1 Tennessee Higher Education Commission Tennessee’s Outcomes-Based Funding Formula AASCU – December 1, 2011

2 Tennessee Higher Education Commission TN Finance Policy Overview For decades, TN operated an enrollment-based funding formula for higher education, with a 5% Performance Funding add-on. Recently, the policy focus has shifted from enrollment to productivity (educational attainment and workforce preparation). In response, states have altered Performance Funding programs or added productivity incentives to existing models.

3 Tennessee Higher Education Commission TN Finance Policy Overview However, enrollment is still the basis of these models. The vast majority of funding is still distributed as a function of enrollment. There is a disconnect between the state policy focus (productivity) and the finance policy instrument (enrollment).

4 Tennessee Higher Education Commission TN Finance Policy Overview TN completely threw out its enrollment model and started over, building from scratch an outcomes-based model that is unique in higher education policy. Key features: exclusive use of outcomes, in lieu of enrollments; institution specific weighting structure for the outcomes; end of entitlement approach to funding.

5 Tennessee Higher Education Commission Tennessee Finance Policy Genesis In 2009, THEC proposed to former Governor Phil Bredesen a new incentive structure – an outcomes- based funding formula that would replace the enrollment based funding formula. Gov. Bredesen included THEC’s idea of an outcomes- based model in a proposal for higher education reforms that he made to the Legislature. In January 2010, Tennessee passed the “Complete College Tennessee Act” which called for the creation of an outcomes-based funding formula.

6 Tennessee Higher Education Commission This is not a reform to TN’s long-standing Performance Funding program. The outcomes-based model completely replaces the enrollment-based model. Enrollment, beginning or end of term, simply no longer factors into TN higher education state funding. The outcomes model is not for the allocation of any new state funding, but for all state funding. TN Outcomes-Based Formula

7 Tennessee Higher Education Commission TN Outcomes-Based Formula Universities

8 Tennessee Higher Education Commission TN Outcomes-Based Formula Community Colleges

9 Tennessee Higher Education Commission TN Outcomes-Based Formula The outcomes-based model “weights” outcomes differently by institution. For instance, as graduate degrees and research have a larger role in institutional mission, they are weighted more heavily in the model. This weighting feature allowed the model to be designed specifically to an institution’s mission.

Tennessee Higher Education Commission TN Outcomes-Based Formula Bachelors degrees; little research/doctoral degrees Extensive doctoral degrees and emphasis on research

11 Tennessee Higher Education Commission TN Outcomes-Based Formula All state funding is back up for grabs every year. No institution is entitled to some minimal level of appropriations that is based on prior-year funding. State appropriations have to be earned anew each year.

12 Tennessee Higher Education Commission TN Outcomes-Based Formula THEC convened a Formula Review Committee to discuss and debate the new formula design. The committee included representatives from higher education and state government. The committee included people with vastly different views on higher education. Broad consensus on the philosophy and principles of new outcomes-based formula model.

13 Tennessee Higher Education Commission TN Outcomes-Based Formula Institutions played a key role in the process. Selected campus presidents, CFOs and provosts were members of the Formula Review Committee. Presidents/chancellors were queried for their suggestions on what outcomes to include and the priority of the outcome.

14 Tennessee Higher Education Commission TN Outcomes-Based Formula Multiple Formula Review Committee (FRC) meetings Explicit institutional feedback and input Regional town halls Staff background briefings with governing boards, Constitutional officers and legislative members Campus visits and consultations

15 Tennessee Higher Education Commission Developing a New Formula Model THEC staff back-tested model designs by simulating the formula calculations for three prior years. This provided comfort that the new design was stable and that the new model’s behavior was properly understood. Once the outcomes model was finalized, THEC staff developed a projection tool, a Dynamic Formula Model, that allowed the user to simulate the effect of future changes in productivity.

16 Tennessee Higher Education Commission Outcomes Based Model Advantages The outcomes model is linked directly to the educational attainment goals of TN’s Public Agenda. The outcomes model establishes a framework for government to have an ongoing policy discussion with higher education. The model is adjustable to account for new outcomes or a different policy focus (changing the weights).

17 Tennessee Higher Education Commission Outcomes Based Model Advantages Emphasizes unique institutional mission. More transparent and simpler for state government. Does not penalize failure to achieve pre- determined goals.

18 Tennessee Higher Education Commission Lessons Learned in Tennessee Go Big. Even a clever PF program at 5% is swamped by the other 95% that is based on enrollment. Smooth transition from old to new rules of the game. Proper engineering/Back testing. Transparency in intention and design. Institutions must help shape the finance policy (in TN’s case, the outcomes and the weights).

19 Tennessee Higher Education Commission Lessons Learned in Tennessee Key philosophical and practical impediments to traditional Performance Funding paradigm: An institutional reluctance to put state funding at risk; Attempts at large-scale PF designs have been too volatile and complex (see South Carolina in the 1990s).

20 Tennessee Higher Education Commission TN Outcomes Formula Extensive information, including the outcomes-based formula, are available on the THEC homepage. tn.gov/thec

21 Tennessee Higher Education Commission Russ Deaton, Ph.D. Associate Executive Director for Fiscal Policy & Administration Tennessee Higher Education Commission 404 James Robertson Parkway, Suite 1900 Nashville, TN