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Do Performance Funding Policies Impact Higher Education Outcomes?

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Frank Woodward
March 24, 2015

Woodward marchIn recent years, the higher education landscape has been characterized by a growing demand for both increased academic performance and expanded public accountability. As states seek to achieve these goals against the backdrop of ever-tightening budgets, a growing number of states have replaced traditional, enrollment-based budget models with new, performance-based initiatives.

Performance-based funding ties at least a portion of state funding to measureable outcomes such as graduation and retention rates. In the late 1970s, the state of Tennessee implemented a pilot performance-based funding program and by the early 1990s performance funding enjoyed a short-lived wave of popularity in many states. Today, a new performance-based funding movement is again sweeping the country. While these initiatives take many forms, they all share an implicit assumption that performance incentives drive improved outcomes. But does the data support this claim, particularly over the long term?

A Surprising Lack of Existing Research

Interestingly, little quantitative research has addressed the long-term effectiveness of performance funding policies. Even when studies consider the issue, they often tacitly assume that the longer a funding policy remains in effect, the greater its impact on outcomes will be. However, this presumed relationship between policy duration and outcomes has remained largely untested.

Because the stakes are high for state budgets and individual institutions, there is a serious need for further research in this area. For this reason, in 2014 I completed a multilevel analysis of Integrated Postsecondary Education Data System (IPEDS) data for 482 public four-year institutions across 50 states from 2004 to 2010. My research examined whether amount or duration of funding had any impact on either retention or completion. A number of state-level and institution-level control variables were included in order to control for the effects of socioeconomic factors.

Results Challenge Current Policy Assumptions

The results of my study were both surprising and informative. Overall, I found that neither funding amount nor policy duration exhibited any meaningful relationship with completion rates or retention rates. Based on these results, states should not expect to drive increased outcomes simply by increasing performance funding levels or by extending the duration of existing programs.

Interestingly, however, my results on the institutional level point to a potential way forward. First, the addition of institution-level variables as a whole explained over three-quarters of the variance for completion and retention rates. In addition, faculty/student ratio exhibited a statistically meaningful relationship with increased completions. In short, while state-level factors have only limited potential to make a difference in performance-based funding models, institution-specific factors can play a much greater role.

If, as these results indicate, universities benefit when funding policies focus on institution-level factors, how could such a policy change be implemented? Tennessee’s recent policy initiatives in this regard are instructive. In 2010, the Tennessee General Assembly’s passage of the Complete College Tennessee Act moved the state toward a completely performance-based funding model. What sets this model apart is its use of institution-specific funding formulae, using outcomes factors such as retention, completion rate, research and service. As an example, funding for public research universities in Tennessee would be more heavily weighted toward doctoral degree completions, research and service, while smaller institutions might incorporate factors such as student progress and undergraduate completion as a larger percentage of overall funding.

Tennessee’s efforts to connect institutional mission with performance-based funding is certainly distinctive, but is it accomplishing its goal? To answer this question, in 2012 and 2013, I conducted a preliminary quantitative analysis of Tennessee’s higher education funding and outcomes based on IPEDS data from 2004 to 2010. My analysis revealed a meaningful relationship between state appropriations and increased completion rate in Tennessee during that time period. In short, Tennessee’s funding model is making a difference.

Further Research is Needed

Taken together, these two studies clearly challenge the underlying assumptions driving higher education funding policies in many states. These results are only a starting point, however, and more substantive research is needed in order to differentiate more fully among program types and other factors. Whatever form funding policies take—whether performance-based or otherwise—they must always depend on a clear evaluation of the data. Furthermore, states must be willing to modify or cease their existing funding policies based on the evidence.

Above all, higher education funding must remain focused on the goal of identifying the most fiscally responsible and effective means to promote the achievement of outcomes, while also preserving academic integrity and free inquiry. This will truly mean the difference in our ability to serve those students who represent the next generation of thinkers and leaders.


Author: Dr. Frank W. Woodward serves as assistant vice president for university advancement at Lincoln Memorial University. He has taught U.S. government and currently serves as an adjunct lecturer in policy analysis at the University of Tennessee, Knoxville. His research interest deals with performance-based funding policy in public higher education. He can be reached at [email protected].

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