Message from the Chief Financial Officer
By Paul Lasiter
Paul B. Lasiter, CPA
Vice President and Chief
If I had to sum up the feelings I have when I review the financial results of fiscal 2011 in one word—that word would be "hopeful."
Following two very challenging years in the history of Pepperdine University, I am breathing a small sigh of relief. In the wake of the financial crisis, and now the California state budget crisis, many of my colleagues at other universities—especially those at publicly funded institutions—have not resumed breathing at all.
Whereas we took decisive action two years ago to internally reallocate funds to improve operating efficiency and institutional liquidity, many others have only recently begun to take such actions, by either dramatically reducing operating budgets or significantly increasing costs to their students.
While I can certainly empathize with those who are currently grappling with these challenges, I must say that I am pleased that Pepperdine University decisively dealt with those same challenges two years ago and is now uniquely positioned to make significant improvements in the quality of service we afford our students.
The financial position of the University has gained strength from a year ago, with net assets and unrestricted net assets increasing to $1 billion and $576 million, respectively. The primary driver of the growth in net assets came from both improved investment results, principally from endowment funds, as well as positive operating performance.
During fiscal 2011, the University's endowment funds increased $58 million, or 10 percent from one year ago, to total $623 million. It is important to note that this is the increase after accounting for appropriations of endowment support totaling nearly $32 million to fund operating costs and student aid. Many financial analysts look to endowment value as one of the key measures of a university's financial strength.
Generally, I am not concerned about the value of our endowment at any single point in time, but more concerned with the ability of our endowment to meet the payout requirement we've budgeted in any given year. With that in mind, the liquidity position of our endowment is very good and has never caused me to question the receipt of our budgeted annual endowment support. The investment policy of our endowment allows management to achieve superior long-term returns with a reduced risk profile while at the same time allowing for tactical asset shifts to adapt to changing market conditions.
At the present time, we are expecting endowment support to remain relatively constant in the short term since the University distributes endowment support based on a five-year moving average of endowment value multiplied by a five percent payout rate. As mentioned before, endowment support totaled $32 million in fiscal 2011, or approximately 12 percent of total expenses. The relatively low level of support for operations provided by our endowment has been advantageous in the midst of the challenging investment environment we have faced recently since we are less dependent on endowment support to fund operations than many other universities.
The University's liquidity position remains strong and continues to improve through positive operating results, and increases in investment values. Investments in property, facilities, and equipment have moderated over the past year, although we are keenly aware of the ongoing needs to improve the places that our students live, study, and work. To that end, future investments in facilities will continue, and are expected to be funded through the use of existing reserve funds and gifts from friends and alumni.
The operating leverage of the University remains conservative with our long-term debt-to-total capitalization ratio standing at 18 percent at the end of fiscal 2011. The University's debt structure consists entirely of fixed-rate debt, with the majority of maturities scheduled to occur in more than 23 years. The only sizeable exception to that general statement relates to the scheduled maturity of $50 million in taxable bonds due in 2019. The current level of general asset reserves is sufficient to make all scheduled principal payments through 2033.
The University's results from operations remained strong in fiscal 2011, primarily as a result of our students' support and the generosity of our alumni and friends, as well as to significant returns from our investment portfolio.
Net tuition revenues increased four percent or $7 million to total $185 million in fiscal 2011. From a student's perspective, net tuition and fee revenues amounted to $30,100 per full-time-equivalent student in fiscal 2011, while at the same time, expenses that directly affect each student's experience, such as instruction, research, academic support, and student services, amounted to $28,865 per full-timeequivalent student, or approximately 96 percent of each net tuition and fee dollar paid.
Net tuition and fees combined with room and board revenues totaled $216 million in fiscal 2011, or approximately 74 percent of total revenues. Strong demand for the vast majority of our academic offerings, in light of this relatively high level of student-related revenues has provided the University with a stable source of cash to fund operations.
Private gift and grant revenues remained strong, but decreased 26 percent to $28 million due to a larger balance of gifts received through deferred-giving arrangements. It is vitally important to the future of the University that we maintain and sustain a high level of private gift and grant revenues to both increase the value of our endowment and support current operations. We continue to need the support of our alumni and friends, since the need for additional student financial aid continues to be a key concern.
During the course of the past two fiscal years, we took decisive steps to reallocate operating costs to help fund increased levels of student aid. In fiscal 2011, growth in student aid stabilized, and we dedicated increased resources to support other operating activities. As a result, student aid increased one percent and total operating expenses increased by six percent. Despite the recent growth in expenses, we continue to retain annual operating reserves that can be used to shore up any declines in future endowment support, fund more student aid should that need arise, make strategic investments in research and instruction, or to improve the quality of the student learning experience through reduced enrollment requirements.
Despite the inevitable financial challenges we face each day, I feel incredibly blessed to be working here at Pepperdine University. God has certainly kept his face shining upon this special place in the midst of very turbulent times. I pray that He continues to give us all peace, and that each of us who serves here passes on His grace to our students through all that we do.