Public Universities Face `Dramatic' Funding Cuts, Moody's Says

Many public universities face “dramatic declines” in funding and possible ratings downgrades as states cut and delay annual appropriations, Moody’s Investors Service said.

States are reducing funding to public universities by as much as 6 percent this fiscal year compared with last, Moody’s analysts led by Dennis Gephardt wrote in a report dated today. Institutions rated A2 and A3, five and six steps below the top grade, face the greatest risk of downgrade, New York-based Moody’s said.

“Many U.S. public universities face dramatic declines in state funding on a scale that surpasses past experience,” the analysts wrote. States spent a combined $90 billion on public universities in fiscal 2009, which amounted to about 30 percent of the revenue at the institutions, down from 50 percent two decades ago, according to Moody’s.

Public colleges and universities also face a potential “funding cliff” beginning in fiscal 2012 when stimulus funds are no longer available, the analysts wrote. In 20 states, money from the American Recovery and Reinvestment Act made up more than 4 percent of budgeted support for public universities in fiscal 2010.

State governments face a combined $127.4 billion budget gap in the fiscal years 2010 through 2012 as the economy recovers from the recession, according to a report last month by the National Governors Association and the National Association of State Budget Officers. Most state fiscal years begin July 1.

Moody’s said in February it was reviewing all the public university bonds it rates from Illinois as a result of the state Legislature’s “extensive delays in budgeted appropriations,” according to the report. It also downgraded five of the institutions, including Illinois State University, to A3 from A2, according to a separate report.

To contact the reporters on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net.

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