A Review of Fiscal Year 2007-2008

Paul Lasiter

Paul Lasiter

I’ve stated in the past that Pepperdine University has been blessed with increasing financial strength. Many of my predecessors faced serious challenges to provide even the most basic services to the University’s students, faculty, and staff. But today, despite the impact of the recent economic downturn, I am fortunate to serve this University during a period of financial fortune. While the University is certainly stronger than it was a decade, or even five years ago, fiscal 2008 began a new period of challenging economic times for higher education, the United States, and indeed the entire world. What began as a national mortgage crisis has evolved into severe financial market disruptions and a dramatically slowing global economy. Virtually every business sector has been impacted.

While the University’s results from operations remain positive for fiscal 2008, the stresses caused by financial market turmoil are evident in the University’s financial statements. During fiscal 2008, the University’s total assets declined $53 million from one year ago, primarily as a result of investment declines. The University’s investment portfolio staged a dramatic downturn during fiscal 2008, resulting in a net $22 million or near 3 percent net loss in operating and nonoperating items, with further significant reductions in value occurring after fiscal year-end.

Total Assets, Net Assets and Endowed Assets financial charts.

In the midst of challenging economic times, particularly during periods of reduced investment returns or losses, it is tempting to abandon long-term investment management principles and seek safety from the financial storm. Fiscal 2008 saw the University’s endowment decline $42 million or nearly 6 percent from one year ago to total $674 million. While short-term losses in endowment values can be worrisome, the continued ability of the endowment to distribute funds in support of annual operations is of much greater importance. Fortunately, as I write this today, the University’s endowment payout is projected to remain relatively stable for at least the next 24 months.

We’re fortunate this is the case as the University distributes endowment support based on a five-year moving average of endowment value multiplied by a 5 percent payout rate. This payout methodology results in a slower endowment payout growth rate during periods of positive investment returns, and a slower decline in payout rate when investment returns are negative. During fiscal 2008, endowment support for operations totaled $26 million, or approximately 10 percent of total expenses. Since the University’s endowment provides a relatively low level of support for operations, continued declines in endowment value will not have as dramatic an impact on the University as on many other institutions that rely much more heavily on endowment support to fund their operating activities.

Despite the decrease in assets resulting from investment declines, we continued to invest in property and equipment to better serve our students. Investments in new facilities and refurbishments of existing facilities have been funded through the use of existing reserve funds and gifts from friends and alumni. During fiscal 2008, the University purchased facilities in Washington, D.C., and Lausanne, Switzerland, to provide permanent homes for students in those programs. Additionally, significant renovations to many of the buildings on the Malibu campus were completed or are underway.

The University’s long-term obligations remained relatively unchanged from one year ago, and totaled $209 million. Although certain forms of debt financing have been very attractive in recent months, we have decided to maintain a conservative leverage position rather than take on additional debt. We’ve funded capital investments from internal resources, a prudent move in this difficult economic environment, and maintained a long-term debt to total capitalization ratio of approximately 17 percent at the end of fiscal 2008.

Today, approximately 7,650 students are enrolled at the University’s five colleges and schools. Maintaining an appropriate level of student enrollment is extremely important since approximately 74 percent of the University’s operating revenues come directly from students. Demand remains strong for the majority of the University’s academic offerings, and during fiscal 2008, net tuition revenues increased $8 million to total $166 million, primarily as a result of increased tuition rates. From a student perspective, net tuition and fee revenues amounted to $27,859 per full-time equivalent student in fiscal 2008. At the same time, expenses that directly affect each student’s experience—such as instruction, research, academic support, and student services—amounted to $26,558 per full-time equivalent student, or approximately 95 percent of each net tuition and fee dollar.

The economic slowdown has also had a negative impact on private gift and grant revenues, which declined 27 percent from fiscal 2007 levels and totaled $25 million for fiscal 2008. With a decline in the total volume of private gift and grant revenues, the cost to raise each gift dollar has increased to 26 percent in fiscal 2008 from 20 percent in fiscal 2007. It is important to the future of the University that we sustain a higher level of private gift and grant revenues. This critical source of funding from friends and alumni is vital for making continued strategic investments in academic and capital programs.

Management and general costs have continued to escalate, driven up recently by investments in technology, health care, and employee development. Since every dollar spent at the University is funded largely by dollars provided from student-generated sources, we recognize that every possible effort should be undertaken to limit the growth of these costs.

The past year has been a challenging one, and I foresee more economic difficulty in the year to come. Nonetheless, I am confident that the blessings that have accrued to this very special place will carry us securely into the future. Above all else, God has blessed Pepperdine University with talented faculty and staff, wonderful students eager to learn and serve, and committed friends who support this University in the pursuit of its unique mission.

Paul B. Lasiter
Chief Financial Officer