Kentucky’s Performance Funding Design Should Work to Prevent Unintended Consequences Reported in Neighboring States
A new book by leading education policy researchers highlights some of the unintended consequences resulting from performance funding for higher education in three of Kentucky’s neighboring states — Indiana, Ohio and Tennessee. As we’ve discussed previously, while at its best performance funding would promote successful outcomes for all students, in practice the models may result in low-income, low-skilled adults being left behind.
These lessons need to play a more prominent role in the development of a performance funding model for Kentucky’s public postsecondary institutions, as the state’s appointed work group gets closer to proposing a specific model to the legislature.
Performance funding in higher education is when a portion — or potentially all — of state funding for public universities and community colleges is tied to institutions’ performance, with states creating metrics and systems for allocating funds. In Kentucky, five percent of state funding for higher educational institutions will be tied to performance in 2018, and it is expected that share may increase in the future. Currently a work group consisting of presidents of the universities and the community college system, the state budget director, a representative from the governor’s office and two legislators, along with the president and staff of the Council on Postsecondary Education, is meeting to develop recommendations for a performance funding model before the end of the year. The work group has had two meetings so far and the next one is scheduled for November 2.
The unintended consequences of performance funding reported by faculty and institutional administrators in Indiana, Ohio and Tennessee should be of concern to Kentucky’s work group and lawmakers. As noted in the new book:
“If higher retention and graduation numbers are purchased at the cost of restricting the admission of less prepared and less advantaged students or of lowering academic standards, this could well vitiate the benefits of performance funding. We need to move to vigorously counter these unintended impacts.”
When institutional funding is tied to degree attainment, for instance, universities and community colleges may experience pressure to admit only students who are the most likely to graduate and in a timely manner. Low-income students — particularly adults and first generation college students — are among those who experience the most difficulty completing a degree, meaning they end up being the students left behind in a performance funding system that does not address such consequences.
Institutions Restricting Admissions to Improve Perceived Performance One of Several Dangers
According to the book, performance funding can and has resulted in universities and community colleges restricting student admission in our neighboring states and was the most frequently reported unintended consequence. Reports included the raising of admission requirements in terms of grades and test scores, the recruiting of more students who are better prepared for college and the directing of institutional aid to academically better prepared students.
A related unintended consequence reported by faculty and administrators in Indiana, Ohio and Tennessee is that performance funding has or can lead to institutions narrowing their missions — where important institutional missions are dropped or deemphasized because they are not addressed by performance funding metrics. Such a consequence should be of concern to our state as Kentucky’s Postsecondary Education Improvement Act of 1997 established separate missions for its research universities, regional universities and community colleges. The mission of the state’s regional universities is to assure statewide access to quality bachelor’s and master’s degrees, and the community college system is tasked with promoting access to a two-year course of general studies, workforce training, and remedial and continuing education. These differing missions would seem to require different measures of performance. It would be detrimental if the state adopted a model of performance funding that reduced access to education for some Kentuckians currently served by the state’s regional universities and community college system.
Other unintended consequences of performance funding described in the book are the weakening of academic standards, with faculty and administrators concerned about grade inflation occurring as the result of pressure created by performance funding; reductions in degree requirements is another such impact. In addition, performance funding was associated with reduced cooperation between institutions, lower faculty and staff morale, and compliance costs.
Heavier Weighting for Disadvantaged Students Among Ways to Lessen Unintended Consequences
At its last meeting, Kentucky’s performance funding work group began focusing its attention largely on measuring performance in terms of improvements in degree attainment, with an institution receiving more credit for degrees earned by students who often face barriers to graduation such as low-income, minority and academically underprepared students. While including the weighting of degrees for these students is one step toward preventing unintended consequences, it alone is not enough to avoid the issues described above; in fact, Indiana, Ohio and Tennessee all included weights for at-risk students in their models.
Here is what the book’s authors recommend to create a model that addresses the unintended consequences of performance funding for higher education:
- Including metrics for, at the very least, low-income, racial minority, adult and academically underprepared students. As mentioned previously, so far Kentucky’s performance funding work group plans to recommend weighting degree attainment more heavily for most of these at-risk categories of students; however, not much attention has yet been given to how heavy the weights would be. The performance funding book’s authors suggest that increasing these weights in our neighboring states could have a positive impact. Closing achievement gaps as a separate performance metric is another option. While this idea was incorporated into the Council on Postsecondary Education’s original proposal last year, it has not been a focus of the state’s performance funding work group so far.
- Another important strategy is adopting performance criteria that rewards intermediate outcomes as well as longer term ones like degree completion — for instance, completion of a first course in developmental education, the transition from developmental education to a first credit bearing course and/or the attainment of the first 15 and 30 credit hours of college level instruction.
The book also emphasizes the importance of universities and community colleges being able to afford to make necessary changes to increase performance. It is costly for institutions to provide the supports and services needed in order to promote success for the state’s low-income, adult and academically underprepared students. The performance funding work group is limited to the funds that were included in the budget for 2018, which are reduced substantially after many rounds of budget cuts in recent years.
As Kentucky’s performance funding work group continues its conversations next week, those involved should keep in mind the lessons of our neighboring states and make the prevention of these unintended consequences a central focus so that all Kentucky students can be successful under the new funding model.
A study recently published in the American Sociological Review validates efforts to strengthen investments in education, health and other key areas by cleaning up tax breaks for those at the top. The finding – that millionaires are unlikely to respond to tax increases by moving – is important for Kentucky, where our upside-down tax code (it asks the least of those with the most) has led to deeply underfunded investments.
Millionaires Are Less Likely to Move
The Stanford University authors of “Millionaire Migration and Taxation of the Elite: Evidence from Administrative Data” challenge the notion that wealthy people are highly mobile and move from state to state “shopping” for low tax rates. Instead, 13 years’ worth of tax returns for millionaires show they migrate less than the general population and in fact, the migration rate “drops steadily with income.”
A compelling explanation is the idea of “elite embeddedness:” those at the top have strong social and economic ties to the region in which they have succeeded financially – in other words strong “place-based social capital” that comes from years of relationship-building. That makes it difficult for millionaires to move including in response to increases in income tax rates. Demographically, those at the top:
- Tend to be the “working rich” who already have employment, whereas a key reason for migration is to pursue employment opportunities;
- Are generally further on in their careers, as opposed to recent college graduates who are beginning at lower income levels and among whom migration is more common;
- Are more likely to be married, have kids in school, own homes and businesses – additional factors that discourage migration.
Supporters of regressive or upside-down taxation may be able to point to examples of millionaires who leave states with more progressive state tax policies: certainly such anecdotal evidence exists, especially when the state in question is Florida, where a tropical climate and luxury accommodations draw wealthy migrants. But after applying rigorous statistical analysis to tax data to see whether millionaires nationally relocate from high-to-low-tax states, the authors conclude that millionaire tax flight occurs “only at the margins of statistical and socioeconomic significance.” That means Kentucky could increase taxes on the top and benefit from additional revenue for investments in schools, health and other important areas, without causing meaningful out-migration.
Another part of the study examines whether millionaires specifically along state borders cluster on the low-tax side. Cross-border studies provide certain “natural controls” for social, cultural, and environmental differences that help isolate the possible impact of tax difference from other variables. In other words, top earners can choose to live on either side of the border, and consequently in either state, without forgoing access to the common market, cultural life or climate. The study finds that millionaires neither locate consistently on the low-tax side of the border, nor do they relocate to the lower-tax side of the border in response to tax changes. These findings cast a shadow on the claim that Kentucky loses out to Tennessee based on our comparatively progressive tax structure.
We Could and Should Fix Kentucky’s Upside-Down Tax System
Kentucky’s tax system is less upside-down than Tennessee’s, but certainly has room for improvement. Though our incomes taxes are slightly progressive — rising as a share of income for the bottom four quintiles then leveling off at the top — our state and local tax system on the whole is regressive. Specifically, with billions of dollars in tax breaks and a top rate on income over $75,000 of 6 percent, our individual income tax is not sufficiently progressive to offset other regressive taxes, namely the sales tax. In 2015, the middle 20 percent of Kentucky earners (making between $30,000 – $50,000) paid 10.8 percent of family incomes in state and local taxes, while the top 1 percent (making more than $330,000) paid only 6 percent.
Source: Institute on Taxation & Economic Policy
This distribution is bad policy for a number of reasons:
- An upside-down tax system leaves money on the table that could be collected to support investments in a stronger state for everyone – without causing those at the top to flee.
- In an economy where an increasing share of growth goes to those at the top, asking the most of those for whom the economy is underperforming undermines fiscal health.
- Relying more heavily on low- to middle-income earners to fund services is bad for an economy driven by consumer demand, since they spend most or all of what they have on basic needs.
Cleaning up income tax breaks favoring those at the top would be an effective strategy to turn our tax code right-side-up and generate revenue for stronger public schools, college affordability, sustained investments in the health of our families and communities, modern and reliable infrastructure, great parks and a safety net that serves all Kentuckians in difficult times. The Institute on Taxation and Economic Policy estimates that a 3.9 percent surcharge on millionaire’s income in Kentucky, for example, would generate $100 million in new revenue for these investments.
This column originally ran on KyForward.com on Oct. 31, 2016.
Last week, the Kentucky Supreme Court pulled the rug out from under tens of thousands of low wage workers in Lexington and Louisville by ruling localities don’t have the authority to raise the minimum wage.
The court’s decision was a blow to local leadership that had stepped up to boost sagging wages. In 2014 Louisville established a minimum wage that would rise to $9 an hour by 2017, benefiting 45,000 workers, while last year Lexington went further with a minimum rising to $10.10 an hour by 2018, assisting 31,000 workers.
These cities had taken action because of the failure of state and federal governments to increase the minimum wage, which has lost about one-fourth of its value since the late 1960s. Louisville’s was the first local law in the entire South, while Lexington’s was the third.
Action on the minimum wage is a critical part of an overall strategy to lift wages across the bottom and middle of the workforce. In Kentucky, those wages fell by 7 percent between 2001 and 2014 after adjusting for inflation. While wages finally rose last year with an improving economy, evidence suggests momentum may have stalled since.
More broadly, the gains from economic growth over the last few decades have gone overwhelmingly to those at the top while many workers face difficulty making mortgage and rent payments, affording education for themselves and their kids, and saving for retirement.
A minimum wage increase is a key, simple policy change that can be a big help. And an increase aids not just low wage workers, but the economy as a whole as people have more money in their pockets to spend. It also results in savings on programs that help those struggling to get by: an increase to $10.10 an hour would save Kentucky $34 million on Medicaid expenses according to the Center for American Progress.
With the state Supreme Court stopping these local wage increases, pressure to fix the problem falls on higher levels of government. Minimum wage increases have been introduced in the Kentucky House of Representatives the last three years — passing two of those years only to fail in the Senate. And Congress is blocking an increase in the federal minimum wage. Impatience with congressional inaction has led 30 states and 29 localities across the country to raise their minimum wages.
Here in Kentucky, increasing the state-wide minimum wage and allowing local governments the freedom to go beyond the state minimum should be at the top of the to-do list when the General Assembly returns to Frankfort in January.
An increase in the state minimum wage to $10.10 an hour would boost incomes for 1 in 4 Kentucky workers, or about 300,000 Kentuckians. And permitting the duly elected bodies of local communities to go beyond whatever bar the state sets gives higher cost of living localities a chance to set a wage that will really make a difference in the future.
We’re now wrapping up a year marked in the news by (among other things) the anger of Americans at a government that doesn’t seem to be working for them. That’s rooted in an economy where jobs are too scarce and wages have been stuck even while corporate profits are at record highs and CEO salaries continue to soar.
This situation isn’t the natural outcome of market forces, as we are led to believe, but the result of leaders’ failure to take the side of working families even when the policies to do so are right in front of them.
The Path to a Stronger Commonwealth: Prioritizing Investments in Our Communities Over Tax Breaks for the Powerful
Kentucky faces a choice: cleaning up our tax code of special interest tax breaks so we can invest in excellent schools, a healthy and skilled workforce, modern infrastructure and other building blocks of thriving communities in the Commonwealth; or continuing to allow our tax code to be manipulated for the benefit of just a few, while essential investments fall farther behind. This report explores these two choices and provides direction for the road ahead. Moving forward means raising new revenue to invest in the foundations of thriving communities by cleaning up our tax code, eliminating breaks those at the top have managed to put there. Moving backward means undermining investments in a stronger state by failing to clean up tax breaks and continuing with more tax giveaways for those at the top.
You can view the report here.
by Linda Blackford