Compacts & Contracts: A Colorado Case

The National Governor’s Association released a report over the weekend calling on states to implement compacts with colleges and universities. It’s a growing trend in higher education, and it deserves a closer look.

The most innovative higher education funding scheme comes from Colorado. In 2005, the state began allocating higher education money based on a student-stipend program called the College Opportunity Fund. Money follows in-state undergraduates to their chosen institution. Students complete a short application in order to be eligible, and the stipend is good for only 145 credits. All stipends to public institutions are equal, and privates get about half that amount. Every institution that opts to participate must agree to a performance contract with the state. The state may purchase fee-for-service contracts for graduate schools, rural education, economic development services, and dual enrollment programs.

Advocates argued the stipend program would increase college attendance for traditionally underserved populations. They argued these students and families suffered more from lack of information about the affordability of higher education than from actual financial limitations. Publicizing the stipend as a use-or-lose system would theoretically address this problem. Accountability schemes in higher education struggle with the principal-agent problem--who exactly is the “client,” students or the state? By setting all stipends equal and allocating funding entirely based on student enrollment, the state has effectively said students are.

National CrossTalk published an in-depth look on Colorado’s stipend program last winter, and they found some things working and some not: the 145 credit limit appeared to be pressuring students to complete college quicker, colleges had almost immediately raised tuition levels to compensate for years of inadequate funding, and the fee-for-service measure had been implemented in such a way that state funding levels remained almost exactly constant. Most important to the program’s success, although current students failed to comprehend the reason for the change, students as young as eighth grade are already registering for the stipends.

Choice requires information, and there will not be symmetry in who has it. Part of the state’s role, then, should be to inform the consumers of their options, or mandate the producers (universities) provide enough data for real choices. That doesn’t appear to be happening. Another gaping hole in this design is that it is entirely state-based. Institutions have no incentive to attract international scholars or high-caliber students from other states, because they’ll receive $0 for enrolling these “clients.”

Before switching to performance contracts with individual institutions, Colorado had a performance-based funding mechanism in place. About 2% of the total general funds in FY2001 were allocated to the governing boards based on performance results. Moving away from this funding scheme to a contractual system means the accountability mechanism has shifted from (admittedly limited) financial consequences to legal ones. The devil is in the details, and we’ll have to wait and see how enforceable the four-year contracts turn out to be.

Contracts are not a panacea. More states should experiment with various accountability tools to better manage this country’s higher education institutions. Kudos to the NGA for featuring various state attempts to do so.