Alabama lawmakers will soon analyze options for adding an outcomes-based funding formula to four-year colleges’ annual appropriations.
The Legislature’s education budget and policy committees will begin meeting in late August to discuss tying some state funding to the universities’ performance, including possibly graduation and retention rates. The goal is to drive improvement in the institutions and reward them for that work, Sen. Arthur Orr, R-Decatur, recently told Alabama Daily News.
“The wish would be that we’re able to navigate legislation through the process in the 2026 session and get buy-in from our higher education institutions for a mutually beneficial product,” Orr said.
Some performance-based funding could be in place in fiscal 2027.
Orr said the upcoming conversations are the second part of a plan to use funding to get improved outputs in education. Lawmakers and Gov. Kay Ivey this year approved the RAISE Act, a new formula that provides targeted funding to K-12 schools serving students with greater academic and economic challenges, including poverty and special education needs, using weights that add per-student funding. They dedicated an initial $166 million to the effort. It is outside of and in addition to the state’s traditional school funding model.
Like with the K-12 RAISE Act, Orr said higher ed’s weighted funding would likely come from the relatively new Educational Opportunity Reserve Fund.
“This is phase II of the reason we put the Opportunity Fund in place, to be able to raise the bar across the state for all our higher education institutions by improving their funding for hitting goals that we mutually agree upon,” Orr said.
That reserve fund was created by lawmakers in 2023 as a savings account when tax revenue exceeds the education budget. The current balance of the EORF is more than $1.1 billion. Lawmakers appropriated $375 million to fund the new K-12 school funding program through the RAISE Act and $180 million to fund the state’s education savings accounts through the CHOOSE Act during the 2025 legislative session.
Orr said the higher ed conversations will start with an informational session with a consultant explaining what other states do. In 2024, performance-based funding was distributed to two-year colleges in 28 states and in four-year colleges in 21 states, according to the State Higher Education Executive Officers Association, which has been collecting annual performance-based funding information since 2020.
Orr said he doesn’t expect the Legislature to pursue a higher education funding model in which universities would get less funding than they currently receive.
“I think we’ll look at it as more of a bonus pool,” Orr said. “I think our (formula) will be an increase of some funding amount for the institutions as we set specific criteria for each one.”
Alabama’s 14 public universities have different missions and challenges. They won’t be in competition with each other for funding, Orr said.
“Our institutions are very different, they’re managed differently with different boards of trustees,” he said. “We’d like to look at each institution and in working with the administration of these institutions, see areas that they may be able to improve and then attempt to reward them for improving accordingly.”
Orr said specific metrics haven’t been decided, but he said improving some schools’ current graduation rates is a likely one.
“What improvements can be made to help those students stay in school?” Orr said.
Schools could also receive more funding based on the number of high-demand degrees needed in Alabama. They should be rewarded for creating more nurses, engineers and other in-demand professionals, Orr said.
Alabama Commission on Higher Education Executive Director Jim Purcell said there are some industry standard metrics for performance-based funding, including increases in retention and graduation rates and degree production.
Purcell recommends institution-specific goals. But an institution whose mission isn’t related to STEM degrees shouldn’t be penalized for not producing engineers.
The number of students from low-income families at institutions should also be a factor in a new formula, ACHE Deputy Director Jim Hood said.
Performance-based funding for Alabama universities is not a new conversation, but it was delayed by the COVID-19 pandemic and the pandemic’s effect on enrollments.
It’s already being done to an extent in the two-year college system. The Alabama Community College System’s performance-based funding includes two primary metrics, completion and progression, a system spokesman told ADN. This year, seven schools received a combined amount of about $529,000. Chancellor Jimmy Baker recently modified the formula to ensure that no school gets decreased funding. Details on which schools received the additional funds were not immediately available.
The Alabama Legislature appropriated $15 million for performance incentives for four-year institutions in a 2023 supplemental spending bill, but the funds have yet to be spent.
The universities couldn’t reach an agreement on how the money should be allocated, Purcell said.
“There wasn’t a consensus,” he said. Several years ago, ACHE began putting more information about schools’ achievements, including employment outcomes, online.
The commission each year makes a funding request to lawmakers for the four-year system as a whole. But universities also lobby on their own for additional funding. That isn’t likely to stop even as more money is distributed under a performance-based funding formula, Purcell said.
Rep. Danny Garrett, R-Trussville, the chairman of the House education budget committee, said the state is facing an education cliff of declining enrollment and existing funding is spread thinly over the about three dozen two- and four-year institutions. Meanwhile, state leaders want to see the state’s labor participation rate, currently 58% compared to a national rate of 62.3%, increase.
“We don’t want to pit schools against each other, but at the same time, we have a limited amount of dollars that we’re spreading very thin and we’re not seeing those higher ed outcomes like we need to be in the state,” Garrett said. “If we did, we would see more labor participation. We would see less migration out of the state.”
Meanwhile, Purcell said, performance-based funding works best in states where there is a standard in tuition increases across institutions. In Alabama, each college’s board can decide increases.
“So, if they don’t have a funding formula that works, all they would do is increase tuition,” Purcell said. “… That makes a big difference in the power and effectiveness of the formula.”
He said to “change behavior,” performance-based funding should be at least 10% of a school’s state funding.
“We are interested in performance funding,” he said. “We do believe that with limited funds, it may be more efficient to tell campuses exactly what you want them to do in a particular area of the state and fund that initiative depending on them doing those things. And hold them accountable for activity.”