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Financial Update Letter

November 5, 2009

Members of the University Community

I am pleased to present to the University of the Pacific community a report on the financial strength of the University. This letter discusses the financial activities during the 2009 fiscal year (July 1, 2008 - June 30, 2009), summarizes our endowment's investment performance during that year, reports our enrollment figures, and projects budget strength for the current fiscal year (FY10) and into FY11. My intention is to send a similar letter annually after we have "closed the books" on the previous fiscal year and finalized our enrollment figures for the new academic year.

FY09

Pacific's financial foundation is fundamentally sound in spite of being buffeted by the worldwide financial crisis of 2008-2009. The University ended the year with net tuition revenue up over $10 million, or 6.5%. Government grants were slightly down, private grants, gifts and bequests dropped by just over $9 million over the prior fiscal year, while spendable funds from endowment investments increased $260,000 from the previous fiscal year. This resulted in a net increase of our operating funds of nearly $1 million over the 2008 fiscal year.

Our net assets (the amount by which the value of all the University's assets, including cash, receivables, pledges, endowment and other investments and facilities, exceed all the University's liabilities) dropped by nearly $36 million, or 8.4%. We realized a gain of nearly $5 million on the successful completion of the sale of the KUOP broadcast license to Capital Public Radio in Sacramento and an increase in net assets of $7.1 million as a result of our operations surplus, but those gains could not fully offset the drop of $40 million in the value of our endowment investments between July 1, 2007 and June 30, 2008.

The extraordinary market conditions of the past year required a rescaling of earlier plans for new facilities, so the University proceeded with only two construction projects, both of which had received significant donor support. However, these required supplemental bond financing to complete. It is a testament to the excellent financial stewardship of Vice President Pat Cavanaugh and his team, along with prudent financial policies set by the Board of Regents, that Moody's Investment Services affirmed the University's "A2/stable outlook" bond rating-a very positive outcome for our University. This allowed the University to sell $15 million of bonds at competitive rates for the new John T. Chambers Technology Center and the Janssen-Lagorio Multipurpose Gymnasium in Stockton as well as for needed infrastructure improvements at the Dugoni School of Dentistry in San Francisco.

Endowment Investment Results

I would like to thank our dedicated and talented Regents and investment staff who have made wise and prudent investments of our endowment over the decades. University of the Pacific's endowment value increased from a level of $95 million just ten years ago to $209 million at the beginning of FY09. This tremendous growth is after over $71 million of endowment support was paid out during this period to support Pacific scholarships and educational efforts.åå This was the result of the very successful Investing in Excellence Campaign, which concluded in 2007, which established approximately 350 new endowment gifts, along with the excellent performance of our endowment investments.

Regrettably, the worldwide financial crisis had a significant impact on those gains. During FY09, the Pacific endowment dropped by over 18% due to the major drop in the value of most asset categories. While this is a significant loss to the University, it is far less than the percentage and dollar value losses of many other university endowments.

Spendable funds from endowments, set by Board policy, are 4.5% of the prior three-year average of the endowment. When the last fiscal year started on July 1, 2008, our endowment was $209 million, down slightly from our record ending balance of $220 million on July 1, 2007. This is why spendable funds from the endowment actually increased over the prior year, but, with both FY08 and FY09 down from that FY07 high, will decrease in coming years. In addition, Board policies further limit payouts on endowments whose market value has fallen below the original gift value. Hence, while last year had a record level of spendable funds from the endowment, this year the funds Pacific will spend from its endowment will drop by about $3 million to $5.7 million. In order to restore Pacific's endowment spending returns to pre-2009 levels, we will have to rebuild the endowment through investment earnings and gifts. Since the beginning of the current fiscal year on July 1, Pacific's endowment investments have improved their performance and our endowment exceeded $181 million as of October 1.


Interestingly, while we may lament the decrease in the contribution of endowment returns to our University's budget, the reality is that even during the record year of FY09, endowment spendable funds were only 3% of the University's budget.

Enrollments

Associate Provost Rob Alexander and his team did an exceptional job in building our enrollments on the Stockton campus. The enrollments for this fall include a number of records for Pacific, including the largest number of freshmen (894), the largest Stockton campus enrollment (4,806), and the largest overall University enrollment (6,401). Meanwhile, enrollments at Pacific McGeorge School of Law were steady with an increase of 21 students and at the Arthur A. Dugoni School of Dentistry of 2 students. New graduate enrollment also jumped by 50 students over 2008. Together, these gains resulted in an increase in enrollments of 150 students over last year.

What is most striking is the composition of our freshman class. Selectivity improved to 42%, from 69% the previous year, while the average SAT score of enrolled students jumped 28 points, to 1189. We also made gains in ethnic diversity, with the percent of Hispanic freshmen increasing from 11% to 14% this year, although geographic diversity declined with 84% of our new freshmen from California, up about 6% from a year ago. Finally, we also saw increased enrollment in programs with capacity, notably music, education and engineering.

Our entering freshman class, though, has greater financial need than previous years. This year, 90% of entering freshmen received institutional aid, as compared with 86% last year, with the most dramatic increases in high-need students from our local and northern California regions.

FY10

The fiscal outlook for FY10 is cautiously optimistic. Since tuition revenue comprises nearly 85% of the general operating revenue at Pacific, the strength of our enrollments is always critical to our financial strength. Pacific projects gross tuition revenue to increase at least $10 million over last year. However, we also expect institutional financial aid to increase more than $3 million over last year. So our net tuition revenue, which is the tuition minus our institutional financial aid, is expected to increase only $7 million. Also, some operating revenues have decreased including those from endowments and short-term investments.

The Institutional Priorities Committee, under the leadership of Provost Phil Gilbertson, does a great job in developing prudently conservative estimates of anticipated enrollments and other revenues and then building a priority-focused budget proposal based on those estimates. Because of this approach and based on the higher enrollments among returning and graduate students, an operating surplus is now projected for FY 10. Decisions on how that projected surplus can best advance the University will be deferred until later in the year after enrollments for the second semester are known.

Prospects for FY11

Pacific is increasing its investments in undergraduate enrollment efforts to ensure this important part of our budget remains strong. While it is too early to say with certainty, initial indications are that next year's enrolling classes will again be strong. Lower endowment spending, the anticipated reduction of the Cal Grants, and an uncertain economic future all suggest we continue our cautious approach to planning and budgeting for FY11.

The strength of our financial position is the work of many dedicated individuals whose work we appreciate and applaud. In addition, it is because our university community creates a superior learning environment at Pacific that engages and attracts students to our excellent academic programs. Thank you, all, for your efforts.

 

Pamela A. Eibeck, PhD, PE
President