The NSW government has promised to provide $26.6 million for a University of New England campus at Tamworth, but it falls $16 million short of what was expected.
On Wednesday, Tamworth mayor Col Murray was visibly disappointed with the "significant setback", after a day of high-powered meetings with politicians in Canberra and Sydney.
The planned campus would be in addition to the current campus in Armidale.
Cr Murray said the state government had been expected to provide $43 million for the University of New England's (UNE) proposed 500-person campus in Tamworth's CBD.
"I've had a telephone conversation with the Deputy Premier [John Barilaro] this afternoon, and we are now working with the state government to see where we go from here," he said.
"This is only a delay, it's not a derailing of the project, but it certainly is disappointing to find out at the eleventh hour.
"I'm still confident we'll be able to come up with the funding. The project stacks up, the benefit-to-cost ratio stacks up."
When asked why the state government had almost halved its commitment, Cr Murray said that was a question for the Deputy Premier.
"We were certainly taken by surprise, and it certainly wasn't what we were expecting," Cr Murray said.
Despite the sudden dip in funding, Tamworth MP Kevin Anderson said he was "very excited" about the announcement.
"Yesterday, there was no money on the table, just a pipe dream with numbers being thrown around," Mr Anderson said.
"Now, we've got $26.6 million in writing. In my view, this gets the project ready to start, and makes it a reality.
"This is the single biggest investment in Tamworth since the new hospital."
Cr Murray also met with a number of politicians in Canberra. Despite the state government's back down, he was confident the federal government would still commit $10 million to the project.
"There seems to be an appetite to support the project, and I'm quite confident that funding will be forthcoming," he said.
On Thursday, UNE and council are expected to meet with Mr Anderson, along with representatives from the Department of Premier and Cabinet.
The $26.6 million has been reserved and is locked in regardless of a change in state government.