This piece first published April 19, 2017, Debtwire Municipals
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President Donald J. Trump’s (R) budget proposal, which proposes steep cuts to some higher education programs, is cause for alarm at some institutions, multiple stakeholders told Debtwire Municipals.

However, the president’s budget proposal may not be enacted as introduced, said Liz Clark, director of federal affairs at the National Association of College and University and Business Officers (NACUBO).

“NACUBO is concerned with the president’s budget proposal – but it’s a long process between proposal and congressional debate or action,” Clark said. “What we saw proposed by the president may not ultimately be what we see in FY18.”

The federal fiscal year begins 1 October.

“We do have concerns about less federal funding available to students and on top of the concerns we have for financial aid programs, we have concerns about the dramatic cuts to research programs,” Clark said. “The federal government supports a lot of university research.”

In 2013, the federal government contributed USD 23.4bn to research nationwide at all universities, according to a University of Michigan (U-M) report.

One of the proposed cuts, an 18%, or USD 5.8bn, reduction to the National Institutes of Health (NIH) spending could have major impact to research institutions nationwide, Clark said. Moody’s Investors Service labeled the proposed NIH cut as the “most significant” credit negative impact for the higher education sector.

The NIH declined to comment for this story. A request for comment from the federal Office of Management and Budget was not returned.

Research institutions face steep cuts

“Institutions that include education and research in their mission will be the ones who are heavily impacted by cuts to federal research funding,” Clark said. “But every institution is different and impacted differently – but these are all concerns they should be paying attention to.”

Two of the largest recipients of NIH grants – U-M and Duke University, both research institutions – shared the concerns surrounding the potential reductions in funding.

U-M is one of those research institutions, and received about USD 487m in NIH funds in FY16 – about 8% of its USD 5.74bn in general revenue, according to a FY16 financial information and operating data statement posted to Electronic Municipal Market Access.

The school spent USD 1.39bn in FY16 on research – and about two-thirds of that came from federal sources, according to U-M data.

“We are very concerned about the suggestion of deep cuts,” said Kim Broekhuizen, a U-M spokesperson. “U-M will work closely with the members of the Michigan congressional delegation and monitor any changes as this proposal works through the process.”

U-M received more than USD 1bn in federal dollars in FY16, including USD 900m for federal grants and contracts, USD 43.3m in federal dollars for Pell Grants and USD 7.6m in subsidies for interest on Build America Bonds, according to its FY16 comprehensive annual financial report (CAFR). U-M has USD 1.98bn in debt outstanding, including USD 1.21bn in fixed-rate municipal bonds, according to its FY16 CAFR.

Duke University is also concerned about the Trump proposed budget. Duke received USD 417m in NIH funding in FY16, or 15% of its USD 2.62bn in operating revenue, according to its FY16 CAFR. Duke has USD 3bn in debt outstanding.

“Reductions in areas like NIH funding and support for college students have a significant negative impact on Duke and every other university, and would undercut a system of research that has led to countless cures, treatments and improvements in the quality and length of life,” said Michael Schoenfeld, vice president for public affairs and government relations at Duke. “It would also curtail a very important source of economic growth and jobs in this region and beyond… higher education and biomedical research are some of the most valuable and productive investments the country makes in its future.”

Duke received USD 504m from federal government sources for grants and contracts, according to the FY16 CAFR.

If enacted, the proposed cuts could lead to a loss of talent and lead to a loss of focus on a university’s research mission, said Cristian Tiu, professor of finance at the University at Buffalo.

“At large, research institutions, the lack of resources can put them at risk,” Tiu said. “Public institutions have a bowl of tricks, private institutions are small and don’t get money from anything but tuition, endowments, and donations – private institutions like that, may (also) be at risk.”

Other reductions and concerns

The budget proposal reduces Department of Education spending by USD 9bn, or 13%, and one of the recommended cuts would eliminate the Federal Supplemental Educational Opportunity Grant (SEOG), a program for low-income students – a USD 732m cut. Trump’s budget also recommended cutting the federal work study program but does not say how much would be saved by trimming or eliminating the program.

Those cuts would be more impactful to students than the institutions themselves, Clark said.

Moody’s estimates the combination of those cuts to total 1% of all student aid, or about USD 160bn in aggregate, and the programs make up about 2.5% of total operating revenue for institutions rated by the agency, creating some budget pressure, especially for institutions with stressed budgets.

Trump’s budget proposal also recommends keeping the Pell Grant spending level at USD 22bn, although about USD 3.9bn of the USD 10.6bn Pell Grant surplus would be redirected toward other spending measures.

The surplus funds should remain in place to fund a potential future surge in Pell Grant recipients, NACUBO said in a policy brief.

by Maria Amante