Does Performance Funding Work?

A little performance-based funding doesn't work. But a lot of it might.

That's the conclusion of a recently published study examining the impact of formulas that tie state funds for public colleges to various measures of institutional performance. Performance-based funding is a favored tool of the policy makers and foundations that are pushing higher education toward greater efficiency and better outcomes in terms of college retention and completion; only if states change the incentives for colleges and universities, the reformers argue -- rewarding them for getting students through college rather than just enrolling them in the first place -- will institutions alter their behavior.

Based on that premise, several states -- including Ohio and Indiana -- have altered their formulas for allocating state funds in recent years, but those programs are too new to offer any evidence of their efficacy. But several other states have had performance-funding programs in place for much longer, and in a paper released this spring at the annual meeting of the Association for Institutional Research, two scholars studied Tennessee's -- the country's "oldest and most stable performance funding program" -- for insights into how such programs affect retention and graduation rates.

Not very much, the authors report. From 1979 through 2005, Tennessee altered its performance funding program numerous times, but throughout that period, the proportions of institutions' state allocations that were tied to performance remained small, varying between 2 and 5.45 percent. And from 1997 on, the program rewarded four-year colleges and universities based on their retention and six-year graduation rates.

But from 1995 to 2008, the state saw no statistically significant change in those rates at its public institutions, according to the study by Thomas Sanford, associate director of research at the Tennessee Higher Education Commission, and James M. Hunter, a doctoral candidate in educational policy and administration at the University of Minnesota. Even when the state doubled the money tied to those outcomes in 2005, the change had no effect.

"Despite these monetary incentives, this study’s findings suggest that the adoption of new performance funding policies has little impact on altering institutional behavior at their current funding levels," the authors write.

That doesn't mean that performance funding can't work, though, says Sanford. "We knew this was a relatively small amount of colleges' total appropriations, and a very small amount of money to change to try to implement something so big," he says.

Just last year, Tennessee totally revamped its funding model to tie as much as 80 percent of institutions' unrestricted appropriations (unrestricted appropriations account for between a third and half of public colleges' budgets in Tennessee) to a set of outcome measures rather than to enrollment, in addition to the 5.45 percent that was already allocated through the performance funding system (those funds are now tied to quality measures).

Tennessee is betting, Sanford says, that tying a more significant portion of institutions' state funds to performance will influence their behavior in ways that smaller amounts did not -- especially because if the state provides no new funds, colleges will end up competing with each other for money.

"There's a real sense that this is going to make a difference," he says. "At an institutional level, we're seeing more and more focus on strategically developing plans to hit these goals." It will take several years to see whether the new funding system has the desired impact, Sanford says.

In the meantime, it would be a mistake to view the state's previous performance funding plan as a failure, says Sanford. While Tennessee's program may have been too weak to change institutional behavior, he argues, it started changing the conversation and the "culture of expectations" within the state, arguably laying the groundwork for the more substantive changes that the state has now adopted.

"[T]he state’s long history of tying state appropriations to outcomes may have made tying 80 percent of state appropriations to outcomes more politically palatable and culturally feasible," the authors write.