Policy Blog: Hedging Bets and Managing Risk

Mar 15, 2012 by Matthew Smith

Legislators are Money Managers

Each legislative session, policymakers choose from several promising strategies, with the final investment decision having implications for educational and economic growth.

While the sure bet does not exist in postsecondary education, state policymakers can insulate their investments from risk by leveraging nonfinancial tools. The foremost levers are legislative authority in three areas: evaluation and oversight; adoption of technical program changes; and, most importantly, power to discontinue ineffective programs and strategies.

How Does the Analogy Work in Reality?

I have provided five examples of how legislatures can use nonfinancial means to provide greater guarantees that investments will produce a long-term return. I have organized the examples based on their place on the P-20/W continuum.

• Dropout Prevention: States already leverage federal at-risk funding to improve the odds that students will not drop out of high school. However, the state can reallocate this money for college outreach and pre-matriculation programs, which facilitate student transitions between high school and postsecondary.

Examples: Florida SB 2150, Texas HB 3708, West Virginia SB 228

• Concurrent Enrollment: States should ensure that dual credit courses are not paid for twice. Clarifying and standardizing the funding responsibilities for school districts and postsecondary institutions could reduce the costs of instruction.

Examples: Mississippi SB 2869, Tennessee HB 837, Utah HB 288

• Remedial education: States should measure whether remedial education is effective in managing cost AND student success. If states were to identify practices that are counterproductive, they could potentially incent effective practice without a new infusion of funds.

Examples: Colorado SB 111, Louisiana HB 419, North Dakota HB 1036

• Transfer: States should develop transfer mechanisms, if they have not already done so. Common course numbering, transferable general education cores and associate degree guarantees develop assurances for quality and maximize state resources spent on instruction.

Examples: Arkansas HB 1772, California SB 940, Oregon HB 3521

• Workforce Recruitment & Retention: By enlisting private sector support, states could investigate where needs are not being met. Recruiting and retaining workers without regard to the value of specific skills and competencies in the workforce increases the likelihood that investments are ineffectively achieving desired outcomes.

Examples: Maryland SB 286, Minnesota SF 184, North Carolina SB 166

In each case, technical policy changes could have an impact on how effectively funds are spent and whether they produce a greater long-term return on state investments.

How Might Student Incentives Diminish State Investment Risk?

Imagine a case whether students receive a grant with the stipulation that they must stay in the state after graduation, or have the grant morph into a student loan. The state wins both ways: either the graduate stays and the state reaps a reward through increased tax revenue or the grant becomes a student loan. While these stipulations do not eliminate risk (e.g., what about the students who do not complete?), they hedge risk by giving the state a near-optimal outcome regardless of where a person settles. Additionally, this grant-loan binary could also be a reasonably effective workforce device by extending the grant to out-of-state students who pledge to stay in the state.

However, policymakers should consider the perverse student and institutional incentives of this practice, which makes data, accountability, and oversight so important.