Texas lawmakers should reshape how Texas funds public universities by giving them more money when students make progress toward degrees and graduate, the state’s higher education agency recommended Wednesday.
That recommendation came during the same meeting at which Texas Higher Education Coordinating Board officials reduced similar incentives in existing outcomes-based funding for community colleges, which outperformed what lawmakers had budgeted.
The recommendation calls for financing the new incentives primarily with additional state funding but did not recommend a specific amount. Such incentive payouts would supplement, rather than replace, universities’ existing enrollment-based funding.
Lawmakers would have to create and finance the model when they return to Austin in 2027.
However, the call for additional money comes as state leaders signal they want to limit spending.
Last week, Gov. Greg Abbott, Lt. Gov. Dan Patrick and House Speaker Dustin Burrows instructed public universities, colleges and state agencies to request 3% less in baseline state funding, saying they wanted to preserve money for affordability measures and property tax cuts.
The THECB proposed a model that bases 40% of the incentive funding on rewarding universities when students remain enrolled and reach certain credit-hour milestones.
The bulk of funding, 60%, would be tied to students earning bachelor’s degrees that provide a financial return. That would be defined as a degree that allows the typical graduate to earn enough within 10 years to recoup the cost of college and surpass the earnings of a typical high school graduate. A THECB committee report notes that all bachelor’s degrees awarded by Texas public universities currently meet that threshold.
Universities could receive additional money for graduating economically or academically disadvantaged students, adult learners or those who returned after leaving college for an extended period of time. For example, schools would get more funding for graduating students who are federal Pell Grant recipients, which are to those from qualifying low-income families.
Universities could also receive additional funding for awarding degrees in high-demand fields and for helping students graduate with no more than 120% of the credit hours required for their degrees.
Texas currently distributes much of its funding for public universities based on the number and type of courses students take.
The schools also receive institutional enhancement funding, which is flexible state money they can use for academic programs, student services or other operating expenses. Lawmakers decide how much each institution receives individually based largely on their own priorities rather than a uniform formula, and the amounts vary widely.
Institutional enhancement funding has been a recurring point of leverage in lawmakers’ disputes with universities.
At the beginning of the 2025 legislative session, House and Senate budget writers proposed eliminating it. Meanwhile, Patrick threatened to reduce university funding if schools did not eradicate diversity, equity and inclusion initiatives.
University leaders warned then that losing the money would force them to cut courses, student services and other operations. Lawmakers ultimately kept it, but included a budget rider directing THECB to examine whether it should be phased out and replaced with performance-based funding.
The THECB board members asked during Wednesday’s discussion why the state should not eliminate institutional enhancement funding outright and redirect all of it into the new performance-based model.
Daniel Harper, vice chancellor for finance and chief financial officer for the Texas State University System and one of several officials who developed the proposal, said the group modeled that option but found it would leave some universities without additional funding and make the proposal politically difficult to pass. For the current two-year budget cycle, universities received a total of about $400 million in institutional enhancement funding, he said.
“It’s been very challenging for the members that represent those districts to support policy that doesn’t provide any additional support for institutions,” Harper said.
Instead, the group proposed creating a new funding stream financed primarily with additional money while gradually redirecting some institutional enhancement funding into it.
The recommendation from THECB takes a page from funding at the community college level.
Lawmakers overhauled how community college got state dollars in 2023, tying more money to outcomes such as degree completions or transfers to universities. Those colleges have repeatedly earned more money than lawmakers budgeted by outperforming predictions. To lower those payouts, the THECB board voted Wednesday to reduce the bonuses community colleges get for educating low-income students and adult learners.
THECB spokesperson Bobbi Kessler said the university proposal is structured differently. Community college funding is adjusted as data are updated between legislative sessions. Under the university proposal, lawmakers would set each university’s allocation during the session based on past outcomes, which would remain fixed until lawmakers reassessed it the following session.
Sneha Dey contributed to this report.
The Texas Tribune partners with Open Campus on higher education coverage.
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