Published on 2014/04/25
Carrots or the Stick: Performance Budgeting for Colleges and Universities
Performance-based funding can be a strong motivator for institutions to improve their student outcomes, but should only account for a portion of a state’s allocation for higher education.
Performance budgeting for public colleges and universities, which ties state support to institutional results, exhibits the conflicting characteristics of popularity and volatility.

By the mid-1990s, we witnessed a shift in accountability in higher education institutions and public sector services, away from merely accounting for expenditures — a bean-counting mentality — to a serious attempt to measure results. The idea was that organizations could improve performance through decentralization and providing specific directions in order to achieve precise, measurable goals. Performance reporting measures were developed with the goal of using publicity as its lever on performance. By this time, many higher education institutions and local governments had already been involved in some level of measuring programmatic outcomes. Performance reporting was associated with the adage that “what gets measured is what gets valued.” Reporting results on performance ensures that publicizing the outcome of governmental programs on specific priority indicators has the proven potential to enhance external accountability and improve the overall performance of public agencies; this includes higher education institutions. Proponents argue that measuring results can create public value strictly because of its informational worth. Using budgets as a carrot or a stick became the strategy used for shaping institutional outcomes at public colleges and universities.

Linking budgeting to performance emerged as a popular phenomenon in the middle of the ’90s. By 2000, the practice had spread to three quarters of the states. The intention of performance budgeting was to move away from traditional budgeting strategies, in which public colleges and universities primarily based their projected budgetary needs on current costs, student enrollments and inflationary increases. These inputs or resource factors ignored the quantity and quality of graduates and the range and benefits of services to states and society. This cost-plus budgeting also promoted inappropriate growth in expenditures, enrollments and programs, even in states with declining demographics and decreasing student demands. Some states had previously provided front-end funding to encourage desired campus activities in research and instruction that was anticipated to promote economic development.

Programs linking budgeting to performance differ from these earlier efforts by allocating resources for results achieved rather than simply promised. This practice shifts the budgetary goal from what states should do for their campuses to what campuses are doing for their states and their students. The shift is slight in all states, since the sums allocated to performance remain relatively small. Whatever the future of using campus performance in budgeting, the workload measures of current costs, student enrollments and inflationary increases will — and should — receive the lion’s share of state allocations. The real issue is whether performance should count for something in state funding and budgeting decisions. However, use of performance-based budgeting for measuring performance requires statewide strategies for all public colleges and universities.

Many states that have adopted performance budgeting during times of robust revenue have abandoned the practice due to budgetary restraints. In some states, after adoption of public budgeting for measures of performance, many public colleges and universities have shown progress. However, lack of stability and consistency in ongoing budgeting efforts undermine the predictable flow of dollars that public colleges and universities expect to receive. For example, the plan in South Carolina’s 33 public campuses, which tied funding to more than 70 indicators of performance, was abandoned due to lack of sufficient state funding of public institutions.

The largest challenge in the use of performance-based budgeting is the uniformity of treatment of institutions regardless of their mission, purpose, location and type of students they serve. Successful design of performance-based budgeting requires close examination of the mission of the college or university, the type of student body it serves and institutional strengths and weaknesses. In many cases, unfortunately, performance budgeting is used for political ends that are not strictly performance based. A decade ago, there was a flurry of interest in performance-based budgeting around the country; however, it has faded, experts say, because the programs were underfunded, were the first thing dropped when budgets became tight and were poorly administered. Interestingly, in the past few years, we are witnessing the early signs of resurgence in state performance approaches, perhaps rooted in the wisdom and experience gained from the earlier problems in this arena — yet ummistakably influenced by the changed political context for higher education in many states.

These newer movements fueled by competing budgetary priorities have a few important features. First, in a competitive global economy and competition, funding is shifting into degree production for the emerging economy. Second, post-recession, the focus and emphasis is largely placed on the development of a workforce specifically prepared for the state’s perceived future needs. Third, the missions, measures and financial incentives are being more tightly allied, thus improving the missing link in the performance chain. Fourth, there is greater focus on output, particularly outcome-based indicators, rather than mainly on measures of inputs and processes. Such throughput indicators have included, for example, rates of student completion of “gateway” courses (such as those in biology, chemistry, mathematics or psychology) where poor academic performance by students often creates bottlenecks that impair their transition to upper-level curricula, thereby contributing to student dropout.

In conclusion, the trust placed in higher education to prepare citizens for the 21st century workplace is too important to be left only in the hands of administrators in colleges and universities. Higher education institutions must play a greater role in broadly preparing the future generation of leaders, innovators, thinkers, writers and workers.

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Readers Comments

Will Wright 2014/04/27 at 11:12 am

While I do think colleges need ot be accountable for their students’ outcomes, I don’t think performance-based funding is the way to do it. It lumps all institutions into the same pile with the same expectations without recognizing (let alone celebrating) their differences in missions and target students.

Good idea, bad execution.

Mike H 2014/05/01 at 7:11 pm

I biggest problem I have with people like Will complaining about performance-based funding is trying to understand what their expectations are.

Fine, institutions are unique. That said, should it really be taking someone more than 3 years to complete their associate’s degree, and more than 6 to complete their bachelor’s?

Can we realistically say “this person graduated after 10 years, that’s a success”?

No.

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