Performance-based funding in the public sector has begun to take root in recent years, most prominently in higher education and in merit-pay plans for some teachers. It’s based on the belief that in order to incentivize stronger performance by individuals and institutions, policymakers should provide them with a portion of their funds based on demonstrated outcomes.
Ohio has also dabbled in performance-based funding for its K-12 schools. Starting in fiscal years 2012 and 2013, state lawmakers provided a $17-per-student bonus to high-performing districts—those rated “excellent” or “excellent with distinction.” That funding stream was not renewed in the next budget cycle but performance-based funding reappeared in a different form in FY 2016-17. Under present policy, districts (and charters) receive nominal bonuses based on their third-grade reading proficiency rates and their graduation rates. Altogether, Ohio spreads about $35 million per year in performance bonuses to each district, with sums typically ranging from $10 to $50 per student. All districts receive some amount of bonus funding.
Ohio’s budget bill (for FY 18-19) keeps these bonus programs intact, and we certainly applaud the rationale and the intent. Yet performance-based funding in its present K-12 form has several flaws, and we’ve recommended in testimony that lawmakers significantly modify or eliminate it. Here’s why:
First, spreading bonuses across all districts dilutes the power of the incentive. By awarding bonuses of similar amounts to every district, the program affirms that everyone is doing a decent job—and little needs to change. In fact, districts with abysmal graduation rates or reading proficiency receive bonuses, sometimes in amounts on par with Ohio’s highest performers. For example, East Cleveland posted the lowest third-grade reading proficiency rate in the state—and received an extra $5 per pupil. Meanwhile, the eight districts reporting 100 percent proficiency earned bonuses ranging from $2 to $26 per student. This is akin to a company awarding all of its employees similar end-of-year bonuses: When everyone is guaranteed a nearly equal share of the pie, why bother trying to go above and beyond?
Second, the bonus amounts are too small to spur higher performance. The goal of the program is admirable: to drive school improvement. But with the widespread distribution of bonus checks to every district in the state—and the relatively small pot to start with—the amounts shrivel to pocket change. Will the prospect of a few extra dollars per pupil do much to incentivize districts to deliver higher performance? Doubtful. Bonuses of this magnitude pale in comparison to the $13,000 per student that an average Ohio district receives in combination from its various streams of taxpayer support (local, state, and federal).
Third, Ohio uses questionable performance metrics to determine bonuses. While we see the logic of rewarding third-grade reading proficiency and high-school graduation, it’s flawed to base overall district performance on just those two metrics. Most evident is that third-grade reading proficiency reflects the achievement of a small fraction of a district’s students in a single subject. Likewise, high school graduation rates may not portray the performance of elementary and middle schools. It’s also well established that these measures correlate with demographics, so offering bonuses for high proficiency or graduation rates could reward districts for simply having fewer low-income students rather than for effectively driving increased student outcomes.
In an effort to overcome this problem, Ohio adjusts bonuses by districts’ state share index, which in school funding policy modifies funding amounts by districts’ wealth. This weakens the link between district demographics and bonus amounts—but it also breaks the link between bonuses and performance, making it much harder to view this funding stream as truly “performance based.” A simple example illustrates the conundrum: Last year, Cleveland, with a 66 percent graduation, rate received $17 per student in bonus funding, while Solon—a wealthier suburban district with a 98 graduation rate—received just $5 per student.
Instead of basing bonus payments on these problematic metrics, then working around the issues via state share adjustments, lawmakers should consider a more straightforward approach. They could use a district’s performance index and overall value-added grades over multiple years; this would cover more broadly the achievement and growth of district students. Or they could premise bonus payments on the state’s summative A-F ratings when those come online, especially if legislators tweak the rating formula. Given more generous bonus amounts—accomplished by increasing the pot of available funds and/or awarding bonuses to a smaller pool of districts—these options would better motivate districts to pursue ambitious yet achievable goals for achievement and/or growth.
Performance-based funding for schools has the potential to spur better outcomes for students. But the policy also needs to be well-designed to allow it to work as intended. Regrettably, Ohio’s current structure has defects that undermine the goal of incentive funding. Ohio lawmakers should consider overhauling performance-based funding or find other uses for these dollars.