Over the past three decades policymakers have been seeking new ways to secure improved performance from higher education institutions. One popular approach has been performance funding, which involves use of a formula to tie funding to institutional performance on specified indicators. This report reviews findings from studies on performance funding programs in a multitude of states. The studies suggest that tying funding to outputs has immediate impacts on colleges in the form of changes in funding, greater awareness by institutions of state priorities and of their own institutional performance, and increased status competition among institutions. Because of these immediate impacts, performance funding produces intermediate institutional changes in the form of greater use of data in institutional planning and policymaking and in changes in academic and student service policies and practices that promise to improve student outcomes. However, claims that performance funding does indeed increase ultimate outcomes in the form of improved rates of retention, completion of developmental education, and graduation are not validated by solid data. In the face of this finding, this report identifies obstacles to the effective functioning of performance funding, as well as unintended impacts. The report closes by providing recommendations for overcoming the many obstacles to the effective functioning of performance funding and addressing the unintended impacts documented by the studies reviewed.
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