Case Study: Texas State Technical College

Debates too often ignore the institutional incentives at the root of workforce development. When the public subsidizes higher education, it typically pays for current enrollment, measured by the “credit hour.” More students enrolled in more courses means more funding, regardless of any relationship to course completion, graduation, or employment success.

For decades, Texas State Technical College (TSTC) operated on that basis, mustering extraordinary effort every term to maximize its enrollment numbers. When Mike Reeser became chancellor and CEO of TSTC in 2010, some states were pivoting toward formulas that rewarded outcomes-based measures such as credit completion, persistence, and graduation rate. Those were an improvement, but struck him as still too far removed from his vision as a workforce college. The single objective was supposed to be training and placing a skilled workforce with Texas employers.

Through two years of collaboration with Texas policymakers and the Texas Higher Education Coordinating Board, Reeser and his team developed the nation’s first “value-added accountability funding formula.” In 2013, the legislature adopted the model.

The Value-Added Funding Formula

Under the new model, 100% of the formula-driven portion of the state funding allocation to TSTC would be informed by the following process:

1.     List of eligible students: TSTC would generate a list of all students who had completed at least nine semester credit hours as part of a given cohort, regardless of whether they had graduated.

2. Generation of workforce data: Using the Automated Student and Adult Learner Follow-Up System authorized by the Texas Legislature in 2003, which allows institutions to monitor student workforce outcomes while complying with Family Educational Rights and Privacy Act  regulations. Wage information for each student is analyzed to determine annual wages over the past five years, adjusted for inflation. Typically, data for 75–80% of students are available; the remainder are predominantly students who have moved out of state. 

3.     Direct and indirect value-added calculation: Direct value-added is defined as the incremental state tax revenue attributable to former TSTC students’ earnings, calculated as 7% of the difference between a student’s annual income and a base wage representing a full-time employee earning minimum wage. Indirect value is calculated as 1.5 times direct value. Direct and indirect value-added are summed together for the five years following each student’s departure from campus. 

4.     Division between the state and TSTC: Value-added is divided 50–50 between the state and TSTC, with TSTC’s funding based on its share. TSTC then generates a value-added score for each campus based upon the proportion of TSTC’s total value-add generated by students from that campus, driving the proportion of total TSTC funding assigned to a given campus.

In colloquial terms, TSTC campuses receive funding based on the incremental tax revenue generated by TSTC students in the five years after they depart.

A Transformational Model

This funding formula has transformed the operations of TSTC. For example, decision making at every level is now driven by the primary question, “How can we put more Texans to work in great-paying jobs?” Faculty and administrators alike understand that TSTC students who do not have well-paying jobs do not generate funding for the college. This new reality created new priorities and practices.

Each academic program now tracks its performance in relation to the common objective using a real-time dashboard of key performance indicators. A central business intelligence unit guides the college in seeing the relationships among the skills requirements of the labor market, the learning outcomes contained in various credentials, and the employment and wage outcomes of students. Each degree or certificate program is subject to the same standard: “Are you earning your keep?” The administration sunsets bottom-ranked programs and reallocates the recovered resources to create programs that offer more promising career pathways for students.

In the past decade, 12 programs have closed due to poor earnings and placement outcomes, including in agriculture, computer maintenance, pharmacy tech, and dental assisting. The act of closing a program is rare in higher education and certainly not without controversy. Phasing out one program while ramping up another is also hard work and can adversely affect enrollment. Program closure led to a 25% enrollment decline, from 12,000 to 9,000 students.  But TSTC would rather take a temporary reduction in enrollment than offer programs lacking a strong employment value for students. Today, enrollment is 12,368.

Under the enrollment-based funding formula, the financial incentive was to make every credential require as many credits as possible. After all, more contact hours meant more funding. Today, credential length is determined by the hiring preference of Texas employers. In a growing number of cases, shorter credentials with deeper specialization were preferred over longer, generalized credentials, like associate’s degrees. For example, some students are opting for fast-to-work credentials that take a semester or less to complete.

Key Lessons

At the start, internal and external critics abounded. As TSTC Vice Chancellor Michael Bettersworth reflects, “Our administrators are zealously entrepreneurial, and many bring business sector experience and recognition that successful operations must constantly change to stay relevant in evolving environments. That often means calculated risks aimed toward innovative change.”

Since implementing the new funding method, TSTC graduates have seen a 34% increase in starting wages ($42,341 in 2010 to $56,740 in 2023), and the number of students placed in jobs each year is up 56%, growing from 1,393 to 2,173 for the same period. Placing more students in higher-paying jobs has generated a a 79% increase in combined, 5-year graduate earnings from 2010 to 2019 and a 156% increase in administration and instruction formula funding (from the 2014/2015 biennium to the 2022/2023 biennium at 100%).

Important lessons from the TSTC experience include:

• States must collect the data. Without an Unemployment Insurance wage record–based student follow-up system, the TSTC funding formula would not have been possible. Practically every state has this capacity, the magic is less in the collection and more in the policy-focused application. 
• Everyone must accept that the data is imperfect. Students make use of programs in unconventional ways or move out of state for work. The job that they accept may not be in the same field of study as their credential, and wages can never be attributed directly to the education that they received. A perfect system? Absolutely not. But it achieves its objective: capturing the direction of change in how TSTC contributes economic value to Texas.
• Long-time stakeholders may struggle with the changes. The swift, deep institutional pivot profoundly changed the TSTC ethos. During the early years, some employees who had been with the college for decades struggled with the new expectations. For a time, turnover increased and morale declined, says Reeser. The immutable commitment of the college’s administration and board, and constant communication throughout the institution, was vital for long-term success.

TSTC is continuing to innovate, moving from time-bound classes and schedules to competency-based pathways with multi-entry, multi-exit calendars and open labs. Soft skills embedded in the training curriculum and training labs are taught and assessed. Form follows the function of connecting Texans with good jobs.e-bound classes and schedules to competency-based pathways with multi-entry, multi-exit calendars and open labs. Soft skills embedded in the training curriculum and training labs are taught and assessed. Form follows the function of connecting Texans with good jobs.