Reforming Higher Education Funding in Rhode Island: Lessons From Other States
The landscape of public higher education funding has changed dramatically in recent years. Nationwide, state appropriations per full-time student have declined by 28% since 2008, contributing to skyrocketing tuition and student debt. In Rhode Island, during the same period, the higher education appropriation has declined by 24% in inflation-adjusted dollars, resulting in a 37% increase in tuition at the state’s public four-year institutions.1 According to a recent report, Rhode Island students now pay 71% of the cost of higher education, compared to 31% a generation ago, and currently have the fourth highest level of student debt in the nation.2
FIG. 1 RI’S ANNUAL APPROPRIATIONS FOR HIGHER EDUCATION PER FTE STUDENT COMPARED TO US AVERAGE
Source: State Higher Education Executive Officers Association (2014)32
At the same time, both in Rhode Island and across the nation, public college enrollments have risen and student bodies have become more economically and racially diverse. Partly as a consequence of these changes, college completion rates have dropped. The decline in graduation rates has, in turn, led to concerns about whether the United States can remain economically competitive in a more educated world.3
In response to these disturbing trends, many states have recently reexamined their method of funding public higher education. Rhode Island joined a national trend in 2015 when a bill providing for performance-based funding (PBF) was introduced in the General Assembly. While that bill died at the end of the legislative session, a similar one was submitted in January of 2016.4
As Rhode Island considers changes to how it funds its higher education system, this study asks: What can we learn from other states about best practices for funding higher education, in particular the use of performance-based funding?
APPROACHES TO FUNDING HIGHER EDUCATION
States have traditionally used three basic models for funding higher education, though few states use any of these in a pure form and most use some combination of approaches.5
Political Budgeting. In a political approach to appropriations, the level of funding for each institution is determined annually based on the current priorities of the state legislature. The legislature may consider the previous year’s funding level, changes in enrollment, and other factors, but no formal criteria govern the decision-making process. Rhode Island is one of only six states that continue to use political budgeting.5
Political budgeting increases the burden on lawmakers, who must decide without objective criteria how much funding to allocate to each institution. Because “allocations of state funds to public higher education have historically been made in direct proportion to the lobbying power of the president of the institution,”6 political budgeting also tends to produce inequalities among institutions, and forces them to engage in divisive political competition with one another over available resources.
Political budgeting also leads to unpredictability in funding levels and can result in inadequate funding, as legislatures frequently make significant cuts to higher education budgets during times of financial stress.7
Base +/- Budgeting. In this model, appropriations are based on the previous year’s budget, with additions or subtractions based on projected enrollments, hiring needs, inflation, program changes, and other factors. In many states, baseline budgets are calculated separately for specific line items such as instruction, staffing, student support services, administration, and facilities maintenance.8 Starting from a baseline can reduce year-to-year unpredictability, but it can also perpetuate prior budgetary misallocations.
Formula Funding. Formula funding of higher education was introduced in the 1950s, and by 2007, 38 states had adopted formulas for distributing at least a portion of their higher education funding.8 In this method, each institution’s annual appropriation is calculated according to a mathematical formula that estimates the total cost of delivering the curriculum and operating the institution. The complexity of the formula varies from state to state, but every state’s formula includes a calculation for instructional costs, typically providing a set dollar amount per full-time enrolled student (FTE) or total credits enrolled.(a)
(a) In addition to formulas for instructional costs, many states also use formulas to calculate other budget categories, such as research activity, public service, academic support, student services, institutional support (administration), physical plant maintenance, and scholarships & fellowships. For simplicity’s sake, most of these are calculated as a percentage of instructional costs, sometimes with adjustments for economies of scale, though some states treat these non-instructional components as non-formula items.
FIG. 2 STATE METHODS OF FUNDING HIGHER EDUCATION
Source: SRI International, States’ Methods of Funding Higher Education (2012)
Many states’ formulas include adjustments for cost variations among institutions such as:
- The number of “at-risk students” (low-income, minority, or first-generation college students), who are more likely to drop out or take longer to complete degrees, and thus need more support;
- Differences among disciplines and programs in terms of method of instruction, class size, equipment needs, and other variables; and
- The type of degrees granted (Associates, B.A., M.A., Ph.D.).
Formula funding has several advantages that explain its expansion over the last half-century. It can produce a more rational allocation of resources based on objective criteria, foster greater equity among institutions, reduce the political complexity of the funding process,(b)make funding more transparent and predictable, and allow for increased accountability.6 If the formula is properly constructed and adhered to, this method also helps ensure that institutions have adequate funding to meet their mandates. However, since the 2007 recession, some states have failed to adhere to their formulas, and funding for higher education has declined even in formula states.9
(b) The initial construction of a funding formula is likely to be a highly complex and politically charged endeavor. Once this is accomplished, however, the formula can be applied in a straightforward way.
THE RISE OF PERFORMANCE-BASED FUNDING
Faced with tighter budgets and declining rates of degree completion, many states have turned to performance-based funding (PBF). Under this approach, a portion of each institution’s funding is determined by how well it meets certain performance criteria, such as how many students it graduates. Unlike the need-based formula funding discussed above, PBF is not a stand-alone funding allocation model. Rather, it is a tool for targeted institutional improvement. PBF attempts to improve student outcomes by influencing institutional behavior with a system of positive or negative financial incentives (rewards and punishments). In nearly all cases, PBF represents just a small portion of a state’s total higher education appropriation; the vast majority is still determined according to one of the three funding methods discussed above.
The popularity of PBF has fluctuated over the years. Between 1979, when Tennessee pioneered the approach, and 2000, approximately twenty-six states adopted some form of PBF.10 After roughly half these states abandoned the model, intensive lobbying efforts persuaded several states to adopt “PBF 2.0,” a stronger approach that links a larger share of state funding to performance metrics. Even in this new form, however, the amount of funding determined by PBF has generally remained below 25% of a state’s total higher education appropriations. As of 2015, 32 states had adopted (or re-adopted) some version of PBF, while several other states were considering it.11
Once PBF has been adopted in principle, a specific set of performance measures must be developed. These vary by state, ranging from a small set of carefully selected criteria to a large number of widely varied metrics. Most commonly, states have focused on measures of student achievement and student progress (retention and graduation rates, or credits completed, for example), typically adjusted to reflect opportunities for underrepresented students. Table 2 shows the wide variety of metrics used by current PBF programs.
Despite the popularity of PBF, our review of the academic literature reveals that the approach has not demonstrated significant success in improving institutional performance. While some case studies of individual states have found improvements following the implementation of PBF,12 these studies did not use statistical controls to determine whether the outcomes were the result of PBF or some other cause.(c) To ensure more reliable conclusions, we identified all of the available peer-reviewed studies that evaluated the effects of PBF using multivariate analysis, the statistical “gold standard” for program evaluation.(d) These studies attempt to isolate the effects of PBF by controlling for the effects of other factors, including state population, state unemployment levels, state appropriations per FTE, total enrollments, the percentage of at-risk students, and so on.
c) Even if an improvement in outcomes occurs after the introduction of a policy, we cannot be sure that the changes occurred because of the policy unless we have ruled out other potential causes using multivariate statistical analysis. As researchers Dougherty and Reddy point out, “a rising number of graduates could simply be due to rising enrollments.”21 Multivariate analysis allows researchers to sort out the effects of multiple variables in a way that case studies and anecdotal evidence do not.
(d) Peer-review means that research has been reviewed by multiple experts before publication. While peer-review does not guarantee correct conclusions, it is an important quality control measure that helps protect against bias.
TABLE 2. PERFORMANCE METRICS USED IN PBF*
Based on these studies, there is little evidence that performance based funding has had significant positive effects on degree completion rates, the time it takes students to obtain a degree, or other key performance measures. States that have employed performance-based funding have not outperformed the states where it has not been adopted. In the few studies where positive effects occurred, they were small in size, appeared inconsistently across states and institutions, and tended to appear only after a substantial period of time. In some cases, researchers found that PBF actually led to declines in performance measures. Additionally, other studies have found that PBF leads to declines in academic standards, a loss of opportunities for low-income and minority students, and a narrowing of institutional missions.13
The reasons for PBF’s lack of success are not fully clear. While proponents of PBF sometimes argue that earlier versions failed because they tied only small amounts of money to performance and therefore did not offer sufficient incentives for institutions to change,14 a study in Tennessee saw no increase in retention even after the state doubled the percentage of funding tied to performance in 2005.15
A second possibility is that most states have not stuck with PBF long enough for it to work. One of the few studies that discovered positive effects for PBF found that they occurred only after seven years.16However, as noted above, many states that have adopted PBF discontinued the program after only a few years.
Finally, PBF’s lack of success may be the result of its focus on institutional behavior, when in fact it is student behavior — particularly persistence toward a degree — that must change in order to increase graduation rates. It is reasonable to ask whether PBF would be more effective if the incentives operated directly on students by, for instance, rewarding students who make continuous progress toward a degree.
CONSIDERATIONS FOR FUNDING HIGHER EDUCATION IN RHODE ISLAND
Based on the empirical evidence discussed above, the following issues are important to consider as Rhode Island explores revising its system of financing higher education.
1. Ensure that adequate funding is available. Inadequate funding undermines higher education outcomes regardless of the funding scheme that is employed. Since 2008, Rhode Island’s appropriation per full-time student has declined 24% in constant 2014 dollars.1 These cuts have left the state close to last in the nation on a number of higher education funding measures, even taking into account its small population. Research shows that when underfunded schools rely too heavily on low-paid adjunct faculty17 and shift the costs of education onto students though tuition increases,18 graduation rates fall. Thus, assessing the adequacy of current levels of funding is an important first step toward developing a new system of funding higher education.
TABLE 3. ACADEMIC STUDIES OF PERFORMANCE-BASED FUNDING
2. Adopt a funding formula. In Rhode Island, formula funding would offer several advantages over our current political budgeting model. It creates a more rational and objective relationship between the level of funding and institutional needs and goals, it makes funding levels more predictable, and it reduces the decision-making burden on lawmakers.
When developing their funding formulas, many states have found it important to consider differences in institutional mission and the varying costs required by different fields of study and degree levels. Their formulas have also accounted for the number of at-risk students, especially low-income and first-generation college students, at each institution.
3. Rhode Island is unlikely to benefit significantly from adopting performance-based funding. There is a lack of evidence that PBF produces the desired outcomes, and there is significant evidence that it sometimes produces undesirable outcomes.
4. If performance-based funding is adopted in Rhode Island, a cautious and realistic approach is important. The following considerations are drawn from the experience of other states and the literature on PBF.
Do not expect dramatic or immediate results. The research showing that PBF has failed to significantly improve key outcomes in other states suggests that we should not expect it to have a major impact in Rhode Island. Furthermore, one rigorous, peer-reviewed study that revealed some positive effects found that they occurred only after about seven years.19
Begin slowly. The National Council of State Legislatures recommends that PBF be phased in slowly to allow institutions to adjust to new mandates before they are held accountable for meeting these mandates.11 They also recommend that the proportion of funding devoted to PBF be kept within the 5% to 25% range.11 Until a PBF program is in place and can be shown to be working as expected, the PBF share should be kept at the low end of that range.
Include major stakeholders in planning and implementation.Researchers and policy officials agree that PBF will be more likely to succeed if relevant stakeholders are included in the design of the program.11 These stakeholders include not only college administrators, but also the faculty, who have the most direct influence on and interaction with students. Failure to include key stakeholders in program planning and implementation risks the creation of unrealistic metrics, lowers institutional buy-in, and increases institutional resistance.
Create systems for data collection. PBF depends on data that are valid, reliable, and collected in a timely manner. Careful data management is costly, so the provision of institutional support and resources for data collection and analysis is essential.
These data systems should be activated even before PBF takes effect in order to provide baseline measurements of key metrics. The effectiveness of a policy like PBF cannot be determined unless baseline performance has been established against which the effects of the policy can be measured.
There are a number of decisions about how PBF programs should be structured that will determine how different institutions will be affected by PBF.
Carefully consider which institutions should be covered. Some states apply PBF only to community colleges, some to four-year schools, and some to both. States have frequently focused on community colleges because their graduation rates tend to be much lower than those of four-year institutions, offering more room for improvement.20 In addition, the institutional missions of community colleges tend to align more closely with state job-training priorities.
Employ positive rather than negative incentives. In some states, PBF funds are an addition to a base budget, serving as a “bonus” that institutions can earn by meeting performance goals. In other states, PBF funds represent a portion of the base budget that can be taken away if performance goals are not met. The problem with this negative approach is that the loss of base funding destabilizes institutional budgets. In a survey of college officials in five PBF states, more than 40% rated funding instability as a negative consequence of performance-based funding.21 If negative incentives are chosen, states can protect against instability by creating stop-loss provisions that prevent institutions from losing more than a specified percentage of their funding in any given year.
The choice of metrics is critical to increasing the chance of success and avoiding unintended negative consequences.
Keep metrics simple. Too many complicated metrics make data collection and analysis costly, overwhelm and frustrate administrators and faculty, and make it easier to “game the system.” For these reasons, experts recommend that states use just a few metrics.12,10 Ideally the number of metrics should be large enough to capture key outcomes, but no larger.
Tailor metrics to institutional mission. Institutions should be evaluated based on how well they meet their particular goals. The number of research grants received would be a suitable metric for a research university, while the percentage of community college transfers might be a better measurement for a four-year college.
Failing to account for differences in institutional mission can reward or punish institutions for the wrong reasons. For example, under many PBF programs, students who leave community college after one year and complete a degree at four-year school are counted as failures by the community college (because the student did not finish a degree there) and not counted as successes for the four-year school (because the student did not begin their degree there).21
Avoid using metrics that are beyond institutions’ control. A likely reason for the limited effectiveness of PBF is that many student decisions are driven by economic factors that are beyond colleges’ control. For instance, both enrollments and degree completions fluctuate in relation to the strength of the job market and to students’ abilities to pay tuition.21Similarly, some PBF programs reward colleges based on the number of graduates who obtain good-paying jobs within the state, even though this outcome is typically based on macroeconomic factors that educational institutions cannot control.21
AREAS OF CAUTION
PBF has been associated with a number of unintended negative outcomes, but these may be mitigated through careful program design.
Guard against the lowering of academic standards. One simple way to increase graduation rates and reduce time-to-degree is to lower academic standards and weaken academic requirements. In a study interviewing 59 college administrators, 41 expressed concern about this possibility, while the remaining 18 believed that the lowering of standards had already occurred.22 In particular, program accreditation should be rewarded, and institutions should be prevented from creating easy-to-earn but economically valueless certificates.23
Guard against the exclusion of low-income and minority students.Institutions can also increase graduation rates and decrease time-to-degree by enrolling fewer “at-risk” students, who are more likely to drop out or take longer to complete their degree.13 The seemingly straightforward remedy to this problem — requiring that institutions continue to enroll a certain share of low-income, minority, and first-generation college students — risks the negative consequence mentioned above: that schools will lower standards instead. This challenge may be mitigated if PBF metrics take into account institutional missions and the composition of the student body at each institution.
Guard against inappropriate narrowing of institutional missions.PBF programs that tie funding to the number of graduates in specific career-oriented disciplines can harm other academic programs.21Socially important but lower-wage careers, such as social work, may be undervalued. Liberal arts programs may also be deprioritized because they are not linked to specific jobs, even though liberal arts majors’ mid-career salaries are comparatively high24 and employers highly value the skills developed through a liberal arts education.25 PBF programs can limit these negative effects by avoiding overly narrow definitions of the value of particular degrees.
After years of declining investment, Rhode Island is now near the bottom of national rankings on most key measures of state support for public higher education. Any effort to design new funding mechanisms should first consider whether total funding is sufficient to meet state needs.
While Rhode Island stands to benefit from adopting and adhering to a funding formula for higher education, our review of the research indicates that the state is unlikely to benefit significantly from adopting performance-based funding. The consistent conclusion of current research on performance-based funding is that, on average, PBF states do not perform better than states that have not adopted PBF. If performance based funding is adopted in Rhode Island, it is important to consider the best practices outlined above when designing and implementing the program.
- Oliff, Phil, Vincent Palacios, Ingrid Johnson, Leachman. 2013. “Recent Deep State Higher Education Cuts May Harm Students and the Economy for Years to Come.” Budget and Policy Priorities.
- Arditi, Lynn. 2014. “Graduates of R.I. colleges have fourth-highest average student loan debt in nation.”Providence Journal, November 12.
- Weston, Liz. 2014. “U.S. falls behind in college competition: OECD.” Reuters, September 9. ###li
- SRI International. 2012. “States’ Methods of Funding Higher Education.” Washington, D.C.
- Noe, Roger C. 1986. “Formula Funding in Higher Education: A Review.” Journal of Education Finance, 11(3).
- Marginson, Simon. 2013. “Higher Education and Public Good.” in Thinking about Higher Education, by Paul Gibbs and Ronald Barnett. New York, NY: Springer.
- Layzell, Daniel. 2007. “State Higher Education Funding Models: An Assessment of Current and Emerging Approaches.” Journal of Education Finance, 33(1).
- Hagedorn, Linda. 2010. “The Pursuit of Student Success: The Directions and Challenges Facing Community Colleges.” in Higher Educations: Handbook of Theory and Research, Vol. 25, edited by John C. Smart. New York, NY: Springer.
- Friedel, Janice Nahra, Zoe Mercedes Thornton, Mark M. D’Amico, and Stephen G. Katsinas. 2013. “Performance-Based Funding: The National Landscape.” Tuscaloosa, Alabama: Education Policy Center.
- National Conference of State Legislatures. 2015. “Performance Based Funding for Higher Education.” Washington, DC: National Conference of State Legislatures.
- Harnisch, Thomas L. 2011. Performance-based Funding: A Re-emerging Strategy in Public Higher Education Financing. Washington, DC: American Association of State Colleges and Universities.
- Umbricht, Mark R., Frank Fernandez, and Justin C. Ortagus. 2015. “An Examination of the (Un)Intended Consequences of Performance Funding in Higher Education.” Educational Policy. Prepublished December 9.
- Miao, Kysie. 2012. Performance-Based Funding of Higher Education: A Detailed Look at Best Practices in 6 States. Washington DC: Center for American Progress.
- Sanford, Thomas, and James M Hunter. 2011. “Impact of Performance Funding on Retention and Graduation Rates.” Education Policy Analysis Archives, 19.
- Hillman, Nicholas W., David A. Tandberg, and Jacob P.K. Gross. 2014. “Performance Funding in Higher Education: Do Financial Incentives Impact College Completions?” The Journal of Higher Education, 85(6).
- Ehrenberg, Ronald G. and Liang Zhang. 2004. Do Tenured and Tenure-Track Faculty Matter? Washington DC: National Bureau of Economic Research./li>
- Dwyer, Rachel E., Laura McCloud, and Randy Hodson. 2012. “Debt and Graduation from American Universities,” Social Forces, 90(4).
- Tandberg, David A., and Nicholas W Hillman. 2014. “State Higher Education Performance Funding: Data, Outcomes, and Policy Implications.” Journal of Education Finance, 39(3). Tandberg, David A., Nicholas Hillman, and Mohamed Barakat. 2014. “State Higher Education Performance Funding for Community Colleges: Diverse Effects and Policy Implications.” Teachers College Record, 116.
- Kena, Grace, Lauren Musu-Gillette, Jennifer Robinson, Xiaolei Wang, Amy Rathbun, Jijun Zhang, Sidney Wilkinson-Flicker, Amy Barmer, Erin Dunlop Velez. 2015. “Institutional Retention and Graduation Rates for Undergraduate Students.” in The Condition of Education 2015. Washington DC: National Center for Education Statistics.
- Dougherty, Kevin and Vikash Reddy. 2011. “The Impacts of State Performance Funding Systems on Higher Education Institutions: Research Literature Review and Policy Recommendations.” Community College Research Center Working Paper No. 37. New York, NY: Columbia University Teachers College.
- Lahr, Hana, Lara Pheatt, Kevin J. Dougherty, Sosanya Jones, Rebecca S. Natow, and Vikash Reddy. 2014. “Unintended Impacts of Performance Funding on Community Colleges and Universities in Three States.” New York, NY: The Community College Research Center.
- Hillman, Nicholas W., David A. Tandberg, and Alisa H. Fryar. 2015. “Evaluating the Impacts of New Performance Funding in Higher Education.” Educational Evaluation and Policy Analysis.
- Peden, Wilson. 2015. “The Myth of the Unemployed Humanities Major.” Washington, DC: Association of American Colleges and Universities.
- Hart, R. 2013. “It Takes More Than a Major: Employer Priorities for College Learning and Student Success.” Washington, DC: The Association of American Colleges and Universities.
- Dougherty, Kevin, Sosanya M. Jones, Hana Lahr, Rebecca S. Natow, Lara Pheatt, and Vikash Reddy. 2014“Envisioning Performance Funding Impacts: The Espoused Theories of Action for State Higher Education Performance Funding in Three States.” Community College Research Center Working Paper No. 63. New York, NY: Columbia University Teachers College.
- Rutherford, Amanda, and Thomas Rabovsky. 2014. “Evaluating Impacts of Performance Funding Policies on Student Outcomes in Higher Education.” The ANNALS of the American Academy of Political and Social Science, 655(1): 185-208.
- Rabovsky, Thomas M. 2012. “Accountability in Higher Education: Exploring Impacts on State Budgets and Institutional Spending Patterns.” Journal of Public Administration Research and Theory, 22(4): 675-700.
- Kantrowitz, Mark. 2012. “The College Completion Agenda May Sacrifice College Access for Low-Income, Minority and Other At-Risk Students.” The Chronicle of Higher Education.
- Shin, J. C. 2010. “Impacts of performance-based accountability on institutional performance in the U.S.” Higher Education, 60: 47-68.
- Volkwein, J. Fredericks and David A. Tandberg. 2008. “Measuring Up: Examining the Connections among State Structural Characteristics, Regulatory Practices, and Performance.” Research in Higher Education, 49:180–197.
- State Higher Education Executive Officers Association. 2014. “SHEEO State Higher Education Finance FY 2014.” Boulder, CO: SHEEO.
Which states use funding formulas for public higher education institutions, and what are the outcomes? Which formulas might be models for Rhode Island?
Type of Research
- Explores the questions of Policy Leaders by providing a unique academic perspective to the research project
- Provides context for challenging state issues