Policy Brief Highlights Consequences of Performance-based Higher Education Funding

October 15, 2018

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Title: Policy Design Matters: The Impact of Performance Funding Policies on Credential Completion at Community Colleges

Authors: Amy Y. Li, Alec I. Kennedy, and Margaret L. Sebastian

Source: Wisconsin Center for the Advancement of Postsecondary Education (WISCAPE)

As policymakers have grown frustrated with rising college costs and stagnant completion rates, a growing number of state governments have turned to performance-based funding schemes to improve institutional accountability.

Performance funding (PF) policies, now active or awaiting implementation in 36 states and under consideration in five more, tie a portion of institutions’ state funding to measures of student access, retention, or completion.

But a recent policy brief from the Wisconsin Center for the Advancement of Postsecondary Education (WISCAPE) suggests that some state PF policies have had unintended consequences in the two-year sector.

The report, based on a 2018 study by policy researchers Amy Y. Li (University of Northern Colorado) and Alec I. Kennedy (University of Washington), estimates the effects of state PF policies on the number of certificate and associate degree completions at 751 public two-year colleges in the 30 states that enacted these policies between 1990 and 2013.

The authors found that PF policies that determine less than 5 percent of funding exerted no effect on community colleges’ completion numbers. However, policies that determine over 5 percent had substantial effects: PF schemes that allocate between 5 and 25 percent of institutional appropriations increased the number of short-term certificates by an average of 71 percent. Even more striking, PF policies that tie more than a quarter of institutional appropriations to performance metrics generated a 37 percent increase in short-term certificates and an 18 percent decrease in associate degrees.

The authors note that the latter result is concerning given the meager labor-market value of short-term certificates, and say that flaws in policy design are likely to blame. While most PF schemes reward institutions for credential completions, few PF formulae distinguish between credential types. In all but three states (Colorado, Massachusetts, and Michigan), a certificate completion secures an institution just as much performance funding as an associate degree. Accordingly, policy experts worry that PF policies give institutions financial incentives to prioritize production of short-term certificates as a quick and cost-effective means of capturing state performance funds.

Li and Kennedy’s findings vindicate those concerns and add to a growing body of evidence indicating that PF policies have not increased degree completions as intended.

—Sam Imlay

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