The impact of performance-based funding. models on university graduation rates in Florida. Institute for Public Policy Studies. University of Denver

Transcription

1 The impact of performance-based funding models on university graduation rates in Florida Institute for Public Policy Studies University of Denver Michael Vente Master of Public Policy Candidate November 2014

2 Table of Contents Executive Summary:... 3 Problem Definition:... 5 Methods:... 7 Issue Analysis: Proposed Solutions: Solution 1, Status Quo: Solution 2, Punitive-based Approach: Solution 3, Incentive-based Approach: Solution 4, Mixed Approach: Strategic recommendations: Enhanced Support Services: Weaknesses and limitations: Conclusion: Appendix: Appendix 1: Glossary of abbreviations Appendix 2: SB 1076: An act relating to K-20 education (2013): Appendix 3: Cost-Benefit Analysis, Tier 1 and Tier 2: Appendix 4: Statistical Inputs-Status Quo, Tier 1 and Tier Status Quo Calculations: Appendix 5: Statistical Inputs-Solution 2, Tier 1 and Tier Solution 2 Calculations: Appendix 6: Statistical Inputs-Solution 3, Tier 1 and Tier Solution 3 Calculations: Appendix 7: Statistical Inputs-Solution 4, Tier 1 and Tier Solution 4 Calculations: Appendix 8: Sensitivity Analysis: Bibliography:

3 Executive Summary: "Our Board will no longer accept low graduation rates, high excess hours, or degrees that don t create jobs or address workforce needs. Our Board will continue to demonstrate its ability to lead the System as we advance into the 21st century. We will continue to improve. Not only do I want our System to be the best System in the country, I want our System to be one of the best Systems in the world." Mori Hosseini, chairman of the Florida Board of Governors 1 The future role and operations of public higher education institutions in the United States face significant challenges in the 21 st century. As policymakers are faced with limited government revenue, universities and other institutions of higher education are faced with greater accountability. Universities must continually strive to justify the appropriations they receive from the state. With calls for greater accountability for limited tax revenue and a desire for efficient government operations, institutions of higher education must use methods of accountability for the programs they offer and the services they provide to their students. Institutions of higher education are forced to adapt to this new paradigm through the use of metrics on their effectiveness as centers for training the nation s workforce and supporting a knowledge driven economy. These metrics assess the effectiveness of the institution through a range of indicators including graduation/completion rate, research expenditures, and grants awarded. Each state has challenges and goals for their systems of higher education. Since much of the funding and oversight for institutions of higher education come at the state level, legislators and policymakers in each state play a vital role in crafting these metrics and goals to reflect their priorities for their higher education systems. In Florida, the legislature has created the designation of preeminent status for universities that meet various metrics including higher graduation rates for students. With preeminent status comes additional funding to enhance academic programs, such as faculty salaries or instructional support. Through the establishment of this designation, the Florida Legislature hopes to encourage all 12 public universities in Florida to raise their 1 Florida university system chairman sets priorities for coming two years. The Tampa Bay Times. Jeffrey Solochek. 1/16/

4 performance a range of indicators used for assessment. Through this approach, policymakers hope that the entire system of higher education in Florida will be strengthened. Recently, the Florida Board of Governors (BOG) has discussed reductions in state funding to universities that do not show improvement in raising their performance in areas identified by policymakers. One key area of focus for policymakers in Florida is raising the 6-year graduation rate for students to at least 70 percent. Low graduation rates at Florida s universities limit the amount of students that successfully complete their undergraduate education. These low graduation rates limit a student s ability to obtain higher paying jobs compared to their high school graduate counterparts. Many policymakers within the Florida Legislature and the Florida BOG feel that the graduation rate for students at most Florida universities is too low and students are not fully able to participate in the Florida economy. In this memorandum, a cost-benefit analysis will determine the effects of an incentive-based approach rewarding universities for reaching a 70 percent 6-year graduation rate or punitive-based approach punishing universities that do not meet a 6-year graduation rate. These policy options will inform policymakers in Florida on the effects of incentive-based and punitive-based state appropriations practices for universities and their impact on Florida s system of higher education as a whole. The recommendation of this memorandum is an incentive-based approach which rewards universities for achieving higher graduation rates. 4

5 Problem Definition: For many years, state support for higher education programs has steadily decreased. According to an analysis by the Chronicle of Higher Education, Florida universities have experienced a 21.6 percent decrease in state support since The Great Recession of 2008, which caused severe economic contraction in the first decade of the 21 st century, led many state legislatures to lose substantial revenue from the state sales and income tax. Since the start of the Great Recession in 2008, 48 states have cut spending on higher education by an average of 26 percent. 3 Additionally, the average state is spending $2,026 per student which represents a 23 percent drop in per student funding compared to before the recession. 4 As a result of the Great Recession, state governments had less revenue to fund all government programs. Additionally, state funding has been unable to keep up with grow in student populations at many state institutions. Many areas of state budgets such as K-12 spending and health and human services programs continue to grow. Increasingly, these entitlement programs take up a larger portion of state budgets. According to the National Association of State Budget Officers, Medicaid costs have increased on average from 10 percent of states budgets to 24 percent. 5 With continuing growth for programs such as Medicaid and K-12 education, policymakers have limited state revenue to fund additional programs. Higher education receives a smaller proportion of limited state revenue because policymakers have sole discretion when appropriating funding for higher education whereas funding for entitlement programs is mandatory based on federal guidelines. In response to declining state support, universities have increased tuition for students. In order to attain postsecondary education, many students are forced to take on debt in the form of student loans. According to the Center for Studies in Higher Education at the University of California, Berkeley, graduates with loans borrow 2 25 Years of Declining State Support for Public Colleges. The Chronicle of Higher Education. 3/03/ Recent Deep State Higher Education Cuts May Harm Students and the Economy for Years to Come. Oliff et al, States Are Still Funding Higher Education Below Pre-Recession Levels. Mitchell, From Public Good to Private Good: How Higher Education Got to a Tipping Point. The Chronicle of Higher Education. 3/03/

6 an average of $19, graduates in the 1990s. 7 This represents a 60 percent increase in inflation adjusted dollars compared to According to the Pew Research Center, 75 percent of adults do not attend college because of the high cost. Additionally, 57 percent of adults feel the higher education system fails to provide good value for the cost. 8 In Florida, the average tuition and fees for the school year totaled $6, This rate is largely similar at all Florida universities and has remained unchanged for the past three years. Florida Governor Rick Scott has vetoed attempts to increase tuition at Florida universities because he views higher tuition rates as a burden to students in terms of higher debt post-graduation and a contributing factor to lower graduation rates. 10 Even with drastically lower tuition when compared to the rest of the United States, six of the eleven state universities in Florida have graduation rates lower than 50 percent. 11 State policymakers find this rate unacceptably low and have encouraged universities to raise their 6-year graduation rates to provide the state with more individuals who have completed their post-secondary education. Lower graduation rates at universities in Florida leads to few students completing their undergraduate education and limits a student s ability to attain better paying jobs. Additionally, politicians and policymakers feel pressure from their constituents who see rising tuition costs for their children and question the value of the education. To address these concerns, many states have started to incorporate performance-based funding metrics into their system s higher education funding formula. With these statistics, policymakers and governments are confronted with the problem: The graduation rate for students at most Florida universities is too low and students are not fully able to participate in the Florida economy. 6 The Student Debt Dilemma: Debt Aversion as a Barrier to College Access. Burdman, Ibid 8 Is College Worth It? Pew Research, Social and Demographic Trends, Tuition and Fees Florida Board of Governors, Governor Rick Scott s Statement on University Tuition Action. Executive Office of Governor Rick Scott Grad Rates at Public Universities in Florida Inch Higher. Florida College Access Network. Troy Miller. 3/13/

7 Methods: In order to assess and implement policy solutions to raise graduation rates in Florida, data on each university s current graduation rate is required. The main source of demographic information was the State University System of Florida s Board of Governors (BOG), the governing board for all of the public universities in Florida. Each year, all universities in Florida submit various pieces of information to the state in the form of a Factbook. These Factbooks include enrollment information and demographic information on all students enrolled at the universities. This information is made available to the public and is available online through the university itself or through the BOG. Each university s 6-year graduation rate is among the data submitted to the BOG through their Factbook. Additionally, enrollment information gathered from the State University System of Florida s Board of Governors was cross referenced with information available from each university and with data submitted to the federal Integrated Postsecondary Education Data System (IPEDS). In cases where detailed information on individual cohorts was unavailable, specifically the number of seniors preparing to graduate from an institution, an extrapolation was done. Generally, seniors comprise 25 percent of a university s student population. This percentage was chosen based on the trends from universities (like Florida State University and the University of Florida) where more detailed class information was available. While increasing graduation rates is a goal sought by all policymakers, the impact of increased graduation rates must be quantified. In order to quantify the economic impact of changing graduation rates, data on additional earnings of college graduates was used. Specifically, information from The College Payoff study conducted by the Center for Education and the Workforce at Georgetown University found that college graduates make on average $24,100 more per year than high school graduates each year of their working life. 12 This premise is supported by a recent study by Maria E. Canon and Charles S. Gascon from the Federal Reserve of St. Louis detailing income disparities between a high school graduate and college graduate. In their analysis, Canon and 12 The College Payoff: Education, Occupations, Lifetime Earnings. Center on Education and the Workforce at Georgetown University. Carnevale et al,

8 Gascon state that a college graduate makes more than $300,000 more in lifetime earnings compared to a high school graduate. 13 In 2013, the Florida Legislature attempted to move to a more performance based funding system for state universities. This involved the establishment of a system of metrics to designate a university as preeminent. The preeminent state research universities program was created with the passage of SB In order to be classified as a preeminent institution, universities had to meet at least 11 or the following 12 metrics as outlined by policymakers. 15 According to these metrics, only Florida State University and the University of Florida qualified for an additional $15 million per year from the state. One metric necessary for preeminent designation is a 6-year graduation rate of 70 percent or higher for full-time, first-time-in-college students, as reported annually to the IPEDS. 16 Designation as a preeminent university and the additional dollars associated with that designation could be used to encourage universities to increase their graduation rates. In order to quantify the effect of increasing or decreasing state appropriations on graduation rates, three recent studies were used. Blose, Porter, and Kokkelenberg: 17 In this study, Blose, Porter, and Kokkelenberg measured the effect of institutional funding cuts on baccalaureate graduations rates in public higher education institutions. The authors used information from The State University of New York (SUNY) to approximate relative academic program costs per student within the system. Data on 4-, 5-, and 6-year graduations rates were used based on information reported by 416 institutions to IPEDS. A regression analysis was performed where the relationship between variables could be determined. Graduation rates were used as depended variables while institutional characteristics such as state 13 Canon and Gascon, SB The Florida Senate, See Appendix 2 16 SB 1076, Lines The Effect of Institutional Funding Cuts on Baccalaureate Graduation Rates in Public Higher Education. Blose et al,

9 expenditures were used as independent variables. The analysis attempted to calculate a predicted graduation rate for each college that is adjusted for institutional characteristics. Their hypothesis was that higher student expenditure levels should result in more output or higher graduation rates. Through the analysis, the authors found that a $1,000 increase in university expenditure results in a 1.09 percent increase in graduation rates. Ryan: 18 In his study, John Ryan measured the relationship between institutional expenditures and degree attainment at baccalaureate colleges. Ryan conducted a regression analysis using IPEDS data from 363 institutions classified as Carnegie Baccalaureate I or II. Ryan identified the university s 6-year class cohort as his dependent variable and the expenditures by universities as his independent variable. In his regression analysis, Ryan attempted to find a relationship between the dependent and independent variables. His hypothesis was that a positive and significant relationship exists between expenditure in instruction, academic support, and student services with student degree attainment as measured by 6-year cohort graduation rates. Through his analysis, Ryan found that a 1 percent increase in instructional expenditures will lead to more than a 0.25 percent increase in cohort graduation rates. Zhang: 19 In his analysis, Zhang assessed whether the institutional-level approach enables a direct test of the link between state funding and college graduation rates at public college and universities. He used IPEDS data on student populations at institutions which submitted their data to the IPEDS system. This use of this data allowed Zhang to perform a regression analysis where 6-year graduation rates were the dependent variable and state appropriations were the independent variable. Based on his analysis, Zhang found that a 10 percent increase in state funding is associated with a 0.64 percent increase in graduation rates at that institution. 18 The Relationship Between Institutional Expenditures and Degree Attainment at Baccalaureate Colleges. Ryan, Does State Funding Affect Graduation Rates at Public Four-Year Colleges and Universities? Zhang,

10 Success of the policy alternatives will be assessed by applying incentive-based and punitive-based state funding allocations on institutions based on their 6-year graduation rate. The net present value (Potential Benefits Potential Costs) of each solution will inform its overall benefit or cost to all stakeholders. Since a 6-year graduation rate of 70 percent or higher has been outlined by the Florida Legislature as one target metric for preeminent status, this metric should be the goal for all public universities in Florida. The increased or decreased number graduates and their earnings will comprise the economic benefit to the individual and to the state. 10

11 Issue Analysis: Low graduation rates present the higher education community with a persistent problem. While institutions of higher education may be increasing their student populations, roughly half of all undergraduate students do not complete a bachelor s degree in 6 years. 20 Graduation rates in Florida follow a similar trend with six of the eleven state universities in Florida having graduation rates lower than 50 percent. 21 By including higher 6-year graduation rates as a metric in attaining preeminent status, the State of Florida has indicated that higher graduation rates should be a priority for all public universities. The movement towards performance-based funding for higher education in Florida began in 2013 with the state s designation of preeminent universities. The preeminent state research universities program was created with the passage of SB As discussed previously in this memorandum, a university needed to meet 11 of the 12 metrics outlined by the state to achieve preeminent status. Rewards for achieving preeminent status included an additional $15 million in their state appropriation. Only Florida State University and the University of Florida met sufficient metrics to qualify for an additional $15 million per year from the state. One metric necessary for preeminent designation is a 6-year graduation rate of 70 percent or higher for fulltime, first-time-in-college students, as reported annually to the IPEDS. Designation as a preeminent university and the additional dollars associated with that designation could be used to encourage universities to push for high graduation rates. By enticing universities with more money if they meet certain metrics outlined by the state, policy makers play a key role in directing the goals of the university system and shaping the agenda of the debate. 20 The Hidden Costs of Low Four-Year Graduation Rates. Sullivan, Grad Rates at Public Universities in Florida Inch Higher. Florida College Access Network. Troy Miller. 3/13/

12 The push for performance-based funding has also spread to the governance board of the university system in Florida. The Board of Governors (BOG) oversees the public universities in Florida and unveiled a plan to tie funding to a wider set of performance-based metrics. These include: Percent of bachelor s degree graduates employed and/or continuing their education Average wages of employed baccalaureate graduates Cost per undergraduate degree Six-year graduation rate for full-time and part-time first time students Academic progress rate (2nd-year retention with GPA above 2.0) Bachelor s degrees awarded in areas of strategic emphasis (includes STEM) University access rate (percent of undergraduates with a Pell grant) Graduate degrees awarded in areas of strategic emphasis (includes STEM) A metric chosen by the Board of Governors A metric chosen by each university s Board of Trustees 22 These 10 metrics were placed on a 5 point scale for a total of 50 points. This method enabled the BOG to assess the success of each individual university in meeting the goals of the system. This performance-based system does not come without a potential cost to the university. Universities gaining at least 26 points will see an increase to their base budget. Universities not gaining at least 26 points will see their funding cut. While this system does not apply to community colleges, the movement towards performance-based funding has begun and policymakers may use performance-based funding for other institutions of higher education to better reflect the goals/priorities of the state. 22 Performance Based Funding Model. State University System of Florida: Board of Governors. 12

13 This carrot and stick approach meets the needs of many stakeholders including students and policymakers that demand more accountability. Students, policy makers, and political leaders have a central component of their political agendas addressed through initiatives such as performance-based funding. 13

14 Proposed Solutions: In this memorandum, an application of different ways to increase the graduation rate at Florida universities will encompass each policy alternative. Each policy alternative will offer either a carrot or stick approach to increasing graduation rates. The punitive-based approach will decrease state appropriations for universities with 6-year graduation rates below 70 percent by 1 percent. State appropriations for universities with graduation rates above 70 percent will remain unchanged from the previous year. The incentive-based policy approach will increase state appropriations for universities with 6-year graduation rate of 70 percent or higher by 1 percent. State appropriations for universities with graduation rates below 70 percent will remain unchanged from the previous year. For this problem, the stakeholders include students, the state budget, and the institutions of higher education. All of these stakeholders will experience benefits and costs under that proposed solutions to increased graduation rates. The student will benefit from increased graduation rates because they will be more likely to graduate and increase their lifetime earnings. As stated by The College Payoff study conducted by the Center for Education and the Workforce at Georgetown University, bachelor s degree recipients are likely to make on average $24,100 more per year than their high school diploma counterparts. 23 The state will benefit from higher graduation rates through an increased number of individuals in Florida with bachelor s degrees with higher annual earning than those without bachelor s degrees. A lower graduation rate would limit the benefits to the state and the individual of attaining an undergraduate education. The more time it takes for an individual to complete their undergraduate education, the less time that individual is able to use his or her skills to seek fulltime employment and fully participate in the Florida economy through greater spending. In a study by the Center on Education and the Workforce at Georgetown University found that those receiving a bachelor s 23 The College Payoff: Education, Occupations, Lifetime Earnings. Center on Education and the Workforce at Georgetown University. Carnevale et al,

15 degree made $2,268,000 during their lifetimes as opposed to those with only a high school diploma who made only $1,304,000 during their lifetimes. 24 Additionally, universities will benefit from higher graduation rates because they will be closer to attaining preeminent status as outlined by the Florida Legislature. The three studies by Blose, Ryan, and Zhang show a positive relationship between increases to the funding received from the state to universities and college graduation rates at public colleges and universities. For the purposes of this memorandum, the study by Zhang was chosen for multiple reasons. Zhang s study is recent (2008) and uses a large sample size when running his analysis (1,781 observations). In Zhang s study, a 10 percent increase in state funding is associated with a 0.64 percent increase in graduation rates at that institution. Since this memorandum will assess the impact of a 1 percent increase or decrease in state funding on a university s graduation rate, this finding was modified to show that a 1 percent increase or decrease in state funding is associated with a percent increase or decrease in graduation rates at that institution. To order to address uncertainty in the CBA output of each proposed solution, a sensitivity analysis was performed. The sensitivity analysis for this memorandum shows the impact on graduation rates and student earnings if the theoretical rate of percent identified by Zhang is higher or lower when put into practice. The sensitivity analysis associated with this memorandum was performed using a 0.05 percent and 0.1 percent change in graduation rates depending on a 1 percent increase or decrease in state appropriations. 25 The analysis helps inform policymakers on how benefits and costs can change for each stakeholder if the percent rate is changed. Additionally, universities were divided into different tiers for the cost-benefit analysis portion of this memorandum. Base state appropriations at universities can be vastly different. The difference between the largest recipients of state appropriations (University of Florida with $657,018,039.69) is drastically different 24 Ibid. 25 See Appendix 8 15

16 than the smallest recipient of state appropriations (Florida Gulf Coast University with $117,829,139.79). For the purpose of presenting the effects of each policy alternative on universities with higher base state appropriations and lower state appropriations, the two-tiered system was used. Universities with yearly base state appropriations higher than $400,000,000 were placed in Tier 1. Universities with year base state appropriations lower than $400,000,000 were placed in Tier 2. This tiered approach give a better view of how each policy alternative effects similar institutions. Universities in Tier 1 Universities in Tier 2 University of Florida (UF) Florida State University (FSU) University of South Florida (USF) Florida International University (FIU) University of Central Florida (UCF) Florida A&M University (FAMU) Florida Atlantic University (FAU) University of West Florida (UWF) University of North Florida (UNF) Florida Gulf Coast University (FGCU) For the purposes of this memorandum, budget allocations and graduation rates for New College of Florida (NCF) and Florida Polytechnic University (FPU) were not included. NCF has been designated as Florida s liberal arts college with a very small student population. FPU is a new university in the Florida system and does not yet have any students. The budgets and student populations for both of these universities is very small and does not fit well within the tiered approach discussed earlier. 16

17 Solution 1, Status Quo: Through SB 1076, state policymakers have set a goal of a 70 percent graduation rate at Florida universities. Florida universities that do not have a 70 percent graduation rate produce fewer graduates each year due to their lower graduate rate. Fewer college graduates in Florida yields fewer individuals with the skill necessary to achieve higher earnings. This represents lost earnings for students who do not attend a university with at least a 70 percent graduation rate. In order to calculate the lost earnings of students who do not attend a university with a 70 percent graduation rate for 1 year, the number of graduates each university would produce if their graduation rate was 70 percent was extrapolated. The potential earnings of these new graduates was then found and represented as lost earnings and a negative benefit to students. Loss of Student Earnings with current Graduation Rates Tier 1 Universities University of Florida (UF) $0.00 Florida State University (FSU) $0.00 University of South Florida (USF) $34,016, Florida International University (FIU) $46,050, University of Central Florida (UCF) $12,362, Tier 2 Universities Florida A&M University (FAMU) $22,129, Florida Atlantic University (FAU) $65,214, University of West Florida (UWF) $14,595, University of North Florida (UNF) $19,394, Florida Gulf Coast University (FGCU) $19,449, This calculation found that students are missing out on $92,429,043 in earnings at Tier 1 schools and $140,783,765 in earnings at Tier 2 schools because university graduation rates are below 70 percent. 26 The net present value (NPV) for the status quo was calculated by subtracting the benefits of this solution from the costs 26 See Appendix 4 17

18 for all stakeholders. No additional earnings are realized by students in the status quo. Additionally, universities do not receive any additional funding from the state. The loss of earnings for students is the only cost expressed in the status quo. This yields a negative NPV for the status quo in both Tier 1 and Tier 2. Net Present Value for Tier 1, Status Quo Net Present Value for Tier 2, Status Quo 27 -$92,429, $140,783, As state budgets continue to be stressed through increased needs of programs entitlement programs such as K- 12 education or Medicaid, availability of funding for higher education will continue to be difficult. Large increases of state funding for universities are unlikely. However, in order to reach at least a 70 percent graduation rate for all universities in Florida the state would need to spend an additional $6,449,110, in addition to current base budgets. Increases needed at each university are listed below: Base Budget increases needed for Universities to reach 70 percent Graduation Rate Tier 1 Universities University of Florida (UF) $0.00 Florida State University (FSU) $0.00 University of South Florida (USF) $637,595, Florida International University (FIU) $1,303,829, University of Central Florida (UCF) $315,029, Tier 2 Universities Florida A&M University (FAMU) $816,050, Florida Atlantic University (FAU) $1,225,771, University of West Florida (UWF) $532,082, University of North Florida (UNF) $504,520, Florida Gulf Coast University (FGCU) $497,091, See Appendix 3 18

19 Solution 2, Punitive-based Approach: Setting a 6-year graduation rate of 70 percent as a goal for preeminent status demonstrates the value the state sees in higher graduation rates for Florida universities. In order to encourage universities to attain this higher rate, the state can limit future funding to universities who do not reach this goal. For universities not meeting this goal, state support could be cut as a punitive-based approach to state appropriations. In this solution, the base budgets of state universities with 6-year graduation rates lower than 70 percent were cut by 1 percent. Institutions that were cut included: University of South Florida (USF) Florida Atlantic University (FAU) Florida International University (FIU) University of West Florida (UWF) University of Central Florida (UCF) University of North Florida (UNF) Florida A&M University (FAMU) Florida Gulf Coast University (FGCU) The only universities that were not cut were Florida State University and the University of Florida due to their graduation rate of 70 percent or higher. The decreases ranged from $5,040, at the University of Central Florida to $1,178, at Florida Gulf Coast University due to the different base budgets of each institution. 28 Change to Base Budgets with Solution 2 Tier 1 Universities University of Florida (UF) $0.00 Florida State University (FSU) $0.00 University of South Florida (USF) -$4,534, Florida International University (FIU) -$4,172, University of Central Florida (UCF) -$5,040, Tier 2 Universities Florida A&M University (FAMU) -$1,684, Florida Atlantic University (FAU) -$2,614, University of West Florida (UWF) -$1,216, University of North Florida (UNF) -$1,467, Florida Gulf Coast University (FGCU) -$1,178, See Appendix 5 19

20 Based on these cuts, new graduation rates for each university was extrapolated based on the findings by Zhang (a 1 percent increase or decrease in state funding is associated with a percent increase or decrease in graduation rates at that institution). Since the base budgets of 10 out of the 12 universities in Florida were cut, the graduation rate at each of these universities decreased by percent. The number of seniors currently enrolled at each institution was then compiled based on data from the BOG and individual institutions. Based on the new graduation rate, a projected number of graduates was ascertained. Using data from The College Payoff study, college graduates make $24,100 more than their high school graduates. The current and projected number of graduates was multiplied with their increased salaries (+$24,100) and a total amount of additional earnings for the college graduates was ascertained. Using the current graduation rates of all institutions, $1,189,047,005 is generated by students higher earnings statewide. Using the projected number of graduates when Solution 2 is applied, $1,188,125, is generated by students higher earnings statewide. When Solution 2 is applied, students statewide make $921, less in earnings. 29 Under this proposal, students received an additional cost from lower earnings of $587, in Tier 1 universities and $320, in Tier 2 universities. However, the state received additional revenue through cuts to universities in the amount of $13,746, in Tier 1 and $8,406, in Tier See Appendix 5 30 See Appendix 5 20

21 Change in Student Earnings with Solution 2 Tier 1 Universities University of Florida (UF) $0.00 Florida State University (FSU) $0.00 University of South Florida (USF) -$241, Florida International University (FIU) -$147, University of Central Florida (UCF) -$197, Tier 2 Universities Florida A&M University (FAMU) -$45, Florida Atlantic University (FAU) -$139, University of West Florida (UWF) -$33, University of North Florida (UNF) -$56, Florida Gulf Coast University (FGCU) -$46, The net present value (NPV) for Solution 2 was calculated by subtracting the benefits of this Solution from the costs for all stakeholders. This yields a negative NPV for the Solution 2 in both Tier 1 and Tier 2. Net Present Value for Tier 1, Solution 2 Net Present Value for Tier 2, Solution $999, $565, See Appendix 3 21

22 Solution 3, Incentive-based Approach: Another method to encourage universities to attain this higher graduation rates involves an incentive-based approach. For universities meeting the state s goal of 70 percent 6-year graduation rates or higher, state support could be increase as a reward. In this solution, the base budgets of state universities with 6-year graduation rates 70 percent or higher were increased by 1 percent. Institutions that received an increase included UF and FSU. The increase for UF was $6,570, The increase for FSU was $5,050, Under this solution, the base budgets of the other universities were not cut. Change to Base Budgets with Solution 3 Tier 1 Universities University of Florida (UF) $6,570, Florida State University (FSU) $5,050, University of South Florida (USF) $0.00 Florida International University (FIU) $0.00 University of Central Florida (UCF) $0.00 Tier 2 Universities Florida A&M University (FAMU) $0.00 Florida Atlantic University (FAU) $0.00 University of West Florida (UWF) $0.00 University of North Florida (UNF) $0.00 Florida Gulf Coast University (FGCU) $0.00 Based on these increase, new graduation rates for each university were extrapolated based on the findings by Zhang (a 1 percent increase or decrease in state funding is associated with a percent increase or decrease in graduation rates at that institution). Since the base budgets of 2 out of the 12 universities in Florida were increased, the graduation rate at UF and FSU increased by percent. The number of seniors currently enrolled at each institution was then compiled based on data from the BOG and individual institutions. Based on the new graduation rate, a projected number of graduates was ascertained. Using data from The College Payoff study, college graduates make $24,100 more than their high school graduates. The current and projected number of graduates was multiplied with their increased salaries (+$24,100) and a total amount of additional earnings for the college graduates was ascertained. Using the 22

23 current graduation rates of all institutions, $1,189,047,005 is generated by students higher earnings statewide. Using the projected number of graduates when Solution 3 is applied, $1,189,404, is generated by students higher earnings statewide. When Solution 3 is applied, students statewide make $357, more compared to the status quo. 32 Under this proposal, students received a benefit of higher earnings of $357, in Tier 1 universities. Since no universities in Tier 2 have graduation rates higher than 70 percent, these universities did not receive a budget increase or higher graduation rates. Since these rates remained unchanged, higher earnings for students were not available. In terms of costs, Solution 3 increased the base budgets of UF and FSU thereby costing the state $11,620, Change in Student Earnings with Solution 3 Tier 1 Universities University of Florida (UF) $204, Florida State University (FSU) $170, University of South Florida (USF) $0.00 Florida International University (FIU) $0.00 University of Central Florida (UCF) $0.00 Tier 2 Universities Florida A&M University (FAMU) $0.00 Florida Atlantic University (FAU) $0.00 University of West Florida (UWF) $0.00 University of North Florida (UNF) $0.00 Florida Gulf Coast University (FGCU) $ See Appendix 6 23

24 The net present value (NPV) for Solution 3 was calculated by subtracting the benefits of this solution from the costs for all stakeholders. This yields a positive NPV for the Solution 3 in Tier 1 and a value of $0.00 in Tier 2. Tier 2 universities did not experience a cut to their base budgets in Solution 3. Since their base budgets remained unchanged, their graduation rates and student earnings remained unchanged. If universities in Tier 2 raise their graduation rates, they would be eligible for additional funding from the state. Net Present Value for Tier 1, Solution 3 Net Present Value for Tier 2, Solution 3 33 $26, $ See Appendix 3 24

25 Solution 4, Mixed Approach: In 2012, presidents at eight of the Florida universities agreed to not increase costs for students if the state increased funding to higher education by $118 million. 34 This Aim Higher initiative was not fully accepted by the Florida Legislature but it does show the willingness of universities to hold costs steady in return for greater state funding. 35 In this solution, a mixed approach was implemented. A 1 percent increase was assessed to the base budgets of any institution with a graduation rate higher than 70 percent. Institutions that received an increase included FSU and UF. Additionally, a 1 percent cut was assessed to the base budgets of any institution with a graduation rate lower than 70 percent. Change to Base Budgets with Solution 4 Tier 1 Universities University of Florida (UF) $6,570, Florida State University (FSU) $5,050, University of South Florida (USF) -$4,534, Florida International University (FIU) -$4,172, University of Central Florida (UCF) -$5,040, Tier 2 Universities Florida A&M University (FAMU) -$1,684, Florida Atlantic University (FAU) -$2,614, University of West Florida (UWF) -$1,216, University of North Florida (UNF) -$1,467, Florida Gulf Coast University (FGCU) -$1,178, Based on these increase and decreases, new graduation rates for each university were extrapolated based on the findings by Zhang (a 1 percent increase or decrease in state funding is associated with a percent increase or decrease in graduation rates at that institution). Graduation rates at UF and FSU increase by percent while graduation rates decreased at all other Florida universities. 34 University presidents would hold the line on tuition if the state would just give them more money. Jim Turner, Sunshine State News, 12/5/ University presidents ask legislators for $118 million investment in higher education. FSU News. 12/5/

26 The number of seniors currently enrolled at each institution was then compiled based on data from the BOG and individual institutions. Based on the new graduation rate, a projected number of graduates was ascertained. Using data from The College Payoff study, college graduates make $24,100 more than their high school graduates. The current and projected number of graduates was multiplied with their increased salaries (+$24,100) and a total amount of additional earnings for the college graduates was ascertained. Using the current graduation rates of all institutions, $1,189,047,005 is generated by students higher earnings statewide. Using the projected number of graduates when Solution 4 is applied, $1,188,482, is generated by students higher earnings statewide. When Solution 4 is applied, students statewide make $564, less compared to the status quo. 36 Under this proposal, students received a cost of lower earnings in the amount of $212, at Tier 1 universities and $320, at Tier 2 universities. In terms of benefits, Solution 4 resulted in increased revenue for the state in the amount of $8,161, due to cuts from universities with graduation rates below 70 percent. Change in Student Earnings with Solution 4 Tier 1 Universities University of Florida (UF) $204, Florida State University (FSU) $170, University of South Florida (USF) -$241, Florida International University (FIU) -$147, University of Central Florida (UCF) -$197, Tier 2 Universities Florida A&M University (FAMU) -$45, Florida Atlantic University (FAU) -$139, University of West Florida (UWF) -$33, University of North Florida (UNF) -$56, Florida Gulf Coast University (FGCU) -$46, See Appendix 7 26

27 The net present value (NPV) for Solution 4 was calculated by subtracting the benefits of this solution from the costs for all stakeholders. This yields a negative NPV for the Solution 4 in both Tier 1 and Tier 2. Net Present Value for Tier 1, Solution 4 Net Present Value for Tier 2, Solution $275, $565, See Appendix 3 27

28 Strategic recommendations: States throughout the nation were forced to reexamine their funding structures for institutions of higher education. The scarcity of state financial resources and demands for enhanced accountability will further promote the use of performance-based metrics when assessing the effectiveness of institutions of higher education. While the status quo limits state expenditure for higher education, the shortage of universities with graduation rates above 70 percent results in fewer students completing their undergraduate education and costs student statewide significantly through lower yearly and lifetime earnings. The memorandum assesses three performance-based methods of state appropriations for universities. Solution 2 cut base budgets by 1 percent for universities with graduation rates of 70 percent or lower as a punitive-based approach. Solution 3 increased base budgets by 1 percent for universities with graduation rates of 70 percent or higher as an incentive-based approach. Solution 4 presented a combined punitive and incentive-based approach by cutting the base budgets by 1 percent for universities with graduation rates of 70 percent or lower and increasing the base budgets by 1 percent for universities with graduation rates of 70 percent or higher. While Solution 2 provides the state with additional revenue by cutting universities that have graduation rates lower than 70 percent, graduation rates at universities are further lowered and students are negatively affected through lost earnings. The mixed approach in Solution 4 offers rewards for universities with already high graduation rates and punishes universities with low graduation rates. While universities with high graduation rates (UF and FSU) benefit from this approach, costs to students and other universities (especially in Tier 2) are negatively affected through lower earnings and lower graduation rates. Analytically, an incentive-based approach as outlined by Solution 3 yields the most benefits for students, universities, and the state. Through this approach, universities with high graduation rates are rewarded for their efforts and continue to raise their graduation rates with additional funding from the state. Universities with lower graduation rates (below 70 percent) are not cut and maintain their graduation rates. With the promise of 28

29 incentives such as a 1 percent increase to their base budgets, universities with lower graduation rates are encouraged to find methods of raising their graduation rates. As graduation rates rise, more students complete their undergraduate education and are able to realize the higher earnings that accompany a baccalaureate degree. The problem presented in this memorandum is: The graduation rate for students at most Florida universities is too low and students are not fully able to participate in the Florida economy. By implementing Solution 3, graduation rates rise at high performing universities and more graduates are able to increase their earning potential. Additionally, graduation rates at lower performing universities are stable with the goal of improving their graduation rates through an incentive-based approach to state appropriations. The status quo, Solution 2, and Solution 4 all negatively impact students and the state s goal of raising 6-year graduation rates throughout the state. Additionally, the status quo, Solution 2, and Solution 4 yield negative net present values. Solution 3 in the only solution to yield a positive net present value which increases graduation rates at Florida universities and positively impacts student populations statewide. Enhanced Support Services: While many factors can influence graduation rates at institutions of higher education, enhanced student support services are critical to student success. In light of dwindling state support, institutions have been forced to find new and innovative ways at engaging students and supporting their academic pursuits. While these approaches can yield some support services for students, traditional services cost institutions money in the form of salaries for advisors or program to assist students in learning about academic services. Institutions recognize the value of the academic support services and have tailored fundraising initiatives around providing these services to students. This process has already begun at universities in Florida. Florida State is currently undertaking a $1 billion fundraising campaign to support the university and its efforts to become a top-25 public university as ranked by U.S. News. The Big Ideas campaign includes many projects that enrich 29

30 the student experience on campus and provide students with added resources to assist in their academic pursuits. These projects include an Honors, Scholars, and Fellows house on campus which provides academic support services to students in the honors program, increased faculty support funding, increased scholarships for students, enhanced undergraduate research opportunities, and programs that help cultivate students early in their coursework through assistance in applying for national awards. 38 Recognition of the importance of these services and the impact they provide to student population demonstrates how additional funding can be spent on student support services and improve graduation rates. As shown by Sullivan, institutions that devote additional resources to academic support services are more likely to be classified as highly effective institutions by the US Department of Education. In a study of the levels and patterns of spending at twenty highly effective institutions involved in Indiana University s Documenting Effective Educational Practices (DEEP) project, for example, the National Center for Higher Education Management Systems found that these highly effective institutions spent a noticeably higher proportion of their available dollars on academic support, a category in [the Department of Education s Integrated Postsecondary Education Data System] under which most institutions report resources dedicated to such things as faculty development, teaching and learning centers, and academic support staff such as tutors and counselors. 39 Similarly, research done at the Cornell Higher Education Research Institute found that student service expenditures influence graduation and persistence rates especially for students at institutions with lower entrance test scores and higher Pell Grant expenditures per student, and currently lower graduation rates. 40 The Cornell study supports the argument that improvements to graduation rates at institutions of higher education is more effectively achieved through an approach of rewarding institutions for their successes rather than punishing institutions which do not meet specified metrics. In the case of Florida universities, only FSU and UF have 6-year graduation rates above 70 percent. Using the Cornell study s assertion that added funding for student services has a larger impact at institutions with 38 An Introduction to the Big Ideas. Florida State University, The Hidden Costs of Low Four-Year Graduation Rates. Sullivan, Do Expenditures Other Than Instructional Expenditures Affect Graduation and Persistence Rates in American Higher Education? Webber and Ehrenberg,