Report of the Treasurer for the Year Ended December 31, 2008 (2009)

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Treasurer’s Statement support received assists the NAS in taking a leadership and proactive role in addressing the issues and challenges facing our nation. To the Council of the National Academy of In 2008, despite the economic downturn, the NAS, Sciences: including the Institute of Medicine (IOM), received a total of $14.1 million in new gifts and pledges, a decrease of This Report of the Treasurer of the National Academy of only 4.1% from the previous year. Contributions to the Sciences presents the financial position and results of NAS Annual Fund (plus other unrestricted funds) totaled operations as well as a review of the endowment, trust, $301,000 in 2008, which is essentially the same as the and other long-term investments pool activities of our previous year. The gifts described below illustrate the Academy for the year ended December 31, 2008. scope of philanthropic support during 2008: Overview ! The NAS received two gifts totaling $2 million from Raymond and Beverly Sackler and their foundation First, we are delighted that we now have on board a new to endow a bilateral scientific forum to be operated Chief Financial Officer for the National Academy of jointly by the NAS and the Royal Society in London. Sciences (NAS), Dr. Julie Englund. Dr. Englund has had The forum will hold scientific conferences and meet- a distinguished career in financial management, most ings in both the United States and United Kingdom, recently as the Treasurer and Vice President for Finance and the topics, participants, activities, and goals of at The Catholic University of America and previously as these conferences will be determined by a joint panel the Dean for Administration at the Harvard Law School. of the NAS and the Royal Society. She has ably and efficiently taken the reins of her new NAS office at a time when the economic climate is, to say ! The NAS received a $140,000 charitable gift annuity the least, complex. from an NAS member and his wife, and a $50,000 bequest from another member. Second, we function on the basis of two sources of income: that received through National Research Council ! The Norman F. Gant/American Board of Obstetrics (NRC) activities as compensation for the myriad of and Gynecology (ABOG) Fellowship was endowed reports, studies, etc. produced each year and second, a through a gift of $650,000 from ABOG. Part of a much smaller sum that we obtain from our unrestricted broader Anniversary Fellows program of the IOM, endowment via the formula of the “spending rule” that we the Gant/ABOG fellowship will provide an excep- can use for essentially any purpose consistent with our tional learning and career development opportunity to charter. Regarding the first of these, the numbers are very obstetricians and gynecologists early in their careers. heartening. Despite the difficult economic environment, Fellows will continue with their main academic our total program revenue for 2008 was above budget and responsibilities while engaging part time over a two- a 7.1% increase over 2007. And for 2009, we are year period in IOM's health and science policy work. anticipating a still greater increase, currently estimated at 11% over the 2008 budget. There are many who deserve ! The Committee on Human Rights received $329,000 credit for this strong showing but not least among them is in gifts in 2008, including support from 191 members Dr. E. William Colglazier for his wise oversight as the of the NAS, IOM, and the National Academy of Executive Officer of the NRC. Engineering (NAE). NAS Highlights In June 2008, Eric C. Johnson was appointed chief advancement officer for the National Academies. Mr. Development Office Programs Johnson, who had been vice president for development at both Rice University and Carnegie Mellon University, The NAS is grateful for the generous support of members, oversees development for all three Academies. Mr. friends, and philanthropic organizations in 2008. The Johnson has been charged with creating a stronger culture 1 

of philanthropy by applying his experience in two top-25 Market values of the Pool, after withdrawals, for the years universities to the development programs of the NAS and ended December 31, 2008 and 2007, are displayed in the the other Academies. New programs and dedicated staff following chart: will focus on improving stewardship of all gifts; increasing annual unrestricted support; developing more (dollars in thousands) 2008 2007 planned gifts, such as charitable gift annuities, charitable Cash and Fixed-Income Securities $ 63,624 $ 80,515 remainder trusts, and bequests; and acquiring new Equity Securities 224,398 357,530 endowment gifts and capital gifts to support the planned Total $ 288,022 $ 438,045 restoration of the NAS Building At the beginning of 2008, the Pool consisted of $438.0 Endowment, Trust, and Other Long-term Investments million in assets. During the year, the Pool received Pool contributions of $7.5 million, withdrew funds for programs of $18.0 million, and suffered investment losses With the assistance of the Finance Committee, I am of $139.5 million, resulting in an ending asset balance of responsible for the prudent management of the endow- $288.0 million. For the year, the Pool portfolio returned ment, trust, and other long-term investments (the “Pool”). -31.4%, compared with a benchmark return of -31.5%. In The goal of the Pool is to provide stable support for the 2007, the portfolio returned 11.2% versus 10.6% for the NAS General Fund; NAS programs, prizes and awards; benchmark. and the Presidents' initiatives within the NRC program. To achieve this goal, the NAS Council, acting on the The Pool has consistently outperformed the market recommendation of the Finance Committee, has adopted a benchmarks over a long period. For the five years ending spending limitation designed to maintain the purchasing December 31, 2008, the Pool return is 2.6% compared to power of the Pool over time by reinvesting a portion of the market composite benchmark of 1.1% and, for the ten the annual total investment return. The spending years ending December 31, 2008, the Pool return is 3.3% limitation caps annual spending at 5% of the three-year compared with the market composite benchmark of 2.3%. average market value of the participating funds in the Pool. In 2007, the NAS Finance Committee adopted the following investment structure for its asset allocation The Pool saw its’ market value decline from $438.0 strategy. The comparison of these guidelines to the actual million on 1/1/08 to $288.0 million on 12/31/08. The Pool portfolio allocation at December 31, 2008, is as follows: returned -31.4% for the year, in line with the relevant market benchmarks and peer group endowments. Despite Overview of Current Investment Structure the broad diversification of the Pool’s investments, the Portfolio markets in 2008 were characterized by indiscriminate Guideline Allocation Fixed- selling that commenced with the September fall of Income: U.S. Fixed/Cash 12.0% 10.6% Lehman Brothers and spread globally to the world’s stock Non-U.S. Fixed 3.0% 11.5% and bond markets. Alternative investments in private Equities: U.S. Large Cap Funds 25.0% 15.6% equity and hedge funds fared only slightly better than the U.S. Small-Mid Cap Funds 12.0% 4.0% publicly traded markets but in the final analysis only cash Non-U.S. Stocks — Developed 20.0% 20.3% and Treasury securities escaped the market sell off. The Non-U.S. Stocks — Emerging 8.0% 8.7% Real Estate Investments 5.0% 2.6% Pool’s holdings at year-end are more defensive than Hedge Funds 12.0% 22.7% would be permitted by the long term policy guidelines but Other Alternative Investments 3.0% 4.0% still include investments in equities of approximately Total 100.0% 100.0% 51%. ! See Schedule 2-A on page 21 for details of investments by asset class. ! The Finance Committee has opted to make only minor changes in the disposition of its investments 2 

since July 1, 2008. While it is too soon to evaluate The 2008 NAS General Fund activity is summarized as the merits of these changes, the initial returns on follows: investment have been excellent. (dollars in thousands) Revenues: ! Included in the $288.0 million total market value of Unrestricted Endowment $ 5,638 the Pool as of December 31, 2008, are $5.6 million Woods Hole Endowment 383 for the Woods Hole Endowment Funds, $47.4 million Communications Initiative Fund 206 for the Institute of Medicine (IOM), and $7.2 million Annual Giving from Members 193 for The National Academies’ Corporation (TNAC). Membership Dues 306 TNAC, which is equally owned by the NAS and the Annual Meeting 232 National Academy of Engineering Fund (NAEF), Short-Term Investment Interest, Royalties, etc. 33 owns and operates the Beckman Center (see note 1 to Total Revenue $ 6,991 the financial statements on page 45). Expenses: ! Withdrawals of $14.6 million were made to fund the Development Office $ 1,240 President’s Committee, NAS General Fund’s activity, Member Services: and prizes and awards for the current period. Annual Meeting 618 Additional withdrawals of $3.4 million were made to Other 123 fund Woods Hole, IOM, and TNAC activity. Programs/Projects: Cultural Programs of the NAS 384 Evolution, Education & Communication 157 NAS General Fund Communications Initiative 206 Frontiers of Science 300 The NAS General Fund accounts for the activities of the Committee on International Council, the Officers, and the Members. The primary Security & Arms Control 190 funding for these activities is received from specified Local High School Project 35 endowment, trust, and other long-term investment funds Committee on Women in Science & (see page 16 for detailed listing), based on the 5% Engineering 26 InterAcademy Council 181 spending rule. Woods Hole 225 Foreign Meetings 194 For fiscal year 2008, the General Fund revenue totaled President’s Office 170 $7.0 million and expenditures totaled $5.4 million, NAS Executive Office 95 resulting in a $1.6 million surplus. Comparable figures for NRC Operations 1,001 fiscal year 2007 were $6.2 million in revenues, $5.3 ISSUES Support 252 million in expenditures, resulting in a surplus of Miscellaneous 5 $875,000. Total Expenses $ 5,402 Surplus $ 1,589 The NAS Reserve is the accumulation of prior year surpluses, and one of the anticipated and appropriate uses Disposition of Surplus: of the NAS Reserve is to provide a cushion for ongoing Due to NAS Reserve 1,431 operations during periods of revenue shortfalls. During Due to Woods Hole Reserve 158 2008, President Ralph Cicerone has prudently spent less than the funds available, returning to the NAS Reserve The NAS Council has approved a General Funds budget $1.4 million. There are plans for a comparable degree of of $6.5 million for fiscal year 2009, which includes a fiscal caution in 2009 as well. The remaining balance of planned surplus of $900,000. the NAS Reserve at December 31, 2008, is $2.8 million. The $1.4 million surplus from fiscal year 2008 will be added to this balance in early 2009, for a net NAS Reserve balance of $4.2 million. 3 

Prizes and Awards ! National Academies Data Center at 8619 Westwood Center Drive in Vienna, Virginia. Several award funds have existed for more than 100 ! National Academy Press Printing Facility at 8700 years, while others were established more recently. The Spectrum Drive in Landover, Maryland. Home Secretary oversees the nomination process that selects award recipients and recommends to the Council Last year, our Treasurer Ron Graham reported that we (subject to legal and financial review) changes in the were working to preserve our option to expand the Keck award cycle, amounts of the honoraria, and any other building over the adjacent District of Columbia fire administrative changes. station. Since then, the District has advised us that it is undertaking a review of its city-wide property develop- Journal Publications ment strategy and is currently not interested in discussing development of the fire station property. This has allowed Financial results of the Proceedings of the National us to focus our attention on the NAS Building Restoration Academy of Sciences are shown below for the years ended Project. December 31, 2008 and 2007: The plans for the NAS Building Restoration are nearing (dollars in thousands) completion and the Council will make a decision on 2008 2007 whether to go forward with the project this summer or to Revenues: wait for a more propitious moment. We are hopeful that Subscriptions $ 6,906 $ 5,856 Author charges 5,535 6,605 current economic conditions will keep the cost of the Other 121 95 project down. At the same time, we have to recognize that Total $ 12,562 $ 12,556 these same conditions also make financing the project much more difficult than we anticipated just a year ago. Expenses: To assist the Council in making this important decision, Printing $ 6,048 $ 6,741 we are carefully monitoring the constantly changing Other 6,429 5,539 financial landscape, analyzing our ability to take on new Total $ 12,477 $ 12,280 debt, and exploring what financing options may or may not be available for the project. Net $ 85 $ 276 NRC Highlights Facilities Revenues NAS owns the following facilities: The two main sources of revenue for the NRC are the U.S. government and private / nonfederal entities. The ! Keck Center of the National Academies at 500 Fifth total contract and grant revenue from both of these St., NW in Washington, D.C. sources totaled $256.2 million in 2008 and $245.7 million ! National Academy of Sciences Building at 2101 in 2007. Constitution Ave., NW in Washington, D.C. ! J. Erik Jonsson Center of the National Academies at U.S. Government Contracts and Grants 314 Quisset Dr. in Woods Hole, Massachusetts. ! Arnold and Mabel Beckman Center at 100 Academy NRC activities conducted in response to requests from a in Irvine, California (jointly owned with NAEF broad range of U.S. government agencies are funded through TNAC). through cost-reimbursable non-fee contracts and grants. NAS is leasing the following facilities: The total amount reimbursed by the U.S. government agencies in the year ended December 31, 2008, was ! Terrell Place Office Building (two suites) at 575 $202.8 million (see following chart and the Statements of Seventh St. NW in Washington, D.C. 4 

Activities on page 43) and in the year ended December Private/Nonfederal Contracts and Grants 31, 2007, was $178.0 million. Private sponsors supplemented government projects and U.S. Government Revenues by Agency (dollars in thousands) provided for new initiatives by funding awards in the Agency for International Development $ 2,432 amount of $53.4 million in 2008, compared with $67.7 Department of Agriculture 1,327 million in 2007. The private and nonfederal revenues Department of Commerce 7,793 were comprised of contracts and grants ($45.2 million) Department of Defense: Department of the Air Force 4,014 and other contributions ($8.2 million). (See Statements of Department of the Army 12,171 Activities on page 43.) Department of Defense 4,898 Department of the Navy 11,433 ! The private contracts and grants decreased from Department of Education 361 $48.8 million in 2007 to $45.2 million in 2008. This Department of Energy 8,477 is due to an overall decrease in the number of private Department of Health and Human Services 17,482 awards received. In 2007, NAS received 112 new Department of Homeland Security 3,165 private awards. In 2008, that number decreased to Department of Housing and Urban Development 343 Department of the Interior 2,651 97. Department of Justice 1,353 Department of Labor 59 ! The other contributions revenue decreased from Department of State 1,068 $18.9 million in 2007 to $8.2 million in 2008. The Department of Transportation 86,621 2007 figure was higher than usual due to a one-time Department of Treasury 598 $11.7 million contribution from TNAC to the NRC to Department of Veterans Affairs 3,509 be spent on programs conducted in whole or in part at Election Assistance Commission 345 the Beckman Center in Irvine, CA. Environmental Protection Agency 5,634 Executive Office of the President 619 General Accounting Office 84 Expenses General Services Administration 6 Institute of Museum and Library Services 143 The NRC programs include funding from government and Marine Mammal Commission 78 private sources. Almost all contracts and grants are cost- National Aeronautics and Space Administration 8,411 reimbursable agreements. Therefore, even if the revenues National Geospatial-Intelligence Agency 120 and expenses are not equal in any one given year, the National Science Foundation 13,971 National Security Agency 114 revenues and expenses will be the same over the life of Nuclear Regulatory Commission 105 the award. Office of the Director of National Intelligence 55 Social Security Administration 10 As in many universities and nonprofit institutions, United States Postal Service 132 managing indirect cost expenditures for funding of Adjustment to Indirect Cost Receivable & Other 3,228 necessary support services, while keeping these costs in Total U.S. Government Agencies $ 202,810 reasonable proportion to program expenditures, is a continual challenge. Historically, NRC management has In the past ten years, the basic core of NRC programs, successfully maintained a relatively constant relationship which is represented by the government contracts and between program and support costs, i.e., the growth rate grants, has experienced relatively small percentage of indirect costs has been approximately equal to the changes from one year to the next. However, in 2008, the growth rate of direct costs. In 2008, total indirect NRC programs funded by the government increased by expenses were $66.9 million compared to an approved 13.9%. The increase was primarily attributable to budget of $69.3 million. The NAS Council approved a programs sponsored by Department of Transportation. In 2009 indirect expense budget of $72.0 million, which 2007, the government funded programs had decreased includes a 3% increase to the total salary budget, which is 0.5% from the previous year. distributed on the basis of merit. This increase was approved in order to maintain a competitive position for hiring and retaining staff in the Washington, DC, market. 5 

Related Entities Conclusion There are many financial transactions exchanged between The NRC continued to demonstrate financial strength and the member organizations of the National Academies. The stability during 2008, with revenues projected to increase NRC serves as the clearinghouse for these transactions. during 2009. The indirect expenses have been well- However, it is important to note that only the financial managed during the year. As is the case for all endow- activity and results of the NAS, NAE, IOM, and NRC are ments, the stock market’s immense sell-off has had a included in these financial statements. The financial serious impact on the value of the NAS endowment, trust, activity and results of the National Academy of and other long-term investments pool. We are weathering Engineering Fund (NAEF) and The National Academies’ this storm with careful spending decisions now and Corporation (TNAC) are audited and reported separately. planned for the future. The Finance Committee has made Financial information for the NAEF is available on some changes to the Endowment investments and will request from the NAE Finance Office; information for continue to work to strengthen the portfolio. TNAC is available from the NAS Controller’s Office. I would like to thank the Council, the Committee on Overall Financial Condition Budget and Internal Affairs, the Finance Committee, and NRC management for their continued input and support. The results of operations, per the NAS Statements of Also, thanks to the Controller’s Office for preparation of Activities, are summarized as follows: the financial statements and to all of the finance staff for maintaining strong financial controls and reporting. (dollars in millions) 2008 2007 Total Revenues $ 131.1 $ 320.5 Jeremiah P. Ostriker Total Expenses 304.1 276.5 Treasurer Change in Net Assets $ -173.0 $ 44.0 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 calendar year 2008, the NAS suffered a decrease in its net assets resulting primarily from significant investment losses recorded in the endowment, trust, and other long- term investments pool. 6