How Higher Education Can Practice Better Budgeting

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August 11, 2017
Paul Lendway

Under a performance–based budgeting model, an entity such as a university or a state government sets expectations, then makes budgeting decisions based on performance relative to those benchmarks. As Investopedia puts it, the emphasis in such models is more on “outputs or outcomes” instead of “inputs.” In higher education, this means basing funding decisions more on outcomes like graduation rates instead of inputs like the number of students enrolled. The strengths of performance-based budgeting are clear given tighter state funding for public universities and the rise of data-driven decision making. But for such new approaches to succeed, higher education administrators and policymakers must be aware of its challenges.

Performance–based budgeting grew in popularity in the 1990s. While this approach has broad appeal, it has become particularly popular in higher education due to “greater accountability demands.” Many administrators and policymakers felt that higher education’s historic emphasis on inputs “ignored the quantity and quality of graduates and the range and benefits of services to states and society.”  

There are many compelling benefits to performance–based budgeting. A California study found that “performance budgeting reduced expenditures by 2 percent per capita on average.” Savings figures like those found in California would be a major win for any university. For universities, one could argue that performance–based budgeting’s emphasis on measuring outcomes against targeted benchmarks helps ensure that parents and students are getting the best return on their investment. Another advantage of performance-based budgeting is that it fosters healthy competition among a university’s academic departments to be a top performer in key metrics, such as degree completion. Perhaps the chief advantage of performance–based budgeting is that the evaluation of performance against benchmarks forces higher education leaders to be intentional in defining what their university truly values while being held accountable for their university’s results.

Performance–based budgeting has a variety of challenges. One key risk of performance–based budget models is that rash conclusions could make a university’s weaknesses even weaker. For example, let’s say that a university has adopted performance–based budgeting, and that its career center is not reaching its performance goal of placing 75% of its undergraduates into summer internships. A simple interpretation of a performance-based approach implies that the career center should receive less funding in the future. However, maybe the career center simply does not have the funds to hire sufficient staff to maintain a robust summer internship recruiting website for its students. If the career center is not hitting its target because it does not have the resources to operate an effective summer internship placement program, then decreasing the career center’s budget due to low summer internship attainment may exacerbate the issue. The administration should inquire as to why this is the case before penalizing its career center’s budget for not meeting performance expectations.

This example highlights another key challenge inherent in performance–based budgeting: higher education leaders using a performance–based budgeting model must invest their time to understand why performance is or is not reaching the expectations. For those universities who do not currently have a performance–based budget model, transitioning to any new budget model would intuitively be a very time–consuming endeavor. Administrative time is a key resource that universities and state officials should keep in mind when deciding whether to adopt a performance–based budget model.

As with any competitive system, another risk of this approach is that universities could resort to undesirable behavior in order to boost their perceived performance. For example, a study by Columbia University identified unintended consequences of performance–based budgeting at universities, including grade inflation and admission of fewer at-risk students, which would artificially improve reported university outcomes.

In conclusion, performance–based budgeting is a very sensible response to calls for greater accountability among universities. This is particularly true for public universities in states with tightening budgets. But before transitioning to a performance–based budget model, higher education leaders should pause to reflect on its challenges and plan accordingly.

Fels Institute of Government

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