Burke and Minassians (2002a) have introduced a useful distinction between performance funding and performance informed budgeting.

_Performance funding_ ties public funding directly and tightly to the performance of tertiary institutions on one or more predefined indicators. The tie is automatic and formula-based. If a university achieves a set target on an indicator, it receives a specific amount of performance funding. By contrast, _performance informed budgeting_ allows policy makers and administrators to consider institutional achievement on performance indicators as a guiding factor in determining resource allocations. The link in performance informed budgeting is loose and discretionary (Burke and Minassians 2002a).

Performance funding and performance informed budgeting each has strengths and weaknesses. Performance funding offers a high degree of predictability and provides high power incentives for institutions to perform. Funded institutions know precisely how their performance will be evaluated and which aspects of their institution need to be strengthened in order to obtain additional resources. Hence, performance funding allows long-time planning and creates a stable environment in which institutions can improve. Performance informed budgeting, on the other hand, provides weaker incentives to perform since achieved results are only considered indirectly in the resource allocation process.

# **Box 13. Performance funding and performance budgeting in US states**

<mark>In 2001 there was a total of 37 US states with either performance funding (19), performance</mark> informed budgeting (27) or a mixture of the two models (9).

<mark>Performance funding has proven relatively easy to introduce but often difficult to implement and maintain. Many states have experimented with performance funding, but in recent years the trend has been towards performance informed budgeting, which has proven to be more flexible and</mark> sustainable.

<mark>In many cases performance informed budgeting models began as performance funding initiatives. Missouri, for example, introduced a performance funding system based on indicators. The funding model turned out to be too costly and the State ultimately decided to use indicators merely as an</mark> input to budgeting and the earmarking of funds.

<mark>Nine US states have chosen a dual system with elements of both performance funding and</mark> <u><mark>performance budgeting, allowing the benefits of each approach to be combined.</mark></u> _Source: Burke (2002b)_ The profiled strengths and weaknesses are reversed when considering system endurance. Performance funding does not allow discretionary policy decisions to be made in light of budget constraints or political necessities. With budget shortfall and high institutional performance, the system may not endure as decision makers would not be in a position to reward institutions according to the agreed formula. By contrast, performance informed budgeting provides more flexibility to control aggregate spending and maintain the funding system despite changes in economic or political circumstances. A loose tie between funding and performance appropriately reflects that budgeting is inherently political, and legislators are often reluctant to cede their budgetary discretion to a “rational” performance-based budgeting system (Moynihan 2003).

The described funding types are not mutually exclusive. Designing a system with elements of both performance funding and performance budgeting allows the tertiary education system to achieve the benefits and counter some of the problems of each approach. In the United Kingdom, for example, teaching and research are evaluated based on a fixed set of indicators. Yet, the process of determining the scoring on each indicator – and in turn

- 17 -