Center for American Progress report: Performance-based funding in higher education

12 Aug

According to the Chronicle of Higher Education Article, State Budget Cuts for Research Universities Imperil Competitiveness, Report Says by Emma Roller:

States have cut funds for public research universities by 20 percent in constant dollars from 2002 to 2010, according to a report issued on Tuesday by the National Science Foundation.

The report, “Science and Engineering Indicators 2012,” is a compendium almost 600 pages long of scientific trends in the United States and around the world. The agency releases such data every two years.

The findings in this year’s report demonstrate a continuing trend in scientific innovation. While countries like China and India have increased their spending on technology and education, the United States has found itself hamstrung by a weakened economy since 2008.

Adjusted for inflation, the drop in state funds for the top 101 public research universities in the United States from 2002 to 2010 was 10 percent, with nearly three-quarters of the universities losing some state support.

Despite those drops in state financing, enrollment at research institutions continued to grow. State funds per enrolled student dropped from $10,195 in 2002 to $8,157 in 2010, in constant dollars.

As colleges see funding sources reduced and even be eliminated, “performance-based funding” is an attractive strategy for some.

In the 2011 American Association of State Colleges and Universities policy brief, Performance-Based Funding: A Re-Emerging Strategy in Public Higher Education Financing, policy analyst, Thomas L. Harnisch describes the strategy:

PBF Theory and Components

PBF is an incentive-based policy instrument predicated on resource dependency theory.9 This theory posits that changes in resource availability will threaten organizations and encourage adaptation for continued existence.10 In this case, because the leaders of public colleges and universities are significantly dependent on state appropriations, the theory postulates that they will take the measures necessary to retain or enhance their institutions’ funding. This may involve encouraging more efficient resource allocation, improving program performance and generating degrees that reflect state workforce needs.

This approach to higher education finance has three main components: goals, measurements and incentives. For the system to be effective, these components must be aligned and complimentary. The goals generally consist of state or institutional priorities, such as increasing the number of college graduates and improving outcomes for low-income students.

The measurement component tracks campus outputs and progress towards these goals. Measurements typically reflect state priorities and campus mission. The U.S. Department of Education’s College Completion Tool Kit categorizes these measurements as:

General outcome indicators (graduation rates, certificates conferred, etc.)

Subgroup outcome indicators (Pell Grant recipients, nontraditional students, etc.)

High-need subject outcome indicators (STEM fields, nursing, etc.)

Progress indicators (course completion, transfer, credit milestones, etc.)

The incentives, which can be financial or regulatory, are rewards given to spur urgency and action on improving measurements to meet state goals. Often these incentives are in the form of state appropriations, but they can also consist of changes in campus autonomy, such as greater tuition-setting authority.

PBF Delivery Models

Three PBF models that directly link state funding and campus outcomes are output-based funding, performance contracts and performance set-asides.11 Within these models are a number of programmatic arrangements, which can encapsulate the entire state higher education budget or only a small share of funding.

Output-based systems (or payment for results) are funding formulas linking state funding and outputs, such as the number of students meeting credit milestones and completing college. The formula can be weighted according to campus mission, with preferences given for low-income and at-risk students. This approach incentivizes campuses to seek better performance on key metrics in order to generate additional state funding.

Performance contracts are negotiated agreements between states and institutions to achieve results. The contracts are regulatory documents representing customized, campus-centric approaches to improving performance. In exchange for a funding allocation, institutions come to an agreement with the state regarding benchmarks and goals.

Performance set-asides are a separate portion of state funding designed to improve campus performance. This may be a “bonus” fund or a separate portion of a regular state appropriation. Campuses compete in order to receive money from this account.

Harnish also describes the disadvantages:

Key disadvantages may include:

A limited portrait of university performance. PBF systems hold universities accountable for a series of measurements of student and institutional success. It offers few “shades of gray” in a multifaceted, complex environment. Rewarding a few campus outcomes is a difficult exercise that can lead to contentious discussions both within and among state universities.

Mission distortion/student access. PBF may lead some institutional leaders to abandon, distort or manipulate the university’s core mission and responsibilities in order to inflate performance metrics. Some systems encourage administrators to change inputs instead of outcomes. This could include limiting access to students from disadvantaged backgrounds. Some changes may even go unnoticed, such as reducing outreach efforts to low-income students.

Quality reduction. The PBF approach may not capture gains in student learning or skills acquired.32 And because it may stress efficiency over quality, some believe academic quality might suffer.33 If the incentives are substantial, it is possible that some may act to reduce program rigor to achieve better outcomes. Institutions could also attempt to alter academic programs to improve performance scores (such as completion rates), while ultimately diluting the value of the student’s degree.

Lack of program support. PBF may not be popular among some groups in academia, including faculty members. Some may object to market principles being integrated into academic operations, believing that evaluating performance based on a few metrics is antithetical to academic freedom and campus autonomy.

Increased inequality and instability. Some believe PBF hurts institutions that need the most help, especially those serving disadvantaged populations. In some cases, the lack of resources, not university efforts, may be the driver behind poor performance.34 Some PBF approaches could also lead to large swings in funding and institutional instability….

The Center for American Progress has published the report, Performance-Based Funding of Higher Education A Detailed Look at Best Practices in 6 States by Kysie Miao.

Here is a portion of the Executive Summary of Performance-Based Funding of Higher Education A Detailed Look at Best Practices in 6 States:

Though many new performance-based funding policies have yet to produce meaningful data, several best practices have emerged in the policy discussion. Many education leaders involved in performance-based funding have made the following recommendations:

  • Gain the support and involvement of key stakeholders early on in the process.
  • Ensure that enough money is apportioned for performance to create incentives that are sufficiently strong to change institutional behavior.
  • Develop different funding formulas for community colleges and universities or use the same formula but weight it differently depending on the type of institution and characteristics of the student population.
  • Integrate all metrics and provisions into the state higher-education-funding formula, as this makes it more durable when states are faced with budget cuts.
  • Use indicators that measure both progress (course completion, momentum, credit attainment) and completion (degrees conferred, program completion), with an emphasis on progress.
  • Incorporate stop-loss provisions that prevent institutions from losing more than a certain level of funding each year.
  • Implement a year of learning during the first year that the policy is in effect, a period in which state spending does not change but colleges receive reports detailing how their funding would have been impacted under the new measures; and/or gradually phase in over a multiyear period the percentage of total funding allocated based on performance.
  • Subject the system to frequent evaluation and make adjustments where needed.

As higher education spending continues to decline, states face growing pressure to demonstrate that they are fully invested in the long-term success of their students. Going forward, it is imperative that states and the federal government continue to explore performance-based funding options, particularly in the context of a series of outcomes-focused higher education reforms.

The following issue brief will summarize the history of performance-based funding in higher education at the state level, outline in further detail a subset of state experiences, and recommend that states continue to explore performance-based funding options in their higher education systems.

A brief history of performance-based funding

Between 1979 and 2007, 26 states experimented with measures that attempted to incor- porate institutional performance as a determinant of higher education funding. During this period 14 states that had enacted performance-based funding programs eventually discontinued them, although two of the discontinuing states later re-established new programs. The states’ dissatisfaction stemmed from the fact that these early funding models were plagued by a number of fatal design flaws. In particular, many programs were inflexible to institutional differences, resulting in rigid and seemingly arbitrary requirements that focused too heavily on degree completion and failed to reward intermediate progress. Furthermore, many models failed to allocate enough funding to create genuine incentives for colleges to improve.

After that initial wave of ineffective models, performance-based funding has once again begun to gain popularity. Careful to avoid the mistakes of the past, proponents of “performance-based funding 2.0” tend to emphasize the need to reward progress over completion, to recognize the differences that exist between community colleges and universities, and to partition off larger percentages of base funding in order to incentivize transformative change.

Download this issue brief (pdf)

Read the brief in your web browser (Scribd)

See, PerformanceBased. Funding in Higher. Education. A case study of three states. By Matthew Crellin, Darrell Aaron, David Mabe, Courtney Wilk. March 2011

An interesting 2004 article by Ben Jongbloed makes some interesting observations about “performance-based’ funding:

1. Introduction

In January this year, the Economist ran a couple of articles on the sorry state of higher education. One of the articles was called “Pay or Decay” (Economist, 2004). It painted a very bleak picture of universities in Britain and elsewhere in continental Europe. The message of the article was twofold: (1) students should bear more of the costs of bringing them to a university degree, (2) universities should be freed from the burden of state planning and regulation. The model propagated by the magazine to fulfill both goals at the same time was one in which universities would be free to decide on the level of the tuition fees and the number of students admitted to their programs. This message was put across very firmly, even aggressively, and some will disagree with part of the evidence used to underpin it. However, one can not deny that there is a lot of truth in the observations that most

graduates earn significantly more than non-graduates and most students are from families that may be regarded as more advantaged than others. It is also very true that while most European universities are overcrowded and underfunded, they cannot expect to get any substantial financial relief from the state. Private funding then will have to increase because governments face increasing claims on their purse from sectors like health care, security, and care for the elderly.

So private money is needed urgently, but in this paper it is argued that one cannot neglect the mechanisms through which public subsidies are being allocated to the universities. One cannot expect the solution for higher education’s problems to come only from increased student (or graduate) contributions. The mechanisms for public funding contain important incentives to achieve higher education’s three main goals, viz. quality, efficiency and equity.

Bringing these incentives more closely in line with incentives to generate increased private resources for higher education would seem to be the goal to be achieved. So, the message of this paper is: it is not just the level of (public and private) funding, but it is just as much the basis and criteria according to which public funds are made available that can improve the quality and accessibility of higher education.


Funding higher education: options, trade-offs and dilemmas

Ben Jongbloed (CHEPS, University of Twente, the Netherlands)


Paper for Fulbright Brainstorms 2004 – New Trends in Higher Education

Of course, just about every institution can look for ways to be more efficient and to consistently improve efficiency. Still, the bottom line is public universities need consistent and stable sources of funding.

Dr. Wilda says this about that ©

2 Responses to “Center for American Progress report: Performance-based funding in higher education”


  1. Ohio report: Regional cooperation to align education services « drwilda - August 17, 2012

    […] Center for American Progress report: Performance-based funding in higher education                                                     … […]

  2. Report: Declining college teaching loads can raise the cost of college | drwilda - April 2, 2013

    […] Center for American Progress report: Performance-based funding in higher education… […]

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