Abstract
Performance funding uses financial incentives to motivate institutions to improve student outcomes and college completion. Perceiving this funding strategy as a helpful mechanism to stimulate better higher education outcomes, many states adopted the policy. Empirical evidence suggests that many of these models have done little to improve student success overall. Further, research indicates that some institutions inflate graduation rates and selectively admit students in order to obtain more state funding. Institutions that have a sizable population of underrepresented students may receive inadequate funding due to their low graduation rates. This chapter reviews the history of performance management reform, explains how it spurs the popularity of performance funding in higher education, analyzes the policy's downfalls, explores the policy's potential contribution to the intensifying higher education inequality, and discusses solutions to overcome the policy's challenges.
TopIntroduction
Knowledge-based employment, characterized by a job market that requires specialized knowledge and skills, is growing steadily (Pew Research Center, 2016). The share of jobs requiring a college degree has doubled since the 1970s, spurring significant increase in the number of students enrolling at two- and four-year postsecondary institutions (Aldeman & Carey, 2009). In 2016, occupations that required a postsecondary degree made up nearly 37 percent of employment (U.S. Bureau of Labor Statistics, 2017). Consequently, states face the stress of building stronger higher education systems to meet such demand. However, higher education graduation rates have remained persistently low. Per the National Center for Education Statistics (2021), the average public college graduates approximately 63 percent of its students within six years, and graduation rates for minority groups are even lower. In 2021, only 28 percent of first-time beginning community college students attained a degree or certificate (National Center for Education Statistics, 2021). This underperformance has led skeptics to question the accountability of higher education and prompted a series of attempts to improve institutional performance, which inspired many states to adopt performance-based funding (Rabovsky, 2012).
The idea of performance funding has been around for decades. Beginning in the 1990s, performance-based funding systems increasingly have been integrated into state and federal government programs as a means of holding public agencies accountable for improving the quality, efficiency, and effectiveness of program services (Ingraham & Moynihan, 2001). Performance-based accountability has incorporated fiscal incentives into government program management, in hope of motivating institutions to become more productive in attaining predetermined objectives in annual appropriations. Linking performance to funding has become one of the primary ways to manage accountability at both the federal and state levels (Willoughby & Melkers, 2001).
The popularity of performance accountability inspired the implementation of such measures to improve higher education institutions that receive government dollars. In the realm of higher education, performance-based funding is a strategy that connects state funding directly to institutional performance on public campuses through indicators such as student retention, graduation rates, and cost efficiency (Burke et al., 2000). Performance funding holds that the institutions are revenue maximizers and will make a strong effort to improve their performance if the amount of funding involved is significant enough (Burke, 2002; Dougherty et al., 2014a). Performance funding incentivizes institutions to pay greater attention to outcomes, including quality control and customer (i.e., students and parents) satisfaction. From the consumers’ standpoint, students and parents object to tuition increases and want assured access to quality educational services. This literature review chapter briefly summarizes the history of performance management reform which inspired the adoption of performance funding in higher education, analyzes the policy’s downfalls, explores the policy’s potential contribution to the intensifying higher education inequality for some undergraduate students (i.e., students of color, low-income students, first-generation, and nontraditional students), and discusses solutions to overcome the policy’s challenges.
Key Terms in this Chapter
Performance Management: A management strategy that focuses on identifying goals and reviewing results for the purpose of achieving the identified goals.
Higher Education Inequality: The uneven distribution of financial resources among higher education institutions.
Performance-Based Funding (Also Referred to as Performance Funding): A funding strategy that determines the amount of funding allocation based on how well the recipient performs on certain metrics.
Nontraditional Students: Older undergraduate students (mostly over 24 years old) who work, have children, and/or have other life circumstances that can interfere with successful completion of educational objectives.
Performance Reporting: The activities of compiling and organizing data to report meaningful accountability ratings to decisionmakers.
Performance Accountability: An oversight process that makes use of performance evaluation data to manage programs and track performance progress with the intention of improving organizational performance.
Performance Budgeting: A system that uses performance information for the allocation and spending of a government’s financial resources.
First-Generation Students: Undergraduate students whose parents did not complete a four-year college degree or students who are the first in their family to attend college.