Advanced Education Minister Kelly Regan said the move is necessary because the province can't afford to bail out schools that may get into financial trouble.
Universities across the country are struggling to rein in costs and balance budgets while still offering students a quality education, and the situation in Nova Scotia is no different, said Regan.
"Universities that are struggling with serious budget shortfalls have had to come to the government for help," she said. "That cannot continue."
Regan said the legislation is the first of its kind in Canada.
In recent years the Nova Scotia College of Art and Design and Acadia University have run into financial problems. Department officials said the government gave a combined $20 million in extra assistance to them.
The legislation introduced Wednesday is aimed at creating an early warning system by requiring the submission of financial reports and updated forecasts each year. It also gives the government power to withhold grants and set conditions for grants when schools get into financial trouble.
Regan said if a university is on the financial brink, they can ask for help under a 12- to 18-month process that would see an advisory committee assist in coming up with a restructuring plan. She said a university could also initiate a merger with another school under the process.
She said any school in the midst of collective bargaining in that situation would have the option of extending negotiations, while the ability to strike or lockout employees would be suspended.
"Revitalization plans offer a tool of last resort to help universities in significant financial trouble get back on track," Regan said.
Acadia University president Ray Ivany, representing the Council of Nova Scotia University Presidents, said the schools realize the importance of managing their financial affairs given that a large portion of their operating expenses are paid for by taxpayers.
The legislation is a positive step forward and makes sense given the fiscal challenges faced by educational institutions, he said.
"From my perspective this is a case of trying to get ahead of a set of circumstances rather than try to deal with them after the fact," said Ivany.
The operating grant for Nova Scotia universities is currently $320 million while the provincial budget tabled earlier this month provides another $3.2 million — or a one per cent increase — to the grant.