Universities with good performance may still miss out on performance funding

Last week the government released more detail about how its university performance funding scheme is to work (in the same week that the re-badged Department of Education, Skills and Employment’s administrative arrangements, showing some very dry bureaucratic humour, listed as one its responsibilities ‘reducing the burden of government regulation’).

Last week’s document confirms that the legal basis of performance funding will change from 2021. As I pointed out last year, at the moment there is performance funding but no performance fund. For 2020, all the government offers is to pay universities a bit more of their demand driven funding entitlements.

If a university’s demand driven entitlements (bachelor-degree EFTSL * the relevant funding cluster rates) don’t reach the performance funding maximum grant (2017 demand driven funding + special deals done since + population-growth based performance-contingent increment) it will not get the performance funding, or will get only part of it.

On my calculations, based on their funding determinations, several universities in 2019 were likely to receive lower bachelor-degree Commonwealth Grant Scheme payments than they had in 2017. The determinations for 2020 indicate that only one university is forecast not to reach its 2017 funding level, but with soft demand enrolment projections in several other institutions may be optimistic.

For as long as the government uses the funding agreements to implement performance funding its hands are tied on this point. Despite the funding cap, the legal basis for appropriating the money to pay for bachelor-degree places remains the demand driven formula, bachelor-degree EFTSL * the relevant funding cluster rates. The government can pay less than this, down to the 2017 total demand driven funding amount, but they cannot pay more – regardless of how well a university does on the performance indicators.

From 2021 the legal basis of performance funding will move to an express power to award performance funding that is already in the Higher Education Support Act 2003. It is the same provision used for the previous (ill-fated) Gillard-era performance funding scheme. One potential benefit of this provision is that it is not inherently tied to enrolments reaching a threshold point, so that universities struggling to maintain past student numbers can still be paid performance funding.

However, according to the government’s performance funding document that is not what will happen. Universities will still need to pay for their performance funding with student places under the bachelor-degree EFTSL * the relevant funding cluster rate formula. The government is only using this different legal basis so that it can build the total performance funding at stake to 7.5 per cent of the university’s maximum basic grant amount. This option would otherwise be blocked by the legal requirement that the maximum grant amount cannot be decreased, unless that is the result of the bachelor-degree EFTSL * the relevant funding cluster rate formula. Using the funding agreements would mean that a performance funding increment paid in a year would be locked in for future years, even if performance subsequently slipped.

The government is requiring universities to pay for their performance funding with places  because the current system lets universities maintain their per student funding by reducing student numbers. This incentive to shrink would there even if performance funding was added to the maximum grant, since population growth-based total funding indexation is less than the inflation indexation used to increase funding cluster rates (this year, 1.36% compared to 1.8%). But it would be even more true if the  2017-funding-level freeze is replaced with a 2020-funding-level freeze, but with a separate extra pot of money for institutions meeting performance funding criteria.

The government does not want student places to go into decline, as they know that the Costello-era baby boom cohort will start wanting university places in the mid-2020s. So we are going to have a 2020-funding-level freeze with a performance increment contingent on maintaining enrolments to the level needed to reach the 2020 amount plus that year’s maximum performance increment.

For mission reasons, I think most universities will probably not ruthlessly follow the student-place cutting financial logic of current policies. But there is no real financial incentive to increase student places (except perhaps in a few cases where student contributions are equal to or more than the marginal cost per place), and not much of an incentive to pursue performance funding, since it is only paying for student costs already incurred, with a risk that it won’t be paid or will come with additional conditions.

In promised consultations over the legal guidelines for performance funding a critical point will be to ensure that the funding is locked in for the entire period needed to reach the 7.5% of grant level. That is likely to be until 2027. Because the guidelines are legislative instruments (unlike the funding agreements) any change would be subject to a Senate disallowance. Without this protection universities risk the money being abolished in the next Budget panic.

My advice to universities remains as it was: don’t do anything for performance funding that you would not do otherwise. This does not mean doing nothing: for mission, market and TEQSA regulatory reasons there are already good reasons to pay close attention to student satisfaction with teaching, attrition, equity group participation and graduate employment. But the performance funding rewards are too low and too risky to justify any significant new expenditure.

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