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Treasurer's Statement To the Council of the National Academy of S. clences: This report, "Treasurer's Report to the Council of the National Academy of Sciences," presents the financial position and results of operations as well as a review of the endowment and trust activities of our Academy for the year ended December 31, 2001. Financial Overview The financial overview that follows expands on the finan- cial statements and notes to the financial statements, as found on pages 39-53. . Cash and Cash Equivalents The increase in cash and cash equivalents in 2001 is the result of uninvested cash in short-term investment accounts at year-end due to the timing of the receipt of the funds. The cash was placed in money market funds, which is considered cash equivalents for finan- cial statement purposes. The cash was fully invested in short-term investment instruments in early January. Short-term Investments Short-term investments of NRC funds amounted to $52.0 million as of December 31, 2001. These funds are held in short-term investments for the following purposes: Programs Corporate financing Swap proceeds Total $40,351,728 7,024,991 4,648,126 $52,024,845 On December 31, 2001, the Academy's short-term fixed income instruments were earning interest at an average rate of 4.55 percent. In addition, a small portion of the portfolio is invested in a diversified list of common stocks. This portfolio generated interest income of $2.7 million and capital appreciation of $0.8 million during the year. (Details are provided in note 4 to the Financial Statements.) Interest and capital gains are reinvested in programs. . . . Bond Proceeds Held with Trustee The decrease in bond proceeds held with trustee from $78.3 million in 2000 to $38.0 million in 2001 is due to the nearing completion of the new NRC office building at 500 5~ Street. This decrease corresponds with the increase in the property and equipment balance from $68.6 million in 2000 to $109.6 million in 2001. The building costs have been capitalized as part of construction in progress. (See notes 5 and 12 in the Financial Statements for additional details.) Revenues The Academies' operating funds come from four main funding sources: government support, private support, contributions and investment income. Although government revenues decreased from $165.7 million in 2000 to $163.9 million in 2001, the basic core of NRC programs has increased steadily over the past few years. This decrease was attributable to a $9 million decrease in flow-thru funding related to the Radiation Effect Research Foundation (RERF) program. Excluding the RERF program, government revenues increased by $7.2 million in 2001 due to an increase in amounts funded for studies. (See 2001 Revenue by Source section for more details.) Contribution revenues decreased from $34.3 million in 2000 to $8.2 million in 2001. This decrease relates to the extraordinary contributions recognized in 2000: Koshland $22.8 million (net of discount); Sackler $5.6 million, and Robert Wood Johnson Foundation $3.7 million. Individual gifts of this magnitude were not received in 2001. However, current year contributions are consistent with the average increase in giving since 1996, excluding 2000. (See also 2001 Revenue by Source section for additional details.) Investment income shows a net loss of $9.9 million in 2001 due to unfavorable capital market conditions. (See note 4 to the Financial Statements for details.) Expenses Total NRC grants and contracts program expenditures for FY2001 was $175.7 million compared to $179.5 million for 2000. This decrease is attributable to the decrease in flow-thru funding related to the RERF program. See the corresponding decrease in govern- ment revenues related to this program above. See 1

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Note 10 of the Financial Statements for a presentation of expenses by NRC program unit. Development Ofrce Programs In 2001, the Development Office continued to raise mem- bers' awareness of our goals for The Campaign for the National Academies, and encouraged participation in the Academy's Annual Fund and Planned Giving program. The $300 million Campaign for the National Acad- emies has progressed well in 2001, bringing the total received to $175 million. Over $48 million has been raised for the NAS, towards its $60 million goal. The campaign is scheduled to conclude at the end of 2004. A total of 420 members made contributions to the NAS exceeding $880,000 in FY 2001. This repre- sented a 21 percent member participation rate, equiva- lent to last year's participation level. We hope to see 50 percent of members participating in annual giving by the close of the Campaign in December 2004. Toward that goal, the 2001 Annual Fund appeal initiated a class-by-class and section-by-section effort to increase participation; in 2002 that process will be expanded to include a broader group of classes and sections. The Development Office's Estate Planning and Planned Giving program was enhanced in 2001 with the introduction of the Insight on Estate Planning newsletter series and the expansion of Insight Online, an estate planning web resource developed specifi- cally for members. Both Insight resources will con- tinue in 2002, and we will explore additional opportu- nities for providing members with Practical ~ .. . . . Information on estate planning and estate-based chari- table giving. Members of the Presidents' Circle - a group of more than 100 of the Academies' friends from business and industry - continue to make significant contributions to our unrestricted and program funds. Beyond their annual gifts of $241,000 in 2001, Presidents' Circle members contributed $504,000 for specific Acad- emies' projects. Notable among those gifts was Sarah Schupf's contribution to underwrite a series of origi- nal biographies of accomplished female scientists for use by middle school girls. The series will be pub- 2 fished by the Academies' Joseph Henry Press, begin- ning in 2004. . In 2000 and 2001 the Development Office initiated regular communications to members about the Campaign's status and significant member gifts. Those communications will continue in 2002, when members will also receive a personal request for support. We firmly believe that NAS members will respond favorably with generous gifts to the Academy's endowment and in support of its important programs. Endowment and Trust Investment Pool With the assistance of the Finance Committee, I am responsible for the prudent management of the Endow- ment and Trust Fund portfolio. To provide stable support for the Academy's General Fund, the NRC programs, and other Trust and Award activities, the Finance Committee, with the approval of the Council, has adopted a 5 percent per year spending rule for the endowment and trust funds. This spending limitation was imposed in order to maintain the purchasing power of the endowment over time by reinvesting a portion of the annual total investment return. The spending rule is based on the three-year average market value of the participating funds in the investment pool. . . During 2001, the investment performance of the port- folio was slightly lower than the composite bench- mark for the year. The endowment sustained a loss of 5.9 percent while the market benchmark was negative 4.8 percent. The less than 1 percent difference is attributed to slight overweighting in Science and Technology funds. While the return for the total portfolio is slightly lower for the year, the performance for the five-year period is consistent with the market benchmark. In addition, for the ten years ending December 31, 2001, the total return for the portfolio is 10 percent while the com- posite benchmark is 9 percent for the same period. The benchmark portfolio is a composite index consist- ing of the Standard and Poor's 500 Index (35 percent), the Russell 2000 Index (15 percent), the EAFE Index (15 percent), the Emerging Markets Index (5 percent), the Lehman Aggregate (25 percent), and the Non U.S. dollar Fixed Income Index (5 percent), and was devel-

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oped to reflect the asset allocation within the NAS portfolio. The next chart presents the investment structure adopted by the NAS Finance Committee in 1995 for its asset allocation strategy. Overview of Current Investment Structure Fixed-Income: U.S. Fixed U.S. High Yield Non-U.S. Fixed Equities: Cash Equivalents Total Mortgages (at cost) U.S. Large Cap Funds U.S. Small-Mid Cap Funds Non-U.S.Stocks - Developed Non-U.S. Stocks - Emerging Hedge Funds Private Commitments Percent Dollar of Amount (in Target Portfolio thousands) 15.0% 13.2% 5.0% 3.7% 0% 1.9% 0% 3.5% 30.0% 31.6% 15.0% 15.2% 15.0% 15.0% 5.0% 1.9% 10.0% 10.2% 5.0% 2.6% 0% 1.2% $ 32,812 9,114 4,656 8,663 78,366 37,846 37,304 4,680 25,435 6,484 2,859 $248,219 Market values of the Endowment and Trust Invest- ment Pool, after withdrawals, for the years ended December 31, 2001 and 2000, are displayed in the following chart: Cash and Fixed-Income Securities Equity Securities Total ($ in thousands) 2001 2000 $ 58,104 $ 84,737 190,1 15 188,764 $248,219 $273,501 See schedule 2-A and 2-B for details of specific investments. NAS General Funds NAS General Funds account for the activities of the Council, the Officers, and the Members as follows: Revenue: Contributions from Endowments Interest Income and Reimbursements Development Office Total Revenue Expenses: Development Office Member Services: Annual Meeting Other Programs/Projects: Committee on Human Rights Arts in the Academy Public Understanding Of Science Beyond Discovery Frontiers of Science Multiethnic Conflict Symposium Issues in Science and Technology Woods Hole NAS Officer's Expenses NRC Operations Interest Expense Other Total Surplus - NAS Reserve Journal Publications . $5,507 894 154 $6,555 $1,816 425 164 165 322 276 397 605 92 328 364 487 243 466 $6,150 $ 405 Financial results of the Proceedings of the National Academy of Sciences are shown below for the years ended December 31, 2001, and December 31, 2000: ($ in thousands) 2001 2000 Included in the $248.2 million total market value of Revenue: Subscriptions $4,534 $4,994 the Endowment and Trust Investment Pool as of Author charges 2,453 2,198 December 31, 2001, are the amounts of $39.2 million Other 260 354 $19.5 million, and $6.0 million for the IOM, TNAC, Total $7,247 $7,546 and Woods Hole Endowment Funds, respectively. Expense: TNAC denotes The National Academies' Corporation POri~ehrng $4'l97 $4,161 (Beckman Center), which is equally owned by the Total $6,986 $7,371 NationalAcademyofSciencesandtheNationalAcad- Net $ 261 $ 175 emy of Engineering Fund (see note 1 to the Financial Statements). Prize and Award Trust Funds . Withdrawals of $9.2 million were made to fund the President's Committee, NAS General Fund's activity, and prizes and awards for the current period. Addi- tional withdrawals of $4.2 million were made to fund IOM, Woods Hole, and TNAC activity. . Several award trust funds have existed for more than 100 years, while others were established more re- cently. The Home Secretary oversees the nomination process that selects award recipients and recommends to the Council (subject to legal and financial review)

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changes in the award cycle, amounts of the honoraria, and any other administrative changes. NRC Operations The NRC Operations Committee reviews NRC ad- ministrative and financial operations each month to ensure quality improvements. We have been success- ful in limiting the growth of indirect costs through operational improvements and a rigorous budget process. . . 4 The Academy owns certain of the facilities used in its operations and leases space in others. Leased Owned 109,626 48,000 17,676 Square Feet Assessed Value $69.4 million $12.3 million $2.8 million $24.1 million Not available Main Building Beckman Center Woods Hole Green/Harris Other Facilities Total 225,471 139,690 3,262 365,161 178,564 Offices occupy most of the facilities with the excep- tion of the NAP printing facility in Landover, Mary- land. The Beckman Center and Woods Hole facilities are conference centers in Irvine, CA, and Woods Hole, MA, respectively. The assessed values are based on insurance records for all facilities. In February 2002, the NAS Council approved a plan to proceed with Phase 2 of the 500 5~ Street building project, which is an eight-story addition in the space above the District of Columbia fire station adjacent to the new building. Phase 2 would add approximately 600 offices and permit the final consolidation of staff from the Green Building in Georgetown that is pres- ently leased from Georgetown University. The design and final pricing should be completed by the end of 2002 with construction completed in the first quarter of 2005. As in many universities and nonprofit institutions, managing indirect cost expenditures for funding of necessary support services while keeping these costs in reasonable proportion to program expenditures continues to be a challenge. From 1996 through 2001, NRC management has successfully maintained a rela- tively steady relationship between program and sup- port costs, i.e.; the growth rate of indirect costs was less than or equal to the growth rate of direct costs. Indirect costs for 2001 were $57.1 million. . NRC activities conducted in response to requests from a broad range of U.S. government agencies are funded through cost-reimbursable non-fee contracts and grants. The total amount reimbursed by the U.S. government agencies in the year ended December 31, 2001 was $163.9 million (see chart below). The comparable figure for 2000 was $165.7 million. In addition, private sponsors supplementing government projects or providing for new initiatives fund $41.2 million of awards. 2001 Revenue by Source U.S. Government Agencies (Grants and Contracts) Agency for International Development Defense Special Weapons Defense Supply Service Department of Agriculture Department of Commerce Department of Defense: Department of the Air Force Department of the Army Department of Defense Department of the Navy United States Marine Corp Department of Education Department of Energy Department of Health and Human Services Department of Housing and Urban Development Department of the Interior Department of Justice Department of Labor Department of State Department of Transportation Environmental Protection Agency Executive Office of the President Federal Emergency Management Agency Federal Judicial Center General Services Administration International Broadcasting Bureau National Aeronautics and Space Administration National Science Foundation National Security Agency Nuclear Regulatory Commission Smithsonian Institute Social Security Administration U.S. Postal Service Veterans Administration Carry forward adjustment for indirect costs & Other Total U.S. Government Agencies Private & Nonfederal Sources Grants and Contracts Contributions Total Private & Nonfederal Sources up 1,005,866 142,023 6,616 1,960,053 6,655,338 3,839,745 13,097,189 1,946,048 8,816,626 358,904 4,133,017 8,457,956 16,701,090 493,120 2,555,804 770,525 1,455,173 1,442,232 41,707,303 6,423,042 168,320 22,298 31,478 256,091 14,292 18,404,222 12,771,976 36,575 631,326 16,202 1,293,291 27,803 5,136,838 3,077,861 $163,856,243 $ 33,035,057 8,156,208 $ 41,191,265

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The Private and Nonfederal sources of revenue listed above were funded by the following parties: Foundations, Corporations & Other Organizations Individuals State Governments, Agencies & Institutions Refunds Discounts on Pledges Receivable & Other Total Private & Nonfederal Sources Related Entities . $31,784,289 2,999,454 4,298,610 (200,918) 2,309,830 $41,191,265 There are many financial transactions exchanged be- tween the member organizations of the National Academies. The NRC serves as the clearinghouse for these transactions. However, it is important to note that only the financial activity and results of the NAS, NRC, and IOM are included in these financial state- ments. The financial activity and results of the National Academy of Engineering, the National Academy of Engineering Fund, and the National Academies Cor- poration (Beckman Center) are audited and reported separately. Financial information for the NAB and the NAEF is available on request from the NAB Finance Office; information for the Beckman Center is avail- able from the NAS Accounting Office. Conclusion . . The financial statements and schedules that follow reflect the sound financial condition of the National Academy of Sciences as of December 31, 2001, and the results of operations for the year then ended. I would like to thank the Council, the Committee on Budget and Internal Affairs, the Finance Committee, and the NRC Operations Committee for their contin- ued input and support. I believe that 2001 was a year of continued financial stability and improved report- ing capability. Respectfully submitted, Ronald Graham, Treasurer s

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