ROI for Public Colleges and Universities: Graduates

By 2020, 75 percent of all jobs will require a college education, according to the U.S. Department of Labor. Yet state and local funding for public postsecondary education has been in a free fall. Repeat: states need more college graduates for in-state employers, and public colleges and universities need more public funding. Evaluating these two problems side by side has led governors and state education officials to implement a 30-year-old idea called performance-based funding — in a new way.

“Governors want to know if they are getting the maximum possible return on investment (in the form of college graduates) on dollars put into higher education,” says Travis Reindl, program director, Postsecondary Education, with the Washington, DC-based National Governors Association Center for Best Practices. “Performance-based funding may help produce an appropriate ROI.

What Is Performance-based Funding?
“By definition performance-based funding awards money to colleges and universities in return for specified levels of performance on basic metrics, which might be graduation rates, student retention rates, job placement rates, numbers of degrees awarded, or some other important end result,” Reindl says.

A key performance-based funding consideration involves the kind of money the state will dispense, continues Reindl. Is it core money for core programs, or is it supplemental money paid on top of what the government normally provides?

For most of their 30-year history, performance-based funding programs have provided supplemental funding totaling only about 2 to 6 percent of an institution’s overall budget. Studies have shown that such small programs don’t boost performance very much, if at all.
“Today, however, states are implementing performance-based funding programs that affect core funds — the money for basic service,” Reindl says. “Arkansas, for instance, plans to base the award of one-quarter of the funds to postsecondary institutions on performance funding goals. That’s a different scenario than in the past.”

Tennessee, Ohio, and Pennsylvania are also moving to performance-based funding programs that will affect major percentages of core-funding.

The Tennessee Performance

Tennessee implemented the first performance-funding program in the U.S. in 1979 and has a long history with the technique. Until last year, however, the percentage of funds tied to performance was a miniscule 5.45 percent.

In 2010, Tennessee made major changes in its approach to performance funding by passing the Complete College Tennessee Act. Under this legislation, state education officials may award up to 80 percent of unrestricted college and university funds on the basis of performance.

Unrestricted funds account for one-third to one-half of public postsecondary institutional budgets. This funding comes on top of the 5.45 percent of performance funding already in postsecondary budgets.

According to the Center for American Progress, an independent, nonpartisan educational policy think tank, Tennessee will measure the performance of its two- and four-year postsecondary institutions by tracking student retention, graduation rates, and success in remedial courses.

The Tennessee system also offers a premium of up to 40 percent for students receiving Pell Grants and for adult educational program enrollments.

While it is too early to tabulate and evaluate results, Tennessee officials say they are optimistic about the program.

The Ohio Model
Ohio recently scrapped a performance-based funding system that provided small amounts of supplemental funding, says the Center for American Progress. The new model, which will affect core funding, began this year as the state tied 5 percent of its higher education budget to performance. The percentage will increase over the next three years and top out at 30 percent in 2015.

Formulas allocate money by measuring course completions and graduations. Formulas also award funding to schools that show good results for so-called “at-risk students,” which are defined as economically disadvantaged and in need of remedial education before taking on a postsecondary curriculum.

In the first year of the program, institutions didn’t receive or lose funding based on performance. Instead, the state provided each with a report illustrating how the new program would have affected funding.

Pennsylvania Has a Different Plan
Pennsylvania reserves 8 percent of its postsecondary education budget for distribution based on performance. In 2012, the Commonwealth will distribute approximately $36M to schools that reach goals set by the Department of Education. There are 10 benchmarks, including graduation rates, retention, and faculty productivity. To receive a share of the funds, a school must meet all 10 goals.

Having implemented the program in 2000, Pennsylvania does have results. Throughout the 12 years, the program has been at work, postsecondary institutions have boosted graduation rates by 10 percent. In addition, retention rates for Hispanic students have risen by 15 percent.

“Performance funding is where a lot of the action is today,” Reindl says. “About half the states have implemented some form of performance funding, are preparing to implement a system, or are talking seriously about it.”

As the Tennessee, Ohio, and Pennsylvania approaches illustrate, states that have implemented programs are by and large taking different tacks. As results begin to arrive, look for a couple of models to excel and pave the way to a more efficient and productive system of public postsecondary education.