As the nation’s colleges and universities struggle with limited budgets and greater demands for increased degree completions, states are once again looking at performance-based funding as a way to increase efficiency and reward institutions for access and success.

Earlier models of performance-based funding encountered well-deserved resistance and criticism and were often short-lived. Adopting performance-based funding is still seen by some as opening the proverbial Pandora’s Box, unleashing evils such as compromising the open-access mission of the colleges, lowering academic standards, punishing colleges for things beyond their control, pitting colleges against one another, and squeezing college budgets at a time when funding is already scarce. The weakness of earlier models and the poor implementation of these models has helped perpetuate these concerns. But newer models are addressing these and other concerns and are gaining increased attention and traction in today’s economic climate.

Several states are implementing these newer performance-based funding models, sometimes called “performance-funding 2.0.” They place greater emphasis on student progress and the attainment of intermediate milestones, rather than just rewarding degree completion. This is a vast improvement for the nation’s community colleges, whose missions are poorly represented by funding approaches that over-rely on measures of completion.

Newer approaches are also genuinely addressing equity concerns in a number of ways. These include:

• rewarding student gains from wherever students begin (i.e., however underprepared),
• providing extra incentive to colleges for the achievements of underprepared and disadvantaged students,
• rewarding improvements in closing specific racial/ethnic performance gaps, and
• rewarding each college’s improvement over time rather than comparing across colleges that serve very different student populations.

Another feature of some newer models is that they allocate all funding up front rather than set aside “performance funds” to be allocated after some judgment of whether performance targets are met. They do this by adjusting the base formula to factor in prior outcomes as well as full-time equivalent (FTE) student enrollment. This baseline approach has several advantages over the set-aside approach. It maintains predictability for college budget planning, enhances sustainability of performance funding (categorical programs are easy targets for lawmakers during budget downturns), and provides colleges with more flexibility and less micromanaging about how performance funds are used. It also sends a clear message that performance is an expected outcome of a state’s investment regardless of budget upturns and downturns, and focuses core institutional activities on student success.

Hardly a radical concept

When performance funding becomes incorporated into base allocations, it becomes clearer that it is not a new and radical concept. Current enrollment-driven formulas that characterize much of higher education can be viewed as performance-based funding, with performance defined as providing access. Colleges earn dollars and avoid losing dollars by enrolling students up to the funded level. Community colleges, in particular, have been paid for providing access, and do an outstanding job. New-generation performance funding simply adds other dimensions of performance: those related to student outcomes and, for some states, institutional outcomes like research and service.  Most new approaches continue to provide the vast majority of funding (80 percent or more) on the basis of enrollment to recognize the vital access mission while signaling the intent of state lawmakers to invest in access and success.

Many who oppose performance funding argue that it is unreasonable to adopt it when colleges are so underfunded. But that argument suggests that student success measures are steps taken with extra funds, when available. By accepting a portion of institutional funding on the basis of outcomes, colleges can send an immensely powerful message to lawmakers that an investment in the colleges is an investment in success that will benefit the state’s citizens and economy. State lawmakers are having to make tough decisions to maximize the impact of limited funds. They are disinclined to provide funds without regard to their impact. Conversely, colleges in some states are discovering that performance funding is so popular with lawmakers that it is positioning higher education favorably against other state programs in the competition for state dollars.

Here is an oversimplified hypothetical example to make the concept more concrete. Let’s assume there are two colleges of equal size – each with 2 percent of the system total FTE – and that the base allocation to the system is $5 billion. Under a pure enrollment-based system as we have today, each college would receive equal funding because they serve the same enrollment.

Suppose that, after a multi-year phase-in period, 90 percent of base funding is allocated for FTE enrollment and 10 percent is allocated based on points derived from a set of six to eight outcome measures, determined through a consultative process, that might include some of the following:

• Number of students advancing levels within remedial and English-as-a-Second-Language course sequences
• Number of students passing college-level math (with extra points for Pell grant recipients)
• Number of students completing at least 30 college credits (with extra points for Pell grant recipients)
• Number of completed certificates of specified minimum length, vocational associate degrees, and transfer associate degrees (with extra points for Pell grant recipients)

Now let’s assume that one college was able to achieve outcomes such that it earned 2.2 percent of the total points earned by all colleges, but the other college performed below average, such that it earned 1.8 percent of the total points earned by all colleges.

Under a hypothetical example of performance-based budgeting, one college making targets would get $101 million; the other that didn't succeed would get $99 million.

The following table compares the funding received by the two colleges under the two funding approaches. College A would see its budget increase by 1 percent compared to a pure enrollment model, whereas College B would see its allocation decrease by 1 percent.

This is purely a hypothetical example, without any detail on how the measures might be computed – but it gives a sense of the kinds of outcomes that could be valued and the way that measures could be applied. The goal of any such system would be to shift the conversation away from enrollment growth and toward success growth.

Experience from Ohio, Washington, and other states suggests that adding some outcomes elements to the funding model has tremendously powerful effects of changing conversations and focusing energies on ways to reduce college, system, and state barriers to student success. Furthermore, a heightened focus on student success can come about even with small changes to college budgets, as in the hypothetical example, where despite 10 percent of the system budget allocated based on outcomes, the actual percent change to a college budget is relatively small.

Nancy Shulock is director of the Institute for Higher Education Leadership & Policy (IHELP) at Sacramento State University, and a professor of Public Policy and Administration.  IHELP conducts applied policy research to advance the understanding of student success in higher education and improve state public policies.  She has authored numerous reports and articles on higher education policy and performance, finance policy, community colleges, accountability, policy analysis, strategic planning, and legislative decision making.