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Treasurer's Statement To the Council of the National Academy of Sciences: 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, 2002. NAS Overview Development Office Programs . The Academy's successful development activities in 2002 were marked by strong support from both members and friends of the Academy. . . . At mid-year, Houston philanthropists George and Cynthia Mitchell solidified their deep commitment to the National Academies with a gift of $10 milk on and an additional $10 million challenge grant. With this gift, the Academies have created the George and Cynthia Mitchell Endowment for Sustainability Sci- ence, which will fund multifaceted projects on the scientific, technological, and medical challenges of achieving global sustainable economic development. In recognition of this generous support, we dedicated the Mitchell Conference Center at the new National Academies building. At the November 2002 meeting of the Presidents' Circle, the group launched the Presidents' Circle Communication Initiative, a special effort to provide funding for the Academies growing public communi- cations programs. In just the first two months of the Initiative, Presidents' Circle members provided more than $650,000 in gifts and pled" es, which represented just a portion of the nearly $2.4 million in gifts and pledges received from the 1 13 Presidents' Circle members in 2002. Academy members made the 2002 fundraising year notable for their increasing support of the NAS An- nual Fund, where 460 members (23 percent of the membership) made annual gifts totaling $342,000. The growing percentage of members who choose to support NAS is especially important in our overall fundraising success as donors outside the Academies often view members' philanthropic participation as a validation of the organization's mission, and consider this a critical factor in their decisions to support the Academy. Looking ahead, we expect strong growth in 2003 annual giving, as members take the opportunity to have contributions matched through the Mitchell En- dowment challenge grant. We also anticipate an up- swing in members' estate-based giving in 2003, par- ticularly as donors see the advantages of establishing Charitable Gift Annuities with payment rates that exceeded the historically low rates currently offered by bonds, certificates of deposit, and money-market accounts. As the year ended, the Keck Foundation informed the Academies that it would provide $40 million in grant funding to create the Keck Futures Initiative of the National Academies. We believe that the program, which will create multifaceted opportunities to ad- vance interdisciplinary research within and between the fields of science, engineering, and medicine, will have a transformative effect on scientific research and application in the decades to come. The grant agree- ment was signed in early 2003 and intensive program planning and implementation are already under way. Endowment and Trust Investment Pool With the assistance of the Finance Committee, I am re- sponsible for the prudent management of the Endowment and Trust Fund portfolio. The goal of the Endowment is to provide stable support for the NAS General Fund, NAS Trust and Award activities, and the Presidents' ini- tiatives within the NRC program. To achieve this goal, the NAS Council, acting on the recommendation of the Finance Committee, has adopted a spending limitation designed to maintain the purchasing power of the Endow- ment over time by reinvesting a portion of the annual to- tal investment return. The spending limitation caps the annual spending at 5 percent of the three-year average market value of the participating funds in the investment pool. . The investment performance of our portfolio is mea- sured by comparing it with that of the composite market benchmark portfolio for the year. The bench- 1
mark portfolio is a composite index consisting 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 developed to reflect the asset allocation within the NAS portfolio. . . . . 2 The NAS Endowment lost 9.2 percent compared to the market benchmark of a negative 12.6 percent. The positive performance differential relative to the benchmark is attributed partly to a restructuring of the portfolio by the NAS Finance Committee in late 2001. This restructure reduced the investment in equities in favor of strategies that were more defensive and were likely to dampen the impact of the equity market declines. Market values of the Endowment and Trust Invest- ment Pool, after withdrawals, for the years ended December 31, 2002 and 2001, are displayed in the following chart: ($ in thousands) 2002 2001 $ 51,467 $ 58,104 167,909 190,1 15 $219,376 $248,219 Cash and Fixed-Income Securities Equity Securities Total The 11.6 percent overall change in the market value is due to the 9.2 percent market loss, as noted above, and a 2.4 percent change due to withdrawals during the year. In addition to the positive differential for the year, the Endowment has outperformed its benchmark for the trailing five and ten year periods as well. For the past five years including Deeember 31, 2002, the Endow- ment returned 1.7 percent compared with 1.3 percent for the benchmark. The Endowment return for the ten- year period was 8.1 percent compared to 6.9 percent for the benchmark. The next chart presents the investment structure adopted by the NAS Finance Committee in 1995 for its asset allocation strategy and compares this target to the portfolio allocation at Deeember 31, 2002. Overview of Current Investment Structure Percent of Target 15.0% 5.0% 0% 0% 30.0% 15.0% 15.0% 5.0% 10.0% 5.0% 0% 100% Fixed-Income: U.S. Fixed U.S. High Yield Non-U.S. Fixed 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 Cash Equivalents Total See schedule 2A and 2B for details of specific invest- ments. Included in the $219.4 million total market value of the Endowment and Trust Investment Pool as of Deeember 31, 2002, are the amounts of $35.7 million, $16.9 million, and $5.2 million for the IOM, TNAC, and Woods Hole Endowment Funds, respectively. TNAC denotes The National Academies' Corporation (Beckman Center), which is equally owned by the National Academy of Sciences and the National Aead- emy of Engineering Fund (see note 1 to the Financial Statements). . Withdrawals of $8.9 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 $1.5 million were made to fund IOM, Woods Hole, and TNAC activity. Prize and Award Trust Funds 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) changes in the award eyele, amounts of the honoraria, and any other administrative changes. NAS General Funds NAS General Funds account for the activities of the Council, the Officers, and the Members as follows:
Revenue: Expenses: Unrestricted Endowment Woods Hole Endowment Annual Giving from Members Membership Dues Annual Meeting Reimbursements and Miscellaneous Total Revenue Development Office Member Services Annual Meeting Other Programs/Projects Committee on Human Rights Office of Exhibitions & Cultural Programs Public Understanding Of Science Committee on International Security & Anns Control Issues in Science and Technology Study of Electronic Publishing Koshland Science Center Sackler Colloquia Woods Hole Foreign Meetings NAS Officers President's Office NAS Executive Office NRC Operations Interest Expense Other Total Deficit - NAS Reserve $ 1,948 557 220 177 357 499 75 240 200 250 295 309 203 140 246 320 481 306 29 $ 6,852 $ (268) This General Funds deficit was funded by the NAS Re- serve, which has a balance of $2.8 million at December 31, 2002, after deducting the CY 2002 deficit. Part of this reserve is held in the NAS Endowment ($1.2 million) and part of this reserve is held in short-term investments ($1.6 million). One of the anticipated and appropriate uses of the NAS Reserve is to provide a cushion for ongoing op- erations during periods of major market declines, such as has occurred over the past three years. Journal Publications Financial results of the Proceedings of the National Academy of Sciences are shown below for the years ended December 31, 2002 and 2001: 2002 2001 Revenue: Subscriptions Author charges Other Total Expense: Printing Other Total $5,028 3,865 316 $9 209 $7 247 . . $4,534 2,453 260 $5,204 3,888 $9,092 $6,986 $4,197 2 789 Net $117 $261 Facilities $4,993 332 342 NAS owns the following facilities: Woos 627 $6,584 · NRC Office Building at 500 Fifth St., NW in Wash- ington, D.C. . . NAS Building at 2101 Constitution Ave., NW in Washington, D.C. Jonsson Study Center at 314 Quisset Dr. in Woods Hole, Massachusetts. Arnold and Mabel Beckman Center at 100 Academy Drive in Irvine, California (jointly owned with the National Academy of Engineering through The Na- tional Academies Corporation). NAS is leasing the following facilities: · Green Office Building at 2001 Wisconsin Ave. in Washington, D.C. . . National Academy Press Printing Facility at 8700 Spectrum Drive in Landover, Maryland. National Academies Travel Offices at 10 G Street, NW in Washington, D.C. The new eleven-story, $130 million NRC office building at 500 Fifth Street, NW, Washington, DC, was occupied in July 2002, as scheduled, and that project was com- pleted within budget. In February 2002, the NAS Council authorized manage- ment to proceed with planning for Phase 2 of the NRC office building at 500 Fifth Street. If approved, the project would add 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 of- fices and permit the final consolidation of staff from the Green Building in Georgetown. Feasibility of this project continues to be evaluated by management in cooperation with the District of Columbia.
NRC Overview Revenues 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, 2002 was $187.3 million (see chart below and the Statement of Activities), and $163.9 million for the previous year. In addition, private sponsors supplementing government projects or providing for new initiatives funded $54.6 million of awards in 2002, compared with $41.2 million in 2001. 2002 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 Anny 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 Accounting Office 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 U.S. Printing Office Technical Support WKG Group Veterans Administration Carry forward adjustment for indirect costs & Other Total US. Government Agencies Private & Nonfederal Revenue Grants and Contracts Contributions Total Private & Nonfederal Sources 4 The Private and Nonfederal sources of revenue listed above were received from the following sources: Private & Nonfederal Revenue by Source Foundations, Corporations & Other Organizations Individuals State Governments, Agencies & Institutions Refunds Discounts on Pledges Receivable & Other Total Private & Nonfederal Sources $33,721,308 1 1,476,982 5,849,587 (54,647) 3,568,296 $54,561,526 The basic core of NRC programs, which is repre- sented by the Government contracts and grants, has increased steadily over the past few years. The NRC programs funded by the government increased 14 percent by generating $187.3 million in revenues in 2002, compared with $163.9 million in 2001. $ 1,361,264 286,741 352 2,35 1,720 6,930,006 5,870,485 14,784,137 2,644,241 10,530,377 409,883 3,01 9,977 7,348,341 23,650,575 929,794 4,073,360 1,097,090 1,930,657 2,101,770 48,545,966 7,123,075 217,919 23,237 (7,363) 368,101 123,643 15,260 20,259,9 1 1 14,809,972 85,795 401,388 234,523 1,219,426 37,362 4,436 49,998 4,41 8,288 62,995 $187,314,702 $ 40,736,51 1 13,825,015 $ 54,561,526 The private contracts and grants increased from $33.0 million in 2001 to $40.7 million in 2002, an increase of 23 percent. This is due to both an increase in the number of new private contracts and grants awarded to NAS and an increase in funding for the fellowship programs. . Expenses . . . Contribution revenues increased from $8.2 million in 2001 to $13.8 million in 2002. This increase is due in large part to a $10 million contribution from George and Cynthia Mitchell, as noted in the Development Office section on page 1. The effect of this gift is somewhat offset by a decrease in unrestricted contri- butions. The NRC programs include funding from Government and private sources. The program expenses of $212.0 million for 2002 are a 21 percent increase over the 2001 program expenses of $175.7 million (see the Statement of Activities). The management and general expenses encompass the costs that support these programs. The 2002 manage- ment and general expenses of $59.7 million represent a 4 percent increase over the same expenses for 2001 (see the Statement of Activities). 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 2002, 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. That trend continued in 2002 as the indirect costs (management and general expenses) grew at approxi- mately 4 percent and the direct costs (program costs) grew at 21 percent. Related Entities . 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 NAE and the NAEF is available on request from the NAE Finance Office; information for the Beckman Center is avail- able from the NAS Controller's Office. Conclusion I conclude my report with the observation that the Acad- emy continues in sound financial condition. The NRC program level continues to be strong, indirect costs are under control, and our internal and external auditing pro- grams disclosed no material weaknesses. Although the NAS Endowment and Trust Fund continues to reflect the lackluster performance of the broad domestic and interna- tional investment markets, the NAS has the financial dis- cipline and reserves to adjust to the reduced income for 2003. I would like to thank the Council, the Committee on Budget and Internal Affairs, the Finance Committee, and NRC management for their continued input and support. I believe that 2002 was a year of continued financial stabil- ity and improved reporting capability. Respectfully submitted, Ronald L. Graham Treasurer -
