Alternative Funding Models for Higher Education

Subject: Education
Pages: 9
Words: 2481
Reading time:
9 min
Study level: PhD


In the United States, economic security has been considerably challenged due to the necessity to increase the value of human capital and succeed in the global economic transition (Harnisch, 2011). It is not enough to recognize the sources and involve reliable people in the financial field of education. Innovation and new missions in terms of which it is possible to develop effective public-private partnerships should be offered. Institutional effectiveness has to be increased, the best practices have to be identified, and alternative educational delivery systems are expected (Harnisch, 2011). The development of performance-based funding (PBF) is one of the possible methods to promote productivity in an educational system and stabilize the modern fiscal environment. This system works when the higher education budget is allocated regarding such measures as course and degree completion or credit attainment (Miao, 2012). There are three main components in this approach and different ways of PBF implementation. The examples and lessons that have been learned will be discussed in this case to explain the nature of the performance-based funding system in the US.

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Miao (2012) defines performance-based funding as a model that can provide a clear picture of how local institutions use their state appropriations to support students and their families in their intentions to have successful college careers and get their degrees. Educational progress depends on how well enrollment and performance metrics can be identified and used by students and their warrantors. The first performance-based funding systems were observed in 1979. Some of them were successful, and some of them failed as soon as they were introduced or implemented with time. In today’s America, each state has its funding amount depending on its unique metrics and official working documents.

The main components of a performance-based funding model are goals, measurements, and incentives (Harnisch, 2011). All of them have to be clearly stated and recognized before the implementation of a model. A goal is a combination of local or state priorities which are supported by society. The best examples of such goals are the improvement of outcomes for low-income students and the increase of college graduation students (Harnisch, 2011). In an effective performance-based funding model, these goals should not be only be identified but also successfully achieved and explained to all participants. Another important component of an effective performance-based funding model is measurement. It is used to check the appropriateness between the achieved outcomes and the already established goals. As a rule, the assessment of these relationships is based on such indicators as graduation rates, the number of students (expected and actual), chosen fields, credit situations, and transfer. All these indicators can be divided into four main types which are general, progress, subgroup, and high-need subject (Friedel, Thornton, D’Amico, & Katsinas, 2013). It is possible to meet the indicators of different groups in the same performance-based funding model. Sometimes, a performance-based funding model contains one or two examples of one group of indicators. A final component that plays an important role in the implementation of a performance-based funding model in American higher education is an incentive. It is a type of reward that can be given to underline the importance of actions and evidence of positive achievements within a certain institution. There are regulatory and financial incentives in a performance-based funding model. Harnisch (2011) calls incentives as local or state appropriations which also include some changes that are observed on campus and may determine the quality of education. It is expected that incentives in any performance-based funding model should be strong and used to change and improve institutional behavior and activities.

The relationships between the goals, measurements, and incentives as the main components of a performance-based funding model can be developed in different ways promoting the creation of new performance-based funding delivery models. The most famous models in American institutions are output-based models, performance contracts, and performance set-asides. Each model has its unique formula according to which states make their final decisions. For example, an output-based system is characterized by the possibility to define the relations between funding and outcomes using the formula where the number of students is analyzed in terms of credit milestones. Performance contracts are used to investigate the relations between state and local institutions and the possibility to achieve positive results. The peculiar feature of a performance set-aside is its bonus nature. It is a separate portion of appropriation where campuses can receive additional money from the already existing account (Harnisch, 2011). As a rule, American institutions find it normal to use one model and follow it during a certain period of time till positive results are observed. As soon as the model fails or requires additional improvements, it is necessary to investigate all available metrics and choose a new performance-based funding model that meets academic and financial goals.

Past experiences of different states prove that not all funding practices may be defined as positive. In some cases, American states aim at developing specific performance-based funding models like funding at stake, rewards for research performance, or the engagement of new stakeholders (National Conference of State Legislature, 2015). At the same time, some mistakes cannot be avoided, and they lead to failures of systems or the necessity to change the direction and establish new goals. For example, Ohio is the state where a performance-based funding model was used to cut the median time for getting a bachelor’s degree (Harnisch, 2011). At first, the model was used to involve additional sources instead of focusing on the base allocation so it was hard for all students to receive the necessary portion of funding (Miao, 2012). The mistakes were recognized, and new approaches were adopted. New indicators were introduced, and new provisions were offered. The example of Pennsylvania demonstrates another approach to the improvement of funding. It was decided to eliminate additional funding for students in case they exceeded performance measures (Miao, 2012). The formula was improved, and it was decided to use the outcomes of the total education and general budget as the main components.

Taking into consideration all these examples and the results obtained by other states, several lessons can be learned. First, it is not enough to identify and implement a model. Local experts should follow all processes and identify any possible shortage to avoid failures or make sure the same mistake never occur. Second, performance-based funding models can fail, and it is not the reason to drop the opportunity to support students. It is a challenge that has to be overcome. Finally, there are many types of models and elements that have to be considered. Sometimes, it is enough to change one component to achieve positive results and avoid complications.


During the last 38 years, more than 40 states have already used different performance-based funding models and achieved different results. Some lessons were positive and helped to clarify the strong aspects of performance-based funding. Some attempts failed, and their developers had to think about new approaches and the involvement of new people and new sources in a funding system. At this moment, 32 states, including Arizona, New York, Indiana, Massachusetts, Oklahoma, and others, have a clear funding formula according to which students obtain financial help. Five states, including Iowa, Vermont, South Dakota, Connecticut, and Georgia, are in their transition, meaning that the government is about to approve a certain program (National Conference of State Legislature, 2015). There are also several states that put the effectiveness of performance-based funding models under question. In this part of the work, Pennsylvania’s performance-based funding system, its implementation, and main challenges will be discussed.

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The performance-based funding situation in the state of Pennsylvania remains to be unclear during the last five years. On the one hand, performance-based funding is characterized by a number of positive aspects from a political perspective. On the other hand, regarding its policy perspective, no big-time wins can be observed (Douglas-Gabriel, 2016). Therefore, the investigation of the model in the chosen state is a step that helps to comprehend all possible positive and negative aspects of the funding system in the United States. The Board of Governors and the Office of the Chancellor of Higher Education are responsible for the development of the performance-based funding model for higher education (Harnisch, 2011). In this state, several models were offered for higher education. The last model was introduced in 2011 in order to replace the old system offered in 2000. A new performance-based funding model is based on such concepts as core values of students’ success, access, and institutional stewardship (Harnisch, 2011). According to this system, five main indicators have to be taken into consideration: two of them are used to check for student success (degrees conferred and closing achievement gap), two of them are used in access (close access gap and faculty diversity), and one of them is for the evaluation of institutional stewardship (private support dollars raised) (National Conference of State Legislature, 2015). There are also several options indicators in each category, including career advancement, values, faculty productivity, etc. Today, the Pennsylvania’s model is one of the best examples created as a one-size-fits-all performance-funding model (Cavanaugh & Garland, 2012). It is one of the oldest performance-based funding models in the United States. The Pennsylvania State System of Higher Education (PASSHE) is a set-aside funding model that is sensitive to institutional missions and goals.

There are certain challenges in the implementation of this performance-based funding model in Pennsylvania. First, there is one fact that cannot be neglected. The development of any funding system is not an easy task. Several metrics have to be used, clear goals should be identified, and leading practices must be chosen. In comparison to other states that may use the examples and experiences of each other, Pennsylvania is an innovator. It is hard for Pennsylvania to consider the mistakes and achievements of different states because it is one of the first states where performance-based funding models were offered. Therefore, it is not enough to pay certain attention, use some knowledge, and develop basic skills. Pennsylvania had to create standards and become a good example for other states to follow.

Another challenge is based on the necessity to focus on different aspects of an educational process. According to the performance-based funding system of Pennsylvania, students have to improve their scores on tests during which their basic skills are evaluated regularly. Besides, students should meet such goals as success in educational achievement, the application of knowledge, the awareness of public services, inclusiveness, and stewardship. The first model did not reflect the differences that played an important role in the strategic development of the field of education (Cavanaugh & Garland, 2012). It was expected that the representatives of the PASSHE could improve the system leadership and promote a successful allocation of indicators, methodology, and desired outcomes. The “policy intervention” system was introduced in terms of which the graduation rate was increased by 10%, and the number of Latino students jumped up to 15% (Li, 2014). Still, Li (2014) admits that no clear connection between the improvements of the performance funding system and the recent changes is observed. Therefore, it is a real challenge for the developers of the performance-based funding model in Pennsylvania to prove the importance of every new step. A new model has to meet a number of requirements and standards. It has to be clear and understandable for all users, including students, teachers, and stakeholders. Besides, the model has to be focused on the results which help to reflect the mission and differentiate appropriate strategies (Cavanaugh & Garland, 2012). Another important goal of Pennsylvania’s performance-based funding model is the necessity to reduce competition among students but make them focused on their progress and skills. Student success and access matter. Other indicators should be mentioned, but their roles remain to be insignificant in comparison to the level of their significance observed in the 2000s.

Pennsylvania’s performance-based funding model helps to reduce the existing gaps between student access and completion. Students learn what they should do to improve their results and get the necessary portion of financial help. This model is also focused on student success and their possibility to improve stewardship using 9% of the higher education budget during four years of education. However, in Pennsylvania, every institution has its metrics. Therefore, it is hard to compare the level of performance in all institutions in the same way. Much work has to be done, and much time should be spent. Sometimes, school leaders are engaged in training activities to promote the development of students and transitions in the system.

In general, Pennsylvania’s performance-based funding model has a number of positive and helpful aspects that can serve as appropriate standards for the development of similar systems in other states. At the same time, there are certain challenges in the creation of such a system, and its developers have to focus on ongoing analysis and investigations in order to understand what steps and improvements should be offered and when. The sensitivity of this model makes it unique. Sometimes, students enjoy the possibility to use their success and stewardship as the main criteria for funding. However, the presence of competition cannot be avoided even if the supporters of the model try to avoid its effects.

Discussion Question Assignment

“Achievement Points” is a performance set-aside system in the state of Washington. It was introduced in 1999 (Friedel, Thornton, D’Amico, & Katsinas, 2013). Campuses receive funding that is based on the possibility to accumulate achievements points which may be acquired through several activities (Harnisch, 2011). For example, students demonstrate their college-level skills and gains at a high level. College retention among first-year students is observed. Students succeed in their completion and earn different certificates demonstrate high results in math courses. The essence of this system is the necessity to utilize new money and check all momentum points which can be gained through the development of basic skills, credit accumulation, training, degree completion, and course completion. During one academic year, all community colleges should share the results of their students’ performance with and without attached funding. There are 1.0 and 2.0 model practices in the funding model in terms of which progress and completion can be measured. During the last years, this system has been demonstrating positive results and increased performance in different categories. Regarding “Achievement Points” model, it is enough for students to earn 15 and 30 college credits. The last stages of their progress should include a certificate or a degree and the participation in a special training program (Miao, 2012). Washington takes steps consistently to clarify which ideas are appropriate for its local facilities, and which methods have to be replaced. Though it is difficult to observe the achievements of all students simultaneously, the system continues working and proving that students’ skills can be measured. Recent observations prove the effectiveness of the model because the average college points have been increased by 31%.


Friedel, J., Thornton, Z., D’Amico, M., & Katsinas, S. (2013). Performance-based funding: The national landscape. Web.

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Harnisch, T. (2011). Performance-based funding: A re-emerging strategy in public higher education financing. Web.

Miao, K. (2012). Performance-based funding of higher education: A detailed look at best practices in 6 states. Web.

National Conference of State Legislature. (2015). Performance-based funding for higher education. Web.

Cavanaugh, J.C., & Garland, P. (2012). Performance funding in Pennsylvania. Change: The Magazine of Higher Learning, 44(3), 34-39.

Douglas-Gabriel, D. (2016). States that tie higher education funding to performance have it all wrong, report says. The Washington Post. Web.

Harnisch, T. (2011). Performance-based funding: A re-emerging strategy in public higher education financing. Web.

Li, A.Y. (2014). Performance funding in the States: An increasingly ubiquitous public policy for higher education. Higher Education in Review, 1. Web.

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National Conference of State Legislature. (2015). Performance-based funding for higher education. Web.

Friedel, J., Thornton, Z., D’Amico, M., & Katsinas, S. (2013). Performance-based funding: The national landscape. Web.

Harnisch, T. (2011). Performance-based funding: A re-emerging strategy in public higher education financing. Web.

Miao, K. (2012). Performance-based funding of higher education: A detailed look at best practices in 6 states. Web.