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Report of the Treasurer to the Council of the National Academy of Sciences 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 highlights of NAS and NRC operations, Endowment and Trust activity, and the financial condition of our Academy for the year ended December 31, 2003. NAS Highlights Development Office Programs In 2003, the Academy’s fundraising program was high-lighted by a series of notable contributions from individuals and foundations, and a significant increase in members’ participation in the annual fund program. These contributions have enabled the Academy to pursue important new initiatives. Highlights of the year’s Development efforts included: Increased support from members – Participation in annual giving continues to increase with a member participation rate of 23% in 2002 and 25% in 2003. This growth in member participation is significant because outside funders view member philanthropy as a validation of the Academy’s mission and value. Notable among members’ gifts was Elkan Blout’s contribution of $363,000 to fund multimedia interactive science education materials for teachers and students, and a $405,000 gift from T.H. Geballe to fund website and outreach efforts for the Academy’s Marian Koshland Science Museum – which opened this spring, underwritten by a previously announced $30 million gift from Daniel Koshland in memory of his wife, NAS member Marian Koshland. Major grants from private foundations – While the Academy historically enjoys strong support from foundations, 2003 saw three notable grants. The W.M. Keck Foundation made a $40 million grant to establish the National Academies’ Keck Futures Initiative, which advances interdisciplinary research within and between fields in science, engineering, and medicine, through annual conferences, research grants, and communication awards. A $2.5 million grant from The W.K. Kellogg Foundation established the Kellogg Health of the Public Fund to increase the Institute of Medicine’s capacity to communicate on important health issues with individuals and communities; an additional $2.5 million is available from Kellogg when matched by other gifts and pledges received by the IOM by October 31, 2005. And at year’s end we learned that the Bill & Melinda Gates Foundation would provide $20 million, beginning in 2004, to underwrite an ambitious 10-year initiative – Enabling African Scientific Communities to Provide Policy Advice in the Public Interest – designed to build the capacity of African academies of science to increase the contribution of African scientists and health experts to policy decisions made by their governments about the significant challenges facing these countries, with an emphasis on sustainable choices for promoting health and reducing disease. Leadership gifts from the Presidents’ Circle of the National Academies – This select group of primarily non-member philanthropists continued to provide strong support to the National Academies, with $2.3 million in new contributions and pledges during 2003 – notably including a series of gifts that underwrite the Academy’s communication and science education programs. For example, Sara Schupf’s $1.25 million gift is underwriting development of a series of biographies of women scientists designed for middle school students; the 10-book series, intended to help inspire a new generation of students to explore the wonders of science, will be published by the Academies’ Joseph Henry Press in partnership with Scholastic, Inc. Continued support from Jack and Rose-Marie Anderson – who have contributed nearly $250,000 in recent years – is underwriting the Anderson Internship Program, through which the Academies encourage disadvantaged minority students to pursue careers in science, engineering, and medicine. The Academy’s initiatives on improving science education in our nation’s classrooms benefited from a $300,000 anonymous contribution from a Presidents’ Circle member. And more than $1.1 million in new gifts and pledges were made to the Presidents’ Circle Communication Initiative, which aims to inform and engage the public by supporting development of new and innovative com-
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Report of the Treasurer to the Council of the National Academy of Sciences munication products based on Academies studies and projects. As of December 31, 2003, with one year remaining in the very successful Campaign for the National Academies, cumulative Campaign contributions and pledges to the National Academies exceeded $293 million, just shy of the overall $300 million target. Development efforts in 2004 – during which we expect to significantly exceed our $300 million Campaign goal – will focus particularly on the need for continuing support for programs that advance the science enterprise, and for building the unrestricted endowment that underwrites our long-term independence and flexibility. Endowment and Trust Investment Pool With the assistance of the Finance Committee, I am responsible for the prudent management of the endowment and trust fund portfolio. The goal of the endowment is to provide stable support for the NAS General Fund, NAS Trust and Award activities, and the Presidents’ initiatives within the NRC program. To achieve this goal, the NAS Council, acting on the recommendation of the Finance Committee, has adopted a spending limitation designed to maintain the purchasing power of the endowment over time by reinvesting a portion of the annual total investment return. The spending limitation caps annual spending at 5 percent of the three-year average market value of the participating funds in the investment pool. Each year, the investment performance of the NAS portfolio is compared to a composite market benchmark portfolio for the year. The benchmark portfolio is a composite index consisting of the Standard and Poor’s 500 Index (35 percent), the Russell 2000 Index (15 percent), the EAFE Index (15 percent), the Emerging Markets Index (5 percent), the Lehman Aggregate (25 percent), and the Non U.S. dollar Fixed Income Index (5 percent), and was developed to reflect the asset allocation within the NAS portfolio. Market values of the Endowment and Trust Investment Pool, after withdrawals, for the years ended December 31, 2003 and 2002, are displayed in the following chart: ($ in thousands) 2003 2002 Cash and Fixed-Income Securities $ 36,627 $ 51,467 Equity Securities 231,210 167,909 Total $267,837 $219,376 During 2003, the NAS portfolio grew from $219.4 million to $267.8 million, which represents a 22.1% increase in the asset balance. Taking into account annual withdrawals, the Academy’s portfolio produced an investment return of 25.8% for the year. By capturing most of the upside performance in the good years, and generating comparatively smaller losses in the down years, the portfolio has been able to outperform the market benchmark by 0.5% for both the last 5 years and the last 10 years. The NAS return for the last five and ten years, respectively, is 4.1% and 8.9%, compared with the market composite benchmark of 3.6% and 8.4% respectively. 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 December 31, 2003. Overview of Current Investment Structure Percent of Target Portfolio Fixed-Income: U.S. Fixed 15.0% 6.8% U.S. High Yield 5.0% 1.9% Non-U.S. Fixed 0% 2.2% Mortgages (at cost) 0% 2.3% Equities: U.S. Large Cap Funds 30.0% 33.7% U.S. Small-Mid Cap Funds 15.0% 16.8% Non-U.S.Stocks – Developed 15.0% 16.8% Non-U.S. Stocks – Emerging 5.0% 5.6% Hedge Funds 10.0% 10.8% Private Commitments 5.0% 2.6% Cash Equivalents 0% 0.5% Total 100.0% 100.0% See schedule 2-A for details of investments by asset class. Included in the $267.8 million total market value of the Endowment and Trust Investment Pool as of December 31, 2003, are the amounts of $45.4 million, $19.9 million, and $6.3 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 Academy of Engineering Fund (see note 1 to the Financial Statements). Withdrawals of $8.4 million were made to fund the President’s Committee, NAS General Fund’s activity, and prizes and awards for the current period. Additional withdrawals of $3.7 million were made to fund IOM, Woods Hole, and TNAC activity.
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Report of the Treasurer to the Council of the National Academy of Sciences Prize and Award Trust Funds Several award trust funds have existed for more than 100 years, while others were established more recently. 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 cycle, 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: Unrestricted Endowment $4,664 Woods Hole Endowment 308 Annual Giving from Members 325 Membership Dues 112 Annual Meeting 195 Capital Investment Interest 255 Short-Term Investment Interest 4 Reimbursements and Miscellaneous 226 Total Revenue $6,089 Expenses: Development Office $2,012 Member Services: Annual Meeting 556 Other 170 Programs/Projects Office of Exhibitions & Cultural Programs 275 Public Understanding Of Science 420 Committee on International Security & Arms Control 75 Local High School Project 12 Israeli Palestinian Science Organization (IPSO) 20 Sackler Colloquia 295 Woods Hole 313 Foreign Meetings 85 NAS Officers 25 President’s Office 279 NAS Executive Office 414 NRC Operations 640 Interest Expense 262 International Council for Science 60 ISSUES Support 197 Other 54 Total $6,164 Deficit – NAS Reserve $ (75) This General Funds deficit was funded by the NAS Reserve, which has a balance of $2.8 million at December 31, 2003, after deducting the CY 2003 deficit. Part of this reserve is held in the NAS Endowment ($2.0 million) and part of this reserve is held in short-term investments ($.8 million). One of the anticipated and appropriate uses of the NAS Reserve is to provide a cushion for ongoing operations during periods of major market declines such as has occurred during 2000-2002. Journal Publications Financial results of the Proceedings of the National Academy of Sciences are shown below for the years ended December 31, 2003, and December 31, 2002: ($ in thousands) 2003 2002 Revenue: Subscriptions $5,376 $5,028 Author charges 4,064 3,865 Other 376 316 Total $9,816 $9,209 Expense: Printing $4,942 $5,204 Other 4,739 3,888 Total $9,681 $9,092 Net $135 $117 Facilities NAS owns the following facilities: The Keck Center, a new NRC Office Building, at 500 Fifth St., NW in Washington, 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 National 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. During 2002, the NAS Council approved a plan to proceed with the planning for Phase 2 of the Keck Center at 500 Fifth Street, NW, Washington, DC., which was to be an eight-story addition in the space above the District of Columbia fire station adjacent to the new building. This move would consolidate the staff from the Green Building in Georgetown with the NRC staff already located at the Keck Center.
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Report of the Treasurer to the Council of the National Academy of Sciences The NAS Council has directed senior management to continue exploring the options available to the Academy, so that when the Green Building lease expires in the middle of 2007, the staff currently there will have adequate office space. Senior management is reviewing the Academy’s option to purchase the air rights over the adjacent fire station and start construction of an additional 3 to 8 floors of building space over the fire station. Another option is to purchase the land under the fire station from the DC Government and integrate the building of a new fire station with the building of an additional 3 to 8 floors of building space above the fire station. Still a third option is to put a hold on the construction decision, and seek to lease space for the short term in a building close to the Keck Center. Management will continue to review the options and the costs for these options, so that the NAS Council will have enough information to create a plan of action by December 2004 that will be in the best interests of the Academies. NRC Highlights Revenues The two main sources of revenue for the NRC are the U.S. Government and private/nonfederal entities. The total contract and grant revenue from both of these sources totaled $258.7 million in 2003 and $240.3 million in 2002. U.S. Government Contracts and Grants 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 revenue recognized from the U.S. government agencies in the year ended December 31, 2003 was $184.5 million (see chart below and the Statement of Activities), and $187.3 million for the previous year. U.S. Government Revenues by Agency U.S. Government Agencies (Grants and Contracts) Agency for International Development $ 1,264 Defense Special Weapons 27 Defense Supply Service 1 Department of Agriculture 869 Department of Commerce 6,415 Department of Defense: Department of the Air Force 6,043 Department of the Army 14,887 Department of Defense 2,013 Department of the Navy 11,408 United States Marine Corp 316 Department of Education 1,557 Department of Energy 7,472 Department of Health and Human Services 21,147 Department of Homeland Security 153 Department of Housing and Urban Development 556 Department of the Interior 3,992 Department of Justice 984 Department of Labor 2,102 Department of State 1,248 Department of Transportation 46,471 Environmental Protection Agency 6,241 Executive Office of the President 762 Federal Emergency Management Agency 56 General Accounting Office 267 General Services Administration 58 National Aeronautics and Space Administration 20,095 National Science Foundation 14,597 National Security Agency 38 Nuclear Regulatory Commission 390 Smithsonian Institution 268 Social Security Administration 365 U.S. Postal Service 30 U.S. Printing Office 8 Technical Support Working Group 34 Veterans Administration 3,872 Adjustment to Indirect Cost Receivable & Other 8,497 Total U.S. Government Agencies $184,503 The basic core of NRC programs, which is represented by the Government contracts and grants, has increased steadily over the past few years. However, the NRC programs funded by the government decreased 1.5% by generating $184.5 million in revenues in 2003, compared with $187.3 million in 2002. We must keep in mind that 2002 represented a banner year for NRC programs, with the highest revenue in the Academy’s history. By comparison, the 2003 results were strong in spite of the uncertain economy and the war in Iraq. Private & Nonfederal Contracts and Grants Private sponsors supplemented government projects and provided for new initiatives by funding $74.2 million of awards in 2003, compared with $54.6 million in 2002. The private and nonfederal revenues were received in the form of Contracts and Grants ($68.1M) and other contributions $6.1M). (See Statement of Activities.) The sources of these revenues are as follows: Private & Nonfederal Revenue by Source Foundations, Corporations & Other Organizations $ 68,156 Individuals 1,595 State Governments, Agencies & Institutions 2,312 Refunds (165) Discounts on Pledges Receivable & Other 2,302 Total Private & Nonfederal Sources $ 74,200
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Report of the Treasurer to the Council of the National Academy of Sciences The private contracts and grants increased from $40.7 million in 2002 to $68.0 million in 2003, an increase of 67%. This is primarily due to a $40 million grant from The W.M. Keck Foundation as noted in the Development Office section of this report. Contribution revenues decreased from $13.8 million in 2002 to $6.1 million in 2003. This decrease is due in large part to a one-time $10 million contribution from George and Cynthia Mitchell received in 2002. A similar gift was not received in 2003. The decrease was also off-set by a permanently restricted gift for $2.5 million received from The W.K. Kellogg Foundation as noted in the Development Office section of this report. Expenses The NRC programs include funding from Government and private sources. Almost all contracts and grants are cost-reimbursable agreements. Therefore, over the life of the awards, the expenses are equal to the revenues. However, in any one given year, some of the private/nonfederal revenues may not be equal to expenses when the revenue is recognized under generally accepted accounting principles. 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 2003, NRC management has successfully managed the growth rate of indirect costs to be approximately equal to the growth rate of direct costs, by adjusting indirect costs from time to time as necessary. Related Entities There are many financial transactions exchanged between 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 statements. The financial activity and results of the National Academy of Engineering, the National Academy of Engineering Fund, and the National Academies Corporation (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 available from the NAS Controller’s Office. Overall Financial Condition 2003 2002 Total Revenues $339.0 $246.2 Total Expenses 262.2 274.9 Change in Net Assets $ 76.8 $(28.7) Each year, the overall financial condition of the NAS can be reviewed by taking into account the increase or decrease in the net assets of the organization. During 2002, the continued decline in the stock market had a large negative effect on the results of operations for the year, which decreased the net assets of the Academy. In 2003, the recovery of the stock market and the $40 million Keck grant to the Academies contributed to the growth in net assets in 2003. Conclusion I conclude my report with the observation that the Academy continues in sound financial condition. The NRC program level for 2003 was one of the strongest performances in the history of the Academy. During 2003, the indirect costs grew at a faster rate than program revenues; however, National Research Council management has made appropriate adjustments to keep indirect costs in line with direct costs for 2004. The NAS Endowment and Trust Fund had a very strong year, returning 25.8%. In addition, our internal and external auditing programs continue to disclose no material weaknesses. I believe that the NAS continues to have the financial discipline and understanding of its operating environment in order to adjust to the many challenges and developments that we have seen over the past few years. 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. Respectfully submitted, Ronald L. Graham Treasurer
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