Pepperdine 2014 Annual Report

Message from the Chief Financial Officer

Paul B. Lasiter

Higher education has become a pretty tough industry over the past few years.

The pressures that families face in making decisions on whether to send their children to college—and if so, where to send them—are increasing. Many families find themselves in seemingly impossible situations. In order to simply remain average in the workplace of the future, students and their parents alike feel they have no choice but to go to college. But remaining competitive and obtaining a college education can come at an enormous cost, adding a burden to be borne for years to come after graduation. So, what to do? Should children go to college to remain competitive in an increasingly competitive world? How much should each family invest in the future of their children? Will families be able to afford college education at all? Or should we be asking, what is the cost of not sending children to college? Every student and every family needs to carefully consider these questions in making a decision about their personal investment in education.

The published gross tuition rates of colleges across the country are high enough to make almost every family ponder these questions. For fiscal 2014-2015 the average published undergraduate tuition and fees for private four-year institutions was $31,231. Here at Pepperdine's undergraduate Seaver College, that amount is $46,692— almost 50 percent higher than the national average. I can't blame the thousands of potential students and parents who look at that "sticker price" and conclude that there is simply no way they can possibly afford to attend Seaver College. It is a daunting figure to contemplate. But, there is still hope.

What receives far less attention in the public domain is the net tuition and fees that are actually paid by students who attend private colleges across the country. These figures are not as readily attainable, and are certainly not as widely reported by institutions of higher education themselves or by the media. In fiscal 2013-2014 the gross tuition price (excluding fees) for Seaver College was $44,650, but the average net tuition paid per full-time equivalent Seaver College student was 47 percent lower than this amount at $23,556. Five years ago in fiscal 2009, the average net tuition paid per full-time equivalent student was $20,765, or over 43 percent lower than the Seaver College published gross tuition price. We have consciously increased the student aid that we award in order to make it more affordable to attend Seaver College. By increasing the discount rate by more than four percent over the past five years, we have been able to slow the average rate of growth in the net amount actually paid by students to an average annual increase of 2.55 percent, a rate more consistent with inflation in the United States over that same time.

I expect that many of you reading this letter will be surprised by that fact. Most are shocked to learn that despite all they have heard in the media, the actual amounts collected from undergraduates by Seaver College, after student aid has been awarded, are essentially unchanged from five years ago after adjusting for inflation. That has not happened by accident. Pepperdine's single fastest growing expense is student aid. Why? Because at Pepperdine, the most significant investments we make are in our students, and we do everything we reasonably can to help make the cost of the world-class education provided by our faculty as affordable as possible. That investment will continue long into the future. But our commitment to this effort also makes it difficult to manage the increasing cost pressures that face the University. In the current environment where students and their families are challenged to bear the full weight of the cost increases we face as a university, support from our donors and friends, particularly for student scholarships, are of paramount importance.

It may seem strange that a chief financial officer would dedicate such a large part of a university financial report to describe a difficult customer environment, and the difficulties customers face in purchasing the services the university is offering. And it may seem equally strange to explain the efforts taken by that university to keep increases in the net price of an education to the smallest amount possible. For many other companies, that would certainly be true. But what we do at Pepperdine to positively affect the lives of our students is important, and the impact that our student's lives will have on the world is of paramount importance. Ensuring their ability to attend Pepperdine and thrive after graduation demands our best effort, full attention, and our most significant investment. The investments we make today in our students will create returns not only for the University, but for the world in the years to come.

Maintaining a strong financial position enables the University to make these investments in our students' futures. And while our total endowment funds ended fiscal 2014 at an all-time high of $790 million, the operating support they provide to the University represents only 8.7 percent of total expenses (including student aid). Significantly increasing the level of support we receive from endowment funds is critical to the future success of the University in an increasingly competitive environment. Additional revenues from endowment support will help continue to reduce the cost increases that our students will experience in the future. Additionally, increased endowment support will help us to make more significant awards of aid to those students most closely aligned with the mission of the University. While endowment support represents a relatively small amount of total expenses, the operating support it has provided to University operations has increased almost every year since 2000 and now totals $34 million in fiscal 2014. This trend must continue, and it will continue with the ongoing support of our alumni and supporters contributing to University endowment funds.

For fiscal 2014, the University's full-time-equivalent student base of 6,048 declined from the 6,202 level five years ago during fiscal 2009. Pepperdine's peak student enrollment occurred in fiscal 2004, and since that time, we have budgeted flat to declining total enrollments and have consistently generated operating surpluses in each year. We don't measure success by the increasing size of our student enrollment, but through the ways we enrich and encourage every student who enters our care. Our low student-to- faculty ratio and small class sizes are a comparatively expensive way to teach, but we believe that is the best way for our faculty to engage students and help transform their lives. We're not about "getting bigger," but we are most certainly about "getting better."

In addition to reaching a new record in the amount of endowment funds as I previously discussed, total assets, total investments and cash, total net assets, and unrestricted net assets all finished fiscal 2014 at record high levels. Increases in investment values and another year of positive operating results contributed to the improvement in the University's financial position.

Total liabilities, as well as long-term obligations outstanding, declined modestly from one year ago, and the amount of expendable net assets available to repay outstanding long- term obligations also increased during the past year. As a result, at the end of 2014, the University could repay the total amount of its outstanding debt 3.2 times from these resources.

I am blessed to serve Pepperdine at this point in its history. The progress we have made in building the financial strength of the University over the past year has been tremendous. But, none of it would have been possible without the continued blessings of God, and without the bountiful help and support of those who love Pepperdine University.