Designing state funding formulas for public higher education to center equity

States provide substantial support for public higher education. In fiscal year 2023, states allocated $116 billion to postsecondary institutions, mostly in state appropriations to public colleges and universities. State appropriations help subsidize the cost of higher education, resulting in lower tuition levels for in-state students at these institutions, and promote college enrollment and completion.

States allocate different amounts of funding to different institutions, but we have little insight into how states make those decisions. How states allocate funds across institutions can have important implications for student outcomes. State funding formulas reward institutions for different actions, such as enrolling students in courses or graduating students from particular programs. Institutions might then respond by enrolling those students most likely to graduate, with implications for equity in college access.

To date, most of the research on state funding formulas for higher education has focused on performance-based funding (PBF), a model that allocates funds based on student outcomes, such as credit hour completion or degree completion, with the goal of motivating institutions to improve those outcomes. While PBF research offers new insight into state funding mechanisms, it is estimated that states allocate just 9% of general fund appropriations through PBF. We know relatively little at a national level about other funding approaches and how funding approaches have changed over time. As a result, state policymakers have little systematic evidence regarding the suite of policy options available in creating state funding formulas and their implications for equity.

Evidence on state higher education funding formulas

Our research team at InformEd States, a collaboration of researchers that examines the equity and effectiveness of state higher education funding policies, has collected and analyzed a comprehensive longitudinal dataset regarding how states fund colleges and universities over time.

We reviewed more than 2,000 state policy documents, including budgets, legislation, and higher education board reports and statements. We coded state funding formulas from Fiscal Year (FY) 2004 to 2020 for the presence of the following approaches:

• Base-adjusted: funding is adjusted based on the prior year allocation or a mechanism to ensure institutions retain a minimum level or share of funding (e.g., stop-loss or hold-harmless provisions)
• Enrollment: funding is adjusted based on increases or decreases in the number of enrolled students
• Performance: funding is adjusted based on student outcomes
• No funding formula: no documented funding formula

We also coded for the presence of equity metrics, which are typically designed to boost funding levels for colleges that enroll students from historically underserved backgrounds. (For more information on data collection, see the Data Collection Appendix below.) Using our national dataset, we offer an overview of state funding formulas for public higher education, how these models have changed over time, and their implications for promoting equity in college enrollment and completion.

A national view of funding formulas for higher education

Figure 1 shows the share of public four-year college systems that had each of the four funding formula components between 2004 and 2020. A system can have more than one funding model–for example, a system may have most of their funding determined through base-adjustments and the remainder determined through performance funding. The most common formula component in the four-year sector was a base adjustment: 60% of four-year college systems over the period had a funding model that included a base component, with some growth following the Great Recession, when states moved away from funding enrollment and performance models and moved to secure whatever base funding for higher education was available. Enrollment funding formulas decreased from slightly over 40% to around 30% during the study period. By contrast, the share of systems with performance components increased from around 10% in 2004 to nearly 40% fewer than 20 years later. Around 30% of four-year college systems had no discernable funding formula in each year we examined.

Figure 2 shows the percentage of community college systems with each of the four formula components over time. A majority of community college systems included a base component, and more systems included an enrollment component than in the four-year sector. Like the four-year college sector, performance became a more prominent funding component over time, and by 2020 a larger share of community college systems (roughly half) included a performance funding component than four-year systems (40%). Systems with no funding formula were less common in community colleges: just over 10% of systems had no funding formula in the sector, and many systems used all three funding models to allocate some portion of funding.

Equity considerations in state funding formulas

Regardless of the overall funding models, states often incorporated equity considerations into funding formulas that focused on features of institutions themselves. For instance, states or state higher education systems often included small school adjustments that increased funding for schools in rural areas with lower enrollment levels. Some states also directed funds specifically toward Historically Black Colleges and Universities (HBCUs), sometimes a result of lawsuits demonstrating that states had underfunded these institutions. An example is Tennessee, which provided $250 million in capital funding to Tennessee State University in fiscal year 2023 after a report found that the state underfunded the university by nearly two billion dollars over the preceding decades. Other states allocated funds to provide equalization aid for districts with lower local tax revenue. In Arizona, for instance, where community colleges receive funding from both state and local appropriations, the state adjusts its appropriation for districts with lower property tax values.

States also incorporated equity considerations by focusing on student populations that a college serves. These equity considerations often existed within performance funding models and direct additional funds to colleges that enroll and/or graduate students from underserved backgrounds. As of 2020, virtually all states with PBF included at least one equity metric, most commonly a metric for enrolling and/or graduating students from low-income families. Less common, though still in place at around 70% of four-year PBF systems and half of community college PBF systems, states also include a metric for enrolling and/or graduating racially minoritized students. 

The amount of state funding likely matters more than the funding formula for student outcomes

In recent work, we explored the relationship between state funding formulas and college enrollment and completion outcomes, particularly among racially minoritized students who face greater structural and systemic barriers to higher education. We found that in the community college system , base-adjustment models combined with enrollment or performance components were associated with higher levels of enrollment among racially minoritized students. However, we did not find evidence of a relationship with college completion. Funding models for the four-year sector did not relate to college enrollment or completion among racially minoritized students. In other words, while the amount of state funding clearly affects student outcomes, the different ways in which funds are allocated have, at most, a modest relationship.

Policymakers aiming to improve funding equity must build equity into formulas

Funding disparities are deeply entrenched in higher education. Community colleges and minority-serving institutions (MSIs) receive less state funding per student, on average, than other institutions. State funding formulas are potentially important levers for promoting equity; however, the existing formula components many states use are designed in ways that sustain these funding gaps. Community colleges and MSIs—especially land-grant HBCUs that have been severely underfunded relative to other land-grant colleges—are likely to be further disadvantaged by base-adjusted models.

Yet our research shows most state funding formulas in both sectors include a base component. About 60% of community college systems receive funding based on enrollment, but those policies are often based on full-time enrollment, disadvantaging colleges that enroll a large share of part-time students. In addition, we find that states often move away from funding based on enrollments during economic downturns, which is when enrollments—especially at community colleges—tend to surge. Performance funding, which we show has become a more common feature of funding formulas in both sectors, can exacerbate funding disparities between research universities and community colleges and between MSIs and non-MSIs.

While many states include equity metrics or equalization efforts into their funding formulas for public higher education, these have not done enough to address historical underfunding of certain types of institutions. We urge state policymakers to create meaningful changes in funding models that promote equitable and effective outcomes across institution types. What does this look like in practice? In the case of enrollment-based funding models, funding levels should be based on the total number of students served rather than full-time enrollment figures that do not fully account for all students, particularly at community colleges that serve many part-time students.

Finally, we should emphasize an important point that is often lost in policy conversations: the amount of funding allocated to colleges and universities is substantially more important than how states allocate funding across institutions. We find limited links between broader state funding formulas and student outcomes. This may suggest that while funding formulas have direct implications for funding equity across institution types, they might not on their own be enough to dramatically move the needle when it comes to college enrollment and completion unless there is a clear theory of action for revising funding formulas to close existing gaps. Rather, greater levels of state support for public higher education institutions have proven critical in supporting college enrollment and completion and promoting equity, and we urge state policymakers to increase investments in public colleges and universities.