2015-2016
FINANCIAL REPORT
Thanks to very favorable developments in several key revenue and expense categories during the fiscal year, we were able to earn a surplus of $1.8 million, notably from an exceptional year for our Annual Fund
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reetings from the Finance, Investment, and Operations teams at Lawrenceville. This report reviews our School’s financial and operating results for fiscal year of 2016 which concluded on June 30, 2016. We have held this report to allow us to include highlights of our audited annual results. In brief, Head Master Stephen Murray’s H ‘55 ‘65 ‘16 P ‘16 inaugural year at Lawrenceville was another strong one for our School. Although investment markets were challenging and left us with a lower endowment at the end of the fiscal year, the School continued its long march to financial sustainability during Fiscal ’16 by continuing to pay down debt when it is due, by growing an unrestricted reserve to sustain it through crisis, by establishing a contingency to buffer operating volatility during the year, and by internally financing more capital maintenance, among other similar steps. We continue to be challenged by our relatively smaller endowment, versus our peer schools, which puts the burden of cost growth on tuition and other sources of revenue, thus we are pleased to have been able to gradually and steadily increase our financial strength in spite of this disadvantage. The pillar upon which all of this progress rests is the record admission demand we enjoy for a Lawrenceville education in spite of our higher tuitions – being a recognized leader in adolescent education has financial resilience as an essential by-product.
ENDOWMENT REPORT Our endowment stood at $381.1 million as of the end of the 2016 academic year, following distributions to the School of $16.8 million throughout the year. The endowment return for the year ending June 30, 2016 was a negative 3.2%, placing us at the median of independent school returns. Over the 10-year period ending at the same date, the endowment’s returns continue to place it in the top quartile of this group. As most observers are aware, it was a difficult year for institutional investors – endowments, foundations, and pension funds – which typically maintain diversified investment portfolios, and median returns for these investor groups were all negative. Among asset classes, the highest returns came from fixed income, which in our portfolio returned 10%. Although the S&P 500 returned 4% for the period, international developed markets were negative 10%, and emerging markets were negative 12%, with allocations to these markets impacting returns. The other main detractor to returns was exposure to hedged equity funds, with disappointing recent performance. In contrast, our private investments have consistently outperformed public markets by a substantial margin, returning an average of approximately 16% over the last three- and five-year periods, aligning with our Investment Committee’s decision to increase this allocation, while reducing our hedged equity allocation. In a recent review of our long-term performance and strategy, analysis by the School's endowment advisor Cambridge Associates showed that over a 10-year period our returns have been in line with a 70% equity, 30% fixed income portfolio, but with considerably less risk as measured by volatility – approximately one-third less volatility. The reduction of volatility is extremely important in a portfolio from which distributions are made each year, and it leads to significantly improved long-term values. In the course of an Investment Committee retreat in August, it was noted that most analysts were predicting a lower return environment for the foreseeable future. Since that time of
course, there has been an American election which has undoubtedly altered some of those expectations, particularly for U.S. markets. The Lawrenceville portfolio is broadly diversified, and with 70% of its public equities U.S. focused, it should be in a position to benefit should these expectations be realized. The diversity of asset allocation and manager selection within the portfolio has, over the long term, well served the needs of the School, and under the chairmanship of Michael Chae '86, the Committee, which consists of seven trustees, has elected to maintain this approach
In our planning for
CASH OPERATING PERFORMANCE
total cash expenses to
In our planning for Fiscal 2016, we anticipated expense growth of 3.7% over Fiscal ’15, which would take our total cash expenses to $59.2 million for our targeted student population of 815. Our preference would be to grow our budget more slowly in low inflationary times like these, but people- and plant-related costs, which together account for 77% of our total cost, tend to rise faster than inflation, hindering our budgetary flexibility. For example, fearing a large increase in our employee health insurance program due to a negative trend in claims, we included a 12.2% increase in a cost category that represents 6.8% of our total expense base. Such items are not at all unique to Lawrenceville, but they illustrate the challenges we face in keeping expense growth in check.
$59.2 million for our
To fund this budgeted expense growth, we looked to our normal three primary sources of revenue - tuition, endowment draw, and annual giving - which have provided, respectively, roughly 56%, 28%, and 10% of total revenue in recent years. For Fiscal ’16, we judged that we needed to raise tuition rates by 4.5% to generate net tuition cash revenue of $33.4 million. Our budgeted endowment draw was able to grow 5.1% to $16.7 million thanks to the growth in size of our endowment to a then record $381 million following infusions from the Bicentennial Campaign and from steady increases in investment value across the preceding bull market. And we conservatively budgeted our annual fund from alumni, parents, and friends to grow 1% to $5.6 million. Together, these sources accounted for 94% of our Fiscal ’16 budget, leaving the remaining 6% to be covered by a series of lesser but still important sources. With a balanced budget planned for Fiscal ’16, we proceeded to operate through Head Master Murray’s first year at Lawrenceville. Thanks to very favorable developments in several key revenue and expense categories during the fiscal year, we were able to earn a surplus of $1.8 million, notably from an exceptional year for our Annual Fund thanks to a surge of donor generosity, as well as from much lower utility costs for the School than we had anticipated as global and regional energy prices remained very favorable to us. In keeping with Board policy to direct surpluses into savings, we have used the surplus to improve our financial security by adding it to our recently established Unrestricted Reserve, taking its balance to a new high of $17.2 million. Unrestricted monies are generally the hardest for non-profits to raise, so the wisdom of our Board to direct undesignated bequests and earned surpluses to this Reserve is helping it to grow and to become an increasingly vital feature of our improving financial picture.
FINANCIAL STATEMENT HIGHLIGHTS Despite strong fiscal operating management, total net assets of the School declined by 3.75% to $510 million. This decline resulted primarily from three items which are largely outside of management control: i) endowment gifts fell by $10 million during Fiscal ’16, back to a typical annual level after a several extraordinary gifts had created a welcome but unusual peak in our Fiscal ’15
Fiscal 2016, we anticipated expense growth of 3.7% over Fiscal ’15 which would take our
targeted student population of 815.
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Physically, we completed the full restoration of
results; ii) we experienced a 30% unfavorable swing of $4.38 million in the fair market value of the interest rate swaps we use to hedge interest-rate volatility on our floating-rate debt – these values swing negatively to us when interest rates fall; and iii) a 3.2% negative return on our endowment investments year-over-year.
Foundation House to return it to its original function as the Head Master’s residence, with much modernization built beneath its paneled interior.
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With the release of our Fiscal ’16 Financial Statements, we also analyze how credit markets will assess them for changes to our credit quality. Using Moody’s long-term debt ratings of our three outstanding bonds and their analytical template as a proxy, we anticipate solidly maintaining our “Aa3” rating from our Fiscal 2016 results. At the close of Fiscal ’16, our public debt totals $51 million, which we have steadily paid down from $65 million over the last 10 years
CAMPUS OPERATIONS In the run-up to Head Master Murray’s arrival in July of 2015 and throughout his first fiscal year, the campus saw a number of exciting developments. Physically, we completed the full restoration of Foundation House to return it to its original function as the Head Master’s residence, with much modernization built beneath its paneled interior. The metamorphosis of the Bath House from our outdoor activities center to a student café and gathering spot was also completed to student and faculty acclaim. Corby Math Building’s replacement by a new math wing on the Kirby Science Center was well under way. And the renovation of the large landscapes marred by Bath House and Kirby Science Center construction, being the Crescent and Flagpole Greens, went under repair for completion in Fiscal ’17. Meanwhile, plans for replacing the badly outdated Abbott Dining Hall were taking form with construction slated to start in the summer of 2016 and to complete in time for the opening of School in August of 2017. In spite of the considerable campus building and infrastructure repair which has taken place over the last decade, Head Master Murray arrived to face equally large physical challenges with our campus. Our iconic Field House is well past its use-by date; our Irwin Dining Center needs renewal; and technological innovation is prompting us to consider programmatic updates to facilities like our Gruss Center for Visual Arts and Bunn Library to intelligently integrate “maker spaces” with computer-driven tools such as 3-D printers and laser-cutters to enrich our curriculum. In the face of such needs, and in the context of his new Strategic Plan, “Lawrenceville 20/20,” Head Master Murray commissioned the School’s first physical master plan in many years with the appointment of Sasaki Associates late in Fiscal ’16, with expected completion toward the end of Fiscal ’17. These activities dove-tailed with some changes to Head Master Murray’s Senior Staff. As the end of Fiscal ’16 approached, after ten years as CFO & COO, I announced my plans to retire in the summer of 2017. Due to growth in the breadth of these roles over my decade with the School, Head Master Murray decided to split and specialize the positions. At the close of Fiscal ’16, Pete DeVine, a plant and construction specialist, was hired as the School’s first Chief Officer of Campus Operations, and our new CFO, Ben Hammond, begins on July 1, 2017. As the baton is passed, the School finds itself strengthened, financially and operationally, and ready for Head Master Murray to lead us into our next phase of exciting change that will enhance our very special school for decades to come. Speaking personally, it has been a great joy and a deep honor for me to support our School in every way I could over these 10 ½ years, and I couldn’t be happier than to leave the School in such great hands.
–Wesley R. Brooks ’71 H’09 P’03 ’05 Chief Financial Officer
Statement of Activities
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2016 2015
Revenue, Gains and Other Suport Student Tuition and Fees (net)
34,207,652 32,408,513
Contributions
25,404,164
Investment Return
35,460,115
(14,809,608) 11,724,261
As the baton is passed, the School finds itself strengthened, financially and operationally, and
(4,381,174)
(1,735,496)
ready for Head Master
Auxiliary Programs
2,593,088
2,574,373
Other Revenues
153,334
Murray to lead us into
Net Depreciation in fair value of interest rate swap
Total 43,167,456
Expenses
96,440 80,528,206
our next phase of exciting change that will enhance our very special
Instruction
20,265,023 20,064,099
school for decades to
Student Services
26,309,355
25,504,140
Institutional Support
13,765,905
14,169,226
come.
Auxiliary Services
2,732,461
2,688,575
Total 63,072,744
62,426,040
Net Increase/(Decrease) in Net Assets
(19,905,288)
Net Assets at beginning of year
529,953,301
511,851,135
18,102,166
Net Assets at end of year
510,048,013
529,953,301
Cash
35,202,683
21,307,930
Receivables
25,209,922
23,649,729
Prepaid Expenses and other assets
1,248,393
1,407,326
Investments at fair value
379,300,681
410,878,127
Balance Sheet Assets
Construction in progress
8,897,863
4,927,296
Plant Facilities
146,549,841
147,355,037
Total Assets 596,409,383
609,525,445
Liabilities Accounts Payable
6,371,567
4,503,311
Deferred Revenue
5,896,051
2,889,994
Note Payable
1,724,643
1,821,767
Liability under split interest agreement
1,982,452
2,394,501
Interest rate swap
18,762,698
14,381,524
Asset retirement obligation
966,116
966,116
Bonds payable
50,657,843
52,614,931
Total Liabilities 86,361,370
79,572,144
Net Assets Unrestricted
162,593,870
172,406,193
Temporarily restricted
148,068,679
163,913,640
Permanently restricted
199,385,464
193,633,468
Total Net Assets 510,048,013
529,953,30
Total Liabilities and Net Assets
596,409,383
609,525,445
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