Rethinking Policy Diffusion: The Interstate Spread of “Finance Innovations”

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  • Rethinking Policy Diffusion: The Interstate Spreadof Finance Innovations

    T. Austin Lacy David A. Tandberg

    Received: 1 April 2013 Springer Science+Business Media New York 2014

    Abstract Recently a number of studies have focused on states adoptions of postsec-ondary-specific policies. Cutting across much of this research is the presence and influence

    of interstate diffusion of policy adoptions, a phenomenon for which support is scant. This

    paper seeks to address this through broadening the categorization of policies beyond the

    discrete form traditionally used to one that encompasses a larger conception of finance

    policy. Our sample uses 131 finance innovations for 47 states over a 29 year period,

    finding that upon broadening our definition, we can detect the process of diffusion.

    However, the findings are striking, showing that while states do learn from one another, the

    process is dynamic and shifts across time.

    Keywords State policy adoption Postsecondary finance Diffusion Eventhistory analysis


    Historically, state policymakers have attempted to keep tuition low through direct

    appropriations to public colleges and universities. Since the nineteenth century, the states

    were the predominant funders of public colleges and universities, a commitment accel-

    erated by the federal land grant acts, the development of teachers colleges, community

    colleges, the expansion of public research universities and further federal action such as the

    GI Bill (Johnson 1987). However, as early as the 1940s, policymakers became concerned

    An earlier version of this paper was presented at the annual meeting of the Association for the Study ofHigher Education, Charlotte, NC. We thank Jim Hearn and Michael McLendon for their comments on anearly draft and continued support. All errors contained are our own.

    T. A. Lacy (&)The University of North Carolina System Office, Chapel Hill, NC, USAe-mail:

    D. A. TandbergFlorida State University, Tallahassee, FL, USA


    Res High EducDOI 10.1007/s11162-014-9330-2

  • with higher educations escalating costs to students.1 In 1965 the federal government

    passed the Higher Education Act (HEA) which included the seeds of the federal, need-

    based financial aid program that would later evolve into the Pell Grant Program. In the first

    reauthorization in 1972, the Act also included the State Student Incentive Grant program

    [later renamed the Leveraging Educational Assistance Partnership (LEAP) program],

    which provided federal matching funds for state-run, need-based grants. The LEAP pro-

    gram resulted in a flurry of state policymakers developing such grants, with all states

    adopting a program by the end of the decade (Heller 2002).

    During the 1980s, college costs and prices began to rise at an even accelerated rate,

    exceeding annual increases in governmental appropriations, inflation, personal income, and

    state and federal financial aid. In this environment, the burden of paying for college

    increasingly moved from states to students while the discourse among policymakers shifted

    to higher education as a private, rather than a public, good (Lyall and Sell 2006). It was

    against this changing backdrop that state postsecondary officials began experimenting with

    new market-based higher education policies as well as other, alternative means for

    financing colleges and universities (Titus 2006; Paulsen and Smart 2001; Wellman 2006;

    Hemsley-Brown 2011). Identifying the factors associated with states adopting one or more

    of this class of policy innovations is the focus of this study.

    To examine this line of inquiry, postsecondary education researchers have drawn from

    the comparative state political science and public policy literatures to study states

    adoptions of postsecondary policies, often centering on questions of geographical policy

    diffusion (e.g., McLendon et al. 2005, 2006, 2007; Doyle 2006; Hearn et al. 2008).

    Geographical policy diffusion argues that the policies ultimately enacted in states tend to

    mimic the policies of their neighbors and, as one state adopts a policy, it increases the

    likelihood that officials in proximate states will follow suit. While support for geographical

    diffusion has been found in other domains, studies testing hypotheses in the context of

    postsecondary policies have found little support for this phenomenon (Sponsler 2010).

    In studying the development of state postsecondary finance innovations, researchers

    have chosen to be discrete in defining very specific policies (e.g., performance funding,

    merit aid). While these distinctions have tangible differences in states policy landscapes

    and their effects on colleges and universities, this deep parsing of larger policy categories

    may obscure geographical policy diffusions influence.2 In this study, we wish to test the

    influence of diffusion after taking a broader view of postsecondary policy types. Specifi-

    cally, we look at the spread of finance innovations as a category, under the rationale that

    they are frequently driven by similar motivations and goals. Though most of these policies

    have been studied individually, we have yet to find a study which attempted to analyze the

    diffusion of these finance innovations as a whole.3

    Our argument for combining these policies under the term finance innovations stems

    from two sources: First, as we detail later, these policies fall under the umbrella of what

    some articulate as market-based approaches to financing higher education (Teixeira et al.

    2006). Second, combining innovations in this manner may better mirror what individuals in

    states respond to when they look across their borders; in the case of postsecondary

    1 This is perhaps best described in the final report of the 1947 Presidents Commission on Higher Education.2 As noted by Boehmke and Skinner (2012), the tendency to focus on discrete, single policies is also aphenomenon in the political science field.3 See McLendon et al. (2006) for Performance Funding; Doyle et al. (2010) for 529 Savings Plans andPrepaid tuition; Deaton (2006) and Warne (2008) for Tuition Decentralization; and Doyle (2006) for MeritAid.

    Res High Educ


  • education, policy emulation might not follow the discrete technocratic policies, but rather

    broad categories that seek similar outcomes. That is, while the distinctions are important in

    their mechanics, we hypothesize that these differences may not be apparent, or even

    meaningful, for public officials to whom problems and solutions do not always precede in a

    linear fashion. From this perspective problems may be matched with any relevant options

    from a broad category of solutions, or even multiple solutions at once (Kingdon 1984). In

    the current national landscape, studying postsecondary policy diffusion may yield insights

    as to policy creation in general and the influence of higher educations unique mix of actors.

    As the federal government, large foundations, non-profit associations, and intermediary

    organizations attempt to scale best practices across state lines, looking at the origins of

    existing policies will point towards enabling conditions and barriers to adoption.

    State Postsecondary Finance Innovations

    Over the past thirty years state policy increasingly utilized market-based approaches to the

    financing and governance of the public sector (Rabovsky 2012). In state higher education

    finance policy, market-based approaches are those that: (1) attempt to incentivize personal or

    institutional behavior towards certain larger outcomes deemed important by state policymakers

    (as opposed to regulations and other top down directive policy approaches); and/or (2) shift the

    burden of paying for college from the state to the individual. The specific innovations under this

    umbrella are: tuition decentralization, voucher programs, 529 savings plans, pre-paid tuition

    programs, performance funding, and broad-based merit aid programs (Titus 2006; Hauptman

    2006; McLendon et al. 2009; Protopsaltis 2008; Wellman 2006; Hemsley-Brown 2011).

    One of the primary arguments supporting the decentralization of tuition authority was

    that markets should drive prices and, once freed from artificial price controls, institutions

    would be able to compete on quality and students would vote with their feet (Wellman

    2006). Spurred by new economic and political realities, in some states tuition authority has

    become decentralized from central state offices, allowing institutionsas opposed to

    postsecondary governing structures or legislaturesto set their own tuition rates which

    predictably led to increased tuition (Lyall and Sell 2006). Realizing that enrollments

    continued to grow even in the face of increasing costs, state legislatures have continued to

    disinvest in higher education, support other public priorities, and allow institutions to

    increase tuition (Breneman and Finney 1997; Hovey 1999). Between 1987 and 2006, 18

    states decentralized tuition setting authority.

    Perhaps one of the most innovative approaches to reorganizing the financial relationship

    between the state, students, and institutions was the creation of the Colorado Opportunity

    Fund, a program that functions as a voucher program for higher education. Using money

    that otherwise would be appropriated directly to institutions, Colorado established a sti-

    pend available to all lawfully present Colorado residents to use for offsetting their total

    costs at the public (and eligible private) higher education institution of their choice. While

    Colorado remains the only state to experiment with vouchers in the postsecondary sector,

    they have a long history as a policy innovation in the K-12 education arena (Rouse and

    Barrow 2009). In both cases, vouchers are an extreme case of enacting legislation which

    pushes institutions to compete for students (Western Interstate Commission on Higher

    Education 2009; Fox 2006; Protopsaltis 2008).

    College savings and prepaid tuition plans are another means through which policies aim to

    alter student and family behavior. Similar to Roth IRAs and other retirement plans, 529 plans

    are college savings accounts where principal is invested and not subject to capital gains tax,

    Res High Educ


  • with many states allowing citizens to deduct contributions from state income tax. Con-

    versely, prepaid tuition plans allow purchasers to lock in a certain tuition rate by purchasing

    future credits at todays prices, theoretically providing a hedge against tuition inflation. Often

    coupled together as options in policy discussions, both plans were designed to increase

    college affordability and personal savings and financial planning. The approaches may be

    seen as natural market-based approaches to college affordability as they do not regulate

    college costs, use incentives as opposed to new laws, are voluntary and require individual

    investment, and almost uniformly allow students to continue to chose the institution in which

    they ultimately enroll.4 Between 1986 and 1999, thirty-one states adopted some form of a

    529 plan and 21 states adopted prepaid tuition plans (Doyle et al. 2010; Hurley 2006; Olivas

    2003).5 Importantly, adoption of 529 plans continued after 1999, though not all at once. In

    2000 five states adopted a plan, followed by four in 2001, and six in 2002.

    Also subsumed in this era of market-based financial policies, was a shift in the oversight

    and accountability environment for public higher education. The movement was from a

    concentration on regulatory compliance and rudimentary reporting of inputs and expen-

    ditures to measuring performance and accounting for outcomes and results (Burke 2005;

    McGuinness 2005; McLendon 2003; Volkwein 2007; Volkwein and Tandberg 2008), a

    postsecondary change that mirrored a larger shift in public education policy referred to as

    the new accountability movement (Gorbunov 2004; McLendon et al. 2006; Zumeta

    1998; Toutkoushian and Danielson 2002). A primary manifestation of this movement was

    state-level performance funding policies, which are programs that link institutions funding

    levels to a set of outcomes (e.g., student retention, graduation rates, student scores on

    licensure exams, job placement rates, faculty productivity, and campus diversity). As

    opposed to other policies that attempt to alter individuals behaviors, these programs seek

    to incentivize institutions to meet state educational priorities (Burke 2002).6

    One of the most frequently studied state higher education policy adoptions is the

    widespread initiation of merit-based student aid programs (Doyle 2006; Ness 2008; Cohen-

    Vogel et al. 2008). Similar to several other higher education finance innovations (perfor-

    mance funding, 529 college savings plans, and prepaid tuition programs), merit aid pro-

    grams seek to encourage particular behaviors, in this case student academic performance

    and enrollment in an in-state institution. At the same time they address affordability (for

    those who qualify) and allow for (limited) college choice. In the early 1990s, the state of

    Georgia initiated the first large-scale, statewide merit aid program with 12 other states

    adopting similar programs (Heller and Marin 2004).7

    Conceptual Framework

    Our conceptualization of the factors influencing state postsecondary policy adoption draws

    from the political science literature which argues that these innovations stem from both

    4 In the case of prepaid tuition, this is limited to publics.5 Following 1999, the federal government hastened the adoption of 529 plans and by 2002 every state butWashington had adopted a plan.6 While the first performance funding policy was implemented in the late 1970s (Tennessee) it was not untilthe 1990s that widespread adoption occurred. Prior to 1990, only Tennessee and Connecticut had a per-formance funding policy in place, a number that would expand to 26 by 2003.7 Since the 1990s increases in the amount of money devoted to merit aid programs have far outpaced anyincreases in other state financial aid programs (National Association of State Student Grant and Aid Pro-grams 2010).

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  • within state characteristics and, in part, the behavior of other states. The first (intrastate

    forces) comes from the new institutionalism perspective which, as March and Olsen

    (1984) succinctly assert, is simply an argument that the organization of political life

    makes a difference (p. 747). While this thinking acknowledges the importance of state

    economic and demographic factors, politics is an important driver as well. Recently the

    new institutionalism perspective migrated to the state higher education policy and finance

    literature. It has been used, often in combination with other perspectives, to explain state

    political actors higher education policy decisions (Doyle et al. 2010; Hearn and Griswold

    1994; McLendon et al. 2007; Nicholson-Crotty and Meier 2003). This has helped scholars

    move away from viewing postsecondary policy creation as solely influenced by economic

    and education related factors. The second influence of thi...