How to Fund (1)

Posted on February 14, 2017 by Alex Usher

Over the next three days, I want to talk about funding formulas. I know I did this a couple of years ago, at the start of the Ontario funding formula review exercise (see here, here, and here, but it’s worth revisiting partly because I’m cheesed off at how Ontario managed to botch the review, but also, it’s because I’ve been looking at funding formulas in Europe and the US for article I’ve been writing, and it’s absolutely stunning to me how pretty much everyone except Canada has some kind of performance measurement in their formula, but we can’t because everyone is afraid of creating “winners” and “losers”. So today I’d like to give you a kind of grand overview of how funding formulas actually work, tomorrow I’ll have an overview of how formulas work in various parts of the world and then on Thursday I’ll come back to blow off steam about Ontario.

Are you sitting comfortably? Then I’ll begin.

There are basically seven ways governments can hand money over to institutions. They are, in more or less ascending order of policy sophistication:

Negotiated Budgets. Most of the developing world works on this system. An institution tots up its wish list for the year, shows up at the Minister’s office, which says yea or nay to a variety of requests, and that’s that. The government is under no obligation to treat institutions in the same manner and so “favoured” institutions often make out pretty well under this system. This system tends to exist in countries where trust in institutions is low: effectively this system gives government a line-by-line veto over institutions budgets.

Historically-based lump sums. This is more or less how it’s done in most Canadian provinces. Government looks at what they gave each institution last year (which probably has at least some relationship to costs and outputs) takes a gander at provincial finances this year, and decides what everyone’s going to get in consequence this year. It’s a step up on negotiated budgets in the sense that everyone gets treated more equally. In provinces like Newfoundland and PEI, where there’s only one institution, this systems makes sense (because really, why make a formula when there’s only one institution?). It probably makes less sense in Alberta, which also uses it.

Enrolment-based funding. In most of North America, including Canada’s two biggest provinces, the majority of cash transferred by governments to institutions is simply based on the numbers of students enrolled, with more expensive programs given an extra “weight”, allegedly based on real costs (so, a medicine student is worth 5x an arts student, etc.). These weights vary quite a bit from jurisdiction to jurisdiction so it’s a bit dubious that they are really based on “actual costs”. It’s better to think of them as consensual fictions which are mutually convenient for both institutions’ and government’s planning purposes. (Intriguingly, during the Ontario funding formula discussions, one of the most urgent pleas from institutions was “don’t mess with the subject weightings”. Make of that what you will.)

Output-based Funding. Fitfully, the world is moving to various types of output-based funding. In the US that means small amounts of funding based on various measure of progress/completion; in Europe, it’s quite large amounts of funding, usually some combination of student output and research outcomes. Where it is based on student funding, the money is often weighted by the discipline from which the student graduate, just the way enrolment funding is. Note that output-based funding is not the same thing as outcome based funding. There are a very few places which get funded based on student employment rates or student loan default rates (though the Harris government in Ontario did give that a try for awhile and countries like Finland do incorporate employment outcomes in funding decisions at the margins).

Competitive Funding. In Canada, we traditionally think of competitive funding as occurring at the level of the individual researcher. But increasingly, we’re seeing funding being competitive at the institutional level (think CFI, think CFREF). In other countries – particularly those which provide money for teaching and research in two separate envelopes – this has been the norm for a long time.

Mission-based funding. There are a few places – Austria in particular – where funding is at least partially conditional on fulfilling a particular mandate or reaching a set of goals. (Arguably, British Columbia uses this method, but the conditions are softer than in Austria). In some ways this is a throwback to a negotiated budget system, but with an actual check for “return on investment”.

Other Stuff. Governments hand out money for all kinds of reasons. Some are recurrent, such as being a Northern university (in Ontario, anyway) or a university serving the French community. In some countries you will see special envelopes for institutions to maintain art galleries and museums. Then there’s the stuff which is basically play-money for ministers wanting to make a few headlines: throw-away money for a new building here, a new building there, money for mental health initiatives, or entrepreneurship centres, or what have you. Most often seen in election years.

(If you want to split hairs, there’s an eighth way: subsidizing student tuition dollars through loan and grants. But we’ll stick to the direct methods of subsidy for now).

Most jurisdictions of course use multiple means of dispersing funds. For instance, though a majority of the world’s jurisdictions provide funds primarily as “negotiated”, “lump-sum” or “enrolment-based formula” systems, they still often have pockets of money given out competitively, or as “other” funding.

Internationally, what is striking about Canada (and to some extent the US) is how reliant they are on methods 2 and 3 compared to Europe which on the whole uses method 4 (output-based funding) a lot more. I’ll show those differences in more detail tomorrow.