Moody's: Sequestration Will Have Little Impact on the Higher Ed Sector

The majority of U.S. universities and not-for-profit organizations face only minimal effects from the sequester in fiscal year 2013, Moody’s Investors Service said in a report Thursday.

The six-page report is the second in a series of in-depth analyses on the impact on each public finance sector rated by Moody’s of the $1.2 trillion in a cross-the-board federal budget cuts.

In its first report, Moody’s said that the sequester will not directly impact states’ finances, but will dampen their economic outlook.

In Thursday’s report, Moody’s said most of the rated entities in the higher education sector also won’t be significantly affected. However, a small one percent of issuers, predominately standalone research institutes, face a potential revenue loss of greater than 3% in the first year of sequestration.

These institutes and research universities will face reductions in grants primarily from the National Institutes of Health and the National Science Foundation.

“While some of these cuts will be restored through growth in funding in subsequent fiscal years, the restoration will be slow, and although federal sequestration is not a major disrupter for U.S. higher education, it will contribute to existing revenue pressures,” analysts wrote.

Federal student aid will be relatively unaffected in 2013 by the sequestration. Pell Grant funding, the largest source of federal student aid, was held flat for the year and is expected to remain fully funded in fiscal year 2014.

Most universities are expected to absorb any cuts to federal student aid with little credit impact, though some that have started to rely on aid in the past few years will be challenged. These include lower-rated universities, including historically black colleges and universities, which may be disproportionately harmed by future funding cuts, Moody’s said.

The 2% cut in Medicare payments for 2013 will have only a minor effect on universities that derive revenue from health care services. Only 10% of Moody’s rated universities and not-for-profit organizations receive revenue from patient care, and among this group, average patient care revenue derived from Medicare was 34% in fiscal year 2011.

“No rated entity in the portfolio faces more than 0.5% in estimated revenue loss due directly to Medicare cuts,” Moody’s said. “Universities that provide patient care services tend to be highly rated with more diverse revenue sources, so the reduction in Medicare reimbursement is negligible compared to total revenue.”

The entire sector has previously been given a negative outlook for 2013 by the ratings agency, primarily driven by weakening revenue growth that is forcing universities to find alternative funding sources and increase cost containment.

However, Moody’s expects that the majority of rated organizations will continue to have a stable outlook for their individual ratings based on high long-term demand for higher education and research services, comparatively strong balance sheets in the sector, high revenue diversity and expense flexibility, and improving leadership and management teams.

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