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Ontario funding formula hurts students

Province should consider outcome-based funding
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The University of Toronto estimates that it will receive approximately $665 million in direct provincial funding this financial year, which constitutes 34 per cent of its $1.9 billion operating budget. After tuition fees, this is the university’s largest source of funding. The question of provincial funding lies at the bottom of almost any debate you can have about the university.

While the total amount of money that the province spends on post-secondary education is important, the funding formula, or the method by which the government decides how much money each institution is allotted, profoundly affects the post-secondary education (PSE) system. As the government struggles to balance the provincial budget, it is difficult to imagine that Ontario will have more money to spend on universities in the near future. Pushing the government to make accessible and well-funded post-secondary education a priority is certainly important, but convincing it to distribute its current funding more effectively is a more practical goal.

The government already uses financial incentives to pressure universities. The vast majority of provincial funding is currently distributed according to enrollment: the more students you have, the more money you get. The advantages of this system are its simplicity, and that it encourages universities to educate more students.

However, closer investigation reveals a perverse incentive, a situation where the formula encourages undesirable behaviour. In order to secure more funding from the province, the university is encouraged to admit more students, but has little funding incentive to support its students, or to ensure they succeed.

The impact of the funding model on U of T is obvious from the way that the university has grown over the past few decades. U of T has increased its undergraduate enrollment far beyond the level of its global competitors in order to secure public funding to support its world-class research. A vast increase in undergraduate enrollment allows more people access to the university, but this is not necessarily a good thing. Many students who go to U of T are running up thousands of dollars of debt to earn a degree that is no longer a guaranteed path towards employment. Systemically, our universities have an incentive to admit students, but no incentive to give them value for their money.

Reassuringly, an arms-length government advisory organization, the Higher Education Quality Council of Ontario, has produced two reports recommending that Ontario explore a differentiated funding model. This would see universities identify areas of specialty — which, for U of T, would almost certainly be research — and have part of their funding assessed based on their success in those areas.

This is encouraging, but the government should also consider a model that was recently implemented in Tennessee’s public PSE system, outcome-based funding. In this system, the government or institution establishes certain criteria for success, and funding is assessed according to performance in those areas. Criteria can include a variety of factors, such as graduation rates, graduate success in employment or further education, and student satisfaction.

Paying universities for being successful is not only a common-sense solution, but is inherently more nuanced than enrollment-based funding, allowing the government to designate more than one metric for assessing funding levels.

This also means that outcome-based funding is easily compatible with differentiation, given that different universities can be assessed using different criteria, depending on their institutional purposes.

Using multiple criteria also allows the government to avoid the most obvious perverse incentives of funding based only on graduation rates. Funding based solely on graduation rates would encourage universities to exclusively admit students who are already very likely to succeed, and to devalue the degrees they offer to make it easier to graduate. It’s essential that outcomes be measured in a more nuanced way, and that steps are taken to encourage universities to admit less privileged applicants.

It is not easy to measure many of these criteria, and the devil will be in the details of whatever new formula the province develops. However, positive changes to the immense financial incentives that the government sets for universities will go a long way towards fixing what is broken in our post-secondary education system.

The fundamental strength of a properly set up outcome-based system is that it encourages universities to admit only as many students as will truly benefit from the education they offer. This is not the case under our current enrollment-based system, where universities benefit from admitting as many students as they can possibly accommodate, even if many students are not successful or do not benefit in the long term from the time and money they spend here.