Formulating Success

Overview

In fiscal year (FY) 2024, states contributed $124.3 billion to higher education institutions — an increase of about $9 billion from FY23. But as state investments have grown, so have expectations for accountability. As a result, many policymakers are turning to outcomes-based funding models to allocate resources for public colleges and universities. 

These funding models — which link improved outcomes to increased state funding — are seen as a way to ensure that taxpayer investment leads to tangible returns for the public and contribute to state education and workforce goals. But legislatures must articulate their goals and carefully design these models to achieve their intended impact.

This primer for policymakers, advocates, funders, and higher education leaders explores the opportunities and challenges of outcomes-based funding. Stakeholders can use this report to make informed decisions about whether, how, and why a state might incorporate outcomes-based elements into its higher education funding model. The resource includes a nuanced analysis of the purpose of outcomes-based funding models, addresses key questions states should consider before adopting one, and provides practical guidance on the critical design choices that can determine whether an outcomes-based model becomes a catalyst for improvement or simply another administrative burden.  

Questions to Consider

When designed thoughtfully, with attention to both traditional and emerging definitions of success, outcomes-based funding models have the potential to focus institutional attention on student success and align higher education with statewide priorities, benefiting both students and other stakeholders. But good design is critical for ensuring these models deliver.

As states contemplate whether to adopt or revise outcomes-based funding models, several questions can help guide discussion and decision-making:

• Does the state have clearly articulated goals for its higher education system? Without clear goals, it will be difficult to design an effective funding formula. Who have been the primary stakeholders engaged in developing those goals? Are there disagreements about priorities? If so, how might they be addressed?
• Who would be most impacted by a new funding model? Is there interest in an outcomes-based funding approach? Building broad support for outcomes-based funding is essential for successful implementation. Resistance from institutional leaders, faculty, or students can undermine even well-designed models.
• Given a state’s specific context, how much funding is appropriate for incentivizing behavioral change without causing adverse effects? Tying too little funding to outcomes could fail to motivate change, while too much could create financial instability and encourage gaming the system.
• Can the state’s goals be captured within an outcomes-based funding framework? Some goals, such as increasing degree completion or improving job placement rates, lend themselves to quantification and incorporation into funding formulas. For these metrics, the next question is what data currently exist — perhaps in a state’s longitudinal data system, for example — to capture the relevant goal and set expectations for future improvement. Other goals, such as promoting civic engagement or supporting regional development, are harder to measure but no less important. Policymakers must determine whether an outcomes-based funding model is the right tool for advancing their priorities.
• Which entity will be responsible for stewarding and implementing the outcomes-based formula? How will this organization monitor funding levels and institutional performance, and how might it propose changes?
• What data infrastructure would be necessary to support the outcomes-based funding model? Effective outcomes-based funding requires robust data systems that can track student progress, calculate outcomes reliably, and provide transparency to stakeholders. States must invest in the infrastructure needed to support their funding models.