1 Alternative Funding Models for California Higher Education Dr. Michael A. Shires School of Public...

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Alternative Funding Models for Alternative Funding Models for California Higher EducationCalifornia Higher Education

Dr. Michael A. ShiresDr. Michael A. ShiresSchool of Public Policy, Pepperdine UniversitySchool of Public Policy, Pepperdine University

Presented to the Postsecondary Education Subgroup of the Working Group on Facilities Presented to the Postsecondary Education Subgroup of the Working Group on Facilities and Financeand Finance

Joint Committee to Develop A Master Plan for Education—Kindergarten Joint Committee to Develop A Master Plan for Education—Kindergarten Through UniversityThrough University

August 9, 2001August 9, 2001


Today’s DiscussionToday’s Discussion

Designed as thought experimentDesigned as thought experiment

Not a formal set of recommendationsNot a formal set of recommendations

Hope to facilitate constructive conversation Hope to facilitate constructive conversation about:about:– Relationship between Legislature and state’s four Relationship between Legislature and state’s four

segments segments

– How that relationship should be reflected in its How that relationship should be reflected in its finance systemfinance system

Focus is on system-levelFocus is on system-level– Many important issues at campus level, tooMany important issues at campus level, too


Some Areas of Concern Lead ToSome Areas of Concern Lead ToConsidering AlternativesConsidering Alternatives

Demographic surge of new students Demographic surge of new students graduating high schoolgraduating high school

Disconnect between state policy objectives Disconnect between state policy objectives and funding—lack of accountabilityand funding—lack of accountability

Inequitable funding between campuses Inequitable funding between campuses within same systems (community colleges)within same systems (community colleges)

Perceptions of inefficiencyPerceptions of inefficiency

Distribution of fiscal subsidies are Distribution of fiscal subsidies are sometimes counterintuitivesometimes counterintuitive


Where We Are TodayWhere We Are Today

Bulk of funding is allocated to systems by Bulk of funding is allocated to systems by Legislature as lump sumLegislature as lump sum

UC Regents have constitutional autonomy UC Regents have constitutional autonomy from legislative mandate, but they generally from legislative mandate, but they generally go alonggo along

CSU Board of Trustees and CCC Board of CSU Board of Trustees and CCC Board of Governors lack constitutional separationGovernors lack constitutional separation– CSU Trustees actively manage allocation of resources CSU Trustees actively manage allocation of resources

across campusesacross campuses

– CCC funds are generally assigned by enrollment formulaCCC funds are generally assigned by enrollment formula


State Money is Fairly Evenly State Money is Fairly Evenly Spread Across SegmentsSpread Across Segments

UC$3.4 billion

CCC$4.3 billion

($2.7 billion state GF)

CSU$2.6 billion

CSAC$0.6 billion

SOURCE: California Legislative Analyst’s Office, Major Features of the 2001 California Budget, p. 10


Enrollments Are Concentrated inEnrollments Are Concentrated inCommunity CollegesCommunity Colleges

UC170,566 FTE

CCC1,031,128 FTE

CSU291,980 FTE

SOURCE: California Postsecondary Education Commission, Student Profiles 2000, Displays 13-15, 40.


If California Changed It’s Funding System,If California Changed It’s Funding System,The Goals Would Be To…The Goals Would Be To…

Improve efficiencyImprove efficiency

Improve funding stabilityImprove funding stability

Increase system responsiveness to Increase system responsiveness to state policy objectivesstate policy objectives

Protect institutional flexibilityProtect institutional flexibility


Four Categories of Approaches to Four Categories of Approaches to Funding Postsecondary EducationFunding Postsecondary Education

System-based funding modelsSystem-based funding models

Performance-based funding models Performance-based funding models

Cost-based funding modelsCost-based funding models

Student-based funding modelsStudent-based funding models


System-based Funding Models…System-based Funding Models…

Generally, current approach in CaliforniaGenerally, current approach in California– With some cost-based adjustmentsWith some cost-based adjustments

EnrollmentEnrollment Special projectsSpecial projects Fee decreasesFee decreases

Provide funding directly to system at Provide funding directly to system at statewide levelstatewide level– Offer either advisory (UC) or statutory guidance Offer either advisory (UC) or statutory guidance

for allocation of resourcesfor allocation of resources

– Leaves opportunities for micromanagement of Leaves opportunities for micromanagement of specific system initiatives (like Gov’s line item specific system initiatives (like Gov’s line item vetoes)vetoes)


A System-based Funding Model in A System-based Funding Model in California Would Mean…California Would Mean…

Few changes in Few changes in status quostatus quo

Year-to-year variation in funding with Year-to-year variation in funding with significant latitude and discretion significant latitude and discretion

Legislative intervention in funding processLegislative intervention in funding process


System-based Funding Models Emphasize System-based Funding Models Emphasize Institutional Discretion…Institutional Discretion…

EFFICIENCYEFFICIENCY: (: (WeakWeak) No specific incentives to seek ) No specific incentives to seek cost reductions for educational services currently cost reductions for educational services currently providedprovided

STABILITYSTABILITY: (: (WeakWeak) Due to lack of connection to any ) Due to lack of connection to any visible criteria, budget sizes are purely discretionaryvisible criteria, budget sizes are purely discretionary

RESPONSIVENESSRESPONSIVENESS: (: (WeakWeak) Lump sum payments ) Lump sum payments unlikely to change system behaviors significantly unlikely to change system behaviors significantly

INSTITUTIONAL FLEXIBILITYINSTITUTIONAL FLEXIBILITY: (: (StrongStrong) Systems are ) Systems are allowed to spend resources as they see fitallowed to spend resources as they see fit




Performance-based funding modelsPerformance-based funding models

Cost-based funding models Cost-based funding models



Performance-based Funding Models…Performance-based Funding Models…

Link funding to specific outcomes or Link funding to specific outcomes or performance measuresperformance measures

Require identification of specific desired Require identification of specific desired outcomes at policymaker leveloutcomes at policymaker level

Require timely accounting and reporting Require timely accounting and reporting procedures to track performance to ensure procedures to track performance to ensure responsiveness to criteriaresponsiveness to criteria


There Are Many Approaches To There Are Many Approaches To Implementing Performance-based ModelsImplementing Performance-based Models

Performance Objective-setting InstitutionsPerformance Objective-setting Institutions– LegislatureLegislature– State-level governing commission/boardState-level governing commission/board– System boardsSystem boards– CampusesCampuses

Linkage MechanismLinkage Mechanism– Points approachesPoints approaches– Absolute numbersAbsolute numbers– Relative to meanRelative to mean– DecilesDeciles– Percentage improvementPercentage improvement– Comparison to peer institutionsComparison to peer institutions


There Are Many Types of Outcomes There Are Many Types of Outcomes That Can Be TargetedThat Can Be Targeted

Student outcomesStudent outcomes– Completion ratesCompletion rates

– Retention ratesRetention rates

– Completion timesCompletion times

– Transfer ratesTransfer rates

– Initial participation ratesInitial participation rates

– Programmatic incentivesProgrammatic incentives

– Time to completionTime to completion


Other Ways Performance-based Other Ways Performance-based Funding Can Be Done Include…Funding Can Be Done Include…

Expenditure targetsExpenditure targets– Limits on overhead (% or dollar cap)Limits on overhead (% or dollar cap)

– Increases in instructional spendingIncreases in instructional spending

Multiple measurementsMultiple measurements– Timing relatedTiming related

Measuring enrollments at beginning and end Measuring enrollments at beginning and end of semester to reward retentionof semester to reward retention

– Creating a score based on multiple cohortsCreating a score based on multiple cohorts Measuring success of only lowest decileMeasuring success of only lowest decile Varying weighting by challenge categoryVarying weighting by challenge category


Approach Used in Many States to Varying Approach Used in Many States to Varying Degrees and With Mixed SuccessDegrees and With Mixed Success

South CarolinaSouth Carolina: most elaborate intent, but : most elaborate intent, but recent review found major implementation recent review found major implementation problemsproblems

LouisianaLouisiana: peer-based formula, with some : peer-based formula, with some cost adjustmentscost adjustments

TennesseeTennessee: large cost-based core funding : large cost-based core funding with 5% performance basiswith 5% performance basis


What Would Need To Be Done ToWhat Would Need To Be Done ToInstitute a Performance-based ApproachInstitute a Performance-based Approach

Establish detailed performance objectives Establish detailed performance objectives and criteriaand criteria

Identify a significant revenue stream to Identify a significant revenue stream to associate with performance against criteriaassociate with performance against criteria

Create reporting and data systemsCreate reporting and data systems– TimelinessTimeliness

– ComprehensivenessComprehensiveness

– Audit/review mechanismAudit/review mechanism


Key Challenges Associated WithKey Challenges Associated WithPerformance-based Funding ModelsPerformance-based Funding Models

Measuring postsecondary outcomes and Measuring postsecondary outcomes and establishing targetsestablishing targets

Targeting monies to appropriate levelTargeting monies to appropriate level– Campus vs. systemCampus vs. system

““Losing” institutions likely those who need Losing” institutions likely those who need resources mostresources most

Gaming by institutions and systemsGaming by institutions and systems– Unintended consequences may include larger Unintended consequences may include larger

classes, reduced accessclasses, reduced access


Performance-based Funding Model Emphasizes Performance-based Funding Model Emphasizes Responsiveness to State Policy Goals…Responsiveness to State Policy Goals…

EFFICIENCYEFFICIENCY: (: (ModerateModerate) Potential incentives to ) Potential incentives to improve quantity and quality of education, given improve quantity and quality of education, given proper objectivesproper objectives

STABILITYSTABILITY: (: (WeakWeak) Lots of variation in most ) Lots of variation in most measured amounts; depends on share in measured amounts; depends on share in performance poolperformance pool

RESPONSIVENESSRESPONSIVENESS: (: (StrongStrong) Systems have direct ) Systems have direct and measured interest in responding to state goals and measured interest in responding to state goals

INSTITUTIONAL FLEXIBILITY INSTITUTIONAL FLEXIBILITY : (: (ModerateModerate) Strong ) Strong incentives to respond to state priorities but great incentives to respond to state priorities but great latitude granted as to meanslatitude granted as to means


Cost-based Funding Models…Cost-based Funding Models…

Link funding to costs of educational Link funding to costs of educational programs providedprograms provided

A key element of today’s funding model in A key element of today’s funding model in CaliforniaCalifornia

Require detailed data systems to provide Require detailed data systems to provide cost estimates and factorscost estimates and factors

Typically formulaic—most states use them in Typically formulaic—most states use them in some waysome way

Require timely accounting and reporting Require timely accounting and reporting procedures to inform accounting processesprocedures to inform accounting processes


There are Many Approaches To There are Many Approaches To Cost-based Funding ModelsCost-based Funding Models

Basic enrollment modelBasic enrollment model: resources are : resources are pegged to number of students servedpegged to number of students served

Peer-institution modelPeer-institution model: increases in : increases in resources are pegged to cost changes in resources are pegged to cost changes in comparable institutions in other jurisdictionscomparable institutions in other jurisdictions


There are Many Approaches To There are Many Approaches To Cost-based Funding ModelsCost-based Funding Models

Cost-of-instruction modelCost-of-instruction model: programs are : programs are funded at actual calculated cost of funded at actual calculated cost of instructioninstruction

Comparable quality modelComparable quality model: educational : educational programs are funded at lowest-producer programs are funded at lowest-producer cost levelcost level


California Already Uses Enrollments California Already Uses Enrollments To Adjust FundingTo Adjust Funding

SegmentSegment

University of CaliforniaUniversity of California

California State UniversityCalifornia State University

California Community CollegesCalifornia Community Colleges

Budgeted Amount Budgeted Amount per New FTEper New FTE

$9,158$9,158

$6,358$6,358

$3,453$3,453

SOURCE: California Department of Finance,, Governor’s Budget, 2000-01.


Peer-institution Model Used in Peer-institution Model Used in Many Other StatesMany Other States

Would use indices and inflation factors from Would use indices and inflation factors from comparable institutions in other states to comparable institutions in other states to adjust California fundingadjust California funding

Requires a major effort to adjust initial Requires a major effort to adjust initial starting pointstarting point

Many factors in California differ from other Many factors in California differ from other statesstates– Cost of livingCost of living

– Program mixesProgram mixes


Cost-of-Instruction ApproachCost-of-Instruction ApproachPromises Adequate FundingPromises Adequate Funding

Funding is based on actual cost of Funding is based on actual cost of instructioninstruction

Requires streamlined categorizations (data Requires streamlined categorizations (data demands are too great for detail)demands are too great for detail)

Creates scenario for micromanagement of Creates scenario for micromanagement of programs by Legislatureprograms by Legislature

Locks in existing cost differentials at time of Locks in existing cost differentials at time of categorizationcategorization

Obfuscates quality considerationsObfuscates quality considerations


Comparable Quality Approach Inserts Comparable Quality Approach Inserts Market Incentives Into FormulasMarket Incentives Into Formulas

Focus is on providing education at lowest Focus is on providing education at lowest costcost

Assumes that similar courses are equivalent Assumes that similar courses are equivalent across sectorsacross sectors

Forces institutions to “compete” in cost of Forces institutions to “compete” in cost of instructioninstruction

Most likely to adversely affect quality of Most likely to adversely affect quality of instructioninstruction

Guarantees cost efficiencies (by Guarantees cost efficiencies (by fiatfiat))


SegmentSegment

University of CaliforniaUniversity of California

California State UniversityCalifornia State University

California Community CollegesCalifornia Community Colleges

Example of Comparable Quality:Example of Comparable Quality:Really Basic ApproachReally Basic Approach

Divide state support per student for each segment Divide state support per student for each segment by average student course load (8 per year)by average student course load (8 per year)

Cost per class Cost per class per studentper student

$2,088$2,088

$1,129$1,129

$570$570

Problem: Very different educational products and mixes!

CostCostper FTEper FTE

$16,704$16,704

$9,032$9,032

$4,560$4,560


Each Segment Produces A Each Segment Produces A Different Mix of CoursesDifferent Mix of Courses

UCUC CSUCSU CCCCCC

Lower division Lower division undergraduateundergraduate XX XX XXXX

Upper division Upper division undergraduateundergraduate XX XXXX

Professional degreesProfessional degrees XXXX XXXX

Academic graduateAcademic graduate XXXX XX


Comparable Quality Model Should Comparable Quality Model Should Compensate For…Compensate For…

Differences in course type offeringsDifferences in course type offerings– Lower division undergraduateLower division undergraduate

– Upper division undergraduateUpper division undergraduate

– Professional degreesProfessional degrees

– Academic graduateAcademic graduate

Major programmatic cost factorsMajor programmatic cost factors– Class size differencesClass size differences

– Faculty salary differentialsFaculty salary differentials


Crudely Correcting For Class Sizes:Crudely Correcting For Class Sizes:

SOME CAVEATS FIRST!!SOME CAVEATS FIRST!!

Values are reported for discussion purposes Values are reported for discussion purposes onlyonly and to give an order of magnitude and to give an order of magnitude

Not definitive estimatesNot definitive estimates—data were not —data were not available over time horizon of projectavailable over time horizon of project

Required simplifying assumptionsRequired simplifying assumptions– Classes are primary educational delivery systemClasses are primary educational delivery system

– Faculty salaries within each system roughly Faculty salaries within each system roughly equal across class typesequal across class types

– One-fourth of state support for UC is pure One-fourth of state support for UC is pure researchresearch


Crudely Correcting For Class Size: Crudely Correcting For Class Size: How We Did ItHow We Did It

Example: Lower Division cost per FTEExample: Lower Division cost per FTE

1.1. Identify percentage of total courses taught Identify percentage of total courses taught at lower division levelat lower division level

2.2. Multiply that percentage times the total Multiply that percentage times the total state instructional cost to arrive at lower state instructional cost to arrive at lower division share of total costdivision share of total cost

3.3. Divide lower division cost by number of Divide lower division cost by number of lower division students (freshmen and lower division students (freshmen and sophomores)sophomores)


The Undergraduate Subsidy of Graduate The Undergraduate Subsidy of Graduate Education is Alive and WellEducation is Alive and Well

UCUC CSUCSU CCCCCC

Lower division Lower division undergraduateundergraduate 7,4437,443 6,5556,555 4,5574,557

Upper division Upper division undergraduateundergraduate 12,47512,475 9,6559,655 ------

Professional degreesProfessional degrees 28,86828,868 10,29510,295 ------

Academic graduateAcademic graduate 38,47738,477 10,77710,777 ------

Estimated Cost of Instruction (dollars per FTE)


Comparable Quality Approach Has Some Comparable Quality Approach Has Some Significant Likely ConsequencesSignificant Likely Consequences

Market forces could help to increase quantity Market forces could help to increase quantity of educational product producedof educational product produced

Likely increase in community college Likely increase in community college enrollments not provided for in current funding enrollments not provided for in current funding schemescheme– Prop 98 mechanismProp 98 mechanism

– Additional growthAdditional growth, beyond current dramatic , beyond current dramatic projections would be necessaryprojections would be necessary


Comparable Quality Approach Has Some Comparable Quality Approach Has Some Significant Likely ConsequencesSignificant Likely Consequences

Reduced revenues could erode quality of Reduced revenues could erode quality of educational courses at higher-cost educational courses at higher-cost institutionsinstitutions

Approach would highlight cost of graduate Approach would highlight cost of graduate programs and could lead to significant programs and could lead to significant legislative disinvestment in this key arealegislative disinvestment in this key area


A Expanded Cost-based Funding Model in A Expanded Cost-based Funding Model in California Would Mean…California Would Mean…

Increased data and reporting requirementsIncreased data and reporting requirements

Developing a consensus of proper cost Developing a consensus of proper cost factors and inflators—topics of great factors and inflators—topics of great controversycontroversy

High-level, explicit decisions about High-level, explicit decisions about California’s willingness to invest in research California’s willingness to invest in research and expensive graduate programsand expensive graduate programs

Commitment by state to fund full cost of Commitment by state to fund full cost of instruction, even in economic downturnsinstruction, even in economic downturns


Cost-based Funding Models Cost-based Funding Models Emphasize Efficiency and Stability…Emphasize Efficiency and Stability…

EFFICIENCYEFFICIENCY: (: (StrongStrong) Depending on approach, either ) Depending on approach, either locks current cost profile and increases reasonably, or locks current cost profile and increases reasonably, or decreases costsdecreases costs

STABILITYSTABILITY: (: (StrongStrong) State commits to meeting costs ) State commits to meeting costs and specifies reasonably course for cost growthand specifies reasonably course for cost growth

RESPONSIVENESSRESPONSIVENESS: (: (ModerateModerate) If state is explicit in ) If state is explicit in funding, responsiveness is moderate, but locking of funding, responsiveness is moderate, but locking of cost factors likely to reinforce cost factors likely to reinforce status quostatus quo

INSTITUTIONAL FLEXIBILITY INSTITUTIONAL FLEXIBILITY : (: (WeakWeak) State has larger ) State has larger role in deciding allocation of expenditures across types role in deciding allocation of expenditures across types of classes or activities. Systems may be able to of classes or activities. Systems may be able to customize response to comparable quality.customize response to comparable quality.


Four Approaches to Four Approaches to Funding Postsecondary EducationFunding Postsecondary Education






Student-based Funding Models…Student-based Funding Models…

Guarantee to every student in California of Guarantee to every student in California of adequate, needs-tested state support to pursue adequate, needs-tested state support to pursue appropriate postsecondary courseworkappropriate postsecondary coursework

Limit state direct support to systems to specific Limit state direct support to systems to specific areas like researchareas like research

Use market forces to create system responsiveness Use market forces to create system responsiveness to student needs and intereststo student needs and interests

Allow fees at state schools to rise closer to market Allow fees at state schools to rise closer to market levelslevels

Maximize role of private institutions in meeting Maximize role of private institutions in meeting state’s temporary enrollment crisis over next decadestate’s temporary enrollment crisis over next decade


A Student-based Funding Model in A Student-based Funding Model in California Would Mean…California Would Mean…

Possibility of different fees at campuses within Possibility of different fees at campuses within same systemsame system

Dramatic and continued expansion of Cal Grant Dramatic and continued expansion of Cal Grant programprogram

New approaches to funding research, capital New approaches to funding research, capital projects, and public serviceprojects, and public service

Eliminating upper-income subsidy created by low Eliminating upper-income subsidy created by low feesfees

Significant efforts to re-educate consumers about Significant efforts to re-educate consumers about new fee structures and expanded financial aid new fee structures and expanded financial aid programsprograms

Removing community colleges from Prop 98 Removing community colleges from Prop 98 formulaformula


Student-based Funding Model Emphasizes Student-based Funding Model Emphasizes Responsiveness to State Policy Goals…Responsiveness to State Policy Goals…

EFFICIENCYEFFICIENCY: (: (StrongStrong) Systems and institutions ) Systems and institutions would compete for students and would leverage would compete for students and would leverage resources as effectively as possibilityresources as effectively as possibility

STABILITYSTABILITY: (: (ModerateModerate) Successful institutions ) Successful institutions would be very stable, others would have less would be very stable, others would have less predictable enrollment streamspredictable enrollment streams

RESPONSIVENESSRESPONSIVENESS: (: (WeakWeak) Systems would ) Systems would respond to student interests, therefore state would respond to student interests, therefore state would have to create incentives targeted at student have to create incentives targeted at student behavior behavior

INSTITUTIONAL FLEXIBILITY INSTITUTIONAL FLEXIBILITY : (: (StrongStrong) Institutions ) Institutions and systems would be granted broad latitude to and systems would be granted broad latitude to pursue their own policies and strategiespursue their own policies and strategies


What Do We Do With All What Do We Do With All Of These Models?Of These Models?

Why are we considering alternatives?Why are we considering alternatives?

How do the approaches compare? How do the approaches compare?

Where do we go from here?Where do we go from here?


Why Are We Considering Alternatives?Why Are We Considering Alternatives?

Demographic surge of new students Demographic surge of new students graduating high schoolgraduating high school

Disconnect between state policy objectives Disconnect between state policy objectives and funding—lack of accountabilityand funding—lack of accountability

Inequitable funding between campuses Inequitable funding between campuses within same systems (community colleges)within same systems (community colleges)

Perceptions of inefficiencyPerceptions of inefficiency

Distribution of fiscal subsidies are Distribution of fiscal subsidies are sometimes counterintuitivesometimes counterintuitive


How Do The Approaches Compare?How Do The Approaches Compare?

ApproachApproach EfficiencyEfficiencyFunding Funding StabilityStability

Responsive-Responsive-ness to Stateness to State

Institutional Institutional FlexibilityFlexibility

System-based System-based FundingFunding WeakWeak WeakWeak WeakWeak StrongStrong

Performance-Performance-based Fundingbased Funding ModerateModerate WeakWeak StrongStrong ModerateModerate

Cost-based Cost-based FundingFunding StrongStrong StrongStrong ModerateModerate WeakWeak

Student-based Student-based FundingFunding StrongStrong ModerateModerate WeakWeak StrongStrong


Where Do We Go From Here?Where Do We Go From Here?

1.1. Develop plan for accommodating medium-term Develop plan for accommodating medium-term enrollment surge—Tidal Wave IIenrollment surge—Tidal Wave II

2.2. Identify areas where state interests are not Identify areas where state interests are not currently being addressed or efficiencies currently being addressed or efficiencies unrealizedunrealized

3.3. Customize blend of approaches that fit with plan Customize blend of approaches that fit with plan from Step 1 and address state concerns and needs from Step 1 and address state concerns and needs from Step 2 using table in prior slide to help craft from Step 2 using table in prior slide to help craft solutionssolutions

4.4. Establish explicit process to evaluate success of Establish explicit process to evaluate success of plan and to revise it as necessaryplan and to revise it as necessary

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