Proposal for Outcomes-Based Higher Education Funding in Alabama

Introduction and Strategic Objectives

Alabama’s legislature is set to explore the implementation of an outcomes-based funding formula for its 14 public four-year universities. Legislative committees will convene in late August to initiate discussions on linking a portion of state appropriations to institutional performance. The primary objective, as articulated by Senator Arthur Orr, is to foster continuous improvement across higher education institutions and to reward them for achieving specific, mutually agreed-upon goals. The anticipated timeline aims for legislation to be passed during the 2026 session, with a potential rollout of the performance-based funding model in fiscal year 2027.

This initiative is positioned as the second phase of a broader strategy to enhance educational outputs throughout the state, following the recent passage of the K-12 RAISE Act.

Alignment with Sustainable Development Goals (SDGs)

The proposed funding model is intrinsically linked to several United Nations Sustainable Development Goals (SDGs), reflecting a commitment to creating a more equitable, educated, and prosperous society.

SDG 4: Quality Education

The core of the proposal directly supports SDG 4 by aiming to ensure inclusive and equitable quality education and promote lifelong learning opportunities for all. By focusing on key performance indicators, the state seeks to enhance the overall quality and effectiveness of its higher education system.

• Improving Retention and Graduation Rates: A primary metric under consideration is the improvement of student retention and graduation rates, which is central to Target 4.1 (ensure all girls and boys complete free, equitable and quality primary and secondary education leading to relevant and effective learning outcomes) and Target 4.3 (ensure equal access for all women and men to affordable and quality technical, vocational and tertiary education, including university).
• Institutional Improvement: The model is designed to be a “bonus pool,” incentivizing universities to identify and address areas for improvement, thereby enhancing the quality of education delivered.

SDG 8: Decent Work and Economic Growth

The initiative strongly aligns with SDG 8, which promotes sustained, inclusive, and sustainable economic growth, full and productive employment, and decent work for all. The funding formula is intended to make the higher education system more responsive to the state’s economic needs.

• Addressing Labor Market Demands: A significant component of the proposed formula is rewarding universities for producing graduates in high-demand fields such as nursing and engineering. This directly contributes to Target 8.6 (substantially reduce the proportion of youth not in employment, education or training).
• Boosting Labor Participation: State leaders, including Representative Danny Garrett, have linked improved higher education outcomes to increasing Alabama’s labor participation rate, which currently lags behind the national average.

SDG 10: Reduced Inequalities

The framework for the new funding model includes provisions that address SDG 10, which aims to reduce inequality within and among countries. This is reflected in the consideration of socioeconomic factors in performance metrics.

• Support for Low-Income Students: The Alabama Commission on Higher Education (ACHE) has suggested that the number of students from low-income families should be a factor in the new formula, ensuring that institutions serving disadvantaged populations are supported and incentivized, aligning with Target 10.2 (empower and promote the social, economic and political inclusion of all).
• Equitable K-12 Precedent: This approach mirrors the recently enacted K-12 RAISE Act, which provides weighted, targeted funding to schools serving students with greater economic and academic needs.

Funding Mechanism and Implementation Framework

The Educational Opportunity Reserve Fund (EORF)

The proposed performance-based funding is expected to be sourced from the Educational Opportunity Reserve Fund. This fund, created in 2023 as a repository for surplus tax revenues, currently holds a balance exceeding $1.1 billion. It is intended to finance strategic initiatives that “raise the bar” for education across the state without disrupting traditional funding streams.

Proposed Model and Metrics

The funding model is envisioned as an incentive-based “bonus pool” rather than a punitive system that would reduce existing university budgets. The process will involve collaboration with each of the 14 public universities to establish institution-specific goals that recognize their unique missions and challenges, avoiding direct competition between them.

1. Institution-Specific Goals: Metrics will be tailored to each university’s mission. For example, an institution not focused on STEM would not be penalized for a low number of engineering graduates.
2. Key Performance Indicators: While specific metrics are undecided, discussions have highlighted several industry-standard indicators:
   • Increases in student retention and graduation rates.
   • Degree production, particularly in high-demand professional fields.
   • Metrics related to the enrollment and success of students from low-income backgrounds.
3. Consultation and Precedent: The process will begin with informational sessions led by consultants to review performance-based funding models used in other states. According to the State Higher Education Executive Officers Association, 21 states utilized such funding for four-year colleges in 2024.

Challenges and Considerations

Stakeholders acknowledge several challenges that must be addressed for the successful implementation of the new model. A previous attempt to distribute $15 million in performance incentives in 2023 failed due to a lack of consensus among the universities on allocation methods. Furthermore, ACHE Executive Director Jim Purcell noted that performance-based funding is most effective when it constitutes a significant portion of state funding (at least 10%) and is paired with standardized policies on tuition increases, which Alabama currently lacks.

Analysis of SDGs, Targets, and Indicators

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 4: Quality Education

  The article is fundamentally about improving the quality and outcomes of tertiary education in Alabama. The proposed outcomes-based funding formula aims to “drive improvement in the institutions” and “raise the bar across the state for all our higher education institutions” by linking funding to performance metrics like graduation and retention rates.

• SDG 8: Decent Work and Economic Growth

  The article explicitly connects higher education outcomes to the state’s economic health. A key motivation for the new funding model is to increase the state’s labor participation rate. The plan suggests rewarding universities for producing graduates in “high-demand degrees needed in Alabama,” such as nurses and engineers, to fill workforce gaps and prevent skilled workers from migrating out of the state.

• SDG 10: Reduced Inequalities

  The article highlights a focus on equity in education. It mentions that the number of “students from low-income families at institutions should also be a factor in a new formula.” This parallels the K-12 RAISE Act, which provides targeted funding to schools serving students with “greater academic and economic challenges, including poverty,” aiming to reduce inequalities of outcome.

• SDG 1: No Poverty

  By extension, the focus on supporting students from low-income families and those facing economic challenges is a strategy to combat poverty. The K-12 model directly targets students in poverty, and the proposed higher education model’s consideration for low-income students aims to provide them with a pathway to economic stability and upward mobility through education and employment.

2. What specific targets under those SDGs can be identified based on the article’s content?

1. Target 4.3: Ensure equal access for all women and men to affordable and quality technical, vocational and tertiary education, including university.

   The article addresses this target by focusing on improving the quality of four-year colleges through performance-based funding. The discussion on improving “graduation and retention rates” and helping “students stay in school” directly relates to ensuring students who access tertiary education can successfully complete it. The mention of tuition increases also touches upon the affordability aspect of access.

2. Target 4.4: Substantially increase the number of youth and adults who have relevant skills, including technical and vocational skills, for employment, decent jobs and entrepreneurship.

   This target is directly supported by the proposal to reward schools based on “the number of high-demand degrees needed in Alabama.” The article specifies that schools should be rewarded for “creating more nurses, engineers and other in-demand professionals,” which directly links education to providing relevant skills for employment in the state.

3. Target 8.6: Substantially reduce the proportion of youth not in employment, education or training.

   The initiative aims to improve higher education outcomes to address the state’s low labor participation rate. By incentivizing universities to improve retention and graduation rates and produce more graduates with in-demand skills, the policy directly aims to reduce the number of young adults who are not successfully transitioning from education into the workforce.

4. Target 10.2: Empower and promote the social, economic and political inclusion of all, irrespective of… economic or other status.

   This target is reflected in the recommendation that “the number of students from low-income families at institutions should also be a factor in a new formula.” This explicitly aims to support and ensure the success of students from economically disadvantaged backgrounds, promoting their inclusion and equal opportunity in higher education.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

1. Graduation rates: The article explicitly states that improving “current graduation rates is a likely” metric for the new funding formula. This is a direct measure of educational attainment.
2. Retention rates: This is mentioned alongside graduation rates as a key performance area. The question “What improvements can be made to help those students stay in school?” highlights its importance as an indicator of institutional success.
3. Degree production in high-demand fields: The article suggests schools could receive more funding based on “the number of high-demand degrees needed in Alabama,” specifically mentioning the creation of “more nurses, engineers and other in-demand professionals.”
4. Proportion of students from low-income families: It is suggested that “the number of students from low-income families at institutions should also be a factor in a new formula,” making this a key indicator for measuring equity.
5. Employment outcomes: The article notes that the Alabama Commission on Higher Education (ACHE) already puts information about “schools’ achievements, including employment outcomes, online,” implying this is a recognized indicator of success.
6. Labor participation rate: This is mentioned as a key state-level economic indicator that leaders want to see increase. Rep. Garrett links poor higher education outcomes directly to the low labor participation rate, making it a macro-indicator of the policy’s success.

4. SDGs, Targets, and Indicators Summary

Source: aldailynews.com