Why One State Is Considering a New Funding Model for Higher Education

A photo of the entrance to Indiana University campus
A photo of the entrance to Indiana University campus

Legislators will consider a new approach to funding higher education based on school-specific goals rather than blanket recommendations, and they got their first look at an Oct. 26 State Budget Committee meeting.

The proposed funding model comes from the Commission for Higher Education, which the General Assembly tasked with researching a new formula to cover costs at Indiana’s state colleges and universities.

Stakeholders criticized the state’s “legacy model” funding formula for not differentiating between two-year and four-year schools or research and non-research institutions. Nor does the state’s current model allow for individualized goals at different schools.

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“The legacy model (of) today essentially rewards growth generally in the same five metrics for every institution and every institution type,” said Seth Hinshaw, the associate commissioner and CFO of the Indiana Commission for Higher Education (CHE). “What this (new prospective) model gives us is the flexibility to… instead identify growth targets for similar institutions but allow those targets to be specific to that institution.”

That legacy model also uses averages over the last few recent years for various factors – such as on-time degree completion – to calculate the state’s fiscal responsibility moving forward.

“You ended up with a 10-year dataset that is about two years behind by the time we implement and fund,” Hinshaw said.

Opportunities for school budgets under new model

The new formula doesn’t eliminate all aspects of the current process, still allowing for institutions to add to their base funding by making progress toward a set list of goals. Should the school move 10% of the way to their goal, for example, 10% of their prospective funding that year will be converted to their base funding moving forward but won’t impact their prospective funding allotment in the next budget cycle.

Prospective funding essentially means additional funding a college or university can earn on top of base funding.

Indiana’s state budget operates in bienniums, or two-year periods. The General Assembly drafts the budget in odd-numbered years, meaning that expenditures must be accounted for in two-year segments.

Hinshaw outlined an example where the General Assembly allotted $100 million as a base appropriation to a school in 2023. Under a new, smaller line item for prospective funding, the school has the opportunity to earn another $10 million if they meet a set of defined goals over the next two years.

The fictional school earned $2 million the first year followed by $5 million the second year, for a combined $7 million by 2025. That $7 million becomes part of the base funding for the school in the following biennium, meaning they will receive $107 million minimum in 2026 and 2027. But the remaining $3 million will carry over and the school can attempt to win it again on top of the additional $10 million of prospective funding for the 2026 and 2027 budget years.

“The amounts will change over time, but the amount earned is paid out in the biennium that it’s earned and added to the base the following biennium,” Hinshaw said. “It would ensure that no base appropriations would necessarily be reduced under this model, but it would also ensure that institutions that are performing well – that are meeting the expectations or exceeding expectations – have the opportunity for growth in their future total appropriations.”

An important aspect of the prospective funding, Hinshaw said, is that unused prospective monies won’t revert back to the general fund, as they do in other special line items.

“The idea here would be that an institution that does not fully earn its allocation in the biennium – whatever was not earned would be reallocated the following biennium based on the new proportions of operating appropriations,” Hinshaw said. “Money earned during the biennium would be added to the institution’s base in the following biennium.”

Goals for schools are divided into two categories: system and institutional. System goals include quality and career relevance, a metric which would consider in-demand industries, as well as completion rate.

The additional layer of flexibility doesn’t penalize schools whose student populations plan from the onset of their education to take more than the standard two or four years to complete their degrees. Those students may be balancing multiple obligations, such as a part-time job or home responsibilities, and no amount of institutional support could have made a difference to them.

“We don’t want to incentivize institutions to move away from on-time completion but we do want to make sure that we’re also not incentivizing students to push students to take more coursework than students should take,” Hinshaw said.

The newer model will also allow institutions to compete against themselves, rather than each other, for funding tied to improvements.

“(For) an educational institution, to show improvement on key metrics that improvement would not be overshadowed or outweighed by another institution’s greater improvement,” Hinshaw said. “Instead allowing improvement to be measured against the institution’s base itself.

Meeting these goals will be measured by data supplied by the universities themselves, which will then be reviewed by CHE staff and supplemented with other sources.

Members of the budget committee listened to the presentation but didn’t have comments on the proposed funding mechanism.

Increasing scholarship amounts to drive up college attendance

Also on Oct. 26, Chris Lowery — the Indiana Commissioner for Higher Education — emphasized the need for Indiana to address its low college-going rate for high school students. Previously Gov. Eric Holcomb aimed to have 60% of Hoosiers with postsecondary education but today just over 48% of residents meet that goal.

“We’ve had a precipitous decline; it’s not unique to Indiana but the decline has been at a steeper rate than it has been nationwide,” Lowery said.

Lowery said he was concerned about the messaging that secondary education isn’t valuable, when research shows those with higher degrees have more earning potential than high school graduates. For the first time in their analysis, less than half of male Hoosier high school graduates went to college in 2022.

To reverse that tide, Lowery recommended increasing funds distributed via scholarships under the Frank O’Bannon Grant by 35%, returning them to their pre-Great Recession award levels when accounting for inflation.

Current maximum award amounts are $9,200 for private institutions or $4,600 for public institutions, not far from their 2008-2009 grants for $9,160 and $5,080, respectively.

With a 35% increase, those amounts would increase to $12,400 for private institutions and $6,200 for public ones, according to Lowery.

The commission estimated that increase could cost the state between $170-190 million.

“I hear daily – and my guess is all of you do too – from employers about the challenges with (the) workforce, with finding talented folks who can get the job done,” Lowery said. “I’m absolutely convinced that there are a number of our fellow Hoosiers (who) – with the right training and skills development – could fill those critically important roles in our society.”

Indiana Capital Chronicle is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Indiana Capital Chronicle maintains editorial independence. Contact Editor Niki Kelly for questions: info@indianacapitalchronicle.com. Follow Indiana Capital Chronicle on Facebook and Twitter.