. For instance, Austin Peay State University offers bachelor’s degrees, but has few doctoral degrees and academic research. The University of Tennessee-Knoxville, however, has an extensive offering of doctoral degrees and a strong emphasis on research. Thirty percent of Austin Peay’s outcomes are based on bachelor’s degrees, compared to 15 percent at UT-Knoxville. None of Austin-Peay’s performance is based on students earning doctoral or law degrees, while 10 percent of UT-Knoxville’s is.

“We think a model like this works whether appropriations are stagnant, increasing or decreasing,” Deaton said. “All state funding is back up for grabs every year. We’ve tried to attack the entitlement mentality for state funding. … We now take the view that all appropriations basically come back to a central location, if you will, and then we send them back out every year based on the new outcomes. Each institution essentially has to re-earn its funding every year.”

Wright said in abstract, the idea of rewarding colleges and universities for their performance sounded like a great idea all institutions could support. When the details of the plan started coming together, the idea became a little bit of a harder sale. In the end, he said, the universities and colleges supported the change because of the wide range of outcomes that were going to be measured.

“The outcomes model included so many outcomes that for years, they’ve been pursuing and the state was largely ignoring from a funding perspective, like workforce development,” Wright said. “It was an extraordinarily easy model to sell because of the things we were going to fund them for doing.”

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