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November 11, 2020

Following up on my comments at the November President's Briefing this morning, and as we approach the holiday season, the end of the fall semester, and especially as we look forward to the coming spring semester, I want to provide you with an update on the University's operational plans, financial landscape, and the ongoing impact that the COVID-19 pandemic has had on higher education nationwide.

Financial Landscape

I am deeply encouraged by the results of our collective efforts and sacrifices to weather this storm as we chart a financially sustainable path forward for the University. Over the past eight months, you have embraced heroically the necessity for providing excellence in our online delivery of courses, and you have engaged faithfully in producing excellence in our expense optimization measures. I am astounded daily by your commitment and work ethic on behalf of our students and your refusal to allow the Pepperdine experience to be compromised. Please accept my deepest gratitude for your unwavering, unified professionalism as we live through these most challenging times.

We know from numerous studies and reports that most universities around the country are facing challenging enrollment deficits and debilitating revenue shortfalls. Some universities are facing an existential crisis as a result of COVID-19. Because of your efforts and the planning and strategy of our Finance and Steering teams, I am confident that we will endure this pandemic and remain financially strong. Last week, Fitch ratings affirmed our AA rating and stable outlook and characterized our financial stability with "strong operating flexibility" and a "healthy financial profile." My confidence is based primarily on two important strategies: 1) continued compliance with our extensive expense optimization measures, and 2) the strategic resource alignment process we are implementing in the coming months and years.

Long-Range Planning

Over the past several years—well before the COVID-19 pandemic—the administration has been studying the escalating trends threatening higher education generally and Pepperdine specifically. We have been researching innovative ways to enhance academic excellence and operational support for a university of the future. Our intent is to integrate innovative ideas with best practices to ensure a sustainable future for Pepperdine's world-class undergraduate liberal arts education and first-rate graduate schools. The confluence of increases in the cost of higher education, the cost of student aid in scholarships, and rising student debt has created a compelling necessity to realign how we operate at Pepperdine.
COVID-19 Impact and Response

As you know, due to COVID-19, the University is facing potential losses in the range of $60 million to $80 million, due largely to losses in on-campus and international program housing revenue ($35+ million), increased COVID-related expenses ($11 million), loss of net tuition revenue compared to budget (in the $20 million range across all schools), and diminished fundraising. In response, our community is standing together to backfill our losses through comprehensive expense optimization measures and prudent budget management. As a result, the University has achieved significant success in offsetting costs through decreased expenses in items like travel, supplies, other standard operating costs, and deferred capital expenditures.

Workforce Decisions

In my August 18, 2020, memorandum, I said the following:

"After careful consideration, we have decided to extend this decision to not furlough or lay off members of our workforce due to COVID-related workload reductions through at least December 31, 2020. This decision applies to all domestic employees. With respect to our international program employees, we are working with the Office of International Programs to ensure that all employees are provided support in compliance with local labor laws and social support services to allow us to provide similar protections. We will re-evaluate the status of the pandemic and our budget condition toward the end of the year to determine whether we need to change our approach in calendar year 2021. Our desire is to take care of our people. Sometimes that will be expressed through avoiding layoffs and furloughs. Other times we may be required to implement reductions in our workforce. If that day comes, our desire will be to do it in a way that takes care of our people."

As we look to the spring semester, we have once again decided to find ways to continue to take care of our people. For the past eight months, together we have been able to avoid furloughs and layoffs and to keep our workforce employed through remote working arrangements or strategic redeployment. As a result of the extraordinary efforts of our entire community, we have decided to extend this decision to not furlough or lay off members of our U.S.-based workforce due to COVID-related workload reductions through the spring semester.

Strategic Realignment

As we prepare Pepperdine for the next era in higher education through the implementation of the 2030 Strategic Plan, it is imperative that we structure the University budget in such a way that allows Pepperdine to create flexibility as we advance long-term initiatives that will be foundational to the continued success of the University. Accordingly, we are committed to achieving a sustainable level of resources that will position the University to be less dependent on tuition revenue. In that process, we will be transparent by forecasting important financial decisions that will soon be announced while emphasizing the principles that guide our decisions.

What this means practically is that beginning now, and continuing over the next few years, we will continue to review all University operations, both academic programs and operational support systems, to ensure alignment with our 2030 Strategic Plan, reallocating resources to support those areas that most effectively advance Pepperdine's mission. In the same way that our community has rallied to execute our expense optimization measures, I expect that we will likewise embrace this realignment process as it unfolds.

Spring 2021

In the meantime, the Los Angeles County Department of Public Health has not yet indicated when and to what degree we will be able to invite students back to campus. We remain hopeful that at some point in early 2021 circumstances will change and we will be back together. Until such time as we have a known pathway to return to campus, we must prepare accordingly. Therefore, I have asked the schools and all areas of the University to implement additional expense optimization measures to capture savings from temporarily unfilled positions, reduced travel, and in other non-personnel expense categories across all schools and operational support departments across the University. To reiterate, this will not include COVID-related furloughs or layoffs. This reduction will help address additional housing and net tuition shortfalls we anticipate for the spring semester. We appreciate your understanding and your patience as we continue to navigate this storm with the University's best interests in mind.

As I reflect on Thanksgiving and Christmas, which are almost upon us, I am grateful to be part of this community—a community that demands excellence in all things because our God deserves our very best. I am grateful that you have chosen to utilize the gifts and passions God has given you to bless and serve our students, and I am grateful for your patience, resilience, and perseverance as we take on this storm shoulder to shoulder.

May God's richest blessings fill you up this holiday season.