Performance-based funding models are reinforcing disparities within higher education, according to a Century Foundation report. (iStock)

Facing budget constraints and demand for greater accountability in higher education, states are tying public college and university funding to the schools’ ability to retain and graduate students. But a new paper from the Century Foundation argues that such performance-based funding models are reinforcing disparities within public higher education and doing little to move the needle on completion.

Author Nicholas Hillman, an assistant professor of education at the University of Wisconsin at Madison, argues that financial incentives are blunt policy instruments that fail to take into account the complexity of educational outcomes. Students can be derailed from graduating for many different reasons, including a lack of academic preparation or money. Colleges with ample resources can readily address those needs to raise graduation rates, but schools with limited means often struggle.

Tying funding to performance favors state flagships and other well-heeled schools to the detriment of institutions that could use the most help, the report said. Rather than exacerbate existing inequalities, states should target resources to schools serving the most underrepresented and needy student populations, which are often the institutions with the greatest financial need, the report said.

“If we truly want to make progress towards a completion agenda and improve educational outcomes, we have to make sure that we have every college on an equal playing field with an adequate amount of resources to perform,” Hillman said. “We’ve got it all backwards to tell colleges to perform first, without actually addressing their capacity constraints.”

States have toyed with performance-based funding for 40 years, but the model really took hold after the 2008 recession. Though states had been dialing back support for higher education for decades, the financial crisis amplified the problem as legislatures scrambled to pull together state budgets with dwindling tax revenue. Pegging appropriations to performance became a way to encourage efficiency and hold colleges accountable for student outcomes, according to the Century Foundation.

“There is a real concern that too many students are falling through the cracks. States have also had to struggle to keep up the pace of funding over the years with tight budgets, requirements to fund healthcare and prisons,” said Julie Bell, education program director for the National Conference of State Legislatures.

She added: “States have been looking for a different approach to funding higher education. Legislators find performance-based funding appealing because it balances one of their most significant levers, which is funding, with one of their most significant responsibility, which is accountability.”

Thirty-two states, including Virginia, Tennessee and Indiana, have a funding formula or policy that allocates money to public colleges and universities based on measures such as course completion, time to degree or the number of low-income and minority graduates, according to the national conference. Many states primarily fund colleges based on a combination of enrollment and historical allocations. Bell said the performance-based model accounts for 5 percent to 25 percent of the funding most states dole out to universities.


Thomas Harnisch, director of state relations and policy analysis at the American Association of State Colleges and Universities, said states are getting better at aligning performance measures to the mission of universities as well as increasing access for low-income and adult students.

“It’s become more sophisticated in recent years,” he said, noting that its success is debatable. “From a political perspective, performance-based funding is a winner. From a policy perspective, it hasn’t produced any big time wins yet.”

In response to performance demands, some colleges are employing predictive analytics to identify and reach out to students who are falling behind in school. Others are targeting grants and scholarships to students at risk of dropping out because of money concerns. While Hillman considers the efforts laudable, he said there is little to no empirical evidence that they are working or that they are sustainable.

Universities in Pennsylvania did not produce more degrees even after operating under performance-based funding for nearly a decade, according to the report. Indiana schools also have failed to measurably boost degree production while at the same time becoming more selective and less diverse. And even after Tennessee ratcheted up financial incentives, universities there did not improve their graduation or retention rates, according to the paper.

Bell contends that Tennessee is gaining ground, though it might be too soon to fairly judge the state’s success.

“Tennessee does have some good results, and has been doing a good amount of research to really track and watch how it is working,” she said.

Graduation rates have gone up and down since Tennessee adopted the model in 2010, but state schools are helping more low-income students obtain undergraduate degrees, according to data from the Tennessee Higher Education Commission.

Hillman cautions against states shifting more taxpayer dollars toward performance-based formulas. He worries that the approach will be effective only in limited circumstances. Instead, he argues, states should allocate funds to closing inequalities, helping schools with the greatest need and supporting professional development of college faculty and staff.

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