Fixing a fatal flaw in performance based funding

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Performance based funding or outcome based funding (OBF) as it is now called, a common state model that ties higher education investment to colleges’ performance on certain measures, has not changed much since its inception in the 1970s. But an innovative OBF proposal announced in the Texas legislature in January looks strikingly different from any existing model and could address two critical flaws in other states’ systems. First, it would challenge conventional limitations like the insufficient funding stakes that make traditional OBF schemes ineffective. Secondly, the tuition-focused proposal would close a major loophole — one that has allowed universities to avoid the sting of outcome based funding losses by independently raising tuition.

In 2013, 24 states had some sort of OBF model for four year institutions. These systems employ a variety of measures to judge college performance, but tend to include things like a six year graduation rate, freshman retention rate, student progress rate, employment rate or continuing education measure for alumni who graduated more than a year prior. States frequently weight each of these measures more heavily for nontraditional, low-income and minority students to ensure that institutions are improving outcomes for target populations.

It’s easy to understand why states are increasingly pursuing OBF models. Much like families choosing a college, states too want to make sure they maximize the return on their limited dollars. And given that between 2008 and 2012, 44 states reduced investment in higher education, and 20 of these cut spending by over 20 percent, there’s a strong incentive to ensure remaining funds are well spent.

But the very same forces that have driven many states to experiment with OBF may simultaneously be undermining its effectiveness. With fewer dollars flowing into the system, states do not have as many bargaining chips with institutions. As a result, states are increasingly caving to colleges that have demanded to set their own tuition. In 2013, just nine states reported having primary tuition setting authority, down from 22 a decade prior. This trend has continued: Last week, Governor Scott Walker proposed a $300 million cut to public universities in Wisconsin, and a key part of the proposal included devolving state tuition setting authority to local boards.

While tying funding to outcomes has its merits, introducing an OBF model will do little to replace the institutional oversight that states lost by relinquishing tuition setting authority. Losing dollars from the state does not mean colleges will just have to tighten their belts and carry on. Instead, they will turn to their customers — students and their families — and raise revenue through higher tuition. The budgetary pressures will just be addressed elsewhere. In this way, introducing OBF without tuition setting authority as 11 states have done, may undermine the important progress they are trying to make. States will need to address tuition and implement OBF jointly to have an impact, which is why the proposal in Texas is so noteworthy.

Instead of thinking about OBF as a way to parcel out depleting state dollars, Texas is considering a bill that would hold colleges accountable by limiting how much they can charge students. Last December, Texas state Senator Charles Schwertner filed a bill that would impose tuition caps on public institutions that could only rise with inflation. Adoption of this bill would pave the way for an innovative outcome based funding model proposed by state Senator Kel Seliger. This proposal could be an effective and compromising solution for institutions, states, and OBF skeptics alike.

Seliger’s model would differ considerably from the way policymakers and researchers have traditionally thought about outcome based funding. By prohibiting universities’ from raising tuition above the rate of inflation unless certain benchmarks have been met, this model could curb tuition prices, and also allay concerns about the ineffectiveness of traditional OBF. But asking universities to do more with less, as many OBF models have, could make the proposal politically challenging.

The Texas proposal is particularly intriguing because it directly affects something colleges care deeply about — their ability to raise revenue. By contrast, many other OBF schemes appear to be minimally effective at best. In January, Paul Fain at Inside Higher Ed reported that skeptics are increasingly concerned that OBF has had little impact on universities’ decision making whatsoever. Universities may find a five percent budget incentive not worth the effort, and since 21 out of the 24 total states using OBF offer less than ten percent of total funding, this could be a widespread weakness. The Texas tuition-focused model may be a more effective method of raising the stakes than adjusting already small state higher education budgets.

Regardless of whether it comes to pass, the proposed OBF model in Texas clearly demonstrates that states must reclaim tuition setting authority if they are going to successfully hold institutions accountable. States cannot simultaneously limit already decreased funding, allow institutions to raise tuition and expect OBF to have the desired effect. As many OBF models currently stand, they may also be inadvertently raising costs for students and their families. Tying outcomes to tuition could be a promising and straightforward new model.

Author Bio: Ben Barrett is a member of the Education Policy Program at New America. Ben previously interned with the US Department of Education and the Texas House of Representatives.

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