Alternative funding mechanisms for appropriating operating and capital outlay revenue for public colleges and universities are described. The following conclusions are drawn: (1) Budget formulas are utilized by 25 of the 50 states in allocating funds to higher education. (2) Budget formulas are used predominantly in budget areas where data related to expenditures are most easily quantifiable, such as instruction and departmental research. (3) Budget formulas are an effective means of implementing zero-base budgeting. (4) They are more easily understood than other methods, but may not be flexible enough to reflect actual needs. (5) A budget formula for Michigan colleges and universities should provide equal funding for programs of instruction and support services where quantifiable data is available to indicate that programs and services are comparable. (6) The budget formula should provide an equitable foundation of support for higher education, but should recognize differences in the role and mission of individual institutions. (7) The funding mechanism should provide for exceptions to the formula-calculated amount if the institution can support such a request with adequate rationale. (Author/LBH)