US: Universities fair well in recession, says Moody's

Universities are expected to experience some stress but be more sheltered than other sectors from the global recession, says a new report on higher education by Moody's International Public Finance. "This is due to their counter-cyclical business aspects, government support, and growing role in economic development and rebuilding." However, many face conflicting pressures of rising demand for their services while also needing to adjust to a weaker funding outlook.

The relatively safe financial position of higher education is one of five key ideas described in Global Recession and Universities: Funding strains to keep up with rising demand, which discusses credit issues facing universities globally and reviews major current influences on Moody's key ratings factors for universities in Australia, Canada, Mexico, Singapore, the United Kingdom and - mostly - the United States.

Moody's credit opinion for leading public universities is favourable compared to many other sectors. Most are able to increase enrolments during recessions, receive quite strong support from their governments, "and offer long-term potential for increasing revenue diversity".

The report's second idea is that credit quality will be steadier in public than in private universities. This is because of public universities' higher reliance on government funding "which provides a relatively more stable source of revenue in most countries than earnings from gifts and endowment funds. Public university economies of scale and subsidised activities frequently allow for lower tuition costs than private universities."

Third, high ratings can nevertheless be achieved by many private universities if there is clear evidence of sustained demand, financial strength and liquidity.

Fourth: "Given rising pressure on governments' balance sheets and limitations on public funding growth, Moody's anticipates that the university sector will, over the long term, seek more independent sources of funding to finance growth and expansion. We anticipate that endowment funding building through philanthropy, enrolments of international students and borrowing will rise in some countries."

Finally, the Moody analysts predict, despite funding diversification efforts public sector funding will continue to play a central role in higher education "given its strategic importance to a nation's long-term economic growth and wealth levels".

These key issues apply to a greater or lesser extent in the countries of universities rated by Moody's, and individual credit ratings rely heavily on the particular country, market and regulatory environment facing universities.

And despite the relatively favourable circumstances for universities, Global Recession and Universities points out, many institutions face significant financial challenges in managing through the recession.

"Some will likely struggle to become more creative to meet increased public pressure to fulfil economic development and social goals, while others may need to develop more independent revenue and capital sources to fulfil their public mandates when government funding is too limited."

One of several facets of higher education and the recession explored in the study is that of growing global competition for faculty and students. The number of students enrolled abroad has risen dramatically in the past three decades, from 0.6 million worldwide in 1975 to 2.9 million in 2006, says the report. With US universities cutting back, non-US faculty and students might be susceptible to recruitment to other leading universities or home countries.

Developments like the Bologna Process in the European Union and similar efforts elsewhere could encourage greater scholar and student mobility. "China recently announced an effort to support the recruitment of 2,000 foreign scholars to boost research capacity."

Rising competition across borders for faculty and students might also lead to greater need for capital investment by universities to enhance their attractiveness - and already it has made foreign student populations, as sources of revenue, increasingly important in most of the countries surveyed - especially in Australia, where one in four students are foreign.

"The need to continue to invest in global marketing initiatives will be important to sustaining this revenue stream, which sometimes represents one of the very few unencumbered or government-controlled revenues."

The Moody's study concludes that student enrolment will rise and policy-makers will continue to seek competitive gains through expanded participation rates and research investments. For some highly prominent universities, financial losses in investment markets and rising global competition will depress balance sheet strength and increase spending pressures, it says:

"We expect university relationships with sponsoring governments to remain strong and possibly evolve gradually toward more independent university funding sources. Overall, given growing demand for services and state support and oversight that is likely to remain a fundamental credit factor regardless of future developments, we expect public university credit quality will remain relatively stable and healthy in most cases."

* Global Recession and Universities: Funding strains to keep up with rising demand is accessible on the University World News site, with permission from Moody's.