A promising higher-education funding model ties institutional incentives to labor-market outcomes.


Public debates about higher education tend to center on affordability and value. Post-secondary degrees have become more expensive and more necessary, even as former students increasingly struggle with long-term debt and underemployment. What our debates too often ignore, however, are the institutional incentives at the root of these challenges. When the public subsidizes higher education, it isn’t paying for measurable, long-term outcomes; it’s paying for current enrollment.

For decades, Texas State Technical College (TSTC) was like most higher education institutions in America. Public funding was based upon the Carnegie Unit, more commonly known today as the “credit hour” or “contact hour.” In practice, that meant that our financial wellbeing was driven by our class enrollment on the official Census Day of each academic term. Why? Not because enrollment on that day predicted course completion or graduation or employment success for our students, but simply because Texas calculated funding allocations for higher education institutions based upon this single metric.

Since our fiscal viability depended on public funding, the entire college mustered extraordinary effort every term to maximize our enrollment number by Census Day. The fact that financial frameworks drive institutional focus should surprise no one, but it frustrated our leadership team to see so much energy devoted to a metric that is so far removed from the true benefit the college provides to students and the Texas economy.

When I was appointed chancellor and CEO of TSTC in 2010, more and more states were pivoting from funding formulas driven by access and enrollment to formulas that rewarded outcomes-based measures such as credit completion, persistence, and graduation rate. We could see that these new outcomes may be the right ones for certain types of higher education institutions, but they struck us as still too far removed from our vision as a workforce college. For more than five decades across our 10 campuses and 9,000 students, our single objective has been training and placing a skilled workforce with Texas employers.

Though a funding formula is about money, we knew the biggest hurdle in this new method was the cultural shift that would be needed within the college to pivot our primary focus from maximizing inputs to maximizing outputs. So, going all-in with an outcomes-based funding method was the best way to clear this hurdle. Accordingly, we resisted suggestions for splitting the funding formula between enrollment and employment outcomes. TSTC was convinced that an approach that split the funding drivers would also split the operational imperatives within the college, thus jeopardizing the transformation. With that conviction, we advocated for all or nothing.

Through two years of collaboration among TSTC, the Legislative Budget Board, the Texas Workforce Commission (TWC), and the Ray Marshall Center at the University of Texas at Austin’s Lyndon B. Johnson School of Public Affairs—and under the guiding leadership of the Texas Higher Education Coordinating Board (THECB)—we developed the nation’s first “value-added accountability funding formula.” In 2013, the legislature adopted the model.

The Mechanics of the Value-Added Funding Formula

The implementation of the new funding formula was enabled by the Automated Student and Adult Learner Follow-Up System (ASALFS), authorized by the Texas Legislature in 2003. The system was designed to allow institutions to monitor student workforce outcomes while complying with Family Educational Rights & Privacy Act (FERPA) regulations.

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

  1. List of eligible students: TSTC generates a list of all students who have completed at least nine semester credit hours as part of a given cohort. This list includes graduates and students who departed without graduating. (It was important to us that all students—not only graduates—informed our funding to eliminate any perverse incentives to “counsel out” students who might not have a positive impact on our workforce data.)
  2. Generation of workforce data: Using the ASALFS data, wage information is analyzed to determine annual wages over five years, adjusted for inflation. The TWC is typically able to match 75–80% of the names submitted by TSTC; the remainder are predominantly students who have moved out of state. Wages not reported to the TWC are also not captured.
  3. Direct and indirect value-added calculation: Direct and indirect value-added are calculated. Direct value-added is defined as the incremental state tax revenue attributable to former TSTC students’ jobs, calculated as 7% of the difference between a student’s annual wages and a base wage representing a full-time employee earning minimum wage. Indirect value is calculated as 1.5 times direct value.1This multiplier was selected based on a 2011 U.S. Bureau of Economic Analysis study: Zoë O. Ambargis, Thomas McComb, and Carol A. Robbins, “Estimating the Local Economic Impacts of University Activity Using a Bill of Goods Approach” (BEA Working Papers 0074, Bureau of Economic Analysis).
  4. Addition of total value-added over five years: Direct and indirect value-added are summed together for the five years following departure for all students by campus.
  5. Division between the state and TSTC: Value-added is divided 50–50 between the state and TSTC. TSTC’s share informs its total allocation.
  6. Campus-specific calculation: A value-added score is calculated for each campus based upon the proportion of TSTC’s total value-add generated by students from that campus. This proportion then drives the proportion of total TSTC funding assigned to a given campus.

The New TSTC

As intended, the new 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 work in well-paying jobs do not generate funding for the college. This new reality created new priorities and practices.

Academic programs have transformed into business units. We’ve built a culture of agile, data-driven analysis, and each business unit now tracks its performance in relation to our common objective using a real-time dashboard of key performance indicators. Our new business intelligence unit guides the college in seeing the relationships among the skills requirements of the labor market, the learning outcomes contained in our various credentials, and the employment and wage outcomes of our students.

“Faculty and administrators alike understand that TSTC students who do not work in well-paying jobs do not generate funding for the college. This new reality created new priorities and practices.”

Each degree or certificate program that we offer is subject to the same standard: “Are you earning your keep?” We regularly consider diversification, yield, and market trends—and we sunset the bottom-ranked programs and reallocate the recovered resources to create programs that offer more promising career pathways for students. So far, 14 programs have closed due to poor earnings and placement outcomes; these programs were in the areas of agriculture, computer maintenance, pharmacy tech, and dental assisting.

The act of closing a program is rare in higher education and certainly not without controversy. But an outcomes-based approach requires making these tough decisions. Phasing out one program while ramping up another is hard work. It can adversely affect enrollment. However, we decided that we would rather take a temporary reduction in enrollment than offer programs lacking a strong employment value for students.

As a result of the closure of those 14 programs, our enrollment dropped by 25%, from 12,000 to 9,000 students. This was a painful but necessary trade-off as we reallocated finite resources to more market-relevant offerings that would see greater student salaries and higher placement rates. In the long run, enrollment will recover as the competitive value of these new offerings and delivery methods attract more students and employer partners.

The new formula also pushed us to take a more active role in helping our alumni get jobs. No matter how well trained they are, graduates do not support our financial sustainability until they are employed, so we have implemented new strategies, including:

  • Money-Back Guarantee: For select programs, students are eligible for a complete refund if they do not have a job within six months of graduation.
  • Rapid Skills Training: We launched 12 rapid upskilling and reskilling training programs with completion times as short as seven weeks, with another dozen programs in the works.
  • Bachelor’s+: Instead of transferring students to a four-year institution, we partnered with flagship university Texas A&M to train undergraduate engineering students in critical workplace skills to boost their employment prospects.

We also learned that a refresh of our product mix was needed. Under the census-based funding formula, our inherent financial incentive was to make every credential as long as possible. After all, more contact hours meant more funding. Today, our 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. So, our product mix has broadened, and the credential length has shortened. For example, some students are starting to opt for fast-to-work credentials that take a semester or less to complete.

Early Metrics

The early results indicate that we are moving in the right direction. Since implementing the new funding method, TSTC graduates have seen a 41% increase in starting wages ($31,112 in 2009 to $44,103 in 2019), and the number of students placed in jobs is up 64%, growing from 1,505 to 2,465 for the same period. Placing more students in higher-paying jobs has generated a 143% increase in combined graduate earnings and a 41% increase in the administration and instruction formula funding (from the 2014/2015 biennium to the 2022/2023 biennium at 100%).

These impressive numbers are not the only benefits seen at the college. As the old saying goes, “Success begets success,” and that notion is at play in our college culture, too. As programs and employees see the growth in student placements and wages realized, their motivation to achieve better results grows. Programs have concluded that their future is determined by factors within their control, and this empowerment has led to better faculty and staff engagement.

Overcoming Structural Barriers and Institutional Resistance to Change

When we set out our vision, 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.” The following are critical challenges we encountered and how we have addressed those challenges.

  1. It will be (almost) impossible to collect all of the necessary data. Without a UI wage record-based student follow-up system, the TSTC funding formula would not have been possible. Practically every state conducts some form of automated student follow-up using UI wage records. But, as with most data, the magic is less in the collection and more in the policy-focused application.
  2. Even with access to the data, there will be lots of holes, and proving causality will not be possible. Even after surmounting the obstacles to data access, we found significant holes in the data, such as students who move out of state following graduation and high school students completing dual-credit enrollment. In addition, the data does not reflect whether a student is working in the field of study and cannot assess the extent to which the education received accounts for wages earned. In the absence of a better alternative, we accepted this inherent messiness. We accepted that 20% of our students would likely not be counted. A perfect system? Absolutely not. Overall, though, it achieves its objective: It captures the direction of change in how we contribute economic value to Texas.
  3. An employment-focused mission may conflict with other higher education goals. Detractors frequently argue that higher education should not just be about preparing workers. It should be about cultivating knowledge, developing critical thinking skills, conducting research, promoting the advancement of scholarship, and perhaps even helping students to discover themselves. We argue that there is great diversity in types of higher education institutions. TSTC is a workforce college, and alignment between funding and mission is essential. So, we focus on maximizing student employability by providing fundamental academic knowledge, world-class technical training, and critical workplace essentials such as problem solving, critical thinking, teamwork, and communication.
  4. Long-time stakeholders may struggle with the changes. The swift, deep pivot profoundly changed the TSTC ethos. During the early years, some employees who had been with the college for decades expressed concern for the disruption of the TSTC they had come to know. Many struggled with the new expectations, like higher levels of personal accountability. For a time, this discontent manifested in higher turnover and lower morale. The keys to persevering were the immutable commitment of the board and administration and constant communication throughout the organization.

The Future of TSTC and Employment-Focused Education

We knew we would see big challenges when we committed to this novel path. After a decade of extraordinary changes, TSTC is better positioned now than ever before to strengthen the competitiveness of Texas business and industry by building the state’s capacity to develop the highest quality workforce. We have established simple, stable, aligned goals and incentives. We have empowered management at all levels to implement innovative business practices. We have increased autonomy and accountability in decision-making.

“Our demonstrated success should bring hope for renewal in higher education, a system that better enables Americans to be productive contributors and build decent lives.”

With the enabling environment established, we are now prepared to tackle a vast body of work that lies ahead, including transformations that would have been impossible under the contact hours model. Our conventional rhythm of three annual terms with time-bound classes and schedules will be replaced with competency-based pathways with multi-entry, multi-exit calendars; open labs; flipped classrooms; and “gamified” curricula. Our training environments will be structured in ways that are fashioned like the workplace, not the lecture hall. Soft skills embedded in the training curriculum and training labs will be taught and assessed. Business hours will expand to include nights and weekends and, as a result, nontraditional students will find a friendlier environment. So, too, will those who seek lifelong learning by “dropping in and out” of college whenever their career objectives evolve and new skills are needed.

Students will have payment flexibility, too. Conventional tuition-based plans will be joined by monthly-fee, all-you-can-study plans. Some programs may also offer income share agreement options to students who need to study now and pay later.

The transformation at TSTC may not be replicable at every workforce college. Policymakers and education leaders will need to assess their own goals, strategies, and students’ needs. Nevertheless, the recent reforms at TSTC offer a powerful case study in the importance of funding incentives to achieving education goals. Our demonstrated success should bring hope for renewal in higher education, a system that better enables Americans to be productive contributors and build decent lives.

This article was originally published by Social Finance, Inc., and the Federal Reserve Banks of Atlanta and Philadelphia in a book entitled Workforce Realigned: How new partnerships are advancing economic mobility (p. 110; Copyright 2021). It has been adapted by its original author and reprinted here for noncommercial, educational purposes only, as permitted by the original publishers.

Mike Reeser
Mike Reeser is the chancellor and CEO of Texas State Technical College.
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