WASHINGTON, Aug 15 (Reuters) - As they struggle to recover from the recession, 12 U.S. states are tying funding for public colleges and universities to performance measures, Standard & Poor's Ratings Service said on Thursday.
"States are hesitant to fully restore higher education budgets because the rate of the economic recovery has been slower than expected," the rating agency said in a report. "Universities still have lower financial resources than before the recession, and major cost-containment and budget efforts continue."
Typically, states base the amount of money sent to universities based on enrollment. But Illinois, Indiana, Louisiana, Michigan, Minnesota, New Mexico, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee and Washington determine some portion of their higher-education funding using metrics such as retention rates and the number of low-income students who graduate, according to S&P.
Arkansas, Colorado, Missouri and Virginia are in the process of adopting their own performance-based funding, "and several additional states have had discussions or hearings about the topic," S&P said.
According to the National Association of State Budget Officers, state spending per student reached a 25-year low in 2010 of $6,278, when adjusted for inflation, and total higher education appropriations declined by 20 percent between 1987 and 2011. A study from the Center on Budget and Policy Priorities found that state governments now spend 28 percent less per student than they did in 2008.
Performance-based funding has become attractive to states because of "its perceived increase in accountability," and because they "believe they see a more demonstrable return on investment," S&P said.
The percentage of higher education funding tied to performance is still relatively small.
"However, with increasing pressure on state budgets for accountability and return on investment, this percentage seems to be growing," S&P said. "And, in order to maximize state funds available to them, an increasing number of public institutions are growing 'student success' efforts and programs designed to improve these performance metrics."
While the focus on performance could create hurdles for universities and colleges, S&P does not expect the shift to have a credit quality impact in the short term.