Performance-Based Funding in Higher Education

Performance-Based Funding in Higher Education Presentation by Arthur M. Hauptman Financing Reforms for Tertiary Education in the Knowledge Economy Seoul, Korea 6-8 April 2005

Performance-based funding represents one of the principal innovations in higher education financing in recent decades • Higher education institutions and systems in most countries are funded through traditional methodologies that focus on input or student measures in the form of: • negotiated budgets, or • formulas based on: • staff levels or other inputs, or • the number of students enrolled multiplied by costs per student • By funding outputs or outcomes rather than inputs or students, performance funding represents a real break from traditional funding approaches

The characteristics of performance funding mechanisms which differentiate them from other financing mechanisms include: • rewarding institutions for actual not promised performance • linking funding to the quantity of outputs or the quality of outcomes rather than inputs • using performance indicators that reflect public policy objectives rather than institutional needs • designing incentives for institutional improvement, not just maintaining status quo

The advantages of Performance-Based Funding relative to other more traditional financing mechanisms include: • Tends to be more transparent than many other financing mechanisms if performance indicators are publicly developed and readily available • Allows for greater linkage between funding and public policy objectives • Encourages greater accountability in the expenditure of public funds by linking results to funding levels

The disadvantages of Performance-Based Funding relative to other financing mechanisms include: • Tends to be more inflexible in its application • Can lead to greater year-to-year variation in funding if performance results vary • May discourage institutional diversity if many insts collectively pursue similar incentives • Often linked to reduced institutional autonomy in the expenditure of public and private funds relative to other financing methods

The conditions for success of performance-based funding include: • Institutions must have sufficient management capacity and autonomy to respond to the incentives and mandates included in performance-based funding • There must be performance indicators that can be reliably tracked and calculated • Adequate quality assurance mechanisms must be in place • Careful planning should be undertaken to avoid or reduce unforeseen consequences

Issues in Designing Performance-Based Funding systems include: • What proportion of public funds should be based on outputs or outcomes rather than more traditional measures such as numbers of staff or students, or costs per student? • How many and which measures should be used to allocate performance-based funding? • Should poor performing institutions be punished or encouraged to do better?

Three types of financing approaches might be considered performance-based funding: • Performance set asides - a portion of public funding for higher education is set aside to pay on the basis of various performance measures • Performance contracts - governments enter into regulatory agreements with institutions to set mutual performance-based objectives • Payments for results - output or outcome measures are used to determine all or a portion of funding formula, or insts are paid for the number of students they graduate in certain fields of study or with specific skills

I. Performance Contracts - Characteristics • Performance contracts typically are regulatory agreements more than legally binding documents • Performance-based evaluation criteria are negotiated between govts and institutions • The agreements may be with entire systems of institutions or individual institutions • A portion of overall funding may be based on whether institutions meet the requirements in the contracts • The agreements can be prospectively funded or reviewed and acted upon retrospectively • The contracts are more often punitive than incentives • failure to meet goals may result in reduced funding

Examples of Performance Contracts • France - • since 1989 has devoted 1/3 to 1/2 of recurrent budget to 4 year performance contracts • Finland - • has contracts that set out general goals for system as well as specific goals for inst • Colorado (U.S.) - • setting up performance contracts that would penalize institutions that don’t meet standards as part of broader reform effort that includes demand-side vouchers and fee for services

II. Performance Set Asides - Characteristics • A portion of funding for recurrent expenses is set aside to be allocated on the basis of a number of performance measures • % set aside varies from less than 5% to in some cases nearly 100 percent of recurrent funding • number of indicators varies from single to multiple (as much as twelve or more) • Performance measures are typically decided through negotiations between govt and insts • Allocation of funds is not done on a formula basis

Examples of Countries that Use Performance Set Asides • More than a dozen states in the U.S. have used performance set asides over the past decade • Tennessee - 6 % of funds set aside based on multiple criteria - four standards and ten indicators - each given a certain weights - insts compete against their own record, • South Carolina set aside most of its recurrent budget to performance funding - funding decisions were based on a large number of performance criteria • South Africa sets aside most of its core budget for teaching, research, and other services based on multiple performance measures • Performance funding supplemented by a competitive fund

III. Payments for Results - Characteristics • Two ways in which countries pay for results • 1) use some set of performance measures to calculate institutional eligibility for all or part of their formula funding of recurrent expenses • 2) when governments or private entities agree to pay institutions for each student enrolled or degree recipient in certain fields of study or with specific skills

Countries that Pay for Results - Examples • 1) Build Performance into Their Funding Formulas • England - recurrent expenses formula is paid on the basis of the number of students who complete each year of study • Denmark - taximeter model in which 30% to 50% of recurrent funds paid for each student who passes exams • Netherlands - Half of recurrent funding based on number of degrees awarded • 2) Payment for Services • Colorado (U.S.) is about to establish a fee for service for postbaccalaureate study to complement demand-side vouchers • Many community colleges in U.S. contract with private firms to train employees

Comparing Different Performance-Based Approaches • Performance Contracts • Most regulatory performance-based approach • Difficult to enforce or to use for incentives • Performance Set Asides • sets up a competition for funds among insts • what % to set aside for performance is an important decision • have to be careful not to use too many indicators • Payments for Results • most market-based performance approach • have to be careful not to create incentives that would reduce quality

Concluding Remarks • Various kinds of performance-based funding mechanisms have the potential to be an effective financing tool in a number of countries, although so far relatively few countries have adopted this kind of approach • Limited experience with performance-based funding thus far suggests program design issues are important in ensuring successful implementation • Deciding which kind of performance-based funding to use may be the most important decision that will determine success

Performance-Based Funding in Higher Education