​​​​​​​​​​​​​​​​Act 188 of 1982, the enabling legislation for the State System, specifies: State funds appropriated to the System shall be allocated to the individual institutions on a formula based on, but not limited to, such factors as enrollments, degrees granted, and programs." The allocation formula currently being used was developed in 2003 and is described below.

Prior to distribution of the E&G Appropriation to the universities, the Board of Governors annually determines what, if any, System-wide initiatives are to be funded from the E&G Appropriation. Currently, items that are funded before allocation to the universities include professional development funds, replenishment of the System Reserve, the Office of Internal Audit and Risk Assessment, Dixon University Center, McKeever Environmental Learning Center, and the Performance Funding pool. In addition, the Office of the Chancellor is to be funded annually at 0.5% of the E&G Appropriation, as authorized in Act 188 of 1982. The remaining portion of the E&G Appropriation is the university base funding to be distributed through this allocation formula. 

The formula is updated annually to reflect changes in enrollment, physical plant inventory, and inflation, but the basic precepts on which this formula are built are not altered annually. Rather, a periodic review of the formula is conducted to address changing conditions. Reviews should occur at least every five years.​