Report: Performance Funding Has Unintended Consequences

• By Dian Schaffhauser
• 12/04/18

Performance-based funding may not be the way to go if states want to see universities and colleges graduate more students. However, this approach can increase the number of people who receive shorter-duration credentials, such as certificates, to the detriment of the number earning associate or bachelor's degrees.

A new report by a researcher at the University of Northern Colorado, published on Third Way, examined the impact of using funding to incentivize schools to improve their student outcomes. According to Amy Li, an assistant professor in the university's Department of Leadership, Policy, & Development in the College of Education, performance funding policies fail "to improve degree completions or graduation rates."

The report laid out how performance funding works. The idea is to structure a formula that allocates state funding to public institutions based on their student outcomes. This contrasts with a traditional model in which schools are funded based on the number of students they enroll. The idea behind this outcomes-based approach, Li wrote, is to push colleges to "earn funds by graduating, not simply enrolling, students."

Performance funding is becoming a norm in many states. While the "exact numbers are unclear," Li stated, according to two estimates, some 25 to 35 states have such a practice in place and another five are developing policies. Another source estimated that 46 states were running or considering performance funding.

The goal in these states is for policymakers to look like they're addressing the "national focus on college completion." It's especially considered a remedy in those states with "lower rates of postsecondary educational attainment," Li stated. It also addresses the need for "accountability," by forcing colleges to prove the value they're delivering both to students and to "the public at large."

The model doesn't look the same from one state to another, Li pointed out. The share of funding tied to performance measures "ranges from 1 percent to 100 percent." In both Washington State and Indiana, for example, the "dosage" is 5 percent of all higher education funding that's based on performance; for Ohio it's 100 percent. Those high "dosages," however, are "outliers," Li wrote. Most states distribute a tenth or less of their higher ed funding through this model.

Does performance funding work? If it's measured by the number of students in a state who earn their two-year or four-year degrees or even by the count that graduate within 150 percent of the typical degree competition period, an outcomes-based policy approach fails, according to a number of studies. The only exception is Tennessee, which saw a boost in completion of bachelor's degrees by full-time students within four years, during the years 2011 to 2013.

The report also examined whether performance funding changed institutional practices, and there it did have impact, both positive and negative. On the plus side, schools gave greater focus to the topics of college completion goals and institutional performance. Also, the model motivated them to get better at collecting data and tracking their efforts.

However, two-year colleges seemed to exploit a loophole in performance funding policies that didn't specify what type of credential warranted full funding. In several states, short-term certificates (which don't have the earning power that full associate degrees do) shot up at the expense of the two-year degrees, since the "funding reward [was] the same for both." Some states have since adjusted their formulas to address this "unintended consequence."

Also, Li noted, performance funding may adversely change who gets into college. In Indiana, as an example, four-year schools tightened their selectivity by going after students with higher grade point averages and college entrance exam scores. She urged policymakers to keep this consequence in mind and design their policies "so that performance funding does not diminish access to higher education for the students who need it the most." To counter that effect, Tennessee provides additional funding for Pell Grant students who graduate. Similar incentives have surfaced in several states for students in STEM fields, under-represented students and adult students.

The report offered several best practices, such as making sure the performance funding model is "stable" over the long term, so that schools want to continue improving their outcomes. Another suggestion was to use "progression metrics" to "incentivize the steps" taken by students toward earning the degree and not just the degree completion itself.

Li also recommended that formulas differentiate among different types of schools. For example, two-year colleges should be recognized not just for associate degree completion but also for transfers and certificate issuance.

The complete report is openly available on Third Way.