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Regents to unveil plan overhauling university funding system

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Arizona is about to consider a funding concept for its three universities that has shown spotty results, but which is re-emerging as the system of choice for legislatures around the nation. The Arizona Board of Regents is set to unveil a detailed plan in early July that will serve as the foundation for legislation to transform the funding system from enrollment-based to performance-based.

MGT of America, a national consulting firm, will submit its final recommendations July 11. It’s almost certain the recommendations will echo a report the firm published in April, which said the preferred plan of a committee made up of regents, consultants and top university administrators is for the state’s three universities to receive a guaranteed base amount of funding and then earn additional funding by meeting certain goals.

Those goals could include increasing the number of credit hours completed by students, increases in research grants received, success in meeting the state’s economic goals and increasing in the number of degrees awarded.

“Money is a powerful tool,” said Fred DuVal, chairman of the Board of Regents.

The board has been looking at performance-based funding since early 2010, and the Legislature this year mandated the regents to collaborate with the universities to develop a new funding structure for the fiscal 2013 budget based on performance and outcomes.

Adopting a performance-based funding model isn’t limited to higher education. Rep. Chester Crandell, R-Heber, is chairing an interim committee whose goal is to develop legislation for next session that would overhaul the K-12 funding system. Instead of paying schools based on enrollment, Crandell envisions a system in which districts get paid only after individual students meet certain levels of achievement.

“We’ve tried a lot of things in the state of Arizona and all over the United States on how to fund education,” Crandell said. “My opinion is we need to start funding on what is an outcome instead of seat time.”

DuVal said budget instability and the level of cuts have shaken the system, forcing both political parties to reflect on what it will take to agree on the importance of educating the population to compete in the 21st century economy.

“We’re hoping the answer is that, if you give the taxpayers a level of transparency and accountability and productivity, we will eliminate all of the rhetorical (criticisms) — there’s all this waste, there’s all this waste — and we’ll get a sustained buy-in we can build for the future and count on it,” DuVal said.

The state’s general fund, tuitions and fees fund Arizona’s universities. There is no funding formula in statute except to define a fulltime student.

Ted Ferris, a consultant who has been working hand in hand with the regents and MGT to develop the new formula, said universities have used an unwritten formula known as “22 to 1” for 50 years to develop their budget requests. The formula works by adding or subtracting the funding for a faculty member and three-fourths of a staff position and related costs for every 22 students that are gained or lost.

That system doesn’t take into account whether a student finishes a course or graduates, Ferris said.

“We’re clearly moving in the direction of it being an output based model where we’ve reviewed a whole bunch of different output measures, and we’re homing in on a few that we think we need to focus on,” he said.

Performance-based funding of higher education has been around for nearly 30 years. Its use peaked in the 1990s, when states had plenty of cash, but it declined at the turn of the century as the recession hit, said Thomas Harnisch, a policy analyst with the American Association of State Colleges and Universities.

Twenty-six states enacted performance funding systems between 1979 and 2007, but 14 have since scrapped them. Two of those states, Colorado and Washington, later returned to them.

“There’s a whole graveyard of well-intentioned programs that failed,” he said.

Performance-based systems failed because they were too complex, phased in too quickly or accounted for too much of the higher education budget of a state, Harnisch said.

But as budgets shrink even more, states have begun to turn again to the performance model.

States have cut anywhere from 15 percent to 50 percent of their higher education budgets in recent years. In Arizona, state funding for universities fell from $1.08 billion in fiscal 2008 to $675 million in fiscal 2012.

Legislatures in seven states — red and blue — this year considered performance-based funding.

A bill is sitting on Illinois Gov. Pat Quinn’s desk, where the Legislature and executive are liberal, and the concept of performance funding was a priority for Texas Republican Gov. Rick Perry and the conservative Texas Legislature, though they came up short of establishing a system this year when they couldn’t agree on a specific model. Virginia Gov. Bob McDonnell, a Republican, signed a bill in April, and Colorado Gov. John Hickenlooper, a Democrat, signed one in May.

Harnisch said that Ohio, Indiana and Tennessee have been the most innovative and successful of the states using the concept, which typically comes in three models: contracts for improving performance, set-asides in which universities get bonuses from a separate portion of state funding and payment for results.

Ferris, of Quadpro Consulting, has been meeting with legislative staff and the Governor’s Office to begin acquainting them with Arizona’s version. He’ll also be briefing legislative leaders and committee chairs in the next few weeks.

He said that, despite the troubled economic waters, the time is right to implement the new system.

The Legislature has required it, the regents have been steadily moving in that direction for months by developing metrics and a long-term vision for the universities, and there are signs that revenues will increase in fiscal 2013.

“Everything is in alignment for us to bring it forward, and I think the other thing is it’s the right thing to do,” Ferris said.

DuVal said all three university presidents are on board with the concept as long as it creates predictability, but they don’t want it to become an unfunded formula.

“The incentives that we want to build in the model aren’t in the language in the bill, they’re in the budget that follows the language of the bill,” DuVal said. “You can design the system all you want but the incentives won’t change the behavior until the money is predictable and rewards the change.”

One of the keys to success will be deciding on what the universities will produce and then aligning the incentive dollars to that, DuVal said.

“It may not be a one-year conversation, it may be a multi-year conversation,” he said. “These are very dramatic reforms.”

There will also have to be agreement from the Legislature that the output funding is guaranteed, which will in turn allow for tuition caps, DuVal said.

The goal is to have legislation drafted by Oct. 1.

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