Higher Education Strategy Associates

Tag Archives: Funding Formula

June 02

Funding Formulas 201

The last time we  talked about funding formulas, we discussed the difference between determinative and allocative formulas.  When we talk about Ontario, which is currently undergoing a funding formula review, we’re definitely talking about the latter.  The formula isn’t going to drive total spending (this remains the legislature’s prerogative), what it is going to do is decide how the total amount will be split up.

The question is: how best to do this?

At this point, it’s worth going into some history about funding formulas.  Back in the day – say, the 1960s – universities would come cap-in-hand to government asking for money for various sundry purposes (usually, there were a couple of new “wow” proposals in there to justify a big increase), and government, in-turn, would cut cheques to individual institutions for any old amount.  Eventually, governments got tired of that shtick, and decided to come up with a way to allocate funds automatically – but fairly – to avoid going through that rigamarole every year.

Over time, however, global thinking about funding formulas changed – due mainly to work done at the OECD.  It’s now no longer just about divvying up money, it’s about using money to create a set of incentives to steer the system.  Now, admittedly, when the OECD talks about using money to steer a system, it does so because it thinks it’s better for governments to set goals for institutions, and then get out of the way.  In other words, governments “should steer, not row”.

(An interesting question in Ontario, of course, is how formula spending power can be made to steer the system, when the government of the day has a predilection not just to row, but to flail around like a five year-old on a boogie board.  Should be interesting.)

Anyhow, the idea is that you can get universities to do stuff by rewarding them via the funding formula.  The question then, from a practical point of view, is: how big a carrot do you need to get an institution to do something it may not want to do (e.g. pay more attention to teaching, get research institutions to reach out more to poorer kids, etc.)?  The answer here is: “nobody knows”.  And this is a bit of a problem, especially if you’re trying to incentivize something.  Thanks to the work of Nicholas Hillman and David Tandberg, we can be pretty sure that small nudges – say, nudges that account for 2-3% of the budget, or so – aren’t going to work.  If you’re going to try something like this, you need to go big.  As in, “at least 10% of an institutional budget” big.

Now, here’s the thing: in Ontario, the government only accounts for about 40% of university funding, with the rest coming from tuition or commercial activities.  So something that puts 10% of the institutional budget at risk actually has to put 25% of government funding at risk.  And logically speaking, this means you probably can only pick one, or at most two goals for your funding formula to target.   So what should the government pick: completion rates?  Research commercialization?

It’s hard, in fact, to see how you can steer competently in a way that makes sense for all institutions, in a jurisdiction where so little institutional funding comes from government.  There is the possibility of creating individual goals for each institution based on individual missions, but now you’re getting a long way from the idea of a “formula”, something where everyone pumps the same numbers into the system, and a global result for all institutions pops out.

Basically, system steering gets a lot tougher for governments if they’ve already allowed institutions to become mostly student-funded.  This is something Ontario is about to discover in a big way.

May 07

Funding Formulas 101

So I’ve been asked to act as a member of the “reference group” (that is, a group of individuals from whom advice may be sought, but which is not technically an advisory group – yeah, I know, it’s a bit odd) for the government of Ontario’s funding formula review.  Since everyone’s about open government these days, I thought I’d make public some of my views on the subject of funding formulae so you can get a sense of what I’m contributing to the discussion behind the scenes.

So, first off: does Ontario actually need a change to its funding formula?  For purely housekeeping reasons, yes.  It’s been about 40 years since the formula was last re-written, and it looks increasingly jerry-rigged (I can’t find a completely up-to-date version of the Ontario formula online, but here’s an ungated 2009 version that, minus some jiggery-pokery around education students, is still pretty much what’s in the system today).

But we need to be clear about what a funding formula amendment can achieve.  The government seems to be under the impression that a new funding system can help institutions better contain costs (it can’t), or support differentiation (it can, but only if you stretch the term “formula” to include a lot of stuff that isn’t particularly algebraic).  Other stakeholders seem to think that a funding formula change might improve financing for institutions.  This it can do in theory, but not – in Ontario at least – in practice.

At a very broad level, funding formulas come in two types: determinative and allocative.  In a determinative formula, the government plugs all the relevant numbers into a formula, and out the other end comes a number that tells the government how much to spend.  These are pretty rare: Australia has a system like this, as does the United Arab Emirates.  Governments tend to dislike these formulas because they hand control of overall spending to bodies outside of government: as long as universities keep admitting people, governments have to keep spending (in the UAE’s case, it also led to Treasury trying to meddle in the admissions process as a way to keep expenditures under control). Instead, most formulas are allocative: government determines how much it wants to spend, and then uses a formula to divide that amount between all the institutions.  That’s very definitely how Ontario’s formula works right now, and I think it is safe to say the current review isn’t going to change that.

Tinkering with an allocative formula will certainly make some universities better off, but by definition it can’t make them all better off.  Indeed, winners and losers tend to be more or less equally balanced.  You can tweak the formula to help institutions that are more research-focused, but small institutions will pay; you can put more money to fund Fine Arts programs, but other fields of study will have to lose money to balance it out.

Another thing about funding formulas: the amount of difference they make to institutional behaviour is basically proportional to the percentage of the total bill that government foots.  In Quebec, where institutions are dependent on government for 80% of their money, changes to funding formulas matter a heck of a lot more than they do in Ontario, where the government share of operating expenditures is closer to 40%.

All of which is to say: let’s not kid ourselves that this funding formula review is going to change very much.  This is a risk-averse government, which dislikes seeing too many losers.  For some reason, they have initiated a process that has the potential to create a lot of losers.  My best guess is there will be a lot of interesting ideas thrown around, which will cause a lot of angst; in the end we’ll have a model that may have a very different set of indicators and coefficients, but will leave the actual distribution of money across institutions more or less unchanged.  Think of it as a policy process as written by Giueseppi de Lampedusa: everything will change, so that everything may stay the same

Regardless, I’m looking forward to the process, and to writing more about funding formulas.  More later.

February 25

The War on Small, Niche Public Universities

Governments love universities that make a niche for themselves.  “How delightful“, governments say.  “Oh, we’re so proud of you for not following the herd and trying to be just another big multi-versity.  You go, girl”.

They say all of this, of course, until it comes time to actually fund them, at which point governments effectively flip small, niche universities the bird.  In practice, governments behave as though they hate small universities with a passion.

There are two separate problems here.  The first has to do with the difficulties governments have with “small”.  Funding formulas tend to push institutions towards “average” costs.  But since most universities in Canada are big, “average” costs usually means the costs that large institutions with major economies of scale can achieve.  Small universities have to survive on the same amount, but without the economies of scale.

At one level, maybe that’s OK.  Smaller institutions probably do less research, and because of that they can pay their staff somewhat less.  And maybe there’s an argument to be made that it’s more important to run higher education systems efficiently than to have well-funded small institutions available to those students who would thrive in them.  But then why not let them charge more for their services?  But of course, no government will go that extra simple step.

The second problem has to do with niches.  These sound great, until you realize that niches, by definition, are unstable.  Change just one or two external parameters and suddenly a species can no longer exist .  So, all those institutions that bet heavily on education over the last decade, with the encouragement of lots of government funding?  Now they’re getting hammered by governments that no longer think their niche is worth funding (Law is in a similar situation, different only in that it was privately, rather than publicly, funded).

Now, imagine you’ve been trying to be both a small university and a niche university over the last few years.  The government won’t pay properly for your non-niche programs, and suddenly decides it dislikes the niche you’ve chosen (or, alternatively, the market for that niche suddenly disappears).  You’re screwed, basically.

This is why most small universities become medium or even large universities: in our system, size = more secure income streams.  Utilitarians might say “so what – what’s wrong with scale?”  But the problem for most of these institutions is that their Unique Value Proposition is being small.  Small doesn’t scale.  When you force these institutions to grow, there’s a real danger that you force them to be something they were never intended to be.  And that’s a loss of diversity to the whole system.

What’s really weird is that after all this, governments still wonder why there’s such skepticism about differentiation.  But on that, more tomorrow.