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Adopt and Sustain Outcomes-Based Funding

Adopt and sustain outcomes-based funding policies for public higher education institutions

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States are developing outcomes-based funding policies as a powerful tool for supporting increased postsecondary student attainment. State policy leaders have collaborated with institutions to adopt policies, practices and models that better serve underrepresented student populations, support overall student success and increase degree attainment. Outcomes-based funding on its own will not guarantee increased attainment, but when coupled with effective student completion initiatives, it can help boost the number of students earning certificates and degrees and focus institutional efforts on improved student outcomes.

A February 2015 report released by HCM Strategists—Driving Better Outcomes: Typology and Principles to Inform Outcomes-Based Funding Models—describes the evolution from traditional funding models to early performance-based models to the newer performance- or outcomes-based models. Traditionally, higher education has been funded through three revenue streams: tuition paid by students, financial aid from federal and state student loans and grants, and institutional aid from state and local appropriations that support institutions’ operating expenses. State allocations to institutions typically have been determined in one of two ways: historic (base-plus) or enrollment-based. Historic allocations are based on previous funding and are adjusted up or down depending on the availability of state resources. Enrollment-based allocations are determined by the number of students enrolled at a particular point in time.

The term “performance funding” generally refers to any number of policies that tie the allocation of resources to institutional performance on identified metrics. Early performance funding models typically offered bonuses or add-on funding to institutions that met prescribed performance goals. As research and experience revealed some of the weaknesses of these models, states began developing more sophisticated “outcomes-based funding” models that also incent and reward progress toward goals but are tied more explicitly to agreed upon state goals for student success. Objectives of the newer outcomes-based models include:

  • Aligning the state higher education funding method with the state’s higher education attainment goals and student success priorities;
  • Aligning institutional priorities with those of the state and supporting the scaling of proven student success practices; and
  • Holding institutions accountable for performance and their role in achieving state attainment goals.

The HCM Strategists report also establishes a classification system for state outcomes-based funding policy based on research-based design and implementation principles. The design principles for stronger outcomes-based funding policies are:

  • Communicate leadership commitment to pursue specific statewide priorities regardless of a state’s funding situation;
  • Establish consensus around goals;
  • Make funding meaningful and secure;
  • Identify limited, measurable metrics;
  • Include all institutions and allow for differentiation;
  • Create incentives for success with underserved populations; and
  • Reward progress and short-term success milestones.

Strong outcomes-based funding policies also need effective implementation. Implementation principles for improved outcomes-based funding include:

  • Phase in impact of transition to outcomes-based funding;
  • Continuously improve data;
  • Evaluate policies and, when needed, make adjustments
Evidence

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A 2011 report from the Community College Research Center (CCRC) reviewed the then-existing research on outcomes-based funding and found that tying funding to performance had a number of positive impacts on colleges and universities. That research suggests that institutions in states with outcomes-based funding policies have greater awareness of state priorities and their own performance. Those institutions also showed “increased use of data in institutional planning, improvements in academic policies and practices, and changes to student services.” The report also noted several obstacles that were limiting the impact of some earlier performance-funding programs, such as weak or inappropriate performance measures, instability in funding indicators and measures, inadequate state funding, lack of institutional capacity, and institutional resistance. There is some evidence to suggest that many of the identified obstacles in earlier models are being addressed in newer outcomes-based funding models.

CCRC has conducted a large study on the implementation of performance funding in Indiana, Ohio, and Tennessee. A November 2014 working paper describes the findings regarding implementation policies and strategies, impact on institutional policies and programs, and the obstacles and consequences. The working paper found that institutions are changing policies and practices in an effort to improve student outcomes. In addition, institutions identified several obstacles that hinder their efforts to improving student success: composition of the student body, inappropriate performance metrics, and institutional capacity. Among the identified unintended consequences were increased college admissions standards and a weakening of course and degree requirements. Additional papers take a deeper look at some of the policy instruments used, institutional responses, and institutional capacity to respond. A January 2015 CCRC policy brief provides research-based recommendations for what states can do to improve institutional capacity to respond to performance funding.

The 2015 HCM Strategists report summarizes research on some of benefits of outcomes-based funding for institutions including:

  • Greater awareness of state priorities and their own institutional performance;
  • Increased use of data to inform decision making;
  • Increased institutional funding dedicated to instruction;
  • Improved student services, policies and practices, from financial aid to advising;
  • Improvements in developmental education and tutoring;
  • Changes to course sequences and curricula; and
  • Professional supports to improve teaching among faculty.
State Examples

Each of the following state examples is a policy solution crafted in response to the unique circumstances of the state in which it was formed. As a private foundation, Lumina does not support or oppose any legislation. Lumina provides educational information, nonpartisan research and analysis to advance Goal 2025.

Colorado

In December 2014, the Colorado Commission on Higher Education approved a new funding allocation model for public two-year and four-year higher education institutions. The Commission’s action is the culmination of an eight-month effort to develop the new model, which began with the passage of HB 14-1319 in May 2014. The new model seeks to provide greater transparency and accountability, and it connects base funding allocations to student outcomes aligned with the state’s goals. Under the new model, about half of public higher education funds will be distributed through the College Opportunity Funds stipends—an amount that follows each resident student to campus—and the other half is divided between role and mission funding and performance funding. Role and mission funding components include measures of institutional selectivity, number of campuses, rural or urban location, high-cost programs, and the provision of support services for Pell-eligible, first-generation and underserved undergraduate students, graduate programs and remediation.  Performance funding includes measures of student transfers, retention and degrees and certificates awarded. Degrees and certificates awarded in STEM and health care fields and those awarded to Pell-eligible and underserved minority students carry a higher weight.

Massachusetts

In 2013, Massachusetts adopted an outcomes-based funding plan for the state’s community colleges as required by the 2013 General Appropriations Act and referenced in the approved FY 2014 budget. Each institution will receive a base $4.5 million operating subsidy. The new formula ties 50 percent of additional funding to outcomes-based measures, such as associate completions, certificate completions, transfers, and students reaching a 30-credit benchmark; degrees and certificates awarded to Pell Grant recipients and in high-demand fields are weighted more. The other half of the additional funding is based on total student credit hours completed, weighted for the cost of teaching in different fields. Community college presidents and other state leaders worked together to create the formula.

The efforts to revamp the community college funding formula began with a 2011 report from the Boston Foundation that pointed to the mismatch between the demand for middle-skill workers and the graduates produced by the state’s system of higher education. The report offered a number of recommendations for strengthening community colleges in Massachusetts, including changes in governance, finance and accountability.

Ohio

In 2013, House Bill 59 (HB 59) was adopted by the Ohio legislature and signed by Governor John Kasich. Based on recommendations from the Ohio Higher Education Funding Commission, the legislation made changes to outcomes-based funding formulas for both the two-year and four-year institutions that had been adopted in 2010 and 2011, respectively. For both types of institutions, HB 59 added an at-risk student factor that recognizes institutions for their success with students from underrepresented populations, and gradually eliminated a stop-loss, which has protected institutions from losing more than a certain percentage of funding in a given year. For four-year institutions, 100 percent of the state funding will continue to be allocated on completion metrics but will shift more weight to degree completion rather than course completion. For the two-year colleges, the share of funding shifted by 2015 to course completion, student success points and degree completion. In FY 2014, an interim formula gave course enrollment 50 percent of the weight in determining the state share of instruction (SSI), but shifted the other half to course completion and success points. HB 59 also charged community college presidents with identifying factors that define students as being “at-risk,” determining the appropriate weighting for such students in the funding formula, and identifying the most appropriate success and completion measures for use in the formula.

A December 2013 report from the Ohio Association of Community Colleges responded to the legislative charge and laid out the community college presidents’ SSI allocation recommendations. In FY 2015, enrollment is not a factor, and course completion carries a weight of 50 percent, success points 25 percent, and completion milestones 25 percent. Each component includes a series of metrics focused on student progression and completion. The formula also rewards institutions for success with students from “access categories”—adult, low-income, and racial/ethnic minority—whose increased success and completion are essential for the state to achieve its educational attainment needs. The report identified additional elements for consideration in later years, such as short-term certificates and certificates of value, academic preparation, course equivalents, dual enrollment, and program of study.

Oregon

In April 2015, the Oregon Higher Education Coordinating Commission approved a new funding model tied to student outcomes. The new model shifts the basis of funding calculations from enrollment to access and successful degree completion. It creates incentives for institutions to support degree and certificate completion, including specifically among low-income, rural, underserved minority and veteran students and students in high-demand fields. The model also incentivizes campuses to support course completion, transfer and articulation from community college, and college credit programs with high school. The funding model is aligned to the state’s 40-40-20 goal for increasing postsecondary attainment and recognizes the distinct mission and scope of each institution. The state will start to implement the new model in the 2015-2017 biennium and will phase it in during a four-year transition period.

Tennessee

In 2010, Tennessee established the Complete College Tennessee Act, which included an outcomes-based funding formula that ties 85 percent of funding to performance metrics aligned to the state’s goals for student success and attainment. Primary metrics include degrees per 100 FTE students and completion of degrees and certificates. The other 15 percent is set aside for operations and maintenance. The new formula replaced the state’s enrollment allocation model and was phased in during a three-year period. The formula provides separate metrics for community colleges and for four-year institutions to allow for their different missions. Further, each institution’s performance metrics and their weights in the formula vary in order to better measure outcomes relative to institutional mission. The formula provides an additional incentive to serve low-income and nontraditional student populations. While the calculations, metrics and weights vary by institution, they all reflect the state’s commitment to student progress and completion, institutional efficiency and other institutional functions. The state also has a separate performance-based allocation that has been in place since 1979. This allocation rewards institutions with up to an additional 5 percent of funding based on quality control measures such as job placement and passage of licensure exams.

Utah

In March 2015, Utah lawmakers enacted SB232 directing the State Board of Regents to establish performance- and mission-based funding components for two-year and four-year institutions of higher education. The funding formula will be tied to systemwide and institutional performance metrics approved by the Board, including degrees and certificates awarded, services provided to underserved student populations, responsiveness to workforce needs, and institutional efficiency. Mission-based funding will be based on enrollment growth and as many as three strategic priorities. Mission and performance funding are just two components of the overall budget recommendation for each institution presented to the governor and legislature. Other components include employee compensation; mandatory costs for building operation and maintenance; and statewide and institutional priorities, such as scholarships, financial aid, and technology infrastructure.

Wisconsin

On March 26, 2014, the Wisconsin Technical College System Board adopted a new outcomes-based funding formula that will allocate a portion of the state’s general appropriation on the basis of performance across certain metrics, such as job placement, awards in high-demand fields, dual enrollment, students successfully transitioning from adult-basic education into postsecondary coursework, and serving special populations (minority, veterans, low-income, incarcerated, dislocated workers and disabled individuals). The formula, required by Act 20 (2013), was developed with extensive consultation of college leaders and other key stakeholders. The formula is scheduled to apply to 10 percent of general funds in fiscal year 2014-15, 20 percent in FY 2015-16 and 30 percent in FY 2016-17.

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