Flat Is the New Up
At a recent business meeting a colleague and I were discussing corporate revenue trends over the past few years and we concluded that "Flat is the new up." I didn't really like the way that sounded, but it generally seems to be true. When I look at Pepperdine University's total revenues over the past three years, our fiscal 2012 revenues of $291 million were indeed basically "flat," a picture that has become all too familiar across the current business landscape.
"Flat" seems to be the new normal for the University because it's very difficult to increase total revenues without significantly expanding our student enrollments, endowment support, or gift revenues. Expanding student enrollments hasn't been a goal at Pepperdine. In fact, over the past decade we've intentionally striven to hold steady, or even decrease, our overall student enrollments in order to maintain and improve on our already "high-touch" educational experience. An indication of our effort can been seen in the University's full-time-equivalent student base which was 6,068 for fiscal 2012, a 2% decline from 6,202 in fiscal 2010. Our low student-to-faculty ratio and small class sizes are a comparatively expensive way to teach, but we believe it's the best way for our faculty to engage students and transform their lives.
In addition to keeping our student enrollments basically "flat," we've tried very hard to keep our tuition rate growth as low as possible. Overall, there is strong demand for students seeking to enroll in one of our many educational programs, but while more students desire to attend Pepperdine University, the trend over the past several years shows that demand for University-funded financial aid has increased even more substantially. Accordingly, in fiscal 2012 we distributed a record $81 million (or about $13,400 per full-time-equivalent student) of University-funded student aid, and we are on track to surpass that figure by a wide margin in fiscal 2013.
The University's endowment funds ended fiscal 2012 at $608 million, a level that remains below the $716 million high-value mark achieved in 2007. While it would certainly be desirable for our endowment to be restored to its previous highs, from my perspective the level of operating support we receive from the endowment each year is much more important than its value at the end of any fiscal year. Even in the wake of the extreme volatility our endowment has experienced over the past five years, the operating support the endowment has provided to University operations has increased every year since 2007 from $26 million to over $32 million in fiscal 2012.
In the face of flat total revenues, I wish I could say that "Flat is the new up" for expenses as well. Unfortunately, that's just not the case. In fiscal 2012, total expenses increased to $277 million. While we've done a good job of curtailing growth in management and general (also known as "plant and administrative") expenses, student-centered costs have continued to escalate. Increased demand for many student services including athletics, career services, disability services, student employment, the Volunteer Center, Intercultural Affairs, student activities, and our counseling and health centers has increased the cost of serving our students.
I remain pleased with the University's overall liquidity and strong financial position. In order to take advantage of our excellent credit rating and the current low interest rate environment, in June of 2012 we refinanced $45 million of outstanding tax-exempt debt. As a result of that transaction, we generated almost $12 million in additional cash that can be used to improve facilities, generated significant present value interest savings, and at the same time reduced continuing interest costs by almost $500,000 annually.
Pepperdine University is young at age 75. But during this short span, through every peak and valley, its leaders put their faith not in the economy, the size of an endowment, or cash in the bank. All of these can change in an instant. God, however, remains faithful, which is why our trust has always rested in Him alone. The faculty, staff, and friends of Pepperdine University keep the faith, and will continue to do what we can to support its unique mission.
Paul B. Lasiter, CPA
Vice President and Chief Financial Officer