Alternative Funding Models for California Higher Education

1. Alternative Funding Models for California Higher Education Dr. Michael A. Shires School of Public Policy, Pepperdine University Presented to the Postsecondary Education Subgroup of the Working Group on Facilities and Finance Joint Committee to Develop A Master Plan for Education—Kindergarten Through University August 9, 2001

2. Today’s Discussion • Designed as thought experiment • Not a formal set of recommendations • Hope to facilitate constructive conversation about: • Relationship between Legislature and state’s four segments • How that relationship should be reflected in its finance system • Focus is on system-level • Many important issues at campus level, too

3. Some Areas of Concern Lead ToConsidering Alternatives • Demographic surge of new students graduating high school • Disconnect between state policy objectives and funding—lack of accountability • Inequitable funding between campuses within same systems (community colleges) • Perceptions of inefficiency • Distribution of fiscal subsidies are sometimes counterintuitive

4. Where We Are Today • Bulk of funding is allocated to systems by Legislature as lump sum • UC Regents have constitutional autonomy from legislative mandate, but they generally go along • CSU Board of Trustees and CCC Board of Governors lack constitutional separation • CSU Trustees actively manage allocation of resources across campuses • CCC funds are generally assigned by enrollment formula

5. State Money is Fairly Evenly Spread Across Segments CCC $4.3 billion ($2.7 billion state GF) UC $3.4 billion CSAC $0.6 billion CSU $2.6 billion SOURCE: California Legislative Analyst’s Office, Major Features of the 2001 California Budget, p. 10

6. Enrollments Are Concentrated inCommunity Colleges UC 170,566FTE CSU 291,980FTE CCC 1,031,128FTE SOURCE: California Postsecondary Education Commission, Student Profiles 2000, Displays 13-15, 40.

7. If California Changed It’s Funding System,The Goals Would Be To… • Improve efficiency • Improve funding stability • Increase system responsiveness to state policy objectives • Protect institutional flexibility

8. Four Categories of Approaches to Funding Postsecondary Education • System-based funding models • Performance-based funding models • Cost-based funding models • Student-based funding models

9. System-based Funding Models… • Generally, current approach in California • With some cost-based adjustments • Enrollment • Special projects • Fee decreases • Provide funding directly to system at statewide level • Offer either advisory (UC) or statutory guidance for allocation of resources • Leaves opportunities for micromanagement of specific system initiatives (like Gov’s line item vetoes)

10. A System-based Funding Model in California Would Mean… • Few changes in status quo • Year-to-year variation in funding with significant latitude and discretion • Legislative intervention in funding process

11. System-based Funding Models Emphasize Institutional Discretion… • EFFICIENCY: (Weak) No specific incentives to seek cost reductions for educational services currently provided • STABILITY: (Weak) Due to lack of connection to any visible criteria, budget sizes are purely discretionary • RESPONSIVENESS: (Weak) Lump sum payments unlikely to change system behaviors significantly • INSTITUTIONAL FLEXIBILITY: (Strong) Systems are allowed to spend resources as they see fit

12. Four Categories of Approaches to Funding Postsecondary Education • System-based funding models • Performance-based funding models • Cost-based funding models • Student-based funding models

13. Performance-based Funding Models… • Link funding to specific outcomes or performance measures • Require identification of specific desired outcomes at policymaker level • Require timely accounting and reporting procedures to track performance to ensure responsiveness to criteria

14. There Are Many Approaches To Implementing Performance-based Models • Performance Objective-setting Institutions • Legislature • State-level governing commission/board • System boards • Campuses • Linkage Mechanism • Points approaches • Absolute numbers • Relative to mean • Deciles • Percentage improvement • Comparison to peer institutions

15. There Are Many Types of Outcomes That Can Be Targeted • Student outcomes • Completion rates • Retention rates • Completion times • Transfer rates • Initial participation rates • Programmatic incentives • Time to completion

16. Other Ways Performance-based Funding Can Be Done Include… • Expenditure targets • Limits on overhead (% or dollar cap) • Increases in instructional spending • Multiple measurements • Timing related • Measuring enrollments at beginning and end of semester to reward retention • Creating a score based on multiple cohorts • Measuring success of only lowest decile • Varying weighting by challenge category

17. Approach Used in Many States to Varying Degrees and With Mixed Success • South Carolina: most elaborate intent, but recent review found major implementation problems • Louisiana: peer-based formula, with some cost adjustments • Tennessee: large cost-based core funding with 5% performance basis

18. What Would Need To Be Done ToInstitute a Performance-based Approach • Establish detailed performance objectives and criteria • Identify a significant revenue stream to associate with performance against criteria • Create reporting and data systems • Timeliness • Comprehensiveness • Audit/review mechanism

19. Key Challenges Associated WithPerformance-based Funding Models • Measuring postsecondary outcomes and establishing targets • Targeting monies to appropriate level • Campus vs. system • “Losing” institutions likely those who need resources most • Gaming by institutions and systems • Unintended consequences may include larger classes, reduced access

20. Performance-based Funding Model Emphasizes Responsiveness to State Policy Goals… • EFFICIENCY: (Moderate) Potential incentives to improve quantity and quality of education, given proper objectives • STABILITY: (Weak) Lots of variation in most measured amounts; depends on share in performance pool • RESPONSIVENESS: (Strong) Systems have direct and measured interest in responding to state goals • INSTITUTIONAL FLEXIBILITY : (Moderate) Strong incentives to respond to state priorities but great latitude granted as to means

21. Four Categories of Approaches to Funding Postsecondary Education • System-based funding models • Performance-based funding models • Cost-based funding models • Student-based funding models

22. Cost-based Funding Models… • Link funding to costs of educational programs provided • A key element of today’s funding model in California • Require detailed data systems to provide cost estimates and factors • Typically formulaic—most states use them in some way • Require timely accounting and reporting procedures to inform accounting processes

23. There are Many Approaches To Cost-based Funding Models • Basic enrollment model: resources are pegged to number of students served • Peer-institution model: increases in resources are pegged to cost changes in comparable institutions in other jurisdictions

24. There are Many Approaches To Cost-based Funding Models • Cost-of-instruction model: programs are funded at actual calculated cost of instruction • Comparable quality model: educational programs are funded at lowest-producer cost level

25. California Already Uses Enrollments To Adjust Funding Segment University of California California State University California Community Colleges Budgeted Amount per New FTE $9,158 $6,358 $3,453 SOURCE: California Department of Finance,, Governor’s Budget, 2000-01.

26. Peer-institution Model Used in Many Other States • Would use indices and inflation factors from comparable institutions in other states to adjust California funding • Requires a major effort to adjust initial starting point • Many factors in California differ from other states • Cost of living • Program mixes

27. Cost-of-Instruction ApproachPromises Adequate Funding • Funding is based on actual cost of instruction • Requires streamlined categorizations (data demands are too great for detail) • Creates scenario for micromanagement of programs by Legislature • Locks in existing cost differentials at time of categorization • Obfuscates quality considerations

28. Comparable Quality Approach Inserts Market Incentives Into Formulas • Focus is on providing education at lowest cost • Assumes that similar courses are equivalent across sectors • Forces institutions to “compete” in cost of instruction • Most likely to adversely affect quality of instruction • Guarantees cost efficiencies (by fiat)

29. Segment University of California California State University California Community Colleges Example of Comparable Quality:Really Basic Approach Divide state support per student for each segment by average student course load (8 per year) • Cost per class per student • $2,088 • $1,129 • $570 • Costper FTE • $16,704 • $9,032 • $4,560 Problem: Very different educational products and mixes!

30. Each Segment Produces A Different Mix of Courses

31. Comparable Quality Model Should Compensate For… • Differences in course type offerings • Lower division undergraduate • Upper division undergraduate • Professional degrees • Academic graduate • Major programmatic cost factors • Class size differences • Faculty salary differentials

32. Crudely Correcting For Class Sizes:SOME CAVEATS FIRST!! • Values are reported for discussion purposes only and to give an order of magnitude • Not definitive estimates—data were not available over time horizon of project • Required simplifying assumptions • Classes are primary educational delivery system • Faculty salaries within each system roughly equal across class types • One-fourth of state support for UC is pure research

33. Crudely Correcting For Class Size: How We Did It • Example: Lower Division cost per FTE • Identify percentage of total courses taught at lower division level • Multiply that percentage times the total state instructional cost to arrive at lower division share of total cost • Divide lower division cost by number of lower division students (freshmen and sophomores)

34. The Undergraduate Subsidy of Graduate Education is Alive and Well Estimated Cost of Instruction (dollars per FTE)

35. Comparable Quality Approach Has Some Significant Likely Consequences • Market forces could help to increase quantity of educational product produced • Likely increase in community college enrollments not provided for in current funding scheme • Prop 98 mechanism • Additional growth, beyond current dramatic projections would be necessary

36. Comparable Quality Approach Has Some Significant Likely Consequences • Reduced revenues could erode quality of educational courses at higher-cost institutions • Approach would highlight cost of graduate programs and could lead to significant legislative disinvestment in this key area

37. A Expanded Cost-based Funding Model in California Would Mean… • Increased data and reporting requirements • Developing a consensus of proper cost factors and inflators—topics of great controversy • High-level, explicit decisions about California’s willingness to invest in research and expensive graduate programs • Commitment by state to fund full cost of instruction, even in economic downturns

38. Cost-based Funding Models Emphasize Efficiency and Stability… • EFFICIENCY: (Strong) Depending on approach, either locks current cost profile and increases reasonably, or decreases costs • STABILITY: (Strong) State commits to meeting costs and specifies reasonably course for cost growth • RESPONSIVENESS: (Moderate) If state is explicit in funding, responsiveness is moderate, but locking of cost factors likely to reinforce status quo • INSTITUTIONAL FLEXIBILITY : (Weak) State has larger role in deciding allocation of expenditures across types of classes or activities. Systems may be able to customize response to comparable quality.

39. Four Approaches to Funding Postsecondary Education • System-based funding models • Performance-based funding models • Cost-based funding models • Student-based funding models

40. Student-based Funding Models… • Guarantee to every student in California of adequate, needs-tested state support to pursue appropriate postsecondary coursework • Limit state direct support to systems to specific areas like research • Use market forces to create system responsiveness to student needs and interests • Allow fees at state schools to rise closer to market levels • Maximize role of private institutions in meeting state’s temporary enrollment crisis over next decade

41. A Student-based Funding Model in California Would Mean… • Possibility of different fees at campuses within same system • Dramatic and continued expansion of Cal Grant program • New approaches to funding research, capital projects, and public service • Eliminating upper-income subsidy created by low fees • Significant efforts to re-educate consumers about new fee structures and expanded financial aid programs • Removing community colleges from Prop 98 formula

42. Student-based Funding Model Emphasizes Responsiveness to State Policy Goals… • EFFICIENCY: (Strong) Systems and institutions would compete for students and would leverage resources as effectively as possibility • STABILITY: (Moderate) Successful institutions would be very stable, others would have less predictable enrollment streams • RESPONSIVENESS: (Weak) Systems would respond to student interests, therefore state would have to create incentives targeted at student behavior • INSTITUTIONAL FLEXIBILITY : (Strong) Institutions and systems would be granted broad latitude to pursue their own policies and strategies

43. What Do We Do With All Of These Models? • Why are we considering alternatives? • How do the approaches compare? • Where do we go from here?

44. Why Are We Considering Alternatives? • Demographic surge of new students graduating high school • Disconnect between state policy objectives and funding—lack of accountability • Inequitable funding between campuses within same systems (community colleges) • Perceptions of inefficiency • Distribution of fiscal subsidies are sometimes counterintuitive

45. How Do The Approaches Compare?

46. Where Do We Go From Here? • Develop plan for accommodating medium-term enrollment surge—Tidal Wave II • Identify areas where state interests are not currently being addressed or efficiencies unrealized • Customize blend of approaches that fit with plan from Step 1 and address state concerns and needs from Step 2 using table in prior slide to help craft solutions • Establish explicit process to evaluate success of plan and to revise it as necessary