Symposium Entry

Rethinking state funding policies to spur innovation

August 17th, 2015

How finance policy and state funding could be restructured to help institutions achieve better student outcomes.

Public finance literature makes clear that incentives and alignment to objectives matter. How to best translate this concept into effective policies for higher education that support broader adoption of innovative academic delivery models and spur increased student completion remains largely unresolved. For many states there is a persistent disconnect between how public funds get resourced to higher education and what the state needs in return. This is true of both what the state invests (level of funding) and how the state invests it (allocation model).

Why Do We Need Innovation in Academic Delivery?

The graduation attainment needs for each state, and the nation as a whole, can not be met by simply increasing the success of “traditional” college students: 18 year old, middle to upper-class, non-minority students. According to Lumina Foundation’s most recent Stronger Nation report, the overall attainment rate for the nation is 40 percent. Most concerning are the gaps that exist between the overall rate and specific student groups – with the attainment rate of African Americans at 28.1 percent and Native Americans and Hispanics at 23.9 percent and 20.3 percent, respectively.

The capacity of higher education must be expanded to better serve a more diverse group of students. And, as illustrated in the 2014 SHEF report, this must be done on an overall base of state support that has declined per student, resulting in tuition becoming an increasing source of revenue for institutions. According to Moody’s, this declining base of support from states is not likely to grow. As a result of this increased reliance on tuition:

  • Costs are increasingly shifting to students. This makes shorter-time to degree, lower-cost opportunities and pathways (including competency-based and prior learning), and well structured need-based financial aid models even more essential for all students, particularly low-income students;
  • The enrollment and retention incentive for institutions is increased. As such, adoption of models such as competency-based education or prior learning assessment comes at an increased opportunity cost, absent other non-enrollment based revenue streams.
  • The ability of states to drive change toward outcomes and completion is more limited. However, state appropriations remain the largest single source of revenue for institutions and can be leveraged in ways that alter the business model.

As documented in the New America Foundation’s report, Cracking the Credit Hour, many of these barriers are grounded in the outmoded notion that the credit hour equals learning. The credit hour, therefore, has become the primary driver and structure upon which higher education – and the funding that supports it – is built. This structure limits the ability for institutions to accelerate the adoption of alternative, innovative, and lower-cost pathways.

What types of Innovations can Expand Capacity and Improve Completion?

Innovations in higher education include those within the traditional model of higher education to those that significantly break down the traditional models and parameters. Examples of this range include:

  • Structured programs designed to take less time with higher success rates. Examples of this would include degree pathways or accelerated models (such as the CUNY ASAP model). Under these models, per student costs per term are likely higher, but per student costs per completion are lower and the return on investment is higher.
  • Learning assessed from multiple sources contributing toward and leading to a credential. This would include competency-based education models that allow students to progress toward a degree through the demonstration of skills and knowledge. These models are not based in the traditional credit-hour construct of postsecondary education allowing students to accelerate at their own pace, once content and competencies are mastered.

Two Ways Finance Policy can Better Support Innovation

Financing locks in how we deliver, and who delivers, education with no financial rationale for acceleration or collaboration.

Below I focus primarily on state general operating support to institutions, but there are other finance policies that can be examined and better aligned to support adoption of innovative academic models. These include changing institutional tuition and state financial aid policies to support students to take competency-based programs. For example, differential and flat-rate tuition policies can charge students in more flexible ways than purely by credit hours completed.

1. Leveraging state appropriations to advance innovation

This single source of revenue for public institutions generally makes up a greater proportion of revenue for comprehensive or regional four-year institutions and community colleges than that of high-level research universities.

The relatively decreased proportion of revenue from state dollars makes the imperative greater for the state to direct its investment more significantly in a way that will support state priorities and advance objectives not already covered by other revenue sources institutions receive. In simple terms, this would mean states more directly invest in completion of programs and degrees and not solely on FTE or a constant base-plus approach (generally disconnected from any state policy objectives).

2. Outcomes-based funding to support innovation

In an effort to address some of these underlying challenges, several states are turning to a concept called outcomes-based funding. The concept is an evolved and refined form of performance-based funding models, inherently meant to provide incentives for institutions to support completion of degree programs, as well as other priorities, such as enrollment and completion of underserved student populations (for example, adult, low-income, minority).

Outcomes-based funding that results in a significant portion of the state’s investment allocated based on degree or program completion, as well as the success of underserved students, can more directly support the adoption of innovative academic delivery models. Directing a significant source of revenue based on degree completion can change the underlying business model for institutions and create a financial incentive that does not otherwise exist:

  • Support advancement and timely completion of students. These models can help to decouple an institution’s revenue from a purely enrollment incentive. As a result, there is an underlying financial incentive for institutions to restructure academic programs, or adopt more expansive innovative models that help students advance more quickly through programs. Articulation of transfer credit would have a greater financial return for institutions in an outcomes-driven environment so long as the “lost cost” from tuition revenue is offset by returns in state dollars. Similarly, competency-based models would be less costly (and have greater return) for institutions as they would support the advancement and more timely completion of degree programs.
  • Create incentives for institutions to focus on underserved populations. From a state policy and institution perspective, it costs more to educate less prepared and less resourced students. State finance policies need to finance higher education in a way that encourages institutions to serve these students and recoup the costs. Without this, the costs will limit the scaling of these strategies needed for higher completion and will also not support expanding capacity to serve more students.

Limitations of Today’s Outcomes-Based Funding Models

While outcomes-based funding is an increasingly popular concept (some 35 states were developing or implementing some form of outcomes-based funding in fiscal year 2015), there is wide variation in the design and level of funding associated with completion supported by these models.

As indicated in the HCM report Driving Better Outcomes, only two states (Ohio and Tennessee) have seemingly significant portions of their state investment based on student progress and completion. Nearly all other models direct only minimal amounts of state investment based on these measures, with the majority remaining aligned to enrollment or a base allocation calculation. These policies may be enough to focus an institution’s attention on student success, but are likely not enough to encourage significant adjustment of the overall business or academic model.

The other notable limitation is one of design. In many cases the student progression measures reflected in the funding models remain largely based on accumulating certain numbers of credits. While these benchmarks support the advancement of students they still provide barriers for institutions to adopt innovative models not inherently based on the credit hour. States have started to pursue establishment of credit equivalencies that can be used to align these models within the common construct of the credit hour. Nonetheless, continued reliance in whole or part on the credit hour does not provide a clean connection between the innovative model and the finance model trying to support it.

There are certainly barriers to innovation beyond state-level finance. Federal student aid programs grounded in credit hours and more standard measures of academic progress. Accreditation systems as well as programmatic approval processes can also limit openness to innovation.

Further, solving the problem is not as simple as states adopting outcomes-based funding models. True expansion of innovation and capacity will require states to examine the entirety of higher education finance, including how and how much is invested in direct support to institutions; the state investment and design of need-based aid programs to allow students to access and progress through education more flexibly; and how tuition policies are structured.