The college employs more than 60 staff and an estimate based on the $1.3 million cut suggests the potential loss of 15 or more staff.
Approached for comment on that estimate, Otago University officials said it was too early to discuss specific numbers.
Vice-chancellor Prof Sir David Skegg said the university was strongly committed to the college, with its Dunedin and Southland campuses.
This was illustrated by the university spending about $10 million in upgrading the college's Bill Robertson Library, he said in a statement.
The university had already noted that decisions in last year's Budget, such as the withdrawal of the Tripartite Adjustment Fund, which had provided some tertiary funds, meant the university would experience "a significant decline in funding" in 2011.
"We have therefore been looking at all of our operations, to see where money can be saved," he said.
The college leadership group had been asked to review college operations and to develop a proposal to meet budgetary needs.
The leaders would consult college staff about options, in order to produce a report to the university by April 19.
Given the "magnitude of the required financial savings", some job losses were likely.
"We regret that this is an unsettling time for staff, but this review has been requested in order to ensure the future viability and vitality of the college," he said.
An email outlining the review and why it was required had been sent to university staff.
College leaders also held a meeting with Dunedin staff on Monday.
Tertiary Education Union University of Otago branch co-president Teresa La Rooy said it was "a troubling time" for college staff, and those wanting to respond to the review faced a "tight time frame".
Union branch organisers and representatives were continuing to speak to college staff and to support them, she said.
Prof Skegg said in order to ensure that the college could continue to deliver high-quality programmes that were also affordable in the university funding environment, arrangements had to be reviewed so that cross-subsidies from other parts of the university - amounting to $1.3 million this year - could be eliminated by the start of next year.
The former Dunedin College of Education merged with the university in 2007.
In the years before the merger, the Dunedin college had faced declining enrolments and had increasingly consumed cash reserves built up earlier.
Since the merger, the college had received nearly $9 million in cross-subsidies from other parts of the university, he said.
