Texas is preparing to extend one of its most consequential higher education funding experiments from community colleges to four-year universities. But as state policymakers consider tying more public dollars to student outcomes, the early results from Texas’ community colleges offer a cautionary lesson: Colleges responded to the incentives faster and more successfully than lawmakers anticipated—and the state was not prepared to pay for the results.
On July 22, the Texas Higher Education Coordinating Board recommended a new performance-based funding model for the state’s public universities. The proposal would supplement, rather than replace, the existing funding system, with 60% of the new performance funding tied to students earning a “credential of value” and 40% tied to measures of academic progression and persistence, including reaching 30-, 60- and 90-credit milestones and returning from one fall semester to the next. The proposal also calls for incentives tied to high-demand fields and historically underserved students.
The recommendation will go to the Texas Legislature when it convenes in January 2027. It is the next step in a broader state strategy that has been years in development.
Texas lawmakers directed the coordinating board to study performance-based funding for four-year institutions as part of the state’s 2026-27 budget. The study was conducted by an executive committee made up of representatives from the state’s public university systems and Texas Southern University.
A July report from Texas 2036, a policy organization that has been closely involved in the state’s education-to-workforce agenda, makes the larger trajectory unusually explicit. It describes House Bill 8, which overhauled community college funding in 2023, and Senate Bill 1786, passed in 2025, as a “coordinated strategy” to reward student success, strengthen program quality and build a workforce system. The report identifies moving four-year universities to an outcomes-based model as the “next frontier.”
The community college experience, however, raises a question for the next phase of that strategy: What happens when the incentives work?
Texas replaced its largely enrollment-driven community college funding system with a model that ties state dollars to three primary outcomes: dual-credit completion, transfer to a four-year institution and completion of credentials of value. The formula also provides additional weight for outcomes among economically disadvantaged students, academically disadvantaged students and adult learners.
The response was rapid.
Dual enrollment increased by more than 20%, credential attainment grew by more than 22%, and completion of high-demand credentials and degrees increased by 26%.
In other words, the colleges did what the funding formula was designed to make them do.
The problem was that the state budget was built around projections of those outcomes—and actual performance exceeded them.
The Texas Tribune reported in July that 42 of the state’s 50 community college districts were projected to receive less state funding in fiscal 2027 than they had in fiscal 2026, even as student outcomes improved. Nearly a dozen colleges were projected to see declines of at least 15%, with three districts facing projected decreases of at least 20%.
The issue was not that the formula had stopped working. It was that the Legislature had appropriated less money than the formula would require if colleges achieved the outcomes it rewarded.
The state currently faces a roughly $1.2 billion cap on what it can distribute to community colleges before lawmakers return for the next legislative session. Texas Higher Education Coordinating Board officials have said additional funding could be considered then.
This is not the first time Texas has encountered the problem. During the previous legislative session, lawmakers approved nearly $90 million in supplemental funding after community colleges again exceeded the performance projections used to calculate their allocations.
Now the state is adjusting the formula.
In July, THECB approved changes that reduce the additional funding colleges receive for educating and graduating low-income students and adult learners. Andy McLaurin, the agency’s assistant commissioner of funding and financial aid, told board members that the changes were necessary for the financial sustainability of the community college finance program.
That creates an important tension as Texas prepares to apply the philosophy to four-year institutions.
The community college formula was deliberately designed to change institutional behavior. It succeeded. But because the state’s projections did not fully anticipate how quickly colleges would improve outcomes, the resulting funding obligations outpaced the Legislature’s appropriation.
That distinction matters for states—and potentially federal policymakers—considering similar models. A performance-based formula is not simply a different way of distributing a fixed pot of money. If institutions respond to incentives, the number of rewarded outcomes can grow. The better the incentives work, the more expensive the formula can become.
Texas’ own funding documents illustrate the challenge. Beginning with fiscal 2025, the state moved to forecasting performance outcomes and adjusting payments as actual data became available. THECB’s forecasting methodology even includes an adjustment for the increased efficiency and effectiveness expected to result from HB 8’s incentives.
The proposed university model will therefore enter a system that is already being recalibrated.
Texas 2036’s July report argues that the state’s next step should include regionalizing its definition of a “credential of value,” noting that the current $30,000 self-sufficiency wage threshold is calculated using an unweighted median across all 254 counties. The organization also calls for stronger workforce data to connect credentials, regional labor demand and earnings.
That suggests the Texas experiment is not ending with performance funding. It is evolving toward a broader system in which state funding, academic programs, student progression and labor-market outcomes are increasingly connected.
For university leaders, the question is not simply whether the new model will reward better outcomes. It is whether Texas has learned enough from the community college experience to build a funding system that can afford them.
The community colleges have already provided one answer: Give institutions a strong enough incentive to improve, and they may do it faster than the state expects.
The next question is whether lawmakers will be ready to pay when they do.
