Funding models refer to the ways in which organizations acquire revenue to operate. There are an array of sources of revenue for non-profit organizations, higher education institutions – both public and private institutions, and K-12 schools.
Non-profit Organizations: The Bridgespan Group identified the following 10 nonprofit models that are commonly used by the largest nonprofits in the U.S. Three parameters are used to define the funding models: (1) source of funds, (2) types of decisionmakers, and (3) motivations of the decisionmakers.
- Heartfelt Connector: Funds derived from donors who focus on causes that resonate with the existing concerns of large numbers of people at all income levels, and by creating a structured way for these people to connect where none had previously existed. These are popular in the environmental, international, and medical research areas.
- Beneficiary Builder: Funds come from Reimbursed services provided to specific individual and rely on people who have benefited in the past from these services for additional donations. These are popular for hospitals and universities.
- Member Motivator: Rely on donations from individuals because the issue is integral to their life and something from which they draw a collective benefit.
- Big Bettor: Funds come from major grants from a few individuals or foundations to fund the organization’s operations.
- Public Provider: Funds rely on working with government agencies to provide essential social services, such as housing, human services, and education, for which the government has previously defined and allocated funding.
- Policy Innovator: Funds rely on government money to address social issues that are not compatible with existing government funding programs.
- Beneficiary Broker: Compete with one another to provide government-funded or backed services to beneficiaries. Nonprofits that do this use what we call a Beneficiary Broker funding model. Among the areas where Beneficiary Brokers compete are housing, employment services, health care, and student loans. What distinguishes these nonprofits from other government-funded programs is that the beneficiaries are free to choose the nonprofit from which they will get the service.
- Resource Recycler: In-kind donations from corporations and individuals. Distributed goods are then donated to needy recipients who could not have purchased them on the market. Businesses are willing to donate goods because they would otherwise go to waste or because the marginal cost of making the goods is low and they will not be distributed in markets that would compete with the producer.
- Market Maker: Funds come from providing a service that straddles an altruistic donor and a pay or motivated by market forces.
- Local Nationalizer: A national network of locally based operations creates a structure for operations and fundraising. These organizations focus on issues such as poor schools or children in need of adult role models that are important to local communities where government alone cannot solve the problem. Most of the funds are raised locally from individual or corporate donations and special events.
Higher Education Institutions: Funding models for the public two- and four-year institutions include three main approaches: incremental funding, formula funding, performance-based funding. As described by Ithaka S+R, there are significant differences between funding models for public two- and four-year institutions. The three largest revenue sources for four-year institutions are tuition and fees (20%); government appropriations (18%), and sales and services from hospitals (15%). Community colleges receive nearly half of their revenue from government appropriations, the majority from state governments. Non-operating grants and contracts, including revenue from Pell grants, represent 18% of total revenues, and tuition and fees comprise an additional 16% of revenue.
Funding models from state governments for public higher education institutions typically include:
- Incremental Funding: States set the level of appropriations in a given year and increase or decrease the amount by a fixed percentage annually. Appropriation levels are not calibrated to achieve specified outcomes, nor to incentivize the efficient use of institutional resources or reward specific performance indicators. Many states combine incremental funding with performance-based funding to enable attention to outcomes-based funding.
- Formula Funding: Funds for variation in inputs across institutions and enrollment changes annually. States calculate appropriations using a formula that accounts for specific inputs (e.g., number and characteristics of students enrolled, the level or field of study). States will often codify allocation formulas through legislation, so legislators and governing boards have fewer opportunities to intervene.
- Performance-based Funding (PBF): Appropriations are based on the outcomes of the institution (e.g., number of degrees conferred). PBG accounts for a small portion of state appropriations (usually less than 25% of state funding). PDF is often paired with either formula or incremental funding (the formula or incremental approach provides a base level of funding and PBF provides variable funding that is based on performance).
States also provide significant funding directly to students through state financial aid programs. These programs are often separate line items from appropriations and they result in a significant source of revenue for state institutions. Additionally, some states provide funding for promise programs, vouchers, differential funding, and public-private partnerships.
According to the 2022 SHEEO/NCHEMS survey, a state’s funding model should be dynamic enough to respond to changing circumstances but stable enough to allow the higher education institutions a reasonable level of predictability of future distributions. To meet this aim, funding models should be periodically reviewed for fit, form, and function.
Schools: As described by the Urban Institute, schools are funded by a federal, state, and local dollars. Local funds come primarily from property taxes. Federal money accounts for only 10&% of all education funding, and tends to target low-income students or other distinct groups. In most states, statewide formulas control school funding. These formulas have long been the subject of controversy, confusion, and sometimes lawsuits. Designed to ensure adequate funding across schools—and sometimes to promote equity—funding formulas distribute revenue to school districts based on factors such as addressing state and district revenue differences among school districts; and ways that students can access a quality education.
Relationship to Ecosystem
The funding models for the many initiatives and alliances, networks and intermediaries that support the learn-and-work ecosystem — including non-profit organizations, higher education institutions, and K-12 schools — are essential to a stable infrastructure of services.
The State Higher Education Executive Officers Association (SHEEO) partnered with the National Center for Higher Education Management Systems (NCHEMS) to survey states to understand how states are providing a basic level of support for operations at public higher education institutions and provide baseline definitions for different types of state funding methods. The survey focused on state funding allocation strategies, not the determinants of funding (how states determine the total amount of funding to give). SHEEO agency finance officers completed the survey in fall of 2021, receiving 48 responses from 46 states. The survey found that most states relied on more than one funding approach for each public sector. While it is common for states to use a formula funding approach in both sectors, community colleges have more formulaic funding, while funding for four-year institutions is more commonly determined based on historical funding levels and institutional requests. Each funding approach has potential benefits and risks. No matter the approach taken, there is a risk that politically privileged institutions will work to ensure that the funding approach benefits them the most. In future editions of the survey on base funding approaches.
As described by Ithaka S+R, states have failed to prioritize higher education funding during economic downturns. Recent efforts in many states to incentivize higher education institutions to raise their completion rates, mostly through performance-based funding (PBF) policies, have largely fallen flat and in some cases, widened racial and economic gaps in college access. There is growing interest in funding strategies that target resources to the students and institutions with the greatest needs, and that also target employer needs — especially high-demand workforce needs.
- Finance Models
- Revenue Models
- Formula Funding
- Incremental Funding
- Performance-based Funding
Christiansen, B.; Kim, P.; and Foster, W. (5 March 2009). Ten Nonprofit Funding Models. The Bridgespan Group. https://www.bridgespan.org/insights/ten-nonprofit-funding-models
Laderman, S.; Dillon McNamara, D.; Prescott, B.; Lugo, S.; Weeden, D. SHEEO and NCHEMS. (2022). State Approaches to Base Funding for Public Colleges & Universities. SHEEO and NCHEMS.. https://nchems.org/project/state-approaches-to-base-funding-for-public-colleges-universities/
Urban Institute. (29 November 2017). How do funding formula work. https://apps.urban.org/features/funding-formulas/
Ward, J.D.; Pisacreta, E.D.; Weintraut, B.; Kurzweil, M. (10 December 2020). An Overview of State Higher Education Funding Approaches. Issue Brief: Ithaka S + R. https://sr.ithaka.org/publications/an-overview-of-state-higher-education-funding-approaches/
Key InitiativesResearch: A Typology and Policy Landscape Analysis of State Investments in Short Term Credential Pathways SkillsFWD
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