Fourth Report of the Tertiary Education Advisory Commission - full report 16/58

Shaping the Funding Framework
Fourth Report
of the Tertiary Education Advisory Commission

Chapter 5: Integration of the Tertiary Funding System
(Cont...)

5.4 A Single Funding Formula

Given the relative strengths and weaknesses of the EFTS system versus the
tight purchase system, the Commission considers that the best way forward in
developing an integrated funding system is to draw upon the positive aspects of
both systems. The principles of respecting provider autonomy, promoting
efficiency and transparency, and reducing transaction costs suggest that a
largely formulaic bulk-funding system is appropriate. The Commission proposes
that this funding system be based on the SFF.

Performance measures are used extensively in the purchase system, and the
Commission believes that ensuring greater accountability for the parts of the
tertiary education system previously funded through the EFTS system would result
in better financial risk sharing, a greater focus on priorities, and stronger
responsiveness to key stakeholders including Maori.

Fundamentally, an integrated funding system based on the SFF should:

• be largely demand driven, with learners able to enrol in the provider of
  their choice;
• continue to recognise the different roles and functions of the different
  components of the tertiary education system;
• have a strong focus on performance;
• recognise the different costs of delivery associated with different parts of
  the tertiary education system; and
• support achievement of the national strategic goals and tertiary education
  priorities.

Moving to a demand-driven funding formula⁷⁴ removes the need for a purchase agent.⁷⁵ Under the Commission's proposed funding framework,
a provider's programme will need to pass both the desirability test and the
quality test administered by the TEC before it is eligible for public funding.
It could be argued that applying these two tests is similar to applying a type
of contracting system. As such, the transaction costs associated with applying
the new funding framework are likely to fall between the costs associated with
the current EFTS system and those associated with the current purchase system.

While accountability should be required of all TEPs, performance measures
should be flexible enough to reflect the distinct nature of the component parts
of the tertiary education system. Because different components of the system
produce different outcomes and serve different groups of learners, these should
be reflected in appropriate performance measures and form part of the
accountability regime (as discussed in Chapter 12).

One risk of shifting foundation education programmes on to a bulk-funding
model is that it could encourage providers to lengthen courses unnecessarily,
thereby weakening the efficiency and effectiveness of these programmes. These
risks could be managed through tightly applied performance measurement, with
funding being awarded to providers that perform successfully. Providers that
access funding for foundation education programmes could be required to report
the average number of weeks they take to achieve satisfactory education and
employment outcomes, and the more efficient and effective providers could be
rewarded with growth or performance bonuses. This would maintain incentives for
performance and responsiveness, while reducing overall costs to providers and
the government.

The balance between the importance placed on employment outcomes and that
placed on course completions will vary, depending on the purpose of the
programmes. In particular, Training Opportunities and Youth Training programmes
focus on placing learners into jobs and employment, and this focus must be
retained or otherwise these programmes will not achieve their desired outcomes.

Having said that, the Commission believes that the current performance
indicators associated with foundation education programmes focus too strongly on
employment outcomes. Performance measures must also offer strong incentives for
providers to support learners in completing their programmes. In addition, the
Commission notes that if there is a greater focus on course and qualification
completion, then course design and funding will need to support part-time and
conjoint delivery so that learners are encouraged to continue their learning
once they are placed in employment.

Recommendation 7

The Commission recommends that the existing performance indicators used in
the foundation education sectors be modified to place greater emphasis on
completion of qualifications.

The use of performance measurement across the whole tertiary education system
may require the TEC to have a regional presence. Ensuring providers are held
accountable under this regime will also require regular assessment, with
monitoring occurring annually at the very least. The issues of accountability,
quality and performance measurement are discussed more fully in Chapter 12.

The final main issue that arises is the rate of funding that should be
applied to programmes that were previously funded through the purchase system.
The Commission believes that this is part of a larger issue involving the
subsidy rates for all tertiary education programmes. The Commission is proposing
that these be reviewed as part of a cost and funding category review. Further
discussion of this matter is covered in Chapter 6.

5.4.1 Implications of a Single Funding
Formula

A number of other questions are inevitably raised as a result of the
recommendation to move to the SFF. These include:

• What will be the basis for funding? (Currently the purchase system has no
  standardised currency for funding; the EFTS system uses the Equivalent Full-Time
  Student formula.)
• Should parts of the tertiary education system continue to be capped?
• How will the proposed SFF support the achievement of priorities such as
  supporting learners with no or low qualifications - that is, the bottom of the
  tertiary education system?⁷⁶

5.4.2 Measures for Allocating Funding

In order to support the SFF, a common measure upon which to base funding
allocations must be developed. The EFTS system is broadly based on inputs - one
EFTS equates to 'the student workload that would normally be carried out by a
full-time student in a single academic year'. Outside of the EFTS system,
Standard Training Measures (STMs) are based on enrolment in National
Qualifications Framework (NQF) credits, which are the main currency used for
allocation of funding. This is because credits are notionally linked to
outcomes, are not linked to a particular delivery type, and are based on
achievement rather than class contact hours (credits indicate the amount of
learning required, on average, to complete a qualification or part of a
qualification). EFTS and NQF credits are, however, roughly comparable, in that
one EFTS is deemed to equal 120 NQF credits.

The introduction of the New Zealand Register of Quality Assured
Qualifications has established a framework that enables all qualifications
to be described in terms of credits. A credit value for a course is the
'notional learning hours' required by a typical learner to complete the
course.⁷⁷ The credit values ascribed by
NZQA for the Register are equivalent to those for NQF credits. So as to minimise
transition costs for the tertiary education system, the Commission concludes
that enrolment in Register credits should form the basis of the common funding
currency. While there will be costs associated with the introduction of the new
system, the Commission believes it will improve transparency of funding and
portability of learning.

All systems currently base their funding allocation on the volume of
education that learners are enrolled in rather than what they actually complete.
There may be some merit in moving to a system that funds on completions, but
there are added complexity and transaction costs associated with funding on this
basis.⁷⁸ The Commission therefore
recommends that funding continue to be allocated on the basis of the volume of
education that a learner enrols in.

Recommendation 8

The Commission recommends that the new funding formula for the tertiary
education system be founded upon enrolments using a measure based on New Zealand
Register of Quality Assured Qualifications credits.

5.4.3 Removal of Existing Caps

The Commission believes that to achieve the priorities it has recommended for
the tertiary education system, it is necessary to remove the caps that currently
exist on enrolments in Industry Training, Youth Training, and Training
Opportunities programmes. Capping the very areas of the tertiary education
system where there is an urgent need to improve the skills and knowledge
(particularly literacy needs⁷⁹ ) of the
workforce is not consistent with New Zealand's desire to build a knowledge
society.⁸⁰ In a knowledge society, all New
Zealanders have a contribution to make and they require skills to support that
contribution.

To help achieve its priorities, therefore, the Commission recommends that the
caps be removed from the foundation education and Industry Training programmes.
With the caps removed, demand would still have to be moderated to some extent
through the use of eligibility criteria for both Industry Training and
foundation education.⁸¹

Moving to a SFF driven by learner demand does carry some potential risks and
important implications. A key concern is the risk of a fiscal blow-out. There is
little information available about potential or unmet demand in the foundation
education sector.⁸² ITOs provided 18
percent more STMs in the year 2000 than they had been contracted for, although
this demand has been largely funded by recent increases in the Industry Training
Fund.

The Commission has therefore concluded that it would be more appropriate to
lessen the current caps over an interim period before completely removing them,
so as to test what effects a more demand-driven system would have. This would
give the providers of Industry Training and foundation education programmes some
time to prepare for the new environment, while reducing the risks of a fiscal
blow-out to the government.

Recommendation 9

The Commission recommends that, as part of their integration into the new
funding system, the caps on those programmes currently funded through Skill NZ
(Youth Training, Industry Training and Training Opportunities) be progressively
removed.

5.4.4 Supporting Those with No or Low
Qualifications

The removal of caps should increase the opportunities for those with no or
low qualifications to access foundation education. But it does not assist in
targeting those with the greatest needs for foundation education, nor solve the
problems created by contradictory, costly, and inconsistent policy frameworks
discussed below. In the longer term, therefore, there is a need to reconsider
how best to meet the needs of people with no or low qualifications - that is,
how to bring a greater level of equity and consistency into learner assistance
and funding for foundation education. In other words, it is necessary to
establish some common framework for eligibility criteria in this area.

Eligibility-related problems with the current arrangements for people with
low or no qualifications include:

• programme-targeting criteria that exclude too many people in need, and which
  create excessive compliance burdens for providers; and
• inequitable treatment of learners at the interface with the compulsory
  sector.

Learners in Training Opportunities and Youth Training programmes do not pay
tuition fees (as do students under 19 in public schools). Those who do not fall
within the criteria for Youth Training and Training Opportunities (see Appendix
2), have to pay sometimes quite considerable fees for their foundation
education.⁸³ These distinctions are not
based on merit, nor upon any clear policy rationale. Rather, they reflect the
fact that policies for the various components of the education system have been
developed in the absence of an overarching framework and an environment of
fiscal constraint on total Training Opportunities/Youth Training funding, tight
definitions for what constitutes disadvantaged learners, and a focus on
labour-market outcomes.⁸⁴

In essence, these differing arrangements ration access by price, age, and -
in a very narrow sense - need. They create a range of unnecessary and unhelpful
compliance costs, as well as transaction costs, barriers to learning, and
inequities. For example, the current school-age criteria and Youth Training
criteria do not ensure access for adults who have left school with few or no
qualifications; and the Training Opportunities criteria exclude a significant
number of people who do not have the qualifications to enter polytechnic or
university degree programmes.

If common eligibility criteria for fully subsidised foundation education
programmes were introduced, they would have to ensure that the development of
unintended incentives, such as encouraging learners in the compulsory sector to
leave school early or discouraging providers from taking on learners with
multiple needs, was prevented. Specifically, the eligibility criteria would need
to retain the current focus on bridging learners into employment, but balance
this with a greater emphasis on educational outcomes. The eligibility criteria
would also need to take into account the interrelationships between the labour
market and education.

The SFF must have the ability to target funding to reflect the different
needs of learners in the tertiary education system. In particular, it will need
to be able to allow different levels of subsidy to reflect different learner
characteristics. The Commission understands that access to tertiary education by
the educationally disadvantaged depends on there being little or no cost to the
learner: there is considerable research indicating that people who have not
previously achieved in education are more likely to be price-sensitive and to
require greater levels of direct assistance.

5.4.5 Targeting Assistance

One option that logically follows from this finding is to fully-subsidise all
foundation education programmes, up to a certain consumption level. The new
(common) eligibility criteria would need to have lower transaction costs than
the existing foundation education programmes while also retaining some means of
targeting assistance.

In determining how to target assistance, the Commission started with two
assumptions:

• The school-based entitlement to 'free education at any state school during
  the period beginning on the person's 5th birthday and ending on the 1st day of
  January after the person's 19th birthday' should remain.
• That harmonisation of foundation education policies in the compulsory and
  tertiary education systems would be a desirable outcome.

This gives rise to two main options. The first is to establish time- or
consumption-based eligibility criteria for access to higher levels of subsidy
(and hence no fees). Under this option, learners who left school before their
19th birthday could be eligible for access to fully subsidised foundation
education for the period of time between when they left school and their 19th
birthday. For example, a learner who left school at age 16 could access three
years (or the equivalent in NQF credits) of fully subsidised foundation
education, either in a state school⁸⁵ or a
tertiary provider which had met the desirability and quality tests. This would
essentially extend the legislative entitlement of 14 years of free education in
state schools to 14 years of fully subsidised foundation education with an
approved provider.

This approach would be transparent and would be relatively straightforward to
understand for learners and providers. Checks would need to be worked into the
funding and profile systems, to ensure that providers did not keep learners in
study longer than necessary and that learners did not linger. This could be
achieved in part by using the performance indicators to 'cull' providers that
perform poorly, and partly by ensuring that learners progress through the levels
of the NQF.

The second option is to allow people who left school with less than a level 3
qualification to have access to a certain number of fully subsidised NQF credits
towards the National Certificate of Educational Achievement (NCEA).⁸⁶

The NCEA has three levels, and is deliberately structured to be able to
include a range of NQF vocational unit standards. It can be delivered in a
number of contexts (school, tertiary provider, workplace) and so should be able
to accommodate a range of learner interests. At the same time, learners wishing
to obtain a Level One NCEA will need to meet literacy and numeracy standards,
which could assist in lifting adult basic-skill levels. NCEA Level One is
equivalent to School Certificate and could be used as the base qualification for
foundation education. In this base qualification, the number of fully subsidised
credits would be established in terms of previous consumption (based on
enrolment), up to a maximum of 240 credits (equivalent to two years of fulltime
study).⁸⁷

This option allows everyone the same access to a nationally recognised
qualification and promotes portability of learning. This is similar to
approaches in some American states, where adults are able to return to public
schools to complete their General Education Diploma without extra cost.

Both options would require some degree of administration, to identify
learners on a national basis and to record consumption of education across both
the compulsory and tertiary education systems. The new National Student Index
(NSI) will be a tool for tracking the progress of learners through all levels of
the education system, and it may therefore provide some of the information
needed to record consumption. There is likely to be a time delay in its full
implementation, however, as the NSI is not due to be introduced until April 2003
in the tertiary education system.

The key point of difference between the two options is the extent to which
funding should be tied to a particular qualification. The key trade-off is
between:

• providing a wide range of choices to learners (in order to encourage them
  back into the education system); and
• gaining some assurance that those learners obtain key basic skills.

It should be noted that this trade-off is not particularly dramatic, given
the wide range of unit standards on the NQF that can be credited towards the
NCEA. On balance, therefore, and in line with its desire to see greater adult
literacy levels and greater harmonisation of foundation education policies
across the tertiary and compulsory systems, the Commission believes that the
basic eligibility criteria for fully subsidised foundation education outside of
state schools should be a learner's previous consumption of foundation education
(expressed in terms of credits), and a requirement that the programme is able to
be credited to the NCEA.

Applying broad eligibility criteria also runs the risk of fiscal blow-out, as
many adults do not have qualifications equivalent to the NCEA level 1 but are
successfully employed. This suggests that it might be reasonable initially to
limit access to these programmes to learners under 19 and to those adults who
cannot obtain sustainable employment because of a lack of qualifications or
skills.⁸⁸ Given the long period of time
between the introduction of the NSI and the accumulation of sufficient data to
measure previous consumption accurately, this may be the most practical scenario
in the short term.

It could be argued that a further risk of changing the eligibility criteria,
lifting the caps on numbers in foundation education programmes, and requiring
tight accountability on the part of providers is that it could have some
unintended effects. For example, it could discourage providers from taking on
more difficult learners as these are the learners who are least likely to have
positive outcomes. Having a larger pool of learners to draw from increases the
risk of this type of 'creaming' occurring.

These arguments would have validity if the eligibility criteria were relaxed
but the caps were to remain in place. In an uncapped environment, of the kind
the Commission is recommending, incentives to enrol as many learners as possible
will be strong.

Currently, the existence of caps constitutes a disincentive for providers to
enrol learners with multiple needs,⁸⁹
especially given the outcome-focus of the programmes. This disincentive is
accentuated by the need for providers to meet their performance criteria. The
key difference therefore, between the current and the proposed systems, in
relation to more challenging learners, is the removal of caps which will
increase the incentive to enrol such learners.

Recommendation 10

The Commission recommends that certain categories of learners should receive
100 percent government subsidy, including those who have not previously achieved
in school or foundation education. Eligibility for this total subsidy level
would be based upon the following criteria:

• the learner's previous consumption of foundation education, as expressed in
  terms of credits; and
  
• the learner's tertiary programme being creditable towards the National
  Certificate of Educational Achievement.

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Footnote(s):

74

The Commission, in recommending a demand-driven system (albeit one modified
from the present), acknowledges that there are benefits from competition in the
tertiary education system. These relate to incentives for efficiency, innovation
and responsiveness. Unfettered competition, however, has led to some system
inefficiencies, and the Commission is recommending through use of the
desirability test that limits are placed on entry to the market, thus minimising
possibilities for undesirable competition.

75

Once a provider is contracted to deliver foundation education programmes,
learners enrol directly with the provider.

76

Shaping the Strategy, p. 21.

77

New Zealand Qualifications Authority (2001), p. 7.

78

Other issues that may arise from moving to a system of funding based on
completions include the incentives to pass learners who should otherwise not
pass.

79

Ministry of Education (2001b), pages 4 and 5.

80

In the EFTS system, on the other hand, there are very few caps.

81

It should be noted that the removal of caps would not signify a move to a
fully demand-driven model of the kind that has operated under the current EFTS
system. In Shaping the Strategy, the Commission has recommended that the TEC
apply both a quality and desirability test to provider and ITO profiles when
making funding decisions. The Commission has also signalled that one of its
priorities is increasing the quality of the tertiary education system. It
anticipates that the TEC will set high threshold criteria for the judgement of
quality and desirability, including the determination of sufficient net benefit.
The application of both the desirability test and quality test will act as a
supply-side constraint on the tertiary education system.

82

It may be that when the employment market is strong there is a decrease in
demand for full-time learning and, when the employment market is weak, demand
for full-time learning places increases.

83

State school students under 19 do not have to pay tuition fees. School,
however, is not an option for would-be Training Opportunities learners (who have
to be over 18) and is unlikely to attract Youth Training learners (who are aged
16 to 17 and have presumably left school).

84

Training Opportunities/Youth Training-type programmes are one of the
government's largest pre-employment interventions as well as one of the largest
foundation education interventions. Until recently, the funding for these
programmes has been located in Vote Labour.

85

The government does not contribute capital to private and integrated
schools.

86

The NCEA will replace School Certificate, Sixth Form Certificate, and
University Bursaries progressively from 2002 to 2004.

87

The total size of the NCEA is 240 credits. NCEA level 1 contains eight
compulsory credits in literacy and eight compulsory credits in numeracy and is
equivalent to School Certificate.

88

It may be very difficult in practice to identify adults who cannot obtain
sustainable employment because of a lack of qualifications or skills.

89

These are learners who require considerable human and other resources to
support their social and learning needs.