alt Hacker NewsHow it would actually work is only the best schools would keep their funding while lower tier schools would be shut out entirely and be forced to severely reduce their research agendas. There's a school near me that just went from College to University status because they grew their graduate program enough, they would probably not weather the storm the same as MIT.
On a system's level, that's probably the desired outcome in a world where total science funding is shrinking and fewer people can be employed as scientists.
In your example, I'd be more worried about the case where the specialized design reviewer knows what the available sources of grants are and procedure to apply to them, and the professor has since forgotten that knowledge, and so the department now cannot bring in any grants or revenue. That'd kill science even at established institutions like MIT or Yale or Harvard, even if they have very good researchers.