Using an Institutional Funding Adequacy Framework to Guide State Allocation Decisions

Public postsecondary institutions are state assets with capacity to meet state needs and priorities. As any other state asset, such institutions have foundational expenditures necessary to simply keep doors open. States that do not fund these institutions at that foundational level force students and their families to assume a portion of the burden of preserving the value of state property, potentially at the expense of funding mission-related costs such as expenditures on instruction and student services. The combination of declining demographic trends, long-term state disinvestment, and unbudgeted costs as well as losses in tuition revenues caused by the pandemic raise questions of fiscal viability for at least some institutions. These tend to be those institutions that enroll disproportionate shares of low-income and first-generation students, rural students, and students of color. Putting further strain on already underserved students runs counter to state goals for boosting educational attainment, societal well-being, and economic prosperity. Pressures on states to better understand funding strategies for public institutions will resume acutely as federal stimulus dollars wane.

Even as states have increasingly allocated state dollars on the basis of institutional performance, and research on performance-based funding has proliferated, the available information on how states provide base funding support to institutions is full of gaps. As policymakers grapple with competing demands on a limited pool of resources, they stand to benefit from an evidence-based framework for funding public institutions. A framework designed to furnish them with an improved understanding of the level of public support necessary to provide for the most basic of institutional funding requirements—the amount necessary for the upkeep and operational costs of these state assets—gives policymakers some assessment of the point beyond which a public institution’s future viability may be compromised by cuts in appropriations.

A New Framework for State Funding Levels

Having worked in numerous states over the years, especially those that provide relatively meager public support to higher education, NCHEMS has conceptualized a new framework for thinking about state funding levels. This framework gives policymakers a guide for recognizing institutional funding requirements related to:

1. The value of institutions as state assets—they occupy real property owned by the state that must be maintained and preserved, from which essential services are delivered to state residents in the surrounding area.
2. Their educational missions—effectively delivering on their educational missions has costs that vary by the specific program array and the number of students enrolled, as well related services such as research.
3. Their need to continuously improve to better fulfill their mission, serve students, and reduce equity gaps.

Framework Components

Specifically, the framework conceptualizes institutional funding requirements as consisting of the following components:

1. Foundational base
2. Costs for maintaining and renewing institutional assets at a level sufficient to avoid worsening current conditions
3. Scope—the array of educational programs and related services offered by an institution
4. Scale—the size of the institution
5. Innovation, performance enhancement, and equity—expenditures that focus on continuous improvement
6. Mission-related activities other than instruction, e.g., research, public service, community engagement, etc.
7. Self-supporting activities, e.g., auxiliaries, advancement, etc.

The framework is aimed at ensuring that policymakers are fully aware of the impact of resource allocation decisions they are asked to make, what share of such costs the state should bear relative to student payments, and how those shares may need to differ across institutions based on their missions and the characteristics of their students.

Application of the Framework & Resources

Since first conceptualizing this framework as part of SHEEO’s webinar series on public finance for higher education in March 2021 NCHEMS has worked to refine it and apply it to real-world cases. NCHEMS is currently applying this framework in its work with the State Council of Higher Education for Virginia (SCHEV) designing a new funding model for its public institutions as part of a study called for by the state legislature. Virginia’s higher education funding guidelines were last updated more than 20 years ago and do not directly align with the Virginia Plan for Higher Education – SCHEV’s strategic plan. Rather, appropriations are driven more by short-term priorities and lobbying efforts of individual institutions and the results can sometimes work in opposition to state goals, especially those related to achieving equitable outcomes. Motivated by a new strategic plan with three major thrusts focused on ensuring that higher education is equitable, affordable, and transformative, a new funding model with a more strategic and goal-aligned approach is critical.

Beginning in August 2021 and concluding with a final report in July 2022, the effort to review and revise Virginia’s approach to funding postsecondary institutions also includes the development of an interactive tool for assessing the impacts of various design parameters, an extensive process of stakeholder engagement, a national survey of state base funding policies, and a survey of institutional initiatives aimed at achieving greater levels of efficiency and effectiveness. We look forward to sharing lessons learned at the conclusion of the project.

For those interested in learning more about the institutional funding adequacy framework, we invite you to read the white paper written by NCHEMS staff for a series on public finance of higher education sponsored by SHEEO.