Federal Budget Cuts Will Have ‘Limited Impact’ on Universities, Moody’s Says

As universities raise alarms about the potentially devastating effects of more than $1-billion in looming cuts in federal research spending, a leading credit-rating agency issued a report on Thursday that seemed to say: “Calm down. This will sting for just a moment.”

The vast majority of American universities and nonprofit organizations will “face only minimal effects” from the budget cuts in the 2013 fiscal year, according to the report by Moody’s Investors Service. Just 1 percent of institutions—”primarily stand-alone research institutes”—are at risk of losing more than 3 percent of revenue during the first year of the across-the-board budget cuts known as sequestration.

Moody’s issued a grim report in January on the general outlook for higher education, but Thursday’s report—part of a series about the effect of sequestration—was optimistic, if measured.

John Nelson, managing director of the health-care and higher-education rating teams at Moody’s, acknowledged that the new report may come as cold comfort for worried federal-grant administrators at research universities.

“There are a lot of careers on the line, a lot of disappointed young researchers and older researchers who were used to certain success rates on their grants,” he said. But “we don’t read this as any kind of major loss of faith in research universities. It’s more a function of the difficult choices that government faces.”

Moody’s assesses the risk of lending money, Mr. Nelson said, and universities remain a solid investment.

“We don’t make any statement about whether the government policy on funding is a good idea,” he said. “We’re just saying that universities have a lot of adaptive abilities, and from the perspective of ‘Are bondholders going to get their money back?,’ this is not a serious threat to them.”

Stand-alone research institutes face the greatest risk from sequestration because they lack the revenue diversity of universities, which can draw on such sources as tuition and room-and-board fees, said Faiza Mawjee, the analyst who wrote the report. The bread and butter of research institutes are federal grants and, if they have them, endowments.

But such institutes have another characteristic that makes them more nimble than universities in dealing with an imperative to retrench. “The ace in the hole,” Mr. Nelson said, “is that most of them don’t grant tenure.”

The government’s decision to leave the $35.6-billion Pell Grant Program intact averted an effect on credit across the higher-education sector, the report says, and the estimated 5-percent cuts in Federal Work-Study and Federal Supplemental Educational Opportunity Grants will not be significant because of their relatively small scale.

The full report, “The Sequester Series: Limited Impact on U.S. Universities and Related Not-for-Profit Organizations,” is available online to Moody’s subscribers.

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