Performance (De-)Funding

Economic downturns are often the enemy of state higher education reforms, especially those that involve money. It's hard enough for state leaders to do things like reallocate funds to reward performance when times are good; when money is tight, the often fragile consensus necessary to make major changes tends to crumble.

Which is why the announcement last week that Indiana's commissioner of higher education recommended distributing budget cuts to state colleges based in significant part on a set of performance measures was so extraordinary.

The Indiana Commission for Higher Education's decision to disproportionately cut the budgets of some institutions because their per-student costs are higher and their completion rates are lower is consistent with the state's recently expanded performance funding system.

But it breaks with states' standard operating procedure of cutting institutions' budgets across the board, or equivalently to their enrollment size -- and that departure from the status quo stood out for many state policy experts.

"This is the first really strategic state response [to the recession] that tries to identify public priorities and use the money that's available in a strategic way," said Patrick Callan, president of the National Center for Public Policy and Higher Education.

"Indiana is showing here that you can put the words 'strategic' and 'budget cut' in the same sentence," echoed Travis Reindl, director of state policy and campaigns at CommunicationWorks, a Washington-based firm. "It definitely is a departure from some of the usual bad habits in bad budget times, where you just make all institutions a little bit poorer."

Indiana's approach -- if embraced, as is likely, by Gov. Mitch Daniels -- will make all of its public colleges poorer, but some (notably the state's multi-campus community college) will fare quite a bit better than others. Teresa Lubbers, the commissioner of higher education, said in a news release about her recommendations that an across-the-board cut for all institutions "would not be in the best interest of Indiana students or our system as a whole.”

The state's strategic plan for higher education, Reaching Higher, and a recently revamped method of distributing state funds to colleges both focus less on enrollment numbers and more on student success, with up to 15 percent of state funds distributed based on student course and degree completion and other performance-based factors. Those efforts are designed to get institutions to focus more on the quality of undergraduate instruction and on helping students finish degrees, especially in programs that best match the state's needs.

With Governor Daniels ordering a cut of 6 percent, or $150 million, from the overall state higher education budget for the remainder of the 2009-11 biennium, Lubbers and other state leaders were faced with the knowledge that cutting all institutions' budgets equally would undo much of the progress they hoped to gain through the shift to performance-based funding.

So after holding a delicate series of discussions with college and university leaders, Lubbers announced that she would recommend that Daniels reduce public colleges' budgets through a formula that took into account several factors: (1) the amount of federal stimulus funds they were due to receive (which themselves had been distributed last spring with performance in mind); (2) state appropriations per student at each institution; and (3) student persistence and completion rates at the individual institutions.

State officials said it was difficult to define precisely how much weight each of those factors received and how they meshed. But the end result is that individual colleges received budget cuts of decidedly different sizes, as seen in the table below, ranging from a low of 3.49 percent for the fast-growing Ivy Tech Community College to a high of 6.64 percent for Indiana State University, a midsized public institution that has seen its enrollment tumble over the course of this decade.

Indiana Higher Education Commission Recommendations for Allocating Budget Cuts

Data provided by the commission as "context" for its decisions offered some insight into the reasons for the differential treatment given to the various institutions. A chart showing the amount of state funding per student that the various institutions receive runs from under $4,500 for Ivy Tech and the Calumet and North Central campuses of Purdue University to nearly $8,000 for Purdue's main campus and Ball State University and more than $9,500 for Indiana State.

A similar table, showing operating expenses per bachelor's degree for the 2008 fiscal year, runs from a low of under $50,000 for Ivy Tech, Purdue-North Central and Indiana University-Purdue University's Fort Wayne campus to more than double that for Indiana State, Purdue and Indiana University's main campus at Bloomington. The costs of the flagship Purdue and Indiana University campuses are driven in large part by their research-intensive focus, but the chart is clearly designed to raise questions about the cost efficiency of some of the other campuses that appear on the high end of the chart.

When asked what messages the commission hoped to send to the colleges with higher per-student and per-degree costs that, as a result, face bigger budget cuts, a spokesman avoided direct criticism of those institutions, saying only that "some [colleges] appear to have made more progress than others" toward the state's goal of improving undergraduate instruction and degree completion.

But the commission accompanied its recommendations on budget cut levels with a list of "efficiency guidelines" for improving individual institutions' academic and operating performance (including rigorous reviews of low-performing programs and more collaboration between campuses to cut purchasing and other costs), as well as a set of possible changes in the system's own structure that could lead to major changes in campus offerings.

One reads: "Review opportunities for program consolidation, particularly in Northwest Indiana where campuses are located in close proximity to each other." That seems a clear -- and unusual -- warning to Indiana University's Northwest campus, Purdue-North Central, Ivy Tech and other local colleges that their breadth of program offerings is due for a review.

That blunt assessment and the commission's overall approach to allocating scarce funds drew praise from advocates for "tough love" for public colleges, especially given the tendency of many state leaders to back away from strategic priorities when money grows scarce.

"Too often, even states that have made tough decisions to implement productive and clear priorities back away from them when they get into a recession, when it's arguably even more important to do that," said Callan of the national higher education policy center. "It becomes every institution for itself," and the colleges with the most friends in high political places often get protected.

Having pushed a new performance-based budgeting formula through Indiana's legislature last spring, overcoming significant opposition from some quarters, Lubbers and the Indiana commission probably saw that any backsliding could have threatened the nascent effort, said Reindl of CommunicationWorks, a longtime advocate for more strategic state policy making.

"They must realize how fragile performance funding is, particularly during a revenue shortfall," he said. "What they don't want to have happen is have this budget meltdown be the nail in the coffin of a performance approach in funding higher education. If they had done anything else here [but apply the performance formula to the budget cuts], they would have sent the message that this is something you only do in 'good times.' "

While Indiana's college leaders were hardly jumping for joy at the prospect of significant budget cuts, the cries of protest that normally accompany such differential treatment of individual colleges were muted.

Even those that face disproportionately large losses praised Lubbers and the commission for their thoughtful and inclusive approach to decision making. In an e-mail to faculty at staff at Indiana State, President Daniel J. Bradley acknowledged that the university does not "fare well" under the commission's emphasis on degree completion and cost per student. "Hence the emphasis in the [university's] strategic plan on improving both enrollment and student success measures such as first year retention and 4- and 6-year graduation rates."

Added Michael A. McRobbie, president of Indiana University, about his university system's collective 5.8 percent budget cut: "We appreciate that the Commission for Higher Education has allocated these budget cuts thoughtfully among the state's public institutions."