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Funding models refer to the ways in which organizations acquire revenue to operate. There is an array of sources of revenue for non-profit organizations, higher education institutions (both public and private institutions), and K-12 schools. [See Student Financial Aid Models]
Non-profit Organizations: The Bridgespan Group identified the following 10 nonprofit models commonly used by the largest nonprofits in the United States. Three parameters are used to define the funding models: (1) source of funds, (2) types of decisionmakers, and (3) motivations of the decisionmakers.
Higher Education Institutions: Funding models for the public two- and four-year institutions include three main approaches: (1) incremental funding, (2) formula funding, and (3) 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:
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.
K-12 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.
The funding models for the many initiatives and alliances/networks/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.
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/
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