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By Dustin Weeden

In the next six years, the U.S. economy will create 24 million new jobs. Add the 31 million baby boomers set to retire, and the United States will need to fill 55 million jobs by 2020.

The Georgetown Center on Education and the Workforce estimates that 65 percent of these positions will require education beyond the high school level. Based on the current rate of degree production, however, the country will be approximately 5 million college educated workers short of what the economy will demand. 

Realizing the negative effect a shortage of educated workers will have on economic competitiveness, many states have implemented a range of policies to proactively address this gap and make their higher education systems more productive. Performance-based funding for higher education is one strategy states are using to increase educational attainment.

In the 20th century, states wanted to improve access to higher education and provided financial incentives for institutions to increase the number of students enrolled. The incentive to boost enrollment, however, did not lead to a productive higher education system.

While more students enrolled in postsecondary degree programs, many did not finish their programs and those that did finish often took longer to do so. Performance-based funding models change the incentive structure and reward institutions for producing strategically important outcomes, such as the number of students who complete degrees. Institutions receive more state funding when they focus on the state goal of increasing the number of educated residents needed to meet future workforce demands.  

Twenty-five states currently have a performance funding policy in place and five more are actively transitioning to a formula that allocates some funding based on institutional performance. States have taken a wide variety of approaches to implementing performance funding polices. In Tennessee for example, institutions only earn state dollars when they produce an outcome (such as a student graduating with a degree). Most states allocate a smaller portion—5 to 25 percent—of state funding to institutions based the outcomes produced. For details of each state’s plan, please visit the NCSL Performance-Based Funding website.

Dustin Weeden is a policy specialist in NCSL's Education Program.

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This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.

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