Moody’s ‘Special Comment’ report on the global recession and public/private universities

They say a year is a long time in politics. This last year has been a particularly long one, not only in political and policy circles, but for whole nations and their institutions. The sub-prime mortgage collapse quickly turned into a fiscal meltdown and is now a full-blown global recession.  ‘Hunkering down’, weathering the effects, and practicing ‘recession-style prudence and risk management’ is now the new game in town.

So how are universities doing in this highly uncertain, fiscally-brutal environment? Clearly there are many kinds of stories which can and are being told — from departments closing to new ventures being advanced.

One story being put forward is by Moody’s — one of the two big global rating agencies whose pronouncements on the creditworthiness of nations and institutions makes them particularly powerful and worth noting (see also our earlier background report on rating agencies and higher education).

In June, Moody’s released a Special Comment report on higher education called Global Recession and Universities: Funding Strains to Keep Up with Rising Demand which makes for particularly interesting reading. The lead author of the report is Roger Goodman, Vice President-Senior Credit Officer, Moody’s Investors Service, New York.  Our thanks to University World News for bringing the report to our attention in their 5 July story ‘US: Universities fair well in recession, says Moody’s‘), and to Moody’s for permission to publish the figure below.

Essentially their argument is that (particularly public):

…universities are proving to be appealing investments for government stimulus efforts due to the sector’s stabilising, countercyclical nature in the short term as well as its potential to stimulate long term economic growth.

…Most universities demonstrate countercyclical ability to increase student enrollments during recessions, receive relatively strong support from sponsoring governments, and offer long term potential for increasing revenue diversity.

On page 3 of their report, Moody’s offer a useful graphic on the enrollment impact of recessions (see Fig 1 below).

MoodysFig1

In other words, as the economy nose-dives, individuals are more likely to consider investing in more education as a means of waiting out the recession, and positioning themselves for the labour market when it revives. For Moody’s this all means a possible ‘tail-wind’ for universities as student demand increases — particularly those who have an access oriented agenda.

Moody’s Report outlines 5 key ideas:

  1. While universities will experience some stress, they will be more sheltered than other sectors.
  2. Public university ‘credit quality’ will be steadier than that of private universities
  3. Private universities can achieve a high rating if they are able to show evidence of sustained demand, financial strength and liquidity is clear
  4. Universities are likely to seek more alternative sources of funding to offset the pressure on government balance sheets and limitations on public funding growth
  5. Despite efforts at diversifying, the public sector will continue to play a central role

There are several issues worth noting here. The first is that individuals have been encouraged to invest in a graduate education, very often at considerable personal expense (loans and so on) with the promise of future earnings that outpace non-graduate earnings. If wages are depressed across the public and the private sectors because governments and firms are having to manage the consequences of bailing out the banks, then a graduate education might not be as appealing as it once was.

Second, aside from the stark black and white categorizing of ‘public’ and ‘private’ in this report (for instance, is the University of Sydney, or the University of Wisconsin-Madison, public or private given that both receive around 14-18% of their core budget from government funding?),  Moody’s also offers us something of a paradox.

To weather the storm, public universities are going to have to become more ‘private’ in order to augment meagre government budgets.  However, the more private a once public university is, the greater the risk. Is this not a classic case of catch-22?

Susan Robertson