Texas Could Shortchange New Funding Model Champions

An ambitious performance-based funding model for community colleges in Texas outperformed all expectations in its first three years. Student success metrics at Texas community colleges skyrocketed with credential attainment and dual-enrollment rates surpassing the state’s projections. But now, the program is suffering from its own success.

Three years ago, Texas celebrated the launch of the new funding model, which was widely applauded by state policymakers and community college leaders for its careful design to reward colleges for improving student outcomes aligned with state priorities.

But the state didn’t appropriate enough funding to pay for the gains, thrusting colleges into financial uncertainty. Forty-two of the state’s 50 community college districts could face funding reductions for fiscal year 2027, according to calculations by the state. For some, that would mean multimillion-dollar shortfalls.

Because of the state’s biennial budget cycle, Texas lawmakers appropriate funds for community colleges for a two-year period based on projections by the Texas Higher Education Coordinating Board, made by looking back at prior data. But the funding formula is so new that there’s limited data to work with, said Barbara Kessler, a spokesperson for THECB.

State lawmakers can still make up the difference between the state’s predictions and what colleges are owed. When community colleges overshot the state’s expectations last biennium, the State Legislature appropriated an extra $89.5 million to the institutions for fiscal year 2025 in a supplemental budget. Community college leaders are hopeful the state will come through with more money again, given the popularity and overall success of the funding model. But in the meantime, they’re anxiously trimming their budgets.

“I hope that the Legislature can hold to its promise of what this dynamic outcomes-based funding model was designed to do,” said Russell Lowery-Hart, chancellor of the Austin Community College District. “We lived up to our end of the bargain.”

The Model’s Successes

When Texas adopted its new funding formula in 2023, the state tied 95 percent of community college funding to a range of performance metrics instead of enrollments.

Now community colleges’ funds depend on how much they boost outcomes including credentials of value earned, the number of students transferring to universities after earning 15 community college credits and the number of high school students earning at least 15 dual-enrollment credits. Colleges get extra funds for serving low-income students, adult learners and academically underprepared students and graduating students in high-demand fields. The legislation that created the formula, House Bill 8, also established the Financial Aid for Swift Transfer (FAST) program, which allows low-income high school students to take dual-enrollment classes for free.

The formula’s positive effects were immediate. Between 2023 and 2025, credential attainment among community college students jumped about 22 percent—and soared even higher for credentials in high-demand fields, roughly 26 percent, according to a July 2026 report by Texas 2036, a state public policy think tank. Dual-credit enrollment increased 20 percent over that period, reaching an “all-time high” for the state. The growth was widespread, with 43 districts increasing credential-attainment rates.

The model also resulted in more funding for community colleges—an increase of $352.2 million, or a 38 percent jump, between fiscal years 2023 and 2027, according to THECB—that could be poured back into student supports, services and programs.

Lowery-Hart said the funding model prompted his district to analyze labor market data and expand programs in high-demand, high-wage fields. The college hired more faculty and dedicated more campus space to these academic offerings, understanding that “there would be funding on the back end to cover that level of investment and expansion.”

“What this model should tell everybody across the country, not just the political apparatus in Texas, is that if you give community colleges just a little bit of funding, we will kill it,” said Lowery-Hart. “We will rise to the moment. We’ll be data-driven. We’ll be employer need–driven … It demonstrates what can happen when community colleges are funded to thrive,” not just survive, he said.

The ‘Growing Pains’

But Lowery-Hart doesn’t want to see colleges returning to “spinning gold out of straw” because of state funding gaps.

The Austin Community College District expected a $4 million boost this biennium because of its progress under the funding formula, but he didn’t factor that money into the district’s budget, knowing state funding could be uncertain. He later realized the state’s predictions left the district $10 million short of what it should earn under the formula.

He said the sprawling district is well-off and can afford the hit, but he worries for rural colleges with smaller property tax bases that rely more heavily on state funding.

He’s confident policymakers will allocate more funding for the program. Still, from now on, “I’m going to budget as if the political system is broken,” Lowery-Hart said. “We’re going to be budgeting very conservatively over the next three biennium—in hopes [the shortfall is] not real—but I’m going to be prepared for it if it is, more than I was this time around.”

Brenda Hellyer, chancellor of San Jacinto College, said the performance-based funding formula initially gave her institution a $13.7 million funding boost in 2023, plus $2.9 million for the FAST program. The college used that money to hire advisers and faculty in sought-after fields and to sustain supports previously funded by COVID-19 relief dollars, such as mental health services.

But now the institution is expecting $6.8 million less than it collected for fiscal year 2027. The college is tasked with finalizing its budget by the end of August, so Hellyer has scrambled to take belt-tightening measures. For example, San Jacinto is lowering merit raises for employees, she told state lawmakers at a Texas Senate meeting in late July. She also restricted travel and professional development opportunities.

Regardless, the budget she’s proposing to her board includes a one-year deficit of about a million dollars. She said the college has a tuition freeze in place to keep costs low for students and is under local pressure not to raise property taxes, so she felt she had little choice but to accept a deficit.

“We’ve got to protect our students, and we’ve got to protect our taxpayers, and we’re going to figure this out,” Hellyer said. Despite the challenges, she believes the funding shortfall is a “blip” in the early implementation of an otherwise successful model.

Grace Atkins, policy adviser for postsecondary and workforce policy at Texas 360, said the gaps between state projections and community college outcomes “will improve with time” as the state collects better data over a longer period to inform its predictions.

“We are still dealing with a very new system,” she said. “This was a big change for Texas community colleges. It basically fundamentally changed their operating models in a lot of ways, and this is, for lack of a better term, the growing pains of such a big change for such a fundamental part of our state’s higher education.”

New Cost Controls

The Texas Higher Education Coordinating Board also made tweaks to the formula at a July meeting, lowering the incentives colleges receive for improving outcomes among high-need groups and capping the number of credentials a student can earn within a five-year period that colleges can be awarded for.

Kessler at THECB said the shifts would “help ensure the financial sustainability” of the model and “more precisely align the program with the education and workforce success goals of the state. She emphasized that the coordinating board will continue to collaborate with the Texas Association of Community Colleges and other stakeholders to bolster the model.

The rule changes were met with mixed reactions.

Jonathan Feinstein, Texas state director at EdTrust, an education policy think tank, said he supports the cap to ensure colleges are rewarded for short-term programs with “true stackability,” those that can lead to degrees, but he opposes the lowering of incentives for colleges serving disadvantaged students.

“We know it takes more resources to ensure the success of those high-need student groups,” Feinstein said, “so it’s obviously disappointing to see, even if it is marginal, that one of the first actions taken here to try and bring some cost control in real time to the formula is to drop those weights.”

He believes other refinements to the formula would be more valuable. For example, from his perspective, “the big next phase is introducing a tighter methodology for certificate programs that we deem as credentials of value.”

Lowery-Hart acknowledged the state may need to adopt a “more realistic” version of its formula and “community colleges will adjust and adapt.”

“I just want to make sure that it produces the kind of funding that promotes innovation,” he said. Otherwise, “students are the ones who are going to lose out in this.”

“[The program] incentivized us to grow our programs that produce family-sustaining wages, which was the point of the funding model—to make students’ lives better,” he said. “As community college students’ lives improve economically, so does the local, state and national economy.”