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Does Performance-Based Funding Fall Short?

By Sonya Stinson

It’s time to rethink performance-based funding of higher education, according to a study that attempts to measure the outcomes of this popular practice.

Washington state’s Student Achievement Initiative is regarded as one of the nation’s most carefully designed performance-based funding systems for higher education. As with other such systems, Washington bases college and university funding on whether institutions meet certain state benchmarks, thereby creating a financial incentive for institutions to do so.

Using information from the U.S. Department of Education’s Integrated Postsecondary Education Data System from 2002 through 2012, researchers at the American Educational Research Association (AERA) investigated Washington’s performance-based funding system and earlier this month released a report detailing what they found. The researchers compared retention and degree completion rates at community and technical colleges funded through Washington’s performance-based model to retention and completion rates in states without such policies.

The report’s conclusion: There was no significant difference.

Theories about the lack of success

The lead author of the study, Nicholas W. Hillman of the University of Wisconsin-Madison, has heard several possible explanations for the study’s surprising results. One is that performance funding alone can’t produce all of a state’s targeted outcomes. “Somebody might say that we don’t see results because performance-based funding is just one arrow in the state’s quiver,” he says.

Another possible reason is that researchers need to look at a few more years’ worth of data to see more appreciable results. And others have posited that performance-based funding programs fall short because their goals and guidelines are too complex to be implemented effectively.

There’s pretty consistent evidence that these kinds of incentive systems don’t work very well in public sector organizations.

On that last argument, Hillman points out that he and his fellow study authors selected Washington’s funding system as their case study because it is one of the nation’s most streamlined programs. “They’ve learned all these lessons from other states and are seen as an innovator in applying what are supposed to be some of the best practices,” he says.

The roots of the state performance-based funding model reach back to at least the early 1990s and have also applied to city planning functions and public hospital administration. Hillman says the body of research on these experiments suggests that private sector models for funding and incentivizing reform may not be the best fit for extremely labor-intensive public organizations, such as colleges.

“In many cases, the performance-based funding models are inadequate and wholly insufficient for changing complex organizations,” Hillman says. “They can be helpful and politically popular in some ways, but, by and large, there’s pretty consistent evidence that these kinds of incentive systems don’t work very well in public sector organizations.”

Switch to different funding models?

Hillman hopes the AERA study generates more dialogue about potential alternatives for state higher-education funding. An equity-based funding model is one possibility.

“What if we focused on building the capacity of the community colleges that currently don’t have the capacity to respond — schools that are maxed out, that don’t have the kinds of facilities to provide high-quality opportunities for students?” Hillman proposes. “What about building up the data system for the schools so they can track their progress toward these performance goals? Let’s focus on capacity building first, which to me is fundamentally an equity question.”

Hillman also likes the idea of linking the funding of community colleges to their service to the broader communities in which the institutions reside. “We could approach it with an Enterprise Zone or Promise Neighborhood-kind of model that we see in K-12,” he says. “There are all sorts of other ways that we could think about funding reform.”

Did the results of this study surprise you? Tell us why or why not in the Comments.

Sonya Stinson

is a contributor to the 21st-Century Center.

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