Performance-based funding is a funding approach where state appropriations are allocated based on how a postsecondary institution performs on a defined set of measures. These formulas are designed to incentivize institutions to prioritize student success over enrollment numbers through increased retention and completion efforts.
Some common metrics include course or program completion, workforce participation and transfer. A growing number of states also include metrics that track the number of degrees completed in specific fields. In most instances, performance-based funding is used in conjunction with one or more additional funding approaches.
States regularly fine tune their performance-based funding formulas. Policymakers and system leaders can use the latest trends and information on performance-based funding below to assess their current policies.
What Does the Research Say?
According to a 2022 report from the State Higher Education Executive Officers Association, at least 32 states use a performance-based funding approach for institutions in at least one sector. The amount of performance-based funding varies across states. The national average of the percentage of operating funds allocated through performance-based funding is 7.9%. SHEEO reports a high of 90.4% in North Dakota and a low of 0% in Illinois.
Research has shown that performance-based funding models have produced modest or no impact on institutional outcomes. In some instances, performance-based funding pushed institutions to be more selective in their admissions by prioritizing students who are more likely to complete degrees.
Research has also shown that performance-based funding can disadvantage minority-serving institutions. MSIs in states with performance-based funding lose funding relative to MSIs in states without performance-based funding. Case studies on performance-based funding implementation in the states tend to focus on best practices such as stakeholder engagement, formulas that account for mission differentiation, identifying appropriate guardrails and evaluation.
Equity Metrics in Performance-Based Funding
A 2021 report from The Education Trust examined the extent to which funding models prioritize the enrollment and success of students of color and students from low-income backgrounds. In doing so, they examined if state performance-based funding models included enrollment, student success and campus climate metrics for students of color and students from low-income backgrounds.
Student Success. According to the same report, metrics related to outcomes for students from low-income backgrounds are the most commonly used. Twenty-six states with performance-based funding measure and reward institutions for success metrics among this student group. Nineteen states include success metrics for students of color.
Enrollment. The Education Trust found that 10 states include enrollment metrics. Among those states, six have an enrollment metric for students of color. In some instances, enrollment metrics are limited by institution type. For example, Wisconsin’s enrollment metric for students of color is mandatory for four-year institutions but not two-year institutions. In Rhode Island, the enrollment metric for students of color is only for the University of Rhode Island.
Campus Climate. Campus climate surveys are the rarest among these metrics. Only four state policies include or allow a measure of campus racial climate (Kansas, Pennsylvania, Rhode Island and Tennessee). Rhode Island requires the use of campus climate surveys at four-year institutions. Climate surveys are optional for Pennsylvania’s four-year institutions and not addressed for two-year institutions.
Workforce Metrics in Performance-Based Funding
According to our 2020 50-State Comparison on postsecondary education funding, at least 15 states award state performance-based appropriations to institutions based on workforce development incentives. Popular metrics include students’ wage earnings after graduation and the number of degrees/certificates awarded in state-defined critical needs areas.
Research indicates these policies confer mixed results in student outcomes, but recent studies highlight a growing trend to include equity-based components such as rewarding institutions for awarding a certain number of STEM degrees to students from low-income backgrounds.
States often differentiate performance metrics by sector like rewarding four-year and two-year institutions for workforce-related student achievements.
State Examples of Workforce Incentives
For the Kentucky Community and Technical College System and public universities, 35% of an institution’s state appropriation (or half of the total performance-based funds) is awarded based on student success outcomes, which can be measured by:
- STEM and health credentials.
- High-wage, high-demand industry credentials.
- Credentials in industries designated by the Education and Workforce Development Cabinet.
Per statute, the Louisiana Board of Regents develops and implements a performance-based funding formula applicable to all public institutions. The formula must align with economic development and workforce needs. The current workforce metric is based on the number of students who complete programs leading to four and five star jobs as determined by the Workforce Investment Council.
The Texas Legislature recently overhauled the state’s community college funding formula. H.B. 8 introduces changes that will primarily fund community colleges based on the number of:
- High school students who complete 15 hours of dual enrollment courses.
- Community college students who transfer to four-year universities.
- Community college students who earn credentials of value.
We track legislation related to postsecondary finance on our State Education Policy tracking map. Make sure to visit the resource regularly thorough the 2024 legislative session to learn more.
