Performance-Based Funding

What is performance-based funding in workforce systems? Performance-based funding is any funding that is received contingent on achieving specific outcomes. This type of funding is most commonly used in in federal, state, and local government programs. A performance-based approach is an alternative or complement to the more traditional method of reimbursing programs according to “outputs,” such as number of participants served or students enrolled. Sometimes only a portion of program funding is performance based, supplementing traditional funding.

What are examples of performance-based funding? A state education board may award performance-based funding to community colleges that achieve a prescribed level of program completion or degree attainment. Currently 36 states have some performance-based funding for higher education institutions. Several states, including Virginia and Kansas, are using performance-based funding to provide incentives to community colleges to enroll students in certificate programs that are in high demand by employers. In 2018, California changed funding for community colleges to include performance-based funding for the number of students graduating or transferring to four-year institutions.

Why use performance-based funding? Performance-based funding is viewed as a way to improve outcomes. However, there is continuing debate on whether performance-based funding as implemented in higher education has been effective in improving outcomes.

What factors are important to make performance-based funding work? Experts warn that the success of this type of funding depends on several factors, such as

  • performance-based funding levels presenting a large enough incentive for change;
  • the selected performance metrics not providing incentives for unintended and unwanted activities, such as only serving students deemed more likely to meet performance outcomes (also called “cream skimming”); and
  • stakeholders having a voice in developing performance-based outcomes, with specifics revisited and updated regularly to incorporate learning.