Sunday, May 12, 2019 1:00 am
Purdue Global successfully extends university's reach
The degree to which the authors of the May 5 piece “Online folly deprives regional campuses” misread Purdue's financial statements and distorted both the financial state and mission of Purdue Global is truly disappointing and unfortunate.
In negotiating the acquisition of Kaplan University, we crafted an agreement that provided a nearly impenetrable defense of Purdue's finances. In no way will Purdue ever need to take money from another campus to pay for expenses at what is now Purdue Global. In fact, using state funds for Purdue Global is not permitted under the law and while we didn't create Purdue Global for financial benefit, it is more likely that revenue from Purdue Global would supplement the Purdue system than the other way around.
The authors' claim that the Purdue system is bleeding the regional campuses dry and that Purdue Global operated at a $38 million loss in its first year revealed their general lack of understanding of the principles of higher education accounting. To sell their narrative, the authors obsessed over a single branch in the forest that composes the Purdue system's finances.
First, they misread the financial statements of Purdue Global. Under standard higher education accounting practices, most if not all universities run an annual operating loss, not because they are financially weak but because the number excludes non-tuition revenue from sources such as federal and state aid, gifts, investment income and grants, all of which are a substantial portion of any public university's financial resources. Without these funds, Purdue's operating loss in 2018 was $589 million, Indiana University's was $790 million and the University of Michigan's was more than $1 billion. But after adding in these other revenue sources, the Purdue system came out ahead by $174 million.
While it is true that, in its first year of operation, Purdue Global invested more in startup costs than it offset by revenues, this was a deliberate strategic choice and was, importantly, prefunded by Kaplan Higher Education through the assets it brought to Purdue at acquisition. It is important to note that Purdue Global had more than $66 million in cash at the end of 2018 – a far cry from “bleeding the system dry.”
Another important consideration is that under the acquisition's terms, Purdue is guaranteed payments of $10 million a year for the first five years. These funds could be reinvested at Purdue Global or they could even be shifted to other areas of Purdue, potentially including the regional campuses. Again, that is a far cry from “bleeding the system dry.”
But perhaps most important is the fact that Purdue has the first claim on any revenue Purdue Global takes in. Recall that Purdue owns and runs the university while Kaplan is reimbursed for its expenses in providing various back office support services as marketing, human resources, admissions and information technology. In the waterfall of cash flow, the last to get paid will always be Kaplan and the first will always be Purdue. That is, as money comes in, Purdue's side of the operating costs and its $10 million priority payment are paid first.
This is an important point because I expect elevated startup costs to continue into 2019 and more modestly in 2020.
But under the terms of the agreement, for the first five years Purdue Global may continue to invest in a successful launch, and even if that means an annual cash deficit, Kaplan, not Purdue, will effectively be on the hook for the shortfall.
From a mission standpoint, Purdue Global serves different students and operates in a different model than the rest of Purdue. The authors' criticism that Purdue Global spends significantly less on the cost of instruction than Purdue's brick-and-mortar campuses is the nature of the internet age. It also costs Amazon less to operate than Target and iTunes or Pandora less than your local record store.
It's the quality that matters, and in this, the testimonials are strong that Purdue Global is a leader in online quality. That's why employees across the Purdue system and Hoosiers across the state are enrolling. In just the first year, the number of Hoosiers advancing their education at Purdue Global grew by 130%, and more than 500 Purdue employees enrolled.
Obsessing over which model is better, online or traditional, misses the point that both models rarely compete against each other. Both options reach and benefit different Hoosiers in different ways. The average age of undergraduates at Purdue Global is about 34. At Purdue Fort Wayne, it's 22 and even younger at West Lafayette. Purdue Global currently serves more than 2,000 Hoosiers who, because of life circumstance or geography, found it difficult to enroll in a traditional program. They now have a Purdue offering that works for them.
Purdue's regional campuses are vital assets to their communities, worthy of additional state and university investment. Yet, the argument that all students “would be better off enrolling in a regional campus” is off base. Working adults, who do not live near a brick-and-mortar campus, understand this in a way the authors do not. Parents who didn't finish school because children came sooner than expected understand this in a way the authors do not. Both groups of students are overwhelmingly represented at Purdue Global.
As I encounter more and more of the men and women who are taking the initiative to finish their degrees despite obstacles, I feel as proud of my small part in it as I do anything else I've done at Purdue. Increasingly, as Purdue faculty and alumni are able to separate the facts from the activism, they are joining me in this enthusiasm.
Bill Sullivan is the treasurer and chief financial officer of the Purdue University system.