The first two blogs in this series examined why Texas is considering performance-based funding for public universities and what outcomes a new model could reward.
But creating a new set of incentives raises another question: Where will the money come from?
That question remains closely tied to an existing source of state support known as Institutional Enhancement funding.
The state budget directed the THECB to study a performance-based funding model with the intention of ending Institutional Enhancement funding after fiscal year 2027. However, the committee’s report stated that replacing that funding is not as simple as moving the same dollars into a new outcomes-based model.
What Are Institutional Enhancement Funds?
Institutional Enhancement funds are flexible state funding universities can use to support faculty, student services, academic programs and other operating expenses. Unlike funding distributed through a uniform formula, lawmakers determine Institutional Enhancement amounts for individual universities based largely on institutional priorities.
This is the third part in a three-part blog series (read Part 1 here and Part 2 here) that discusses performance-based funding, the precedent set by community colleges, and the recommendations set forth by the THECB Executive Committee.
As a result, universities receive widely different amounts.
Over time, Institutional Enhancement funds have also become part of the basic operating support on which some universities rely. That creates a challenge for lawmakers considering a new funding system: changing or eliminating Institutional Enhancement could affect universities differently depending on how much they currently receive and how those dollars are replaced.
Why not move all of it into performance-based funding?
Institutional Enhancement and performance-based funding serve different purposes.
The proposed performance-based model would reward universities for helping students make progress and earn valuable degrees. Institutional Enhancement funding has become part of the basic support some universities use to employ faculty, provide student services and operate academic programs.
The report found no clear way to eliminate Institutional Enhancement and move it immediately into the new model without significant funding reductions at many universities. That leaves lawmakers to decide how much funding should support core operations, how much to tie to outcomes, and how quickly to make the transition.
For this reason, the committee recommends adding performance-based funding to the state’s existing university formulas rather than using it as a replacement for the broader finance system.
What options does the report identify?
The report does not recommend one specific replacement for Institutional Enhancement funding. Instead, it identifies three approaches lawmakers could consider:
Using a portion of a university’s existing Institutional Enhancement funding to support the performance-based funding it earns:
For example, if a university earned funding for improving student outcomes, part of that award could come from its current Institutional Enhancement allocation, with the state providing the remainder through the new model. This would connect some existing funding to student results without eliminating Institutional Enhancement all at once. It would also mean a university covering part of its own performance award.
Limiting how much any university could contribute through that approach:
The Legislature could limit how much Institutional Enhancement funding any one university must contribute. This could protect universities that rely heavily on the funding from experiencing especially large or sudden reductions. In practice, the limit would work as a ceiling: no matter how much performance funding a university earned, only a set share of its Institutional Enhancement allocation, rather than all of it, could be redirected to cover the award. The cap is intended to protect the universities that depend most on Institutional Enhancement from large or sudden reductions, at the cost of slowing the shift toward outcomes.
Providing every university with a minimum amount of performance-based funding to improve stability:
Every university could receive a minimum amount of funding through the new model, regardless of how much it initially earns from the performance measures. This would give institutions a more stable starting point and help ensure they have resources to invest in improving student outcomes.
How these options would work depends largely on how much funding the Legislature provides for the new model.
Future Considerations
The committee’s report outlines a possible structure for performance-based funding, but several major policy choices remain unresolved. Those decisions will shape which universities gain or lose funding, how significant the new incentives are and how the model interacts with the rest of the university finance system.
How much money needs to be at stake to influence institutional behavior?
The effect of the model depends on the size of the performance-based funding pool and whether it consists of new state funding, money redirected from appropriations universities already receive, or some combination of the two. One lesson from early outcomes-based funding models for community colleges is that tying a very small share of funding to outcomes may not be enough to change institutional behavior. For the model to influence decisions about programs, student supports or resource allocation, the amount at stake has to be large enough for institutions to respond to the incentive.
How should the model balance persistence and completion?
While persistence is an important indicator of student progress, the model should place greater weight on completion. Staying enrolled and reaching credit-hour milestones matter, but the ultimate goal is for students to earn a credential that delivers value in the workforce. Weighting completion more heavily would keep the strongest financial incentive focused on that end result, while still recognizing persistence as an important step along the way.
How should definitions of “credential of value” align across higher education?
Texas is proposing to use the credential-of-value concept across multiple parts of its higher education funding system. As these models and definitions of value develop, the state should ensure they are working toward a consistent goal across sectors: directing public funding toward credentials that have demonstrated value in the workforce. Alignment in the definition and measure of that value will ensure state incentives reinforce one another, while still allowing for differences across credential types.
How should the model support Texas’ broader higher education goals?
The university funding model should be designed as part of a broader higher education finance system, not in isolation. The weights and rates should reinforce statewide priorities, including credential attainment, workforce alignment and successful transfer, while complementing the outcomes Texas already funds through the community college finance system. Aligning incentives across sectors can help ensure that universities earn rewards for outcomes that support the state’s overall goals and that the model does not unintentionally create competing incentives between community colleges and universities.
The committee’s report answers none of these questions. They are the ones worth watching as lawmakers take up the recommendations in the 2027 session.
