Incentives, Initiatives, and Innovation in Indiana

By Richard Vedder

The Indiana Commission on Higher Education, that state's university coordinating body, invited me to speak at their November meeting yesterday. I did, with my usual spiel about strengths and weaknesses of higher education, with a few suggestions for things to do to improve efficiency and productivity. What surprised me, however, is how much the state is already doing --in large part in response to demands from its coordinating board, which includes a number of impressive business leaders (who whom I also informally interacted).

A few examples of how Indiana is using the funding formulas to effect positive change are appropriate. They are moving away from funding institutions on the basis of students enrolled, towards rewarding them on the basis of actual outcomes. For example, they are transitioning to relating subsidy payments to courses successfully completed instead of courses attempted. They give institutions that improve their four and five year graduation rates added incentives --up to several thousand dollars per graduate.

Concerned about low levels of minority achievement, added incentive payments were approved for raising minority graduation rates. Concerned about the ease of transfer of credit between institutions, the Board has been giving some incentive payments to the community colleges (most predominantly, Ivy Tech, which has several branches). Realizing the community colleges already want transfer of credit to occur, the Commission is revising its incentive system to rewarding four year schools that actually give credit to community college or other students wanting transfer.

I applauded them for their efforts, but noted a problem that no doubt will be aggravated by this move, one I think some of the commissioners had not considered --grade inflation. If you give schools money for getting students through courses or graduation, you put pressures on to NOT fail students. Incentives rise to lower academic standards. Did the Commission vote to improve efficiency or lower academic standards? Time will tell.

I think the Commissioners were a bit surprised to learn that an Indiana-devised test instrument, the National Survey of Student Engagement, is widely used nationally but whose results are little known by the general public. I urged them to encourage schools to use Nessie, probably by using carrots (incentives) rather than sticks (requiring the use of the test). More important than using it, is analyzing and reporting its results to the general public, in a uniform manner for all Indiana higher education institutions under public control (the board has no control over the state's fine private schools, such as Notre Dame and my favorite, Wabash College, one of the top liberal arts institutions in the country according to the forbes.com rankings done by CCAP.

Indiana is a fiscally conservative state, and it is paying off. They have $1.3 billion in the bank, and deficits have not begun yet, although they will shortly. Consequently, the coordinating board recommended a budget that is essentially flat in terms of subsidies, an outcome many states would envy in the months ago when declining economic conditions really start hitting college campuses.