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A Review of the Higher Education Performance Funding Process
June 2001

FOLLOW-UP (PDF)     REPORT (PDF)     SUMMARY (PDF)

Members of the General Assembly requested that the Legislative Audit Council review the higher education performance funding process. We focused on the Commission on Higher Education’s (CHE’s) implementation of Act 359, enacted in 1996, which required the CHE to develop a funding formula based on performance. The act established 9 critical success factors and 37 indicators that could be used to measure an institution’s performance.

  • Although the law required the CHE to allocate all funds based on performance beginning in FY 99-00, only a small percentage of funding has been affected by performance scores. In FY 99-00 and FY 00-01, the years in which funding was to be based entirely on performance, the amount affected by performance scores was 3% each year.
  • The law requiring appropriations for higher education to be based entirely on performance should be changed. If funding allocations had been based solely on performance, extreme fluctuations in funding could result. Funding for institutions fluctuated as much as 30%–40% annually in our simulated example of 100% performance funding.
  • Beginning in FY 91-92 the CHE allocated some institutions a higher percentage of needed funds than others. In order to avoid some schools receiving less funding than they had in the previous year, CHE shifted a percentage of other institutions’ funding to those with dropping enrollment. As a result, when Act 359 mandated that funding be based on performance, the institutions did not start on a level playing field.
  • With performance funding, the CHE developed a new formula, the Mission Resource Requirements (MRR), to determine institutional needs. This formula is similar to the formula used previously by the CHE. A consultant study found the MRR to be a valid funding method, and also found that South Carolina institutions were generally funded at a lower level than their peer institutions.
  • The CHE has complied with the law in developing and implementing performance measures. However, the current performance funding measures do not provide a comprehensive assessment of institutional quality. Reasons that the performance measurement system should not be used as the sole determinant of institutional funding include: changes and volatility of the system, problems in measurement, the narrow focus of the indicators, and the use of some indicators that may be inappropriate for some institutions.
  • Performance funding has had little effect on the elimination of waste and duplication in higher education. The CHE has promulgated regulations for the reduction, expansion, consolidation, or closure of an institution as a result of institutional performance, but the possibility of this occurrence is remote. Institutions report their internal efforts to eliminate duplication and waste in both academic and administrative areas.
  • The CHE has implemented a data verification process that provides improved control over information used to evaluate performance. However, this process could be strengthened if the CHE implemented a policy to correct any misallocation of funds that occurred due to data errors.
  • We found no material problems with the performance improvement grants awarded by the CHE to eligible institutions. However, CHE should follow up and review expenditures and results of the grants.