Iowa looks nationally in considering performance funding for universities

Iowa has been funding its public universities the same way for decades.

But that could change if lawmakers follow the national trend of allocating money based on performance.

Tennessee – the first state to base higher education funding entirely on outcomes, such as graduation numbers – has become a bellwether of the new funding metrics. And Iowa and other states are paying close attention.

“So far, I think it’s fair to say that it has had the desired impact,” said Russ Deaton, associate executive director of fiscal policy and administration for the Tennessee Higher Education Commission. “It has altered conversations about higher education in Tennessee, and it has aligned state funding goals with institution goals.”

The Iowa Board of Regents has convened a task force to look at how its state dollars are allocated to the three public universities and consider the implications of using performance metrics such as Tennessee’s. The five-member task force has met three times to hear from local and national research groups about what other states are doing, what is working and what a funding change might mean here.

At its next meeting in February, the task force will discuss with university presidents the possibility of using performance metrics in Iowa and how much money could be involved.

Although Tennessee was first to tie 100 percent of its higher education funding to outcome, many states have or now are considering attaching at least some funding to performance — which typically refers to graduation numbers.

“I do see this as the way forward,” said Chris Miller, executive director of the Education Advisory Board, a national group of analysts and advisers who research academic and business topics. “It’s not whether, but to what degree.”

The Iowa task force will make recommendations to the Board of Regents in June on how to proceed, if at all, with performance-based funding. After receiving the recommendations, regents will study the issue further and possibly make a recommendation to the governor.

‘Iowa never changed’

Over the years, state funding in Iowa has made up a smaller portion of the general education budgets to the University of Iowa, Iowa State University and the University of Northern Iowa. As a result, tuition has made up a larger portion.

In the 2012 budget year, state money accounted for 36 percent of the general university funding for the three universities compared with 64 percent in the 2001 budget year. Student tuition, conversely, made up 59 percent of the general university funding in 2012, up from 31 percent in 2001.

Iowa has been funding its three public universities the same way for decades, dating back to at least 1945, by distributing money on a 40-40-20 split, according to Patrice Sayre, business officer for the Board of Regents — UI, ISU and UNI, in that order.

Lawmakers in many other states began using some type of enrollment metric to distribute money in the 1960s, Sayre said.

“But Iowa never changed,” she said.

The national trend toward performance-based funding is behind Iowa’s review of its own funding methods, not a local outcry against the current system, Sayre added. According to Education Advisory Board Executive Director Miller, 29 states have approved or are planning to implement some type of outcome-based funding model.

Believers of performance funding say distributing money based on enrollment alone motivates universities to funnel resources toward getting students in the door rather than graduating them on time. It might mean a “sweetheart package for freshman” that includes improved residence halls, sports facilities, and financial aid opportunities, Miller said.

“If you provide a flashier product, it takes money away from getting them across the finish line,” Miller said.

Switching to outcome-based funding still gets students in the door, he said, but it forces universities to get them out the door – degrees in hand – as well.

The challenges

Performance-based funding systems aren’t without challenges and hiccups. The Education Advisory Board interviewed officials in those states trying new funding models, and many said it can be tricky to design metrics that are both fair and effective.

For example, some colleges and universities have unique missions – such as fostering diversity or access to low-income students. The concern is that tying funding to outcome could prompt those schools to alter their missions, Miller said.

To account for those concerns, states have attached weights based on institutional mission and other variances. And states such as Florida and Texas want to go beyond attaching funding to graduation rates, Miller said.

Those states are moving toward tying funding to employment and compensation 5 to 10 years after graduation, he said. But what qualifies as “success” in that area can be hard to measure – especially if a student moves out of state and is contributing to another state’s economy.

“It’s a difficult thing to track,” Miller said.

States have been divided on how much state funding should be tied to performance. Tennessee has attached all its dollars to outcome, but most states are starting with just a percentage.

“There is contention about how to strike the right balance between stability – not changing too quickly – and making sure the formula has enough teeth to change something,” Miller said.

The way forward

States have tried performance-based funding before, and it hasn’t lasted. But Miller said this time might be different for two reasons – big philanthropy is involved, and students are getting smarter about how they shop for a school.

Philanthropic organizations such as the Bill and Melinda Gates Foundation now offer grants based on university outcomes – motivating lawmakers and university leaders to make real changes. And as students consider where to apply to school, they are doing more independent research – including considering timely graduation rates.

“The markets are getting more sensitized to college completion, not just college access,” Miller said.

That’s why the way forward likely will include some type of performance funding for most states, Miller said. But many lawmakers are watching Tennessee before taking the leap.

“If it lasts four years in any state, it’s likely to last a long time,” Miller said. “And Tennessee has been at it for three years, and the world hasn’t ended in that state.”                              

Tennessee’s largest performance metric is the number of graduates per institution per year – not the graduation rate. That means larger schools – such as the University of Tennessee in Knoxville – still get the most money, and schools with specific missions, such as access, aren’t negatively affected.

So far, there have been some winners and some losers, said Deaton, with the state’s higher education commission.

“Some schools have lost money, but not so much so that their stability is in question,” he said. “And one thing about doing a model that is 100 percent based on outcome, the money fluctuates every year.”

Graduation rates have improved since Tennessee implemented the new system. But it’s too soon to attribute that to outcome-based funding, Deaton said.

“The true test is going to be long term,” he said. “But I think it will have a dramatic impact, and we can see the seeds of that right now.”

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