Higher Education Strategy Associates

Random Crazy Thoughts About Funding Formulas

A few days ago, I attended a meeting of an advisory group on the review of the Ontario University Funding Formula. I can’t of course tell you what went on inside the meeting, but I thought I would share with you some of the (creative? crazy?) ideas that I had while inside them.

One issue which has popped up both in Ontario and in some meetings I had in DC last week, was the problems created by having money automatically fund enrolments. Now obviously money has to track enrolments to some degree – big universities need more money than little ones, expensive programs need more money than cheap programs, etc, etc. But on the other hand making the relationship direct creates an institutional incentive to deal with every cost problem by just chasing more students, which may not be socially optimal. Indeed, it leaves institutions open to the charge (not always entirely fairly) that they care more about getting people in the door than making sure they graduate.

So here’s an idea: since tuition fees rise directly with enrolment, institutions already have an incentive to chase bodies. Why not switch the funding formula incentive entirely to completion as Denmark does with its “taximeter” system? Completions are probably correlated about .75 or .8 with enrolments, which means that it wouldn’t cause a massive dislocation; you could probably up that to .9 or so if you funded based on an “expected completion metric” which took into account the quality of the incoming students (so, for instance, Queen’s would have to show much higher completion rates than Algoma to get the same money because the entrance averages of its students is higher).

Compounding the money-follows-enrolment problem is the fact that no formula I’ve ever been able to locate ever makes a distinction between the cost of an average student and the cost of a marginal student. This is on the face of it ridiculous: the 15,000th student at any institution is a heck of a lot cheaper to educate than the first or even the 5000th. And while yes, actually calculating marginal costs is a mug’s game and you certainly wouldn’t want to try to work that out in a funding formula, it’s not impossible to include a taper in the funding mechanism. That is, the first 100 in a particular field of study might be worth X, the next 100 might be worth .9x, the next 100 .8x, and so on and so forth. Easy enough. Why not do it?

One other interesting discussion to be had around funding models is the extent to which they can make systems “sustainable” (by which government means “not cost too much”). The Government of Ontario is very keen on the idea of using the funding formula to promote “sustainability” in Ontario universities. My first thought was that this was kind of nutty since a) the funding formula discussion is entirely allocative (ie. it is about how to divide the money not how much to give) and b) as I understand it, this funding formula review is not allowed to touch i) tuition, ii) collective agreements and iii) pensions. Frankly it’s pretty difficult to address sustainability if the formula can’t really take into account the largest components of revenue or costs. And yet, the central problem in institutions is getting cost increases back in line with revenue increases (see here and here).

As I’ve argued previously, there are good reasons why we might want to link total compensation to a particular percentage of total income, in much the same way that teams in professional sports do: it keeps the lid on costs when times are tight and it gives everyone in the institution an incentive to raise net revenues. Now, this particular provincial government won’t countenance doing that by interfering with collective bargaining (a problem since universities on their own don’t seem to be able to control costs very well) or by implementing the “BC solution”  where the government sets out sector-wide guidelines about the extent to which aggregate pay can rise.

But then I thought of a way around this: what if the funding formula actually fixed the proportion of compensation costs to non-compensation costs? What if the formula contained a dollar-for-dollar clawback as compensation rises above 75% of total income? Of course, there’d be all sorts of screaming, and the devil would be in the details as to how to define compensation (circumventing the limit by hiring people as contractors would be the obvious loophole to close), but I think it might actually be a very effective tool for to help institutions become more sustainable.

Food for thought, anyway.

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2 Responses to Random Crazy Thoughts About Funding Formulas

  1. Sean Lawrence says:

    De facto at the moment faculty compensation as a fraction of the overall budget is a de facto fixture of the UBC collective agreement and the system of arbitration pretty much always used to decide it.

    I wonder, though, if there’s any way to guard against perverse results: would measuring retention just provide an incentive to fail nobody?

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