Report of the Treasurer to the Council for the Year Ended December 31, 2001 (2002)

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

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

oped to reflect the asset allocation within the NAS NAS General Funds portfolio. NAS General Funds account for the activities of the • The next chart presents the investment structure Council, the Officers, and the Members as follows: adopted by the NAS Finance Committee in 1995 for its asset allocation strategy. Revenue: Contributions from Endowments $5,507 Interest Income and Reimbursements 894 Development Office 154 Overview of Current Investment Structure Total Revenue $6,555 Percent Dollar of Amount (in Expenses: Target Portfolio thousands) Development Office $1,816 Fixed-Income: U.S. Fixed 15.0% 13.2% $ 32,812 Member Services: U.S. High Yield 5.0% 3.7% 9,114 Annual Meeting 425 Non-U.S. Fixed 0% 1.9% 4,656 Other 164 Mortgages (at cost) 0% 3.5% 8,663 Programs/Projects: Equities: U.S. Large Cap Funds 30.0% 31.6% 78,366 Committee on Human Rights 165 U.S. Small-Mid Cap Funds 15.0% 15.2% 37,846 Arts in the Academy 322 Non-U.S.Stocks – Developed 15.0% 15.0% 37,304 Public Understanding Of Science 276 Non-U.S. Stocks – Emerging 5.0% 1.9% 4,680 Beyond Discovery 397 Hedge Funds 10.0% 10.2% 25,435 Frontiers of Science 605 Private Commitments 5.0% 2.6% 6,484 Multiethnic Conflict Symposium — Cash Equivalents 0% 1.2% 2,859 Issues in Science and Technology 92 Total $248,219 Woods Hole 328 NAS Officer’s Expenses 364 NRC Operations 487 • Market values of the Endowment and Trust Invest- Interest Expense 243 ment Pool, after withdrawals, for the years ended Other 466 December 31, 2001 and 2000, are displayed in the Total $6,150 following chart: Surplus – NAS Reserve $ 405 ($ in thousands) 2001 2000 Journal Publications Cash and Fixed-Income Securities $ 58,104 $ 84,737 Equity Securities 190,115 188,764 Total $248,219 $273,501 • Financial results of the Proceedings of the National Academy of Sciences are shown below for the years ended December 31, 2001, and December 31, 2000: • See schedule 2-A and 2-B for details of specific investments. ($ 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 Total $7,247 $7,546 $19.5 million, and $6.0 million for the IOM, TNAC, and Woods Hole Endowment Funds, respectively. Expense: Printing $4,197 $4,161 TNAC denotes The National Academies’ Corporation Other 2,789 3,210 (Beckman Center), which is equally owned by the Total $6,986 $7,371 National Academy of Sciences and the National Acad- 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 • Several award trust funds have existed for more than President’s Committee, NAS General Fund’s activity, 100 years, while others were established more re- and prizes and awards for the current period. Addi- cently. The Home Secretary oversees the nomination tional withdrawals of $4.2 million were made to fund process that selects award recipients and recommends IOM, Woods Hole, and TNAC activity. to the Council (subject to legal and financial review) 3 

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

The Private and Nonfederal sources of revenue listed NAEF is available on request from the NAE Finance above were funded by the following parties: Office; information for the Beckman Center is avail- Foundations, Corporations & Other Organizations $31,784,289 able from the NAS Accounting Office. Individuals 2,999,454 State Governments, Agencies & Institutions 4,298,610 Refunds (200,918) Conclusion Discounts on Pledges Receivable & Other 2,309,830 Total Private & Nonfederal Sources $41,191,265 • The financial statements and schedules that follow reflect the sound financial condition of the National Related Entities Academy of Sciences as of December 31, 2001, and the results of operations for the year then ended. • There are many financial transactions exchanged be- tween the member organizations of the National • I would like to thank the Council, the Committee on Academies. The NRC serves as the clearinghouse for Budget and Internal Affairs, the Finance Committee, these transactions. However, it is important to note and the NRC Operations Committee for their contin- that only the financial activity and results of the NAS, ued input and support. I believe that 2001 was a year NRC, and IOM are included in these financial state- of continued financial stability and improved report- ments. ing capability. • The financial activity and results of the National Academy of Engineering, the National Academy of Engineering Fund, and the National Academies Cor- Respectfully submitted, poration (Beckman Center) are audited and reported Ronald Graham, Treasurer separately. Financial information for the NAE and the 5