Nevada may become the first state to allocate 100 percent of its higher education funding based on completed credits, not student enrollment. Other states have modified performance-based funding systems (also called outcomes-based funding) that allocate a percentage of state appropriations on course completion, but none go as far as Nevada’s plan proposed last week in a legislative committee. As The Hechinger Report explains:

“We want to fund institutions based on student success,” said State Senator Steven Horsford, who chaired the study committee that made its final recommendations at an all-day meeting at the University of Nevada, Las Vegas.

While the concept the committee approved, which is called performance funding, isn’t new, Nevada’s version would be among the most dramatic. It would allocate 100 percent of the state’s base annual budget for higher education by calculating the number of completed credits. That is, money now parceled out based on how many students enroll would instead be distributed in response to how many complete their classes.

Other states that use performance funding allocate only small portions of their higher-education budgets based on such measures.

In times of tight budgets and steep college price increases, such plans make sense:

“If this is all the money you have,” Horsford said, “what are you going to prioritize?”… Many university administrators and faculty are in favor of the change. That’s because it also allows campuses to set their own tuitions, and to keep the money they get from students; under the current system, all of the tuition collected at all Nevada public universities and colleges goes into the state’s general fund and is then parceled back out again.

Funding institutions based on performance makes sense. It helps protect students and taxpayers from irresponsible spending that drive process up. Meanwhile, it puts powerful incentives in place for postsecondary institutions to define their missions and eliminate areas where they don’t excel (leaving room and resources for institutions that can excel to get the job done).

It’s important to also avoid perverse incentives such as limiting college access to low income or struggling students. Policy makers in other states do so by weighting course completion for these students in their funding formulas.

Caveats like that one aside, performance-based funding makes sense, and law makers in other states will likely be watching Nevada’s progress.