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