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Report of the Treasurer of the National Academy of Sciences III. Financial Condition
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Report of the Treasurer of the National Academy of Sciences NATIONAL ACADEMY OF SCIENCES THE NATIONAL ACADEMIES Report of the Auditing Committee of the National Academy of Sciences June 9, 2009 Dr. Ralph J.Cicerone, President National Academy of Sciences Dear Dr. Cicerone: In accordance with paragraph 11 of section II of the Bylaws of the National Academy of Sciences, the firm of KPMG LLP was retained by the Auditing Committee on behalf of the Council to conduct an audit of the accounts of the Treasurer for the year ended December 31, 2008, and to report to the Auditing Committee. The independent accountants have completed their audit and submitted their report. In accordance with paragraph 13 of section II of the Bylaws, the Auditing Committee has reviewed the report and recommends to the Council that it be accepted and that the opinion of the independent accountants be published with the report of the Treasurer. Respectfully submitted, PURNELL W.CHOPPIN, Chair SUSAN GOTTESMAN RONALD L.GRAHAM GERALD M.RUBIN SEAN C.SOLOMON Auditing Committee THE NATIONAL ACADEMIES Advisers to the Nation on Science, Engineering, and Medicine 2101 Constitution Avenue, NW Washington, DC 20418
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Report of the Treasurer of the National Academy of Sciences KPMG LLP 2001 M Street, NW Washington, DC 20036 Independent Auditors’ Report The Auditing Committee National Academy of Sciences: We have audited the accompanying statements of financial position of the National Academy of Sciences (NAS) as of December 31, 2008 and 2007, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of NAS’ management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of NAS’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NAS as of December 31, 2008 and 2007, and its changes in net assets and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. As discussed in note 2(j) to the financial statements, NAS adopted the provisions of Statement of Financial Accounting Standards No. 157, Fair Value Measurements, as of January 1, 2008, for fair value measurements of all financial assets and financial liabilities. As discussed in notes 2(k) and 9 to the financial statements, NAS adopted the provisions of FASB Staff Position 117–1, Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act and Enhanced Disclosures for All Endowment Funds, as of January 1, 2008. May 28, 2009 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.
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Report of the Treasurer of the National Academy of Sciences NATIONAL ACADEMY OF SCIENCES Statements of Financial Position December 31, 2008 and 2007 (Dollars in thousands) Assets 2008 2007 Current assets: Cash and cash equivalents $4,110 $3,203 Short-term investments (note 3) 43,456 46,941 Contracts receivable—U.S. government (note 11) 55,786 45,566 Contributions and other receivables, net (note 5) 15,212 16,377 Other current assets 4,156 3,813 Total current assets 122,720 115,900 Other assets (notes 2, 12, 14, and 16) 8,508 12,266 Long-term investments (note 3) 309,740 464,908 Contributions receivable, net (note 5) 31,480 37,312 Property and equipment, net (notes 4 and 15) 128,349 129,671 Einstein Memorial 1,723 1,723 $602,520 $761,780 Liabilities and Net Assets Liabilities: Current liabilities: Accounts payable and accrued expenses $38,598 $30,770 Deferred revenue (note 6) 35,471 31,414 Line of credit (note 7) 686 3,345 Other current liabilities (note 12) 4,818 5,533 Total current liabilities 79,573 71,062 Bonds payable (note 12) 120,681 121,067 Funds held on behalf of others (note 3) 7,186 11,804 Note payable (note 13) 1,513 2,270 Accrued employee benefits (note 14) 8,597 5,879 Other long-term liabilities (notes 2, 12, and 15) 17,698 9,409 Total liabilities 235,248 221,491 Net assets: Unrestricted 51,731 191,130 Temporarily restricted (note 8) 200,791 238,325 Permanently restricted (note 9) 114,750 110,834 Total net assets 367,272 540,289 Commitments and contingencies (notes 3, 11, 12, 14, 17, and 18) Total liabilities and net assets $602,520 $761,780 See accompanying notes to financial statements.
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Report of the Treasurer of the National Academy of Sciences Statements of Activities Years ended December 31, 2008 and 2007 (Dollars in thousands) 2008 2007 Unrestricted Temporarily restricted Permanently restricted Totals Unrestricted Temporarily restricted Permanently restricted Totals Revenues, gains, and other support: Government contracts and grants (note 11) $202,810 - - 202,810 $178,021 - - 178,021 Private contracts and grants 23,836 21,423 - 45,259 20,071 28,763 - 48,834 Other contributions 3,195 1,064 3,916 8,175 4,511 12,825 1,544 18,880 Fees and publications 18,757 - - 18,757 19,909 - - 19,909 Investment income (loss) (note 3) (25,108) (120,758) - (145,866) 23,636 24,290 - 47,926 Other income (note 12) 1,945 - - 1,945 6,944 - - 6,944 Net assets released from restriction (note 8) 42,077 (42,077) - - 33,991 (33,991) - - Total revenues, gains, and other support 267,512 (140,348) 3,916 131,080 287,083 31,887 1,544 320,514 Expenses (notes 12, 14, and 15): Programs (note 10) 247,426 - - 247,426 225,164 - - 225,164 Management and general 47,823 - - 47,823 48,452 - - 48,452 Fundraising 2,511 - - 2,511 2,302 - - 2,302 Total expenses 297,760 - - 297,760 275,918 - - 275,918 Post-retirement changes other than net periodic benefit cost (note 14) 6,337 - - 6,337 - - - - Change in net assets, before adoption of SFAS No. 158 and reclassification of net assets under FSP 117–1 (36,585) (140,348) 3,916 (173,017) 11,165 31,887 1,544 44,596 Effect of adoption of SFAS No. 158 (note 14) - - - - (604) - - (604) Reclassification of net assets under FSP 117–1(note 9) (102,814) 102,814 - - - - - - Change in net assets (139,399) (37,534) 3,916 (173,017) 10,561 31,887 1,544 43,992 Net assets at beginning of the year 191,130 238,325 110,834 540,289 180,569 206,438 109,290 496,297 Net assets at end of the year $51,731 200,791 114,750 367,272 $191,130 238,325 110,834 540,289 See accompanying notes to financial statements.
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Report of the Treasurer of the National Academy of Sciences Statements of Cash Flows Years ended December 31, 2008 and 2007 (Dollars in thousands) 2008 2007 Cash flows from operating activities: Change in net assets $(173,017) $43,992 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 7,162 7,571 Loss on disposal of property and equipment 84 50 Bad debt expense 533 322 Net loss (gain) on investments 165,904 (20,098) Net loss (gain) on investments held on behalf of others 3,765 (562) Amounts collected on behalf of others (2,723) (5,630) Amounts remitted on behalf of others 3,664 17,402 Amortization of deferred gain - (430) Change in value of interest rate swap 9,057 2,325 Change in value of split-interest agreements 343 (121) Effect of adoption of SFAS No. 158 - 604 Contributions restricted for construction or endowment (6,645) (3,997) (Increase) decrease in assets: Other receivables 6,465 181 Contracts receivable—U.S. government (10,220) (4,262) Other current assets (343) 401 Other assets 2,612 (183) Increase (decrease) in liabilities: Accounts payable and accrued expenses 7,828 (1,492) Deferred revenue 4,057 3,768 Other current liabilities (885) (1,702) Funds held on behalf of others (4,618) (11,210) Other long-term liabilities 35 3,692 Accrued employee benefits 2,718 (2,046) Net cash provided by operating activities 15,776 28,575 Cash flows from investing activities: Additions to property and equipment (5,910) (1,874) Sales or maturities of investments 231,756 294,044 Purchases of investments (243,624) (321,899) Net cash used in investing activities (17,778) (29,729) Cash flows from financing activities: Contributions restricted for construction or endowment 6,645 3,997 Proceeds from line of credit 123,426 108,029 Payments on line of credit (126,085) (108,449) Payments on bank note (757) (757) Proceeds from interest rate swaption - 2,150 Proceeds from bond issue 66,325 - Payments on bond principal (66,645) (1,565) Payments on capital lease liability - (2,830) Net cash provided by (used in) financing activities 2,909 575 Net increase (decrease) in cash and cash equivalents 907 (579) Cash and cash equivalents, beginning of year 3,203 3,782 Cash and cash equivalents, end of year $4,110 $3,203 Supplemental disclosure of cash flow information: Interest paid $5,189 $6,324 See accompanying notes to financial statements.
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Report of the Treasurer of the National Academy of Sciences Notes to Financial Statements December 31, 2008 and 2007 (1) ORGANIZATION AND RELATED ENTITIES (a) National Academy of Sciences The National Academy of Sciences (NAS) was formed under a charter that was passed as an Act of Incorporation by the United States Congress and signed into law on March 3, 1863. NAS operates as a private cooperative society of distinguished scholars engaged in scientific or engineering research, dedicated to the furtherance of science and its use for the general welfare. NAS is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code, except for unrelated business income. (b) National Research Council Most of the activities undertaken by NAS are carried out through the divisions and boards of the National Research Council (NRC). The NRC draws on a wide cross section of the nation’s leading scientists and engineers for advisory services to government agencies and Congress. To respond effectively to both the disciplinary concerns of the research community and the complex interdisciplinary problems facing American society, NRC is organized into the following five major divisions responsible for most study activities: Behavioral and Social Sciences and Education Earth and Life Studies Engineering and Physical Sciences Policy and Global Affairs Transportation Research Board NRC activities are under the control of the NAS governance structure, and therefore are included in the NAS financial statements. (c) Institute of Medicine The Institute of Medicine (IOM), established in 1970, conducts studies of policy issues related to health and medicine. IOM issues position statements on these policies, cooperates with the major scientific and professional societies in the field, identifies qualified individuals to serve on study groups in other organizational units, and disseminates information to the public and the relevant professions. IOM was established as a separate membership organization within NAS. The financial activities and results of IOM are included in the NAS financial statements. (d) National Academy of Engineering The National Academy of Engineering (NAE) was established in 1964 under the charter of NAS as a related parallel organization, autonomous in its governance, administration, and the selection of its members. NAE shares with NAS the responsibility for advising the federal government on scientific issues. The NAE conducts independent program activities and activities through the NRC. The results of both of these activities are included in the NAS financial statements. (e) National Academy of Engineering Fund The National Academy of Engineering Fund (NAEF) is a separately incorporated not-for-profit organization established and controlled by NAE to raise funds to support its goals. The financial activities and results of NAEF are not included in the NAS financial statements. (f) The National Academies’ Corporation The National Academies’ Corporation (TNAC) was separately incorporated in 1986 as a not-for-profit corporation for the purpose of constructing and maintaining a study and conference facility. This facility, the Arnold and Mabel Beckman Center, located in Irvine, California, operates to expand and support the general activities of NAS, NRC, IOM, and NAE. TNAC is controlled by NAS and NAEF. The financial position and results of TNAC are not consolidated in the NAS financial statements. In May 2007, NAS began managing the operations of the Beckman Center. TNAC contributed $510,000 and $851,000 to the NRC for the years ended December 31, 2008 and 2007, respectively, towards the operation of the Beckman Center. In addition, TNAC contributed $277,000 and $11.7 million to the NRC for the years ending December 31, 2008 and 2007, respectively, to be spent on programs conducted in whole or in part at the Beckman Center.
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Report of the Treasurer of the National Academy of Sciences (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Accounting Net assets, revenues, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of NAS are classified and reported as follows: Permanently restricted—Net assets subject to donor-imposed stipulations that they be maintained in perpetuity by NAS. Generally, the donors of these assets permit NAS to use all or part of the income earned on related investments for general or specific purposes. Temporarily restricted—Net assets subject to donor-imposed stipulations that may or will be met either by actions of NAS and/or the passage of time. When a donor restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets. Unrestricted—Net assets arising from exchange transactions and contributions not subject to donor-imposed stipulations. (b) Cash Equivalents NAS reports liquid, temporary investments purchased with original maturities of three months or less as cash equivalents. (c) Investments Investments are stated at fair value. Changes in the fair value of investments are reported within investment income in the statements of activities. Certain investments are pooled for long-term investment purposes. Investments in the pool are administered as an open-end investment trust, with shares of the pool funds expressed in terms of participating capital units (PCUs). PCU values are used to determine equity in the allocation of investment income among funds in the pool whenever additional funds are contributed or withdrawn. (d) Contributions Contributions, including unconditional promises to give, are recognized as revenues in the period received. Conditional promises to give are not recognized until all conditions on which receipt depends are substantially met. Gifts of land, buildings, or equipment are reported as unrestricted net assets unless explicit donor stipulations specify how the donated assets must be used. Temporary restrictions on gifts that must be used to acquire long-lived assets are released in the period in which the assets are acquired or placed in service. Allowances are recorded for estimated uncollectible contributions based upon management’s judgment and analysis of the credit worthiness of the donor, past collection experience, and other relevant factors. Contributions to be received after one year are discounted at an appropriate rate commensurate with risks involved. Amortization of the discount is recorded as additional revenue and is used in accordance with donor imposed restrictions, if any, on the contributions. NAS performs certain fundraising activities on behalf of NAEF. NAS collected a total of $2.5 million and $4.9 million in 2008 and 2007, respectively, on behalf of NAEF. NAS disbursed $2.6 million and $4.9 million to NAEF from these collected amounts in 2008 and 2007, respectively. Amounts collected but not yet remitted to NAEF are reported as assets and liabilities in the NAS financial statements (e) Contracts and Grants The majority of NAS activities are performed under cost-reimbursable contracts with the U.S. government. For the years ended December 31, 2008 and 2007, the Department of Transportation provided 43% and 35%, respectively, of NAS government grant and contract revenue. NAS records federal contracts as exchange transactions, recognizing revenue as recoverable costs are incurred. Revenues from nonfederal grants qualifying as contributions are recorded by NAS upon notification of the grant award. Such grants are classified as temporarily restricted net assets when use of the grant funds is limited to specific areas of study or is designated for use in future periods. (f) Deferred Revenue For both federal and nonfederal grants and contracts that are determined to be exchange transactions, revenue is recognized as the related costs are incurred. Funds received in advance of being earned for these grants are recorded as deferred revenue in the statements of financial position. (g) Inventories Inventories are stated at the lower of cost or net realizable value and include both work in-process and financial goods related to publication activities. The majority of NAS publication inventories and supplies reside with an NAS unit, the National Academy Press (NAP). NAP uses
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Report of the Treasurer of the National Academy of Sciences the full absorption costing methodology in pricing financial products. This methodology includes direct printing and related indirect costs. Inventories are included in other current assets in the statements of financial position. (h) Property and Equipment Depreciation of NAS buildings and equipment is computed on a straight-line basis using the following lives: Buildings—40 years Building and leasehold improvements—lesser of the remaining life of the building or improvement Furniture and equipment—4 to 10 years The Einstein Memorial sculpture is valued at cost and is not depreciated. Construction-in-progress is not depreciated until the related assets are placed in service. (i) Split-Interest Agreements Charitable gift annuity agreements are classified as other assets in the statements of financial position. Periodically, NAS pays a fixed amount of the assets to the beneficiary designated by the donor. Upon termination of an annuity, the remainder interest in the assets is available for use by NAS as restricted or unrestricted assets in accordance with the donor’s designation. At December 31, 2008 and 2007, NAS had charitable gift annuity assets of $2.1 million and $3.0 million, respectively. NAS has recorded a liability of $1.5 million and $1.4 million at December 31, 2008 and 2007, respectively, representing the present value of estimated future cash payments to annuitants based on the annuitant’s life expectancy. (j) New Accounting Standards: Fair Value Measurements and Fair Value Option Effective January 1, 2008, NAS adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. This pronouncement did not require any new fair value measurements and its adoption did not affect the results of operations or financial position of NAS. On January 1, 2009, NAS will be required to apply the provisions of SFAS No. 157 to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. NAS is in the process of evaluating the impact, if any, of applying these provisions on its financial position and results of operations. In October 2008, the FASB issued FASB Staff Position FAS 157–3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP 157–3),” which was effective immediately. FSP 157–3 clarifies the application of SFAS No. 157 in cases where the market for a financial instrument is not active and provides an example to illustrate key considerations in determining fair value in those circumstances. NAS has considered the guidance provided by FSP 157–3 in its determination of estimated fair values during 2008. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liabilities. The following discussion describes the valuation methodologies used for financial assets measured at fair value. The techniques utilized in estimating the fair values are affected by the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. Care should be exercised in deriving conclusions about NAS’ business, its value or financial position based on the fair value information of financial assets presented below. Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial asset, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial asset. Furthermore, the disclosed fair values do not reflect any premium or discount that could result from offering for sale at one time an entire holding of a
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Report of the Treasurer of the National Academy of Sciences particular financial asset. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: The carrying value of cash equivalents such as money market funds approximates the fair value because of the short maturity of these investments. These amounts are disclosed in Level 1. NAS’ fixed maturity investments (bonds and notes), other than U.S. Treasury securities, generally do not trade on a daily basis. The fair value estimates of such debt securities are based on prices provided by NAS’ investment managers and custodian bank. Both the investment managers and the custodian bank use a variety of pricing sources to determine market valuations. Each designate specific pricing services or indexes for each sector of the market based upon the provider’s expertise. NAS’ debt securities portfolio is highly liquid, which allows for a high percentage of the portfolio to be priced through pricing services. Accordingly, the estimates of fair value for such debt securities are included in Level 2 inputs. The estimated values of U.S. Treasury securities are based on actively-traded market prices and are accordingly included in the bonds and notes amount in Level 1. Fair values of exchange-traded equity securities have been determined by NAS from observable market quotations on major trade exchanges. Accordingly, such equity securities are disclosed in Level 1. NAS also invests in institutional debt and equity mutual funds. These mutual funds are not available to retail investors and are not traded on national exchanges. The fair values of such institutional mutual funds are based on observable market information rather than quoted exchange market prices. Accordingly, the estimates of fair value for such mutual funds are included in Level 2. Fair value of alternative investments including private placement equity securities and hedge funds is based on the alternative investment fund managers’ net asset value (NAV). Valuations provided by alternative investment fund managers include estimates, appraisals, assumptions and methods that are reviewed by management. When necessary, NAS adjusts NAV for contributions, distributions, or general market conditions subsequent to the latest NAV valuation date when calculating fair value. Since the most significant valuation inputs are not observable in the marketplace, the alternative investment valuations are disclosed in Level 3. Charitable gift annuity investments and deferred compensation investments are held in institutional debt and equity mutual funds along with some U.S. Treasury securities. The U.S. Treasury securities are included in Level 1, and the mutual funds are included in Level 2. The deferred compensation obligation to employees is equal to the fair value of the investments held and is disclosed in the same levels as the investment assets. NAS has an interest rate swap agreement covering the fixed-rate bonds payable. NAS also entered into a swaption agreement which gives the counterparty the option to require NAS to enter into an additional swap agreement related to the fixed-rate bonds payable. The fair value of the swap and swaption are determined using pricing models based on observable market data such as prices of instruments with similar maturities and characteristics, interest rate yield curves, and measures of interest rate volatility. The value was determined after considering the potential impact of collateralization and netting agreement, adjusted to reflect nonperformance risk of both the counterparty and NAS. Accordingly, the swap and swaption are included in derivative assets and liabilities as Level 2. The funds held on behalf of others liability approximates the investments held in NAS’ long-term investment pool on behalf of TNAC. Therefore, the liability is disclosed in the same levels as the investment assets.
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Report of the Treasurer of the National Academy of Sciences The following table presents NAS’ fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis at December 31, 2008 (dollars in thousands): Fair value measurements at December 31 using: Fair Value Level 1 Level 2 Level 3 Financial Assets: Short-term and Long-term Investments: Cash Equivalents $19,928 $19,928 $- $- Bonds and notes 83,820 21,790 62,030 - Equity securities 172,481 71,353 101,128 - Hedge funds 65,283 - - 65,283 Private placements 11,684 - - 11,684 Total Investments 353,196 113,071 163,158 76,967 Charitable gift annuity assets: Cash equivalents 30 30 - - Bonds and notes 644 59 585 - Equity securities 1,439 - 1,439 - Total charitable gift annuity assets 2,113 89 2,024 - Deferred compensation assets: Cash equivalents 31 31 - - Bonds and notes 339 - 339 - Equity securities 1,835 - 1,835 - Total deferred compensation assets 2,205 31 2,174 - Interest rate swap 934 - 934 - Total Financial Assets $358,448 $113,191 $168,290 $76,967 Financial Liabilities: Funds held on behalf of others $7,186 $2,021 $3,245 $1,920 Deferred compensation liability 2,205 31 2,174 - Interest rate swaption 12,543 - 12,543 - Total Financial Liabilities $21,934 $2,052 $17,962 $1,920 Level 3 assets comprised approximately 22% of NAS’ total investment portfolio fair value at December 31, 2008. The following table presents the changes in Level 3 assets measured at fair value on a recurring basis for the year ended December 31, 2008 (dollars in thousands). Hedge Funds Private Placements Total Financial Assets Beginning balance January 1, 2008 $65,487 $13,622 $79,109 Net loss on investments (10,704) (2,253) (12,957) Purchases and sales, net 10,500 315 10,815 Transfers in (out) of Level 3 - - - Ending balance December 31, 2008 $65,283 $11,684 $76,967 Effective January 1, 2008, NAS adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits all entities to choose to elect, at specified election dates, to measure eligible financial instruments, as defined in SFAS No. 159, at fair value. Changes in unrealized gains and losses on items for
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Report of the Treasurer of the National Academy of Sciences which the fair value option has been elected are reported in income at each subsequent reporting date and upfront costs and fees related to those items will be reported in income as incurred and not deferred. At adoption, for those financial assets and financial liabilities which management has elected to carry at fair value, an entity will report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of unrestricted net assets. Management did not elect to measure any additional eligible financial assets or financial liabilities at fair value and as a result, adoption of this standard did not have an effect on the results of operations or financial position of NAS. (k) Other New Accounting Standards As discussed in note 9, NAS adopted the provisions of FASB Staff Position 117–1, Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act and Enhanced Disclosures for All Endowment Funds, effective January 1, 2008. On January 1, 2007, NAS adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 requires that a tax position be recognized or derecognized based on a “more likely than not” threshold. This applies to positions taken or expected to be taken in a tax return. The implementation of FIN 48 had no impact on NAS’s statement of financial position or statement of activities. NAS does not believe its financial statements include any uncertain tax positions. As discussed in note 14, NAS adopted the provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, effective December 31, 2007. (I) Use of Estimates The preparation of these financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures in the financial statements. Actual results could differ from those estimates. (m) Reclassifications Certain amounts from the prior year have been reclassified to conform to the current year presentation. (3) INVESTMENTS Investments, which are reported at fair value (except as noted), consisted of the following as of December 31, 2008 and 2007 (dollars in thousands): 2008 2007 Short-term investments: Cash equivalents $5,762 $4,570 Bonds and notes 26,026 29,477 Equity securities 11,668 12,894 Total short-term investments $43,456 $46,941 Long-term investments: Investment pool, including endowment assets: Cash equivalents $13,479 $22,086 Bonds and notes 50,145 58,429 Equity securities 147,431 278,421 Hedge funds 65,283 65,487 Private placements 11,684 13,622 288,022 438,045 Other long-term investments: Cash equivalents 687 503 Bonds and notes 7,649 9,054 Equity securities 13,382 17,306 21,718 26,863 Total long-term investments $309,740 $464,908 Vanguard equity funds comprised approximately $47 million and $119 million of the total equity securities funds at December 31, 2008 and 2007, respectively. NAS holds alternative investments, comprised of private placement equity securities and hedge funds, in its long-term investment pool. At December 31, 2008 and 2007, these funds had a fair value of approximately $77.0 million and $79.1 million, respectively. The unrealized gain or loss on the hedge funds was approximately a $10.7 million loss and a $5.2 million gain for the years ended December 31, 2008 and 2007, respectively, and is included as a component of investment income in the accompanying statements of activities. Private placement equity investments are comprised of limited partnership interests. NAS had remaining commitments at December 31, 2008 and 2007 to provide approximately $5.9 million and $5.2 million, respectively, to these partnerships. TNAC, a related entity, invests certain of its assets in the NAS long-term investment pool. TNAC investments participate in the investment pool experience proportionally with all other funds in this pool. The NAS obligation to TNAC for these funds held in trust, which totaled approximately $7.2 million and $11.8 million as of
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Report of the Treasurer of the National Academy of Sciences December 31, 2008 and 2007, respectively, is reported as funds held on behalf of others in the statements of financial position. Investment income is reported net of investment expenses of approximately $597,000 and $566,000 for the years ended December 31, 2008 and 2007, respectively, and is comprised of the following (dollars in thousands): 2008 2007 Interest and dividends income $20,038 $27,828 Net gain (loss) on investments (165,904) 20,098 Total investment income (loss) $(145,866) $47,926 (4) PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2008 and 2007, is comprised of the following (dollars in thousands): 2008 2007 Land $29,689 $29,689 Furniture and equipment 33,001 32,096 Buildings and improvements 109,199 109,063 Construction in progress 4,857 240 Leasehold improvements 7,349 7,286 184,095 178,374 Less accumulated depreciation and amortization (55,746) (48,703) Total property and equipment, net $128,349 $129,671 (5) CONTRIBUTIONS RECEIVABLE Contributions not yet collected are included in contributions and other receivables (current) and contributions receivable (long-term) in the statements of financial position, and mature as follows (dollars in thousands): Years ending December 31: 2009 $13,109 2010 4,652 2011 8,807 2012 5,265 2013 3,633 Thereafter 13,147 48,613 Less discount at rates from 3% to 5% to estimated net present value (4,024) Less allowance for uncollectible contributions (456) 44,133 Less current portion (12,653) Total contributions receivable, long-term $31,480 At December 31, 2007, the discount on contributions receivable was approximately $5.4 million at rates ranging from 3% to 5% and the allowance for uncollectible contributions was approximately $208,000. (6) DEFERRED REVENUE Deferred revenue consisted of the following as of December 31, 2008 and 2007 (dollars in thousands): 2008 2007 Advances from private grants and contract sponsors $24,537 $24,082 Advances from U.S. government sponsors 6,958 2,663 Publication subscriptions and other 3,976 4,669 Total deferred revenue $35,471 $31,414 (7) LINE OF CREDIT NAS is party to an $18 million unsecured line of credit from Bank of America which bears interest at LIBOR plus 0.40% and expires on August 30, 2010. Interest expense related to the line of credit for the years ended December 31, 2008 and 2007, was approximately $343,000 and $497,000, respectively. (8) TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets were available for the following purposes as of December 31, 2008 and 2007 (dollars in thousands): 2008 2007 Sponsored research and advisory programs $126,835 $203,182 General endowment 54,157 - Prizes and awards 17,903 30,088 Woods Hole facility 1,896 5,055 Total temporarily restricted net assets $200,791 $238,325 Temporarily restricted net assets were released from restriction for the following purposes during the years ended December 31, 2008 and 2007 (dollars in thousands): 2008 2007 Sponsored research and advisory programs $34,397 $32,989 General endowment 6,300 - Prizes and awards 917 658 Woods Hole facility 463 344 Total temporarily restricted net assets released from restriction $42,077 $33,991
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Report of the Treasurer of the National Academy of Sciences (9) ENDOWMENTS (a) Permanently Restricted Net Assets The income generated by permanently restricted net assets is available to support donor-specified programs. As of December 31, 2008 and 2007, NAS held the following permanently restricted net assets, classified by the purpose for which the income is to be used (dollars in thousands): 2008 2007 Sponsored research and advisory programs $109,635 $105,720 Prizes and awards 5,115 5,114 Total permanently restricted net assets $114,750 $110,834 (b) Endowment Assets In August 2008, FASB Staff Position No. FAS 117–1, Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act and Enhanced Disclosures for All Endowment Funds (FSP 117–1), was issued, and its guidance is effective for fiscal years ending after December 15, 2008. A key component of FSP 117–1 is a requirement to classify the portion of a donor-restricted endowment fund that is not classified as permanently restricted net assets as temporarily restricted net assets until appropriated for expenditure. NAS recorded the effect of adopting FSP 117–1 as a reclassification of unrestricted net assets to temporarily restricted net assets of $102.8 million as of January 1, 2008. The NAS endowment consists of approximately 100 individual funds established to support general operations, sponsored research and advisory programs, prizes and awards, and the operations of the Woods Hole facility. The endowment is comprised solely of donor-restricted endowment funds. The investments of the endowment are included in the NAS long-term investment pool, as described in note 3. Interpretation of Relevant Law NAS has interpreted the District of Columbia “Uniform Prudent Management of Institutional Funds Act of 2007” (the “Act”) as requiring NAS, absent explicit donor stipulations to the contrary, to act in good faith and with the care that an ordinarily prudent person in a like position would exercise under similar circumstances in making determinations to appropriate or accumulate endowment funds, taking into account both its obligation to preserve the value of the endowment and its obligation to use the endowment to achieve the purposes for which it was donated. NAS classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment required by the applicable donor gift instrument. The remaining portion of donor-restricted endowment funds that are not classified as permanently restricted are classified as temporarily restricted net assets until those amounts are appropriated for expenditure by NAS. In making a determination to appropriate or accumulate, NAS adheres to the standard of prudence prescribed by the Act and considers the following factors. The duration and preservation of the endowment fund; The purposes of the institution and the endowment fund; General economic conditions; The possible effect of inflation or deflation; The expected total return from income and the appreciation of investments; Other resources of the institution; and The investment policy of the institution. Return Objectives and Strategies NAS has adopted an investment and spending policy for endowment assets that is designed to provide a predictable stream of funding to programs supported by the endowment while seeking to protect the real purchasing power of the assets from inflation. Accordingly, NAS has adopted guidelines which feature a material commitment to equity and equity-like investments. The asset allocation guidelines are as follows: Asset Category Guideline % US Large Stocks 25% US Small-Mid Stocks 12% Non-US Stocks (Developed) 20% Non-US Stocks (Emerging) 8% Real Estate Stocks 5% Total Stocks 70% US Fixed/Cash 12% Non-US Fixed 3% Total Fixed 15% Hedge Funds 12% Other Alternative 3% Total 100%
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Report of the Treasurer of the National Academy of Sciences NAS has adopted a spending policy that limits the annual spending to 5 percent of the three-year average fair value of the participating funds in the endowment portfolio. This is consistent with NAS’ objective to maintain the purchasing power of the endowment assets held in perpetuity as well as to provide additional real growth through new gifts and investment return. Changes in Endowment assets for the fiscal year ended December 31, 2008 are as follows (dollars in thousands): Unrestricted Temporarily Restricted Permanently Restricted Total Endowment assets, January 1, 2008 $102,814 $124,459 $102,351 $329,624 Net asset reclassification based on change in law (102,814) 102,814 - - Endowment assets after reclassification - 227,273 102,351 329,624 Investment return: Interest and dividend income - 13,605 - 13,605 Net loss on investments (2,358) (116,239) - (118,597) Total investment return (2,358) (102,634) - (104,992) Contributions - - 6,173 6,173 Amounts appropriated for expenditure - (13,828) - (13,828) Other changes: 2007 Appropriation withdrawn in 2008 - (395) - (395) Unspent purpose restricted appropriations - 1,667 - 1,667 Accrued expenses withdrawn in 2009 - 1,377 - 1,377 Endowment assets, December 3 1 , 2008 $(2,358) $113,460 $108,524 $219,626 Changes in Endowment assets for the fiscal year ended December 31, 2007 are as follows (dollars in thousands): Unrestricted Temporarily Restricted Permanently Restricted Total Endowment assets, January 1, 2007 $93,628 $108,827 $99,228 $301,683 Investment return: Interest and dividend income 8,003 11,567 - 19,570 Net gain on investments 5,524 7,718 - 13,242 Total investment return 13,527 19,285 - 32,812 Contributions - - 3,123 3,123 Amounts appropriated for expenditure (5,704) (6,824) - (12,528) Other changes: Unspent purpose restricted appropriations 1,363 3,171 - 4,534 Endowment assets, December 31, 2007 $102,814 $124,459 $102,351 $329,624 Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the original value of the gift donated to the permanent endowment. Deficiencies of this nature are reported as unrestricted net assets. At December 31, 2008, NAS had deficiencies of $2.4 million reported as unrestricted net assets. These deficiencies were primarily a result of unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions. Subsequent gains that restore the fair value of the assets of the endowment fund to the required level will be classified as an increase in unrestricted net assets. There were no such deficiencies as of December 31, 2007.
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Report of the Treasurer of the National Academy of Sciences (10) PROGRAM EXPENSES Program expenses for the years ended December 31, 2008 and 2007 are summarized as follows (dollars in thousands): 2008 2007 Transportation Research Board $91,742 $65,179 Policy and Global Affairs 53,593 55,911 Institute of Medicine 23,154 20,388 Earth and Life Sciences 19,319 19,435 Engineering and Physical Sciences 19,783 18,839 Behavioral and Social Sciences and Education 9,649 13,886 Proceedings of the National Academy of Sciences 12,477 12,280 National Academy Press 4,573 5,479 National Academy of Engineering 4,641 4,950 Koshland Science Museum 1,890 1,932 NAS and National Sciences Resource Center 6,605 6,885 Total program expenses $247,426 $225,164 (11) RECOVERY OF INDIRECT COSTS NAS receives indirect cost recovery on its federal contracts and grants. An overhead assessment is applied to direct salaries, accrued leave, fringe benefits, and services provided by outside contractors (e.g., temporary personnel agencies, consultants) on NAS property. A general and administrative assessment (G&A) is applied to direct costs and overhead less subcontract costs and stipends. Therefore, both the overhead and G&A rates are applied to projects incurring direct salaries and other direct costs such as travel. If a program does not require direct salaries, such as a travel grant program, a subcontract/flow-through administration rate is applied. Certain off-site work (not performed on NAS property) is assessed reduced overhead rates. NAS bills for indirect cost recovery throughout the year based on negotiated rates. At the end of each year, NAS compares actual expenses incurred in each of its cost pools to the amounts recovered based on its billing rates. The difference is recorded as its indirect cost carryforward. If NAS overrecovers on its indirect costs during the year, a liability is recorded. If NAS underrecovers, a receivable is recorded. NAS has a cumulative net underrecovery of approximately $7.5 million and $3.1 million as of December 31, 2008 and 2007, respectively, which is included in the contracts receivable balance in the statements of financial position. (12) BUILDING PROJECT AND FINANCING (a) Building Project Revenue Bonds In January 1999, the District of Columbia issued Series 1999A, Series 1999B, and Series 1999C tax-exempt revenue bonds in the total amount of $130,960,000 on behalf of NAS. Proceeds from the sale of the revenue bonds financed the cost of the acquisition of 44,250 square feet of land and related construction of an office building, as well as paid certain costs of issuing the bonds. This building consolidates most of NAS’ program activities into one location. The facility was occupied in July 2002. In June 2008, the District of Columbia issued Series 2008A tax-exempt revenue bonds in the amount of $66,325,000 on behalf of NAS. The proceeds were used to refund the Series 1999B and Series 1999C revenue bonds, as well as pay certain costs of issuing the bonds NAS is obligated under the revenue bonds as follows (dollars in thousands): 2008 2007 Series 1999A revenue bonds, serial, interest rate 5%, maturing at various 2012 dates from January 1, 2009 through $7,440 $9,085 Series 1999A revenue bonds, term: Interest rate 5%, due January 1, 2019 17,085 17,085 Interest rate 5%, due January 1, 2028 32,545 32,545 Series 2008A revenue bonds, term, at flexible rates (2.1% in 2008) maturing at various dates from January 1, 2029 through 2039 66,325 - Series 1999B revenue bonds, term, at flexible rates (2.6% in 2008 and 3.62% in 2007) due January 1, 2039 - 32,500 Series 1999C revenue bonds, term, at variable rates (2.8% in 2008 and 3.62% in 2007) due January 1, 2039 - 32,500 Total bonds, at face value 123,395 123,715 Less unamortized discount and premium (989) (1,003) Total bonds payable 122,406 122,712 Less current portion (included in other current liabilities) (1,725) (1,645) Bonds payable, long-term $120,681 $121,067 The serial and term bonds represent unsecured general obligations of NAS. Interest on all Series 1999A revenue bonds is payable semiannually every January 1 and July 1. Interest on the 2008A, 1999B and 1999C bonds is payable monthly. The carrying value of bonds payable in the financial statements was less than their fair value by approximately
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Report of the Treasurer of the National Academy of Sciences $1.1 million and $2.4 million on December 31, 2008 and 2007, respectively. The term bonds maturing on January 1, 2019, and January 1, 2028, are subject to mandatory redemption by operation of sinking fund installments. The installment payments for the term bonds maturing January 1, 2019, begin on January 1, 2013, and range from $2.1 to $2.8 million per year through the maturity date. Installment payments for the term bond maturing January 1, 2028, begin on January 1, 2020, and range from $2.9 to $4.3 million per year through the maturity date. Scheduled maturities and sinking fund requirements are as follows (dollars in thousands): Years ending December 31: 2009 $1,725 2010 1,810 2011 1,905 2012 2,000 2013 2,100 Thereafter 113,855 $123,395 Interest expense on the bonds payable for 2008 and 2007 totaled $4.5 million and $5.3 million, respectively. (b) Interest Rate Swaps In October 1999, NAS entered into a swap agreement, with an effective date of February 1, 2000, relating to the $66 million face amount of its Series 1999A revenue bonds. The agreement provides for NAS to receive 4.97% in interest on a notional amount of $65 million and to pay interest at a floating rate option based on the weekly interest rate resets of tax-exempt variable-rate issues per the SIFMA Municipal Swap Index. NAS amended the agreement for the 2005–2020 period by agreeing to give up the benefit of any 30-day period during which the SIFMA index remains below 2.25% for the entire 30 days. Each time this occurs, the rate on the swap portfolio reverts to the fixed rate noted above for that month only. NAS entered into this swap agreement to manage its exposure to interest rate changes. The fixed-rate debt obligations expose NAS to variability in the cost recovery stream due to changes in interest rates. NAS recovers the costs of borrowing through a capital investment incentive rate that is set by the U.S. government and is tied to a variable index. If interest rates increase, the capital investment incentive recovery increases. Conversely, if interest rates decrease, the capital investment incentive recovery decreases. Therefore, NAS entered into a derivative instrument that ties the fixed-rate debt to a variable index to manage fluctuations in cash flows resulting from interest rate risk. By using derivative financial instruments to hedge exposures to changes in interest rates, NAS exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes NAS, which creates credit risk for NAS. When the fair value of a derivative contract is negative, NAS owes the counterparty, and therefore, it does not possess credit risk. NAS minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties. NAS entered into a swaption agreement on August 21, 2007 that gives the counterparty the option to require NAS to enter into an additional swap agreement related to the Series 1999A Revenue Bonds. If executed by the counterparty (see note 19), the swap will be effective on May 1, 2009 and require NAS to pay 5.00% on a notional amount of $55 million and to receive a floating rate equal to 67% of 1-month LIBOR plus 0.41%. The counterparty paid NAS a premium of $2.2 million in advance to enter into this agreement. Under Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, the fair value of the swap and swaption must be recorded in the NAS financial statements. Accordingly, for the years ended December 31, 2008 and 2007, NAS recorded a loss on the change in the fair value of its swap agreement of $803,000 and $185,000, respectively, which is included in other income in the accompanying statements of activities. The fair value of the interest rate swap was $934,000 and $2.0 million as of December 31, 2008 and 2007, respectively, and is included in contributions and other receivables and other assets on the statements of financial position. The fair value of the swaption at December 31, 2008 and 2007 is recorded as a liability of $12.5 million and $4.3 million, respectively, in other long-term liabilities and represents the estimated cost to NAS to cancel the agreement at the reporting date and is based on pricing models that consider interest rates and other market factors. The change in the fair value of the swaption is a net loss of approximately $8.3 million and $2.2 million for the years ended December 31, 2008 and 2007, respectively, and is included in other income in the statements of activities.
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Report of the Treasurer of the National Academy of Sciences (13) NOTE PAYABLE During 2006, NAS entered into a loan agreement with Bank of America for an amount up to $5 million. The principal balance of this note is payable in equal monthly installments until January 1, 2012. On December 31, 2008 and 2007, the principal balance was approximately $2.3 million and $3.0 million, respectively. The note bears interest at 30-day LIBOR plus 40 basis points. The interest rate at December 31, 2008 was 0.86%. (14) EMPLOYEE BENEFITS (a) Retirement Plans NAS has a noncontributory defined contribution retirement plan covering substantially all of its employees (based on certain benefit eligibility requirements). The plan is intended to qualify under Section 401(a) of the Internal Revenue Code and uses Teachers Insurance and Annuity Association/College Retirement Equities Fund (TIAA/CREF) group retirement annuity contracts as the investment vehicle. Participants in this plan vest immediately. NAS has received a favorable determination letter from the IRS on the qualification of this plan under Section 401(a) of the Internal Revenue Code. In addition, NAS has a voluntary employee contribution retirement plan that is funded solely by employee contributions made on a pretax salary-reduction basis under Section 403(b) of the Internal Revenue Code. The investment vehicles under this voluntary plan are retirement annuity contracts issued by TIAA/CREF and mutual funds offered by the Vanguard Group, Inc. Pension expense for the years ended December 31, 2008 and 2007, amounted to approximately $10.3 million and $9.8 million, respectively. The NAS policy is to fund pension benefits as they are earned. The NAS normal retirement age is 60, but there is no mandatory age for retirement. (b) Deferred Compensation NAS holds long-term investments as part of a frozen deferred compensation arrangement for certain employees. The fair value of these investments was approximately $2.2 million and $4.1 million as of December 31, 2008 and 2007, respectively, which is reported within other assets in the statements of financial position. The related obligation is included in accrued employee benefits in the statements of financial position. (c) Postretirement and Postemployment Benefits NAS provides certain health and life insurance benefits for employees retired due to length of service. All benefit-eligible employees may become eligible for service retiree benefits if they reach age 60 while working for NAS and complete 5 years of service in a benefit-eligible status for medical and life insurance benefits. In addition, certain health and life insurance benefits are provided for employees retired due to disability. A benefit-eligible employee may become eligible for disabled retiree benefits if deemed totally disabled under NAS' long-term disability insurance or if they are eligible for disability benefits from the Social Security Administration. Life insurance benefits are provided based on coverage at date of disability and health insurance may be continued if the disabled retiree had participated in an NAS health insurance plan for 5 years at the date of disability. Insurance companies whose premiums are determined on an experience-rated basis provide life and health insurance benefits for retirees. Medicare supplement insurance is not experience rated. The retiree welfare benefit plan is contributory for health insurance purposes for employees who retired on or after January 1, 1990. Participant contributions for health insurance are based on a percentage of the monthly premium paid by NAS (from 25% to 100%). The participant contribution is also based on their date of retirement, length of service and choice of health insurance carrier. NAS has elected to recognize the initial postretirement benefit obligation over a period of 20 years. The accrued postretirement benefit obligation is reported in accrued employee benefits on the statements of financial position. In 2006, the Financial Accounting Standards Board issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, which NAS has adopted for the year ended December 31, 2007. This statement requires that an employer recognize the funded status of its benefit plans in its statement of financial position and report the corresponding gains and losses in its statement of activities. NAS reported the funded status of the accumulated postretirement benefit obligation of $1.8 million as a component of accrued employee benefits liability at December 31, 2007. NAS recorded the effect of adopting SFAS No. 158 of $604,000 for the year ended December 31, 2007.
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Report of the Treasurer of the National Academy of Sciences The effects of applying SFAS No. 158 on NAS’ financial position as of December 31, 2007 were as follows (dollars in thousands): Before SFAS No. 158 After SFAS No. 158 Accrued employee benefits $5,275 $5,879 Total liabilities 220,887 221,491 Total net assets 540,893 540,289 Post-retirement changes other than net periodic benefit cost are as follows (dollars in thousands): 2008 Net actuarial (gain) loss $6,555 Recognized actuarial gain (loss) 18 Recognized prior service (cost) credit (210) Recognized net initial asset (obligation) (26) Total $6,337 Items not yet recognized as a component of net periodic benefit cost at December 31, 2008 and 2007 are as follows (dollars in thousands). 2008 2007 Net actuarial loss (gain) $5,447 $(1,125) Prior service cost (credit) 1,352 1,562 Unrecognized net initial obligation 142 167 Total $6,941 $604 The estimated amounts, measured at year-end, that are expected to be recognized in the net periodic benefit cost over the next fiscal year for the postretirement benefit plan are as follows (dollars in thousands): 2008 2007 Prior service cost $210 $210 Recognized actuarial loss (gain) 469 (18) Recognized net initial obligation 26 26 Total $705 $218 The following table presents the changes in benefit obligations, changes in plan assets, funded status, and the components of net periodic benefit cost for the year ended December 31, 2008 and 2007 (dollars in thousands): 2008 2007 Change in benefit obligations: Benefit obligation, January 1 $16,461 $16,525 Service cost 608 660 Interest cost 963 927 Plan participant contributions 131 117 Actuarial loss (gain) 1,161 (1,152) Benefits paid (732) (616) Benefits obligation, December 31 18,592 16,461 Change in plan assets, combined: Fair value of plan assets, January 1 14,660 11,920 Actual return on plan assets (4,325) 797 Employer contributions 1,865 2,442 Plan participants contributions - 117 Benefits paid - (616) Fair value of plan assets, December 31 12,200 14,660 Funded status $(6,392) $(1,801) Components of net periodic benefit cost: Service cost $608 $661 Interest cost 963 927 Expected return on plan assets (1,069) (899) Recognized prior service cost (credit) 210 210 Recognized actuarial (gain) loss (18) (2) Recognized net initial obligation (asset) 26 26 Net periodic benefit cost $720 $923 The assumptions used to determine net periodic benefit cost for years ended December 31, 2008 and 2007 are as follows: 2008 2007 Discount rate 6.00% 6.00% Expected long-term return on plan assets 7.50% 7.50% The assumptions used to calculate the accumulated postretirement benefit obligation for the years ended December 31, 2008 and 2007 are as follows: 2008 2007 Discount rate 6.00% 6.00%
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Report of the Treasurer of the National Academy of Sciences NAS postretirement benefit plan asset allocations at December 31, 2008 and 2007, by asset category are as follows: 2008 2007 Cash 3% 11% Bonds and notes 11% 15% Equity securities 86% 74% 100% 100% The investment objective of the Plan is to produce a rate of return over the long term that will provide for fund growth, protect against the effect of inflation, and provide for some stability in different market environments. The fund is diversified between fixed income and equity investments. With this diversification and investment in broader market funds, there is reasonable assurance that no single security or class of securities will have a disproportionate impact on the Plan assets. The Plan assets are invested with a long-term growth strategy, with a 70% equity guideline. The overall long-term rate of return was developed by estimating the long-term real rate of return for the Plan’s asset mix, while taking into account the effects of inflation. This estimate was developed by evaluating the history and similar asset allocation of the NAS Endowment. NAS expects to contribute to the Plan the actuarially determined net periodic cost for 2009, which is approximately $1,500,000. The following benefit payments, which reflect future services, are expected to be paid in future years as noted, as of December 31, 2008 (dollars in thousands): Years ending December 31: 2009 $906 2010 1,028 2011 1,139 2012 1,221 2013 1,294 2014–2017 7,115 $12,703 The measurement date of the plan assets and benefit obligations for 2008 and 2007 is December 31, 2008 and 2007, respectively: The trend rate for growth in healthcare costs used in calculating the accumulated postretirement benefit obligation was 8.7% and 9.5% for the years ended December 31, 2008 and 2007, respectively, declining gradually to 5% in the year 2019. The healthcare cost trend rate assumption has a significant impact on the postretirement benefit costs and obligations. The effect of a 1% change in the assumed healthcare cost trend rate at December 31, 2008, would have resulted in an estimated $1.7 million increase or $1.5 million decrease in the postretirement benefit obligation and an estimated $201,000 increase or $165,000 decrease in the 2008 benefit expense. The effect of a 1% change in the assumed healthcare cost trend rate at December 31, 2007, would have resulted in an estimated $1.5 million increase or $1.3 million decrease in the postretirement benefit obligation and an estimated $203,000 increase or $167,000 decrease in the 2007 benefit expense). (15) CONDITIONAL ASSET RETIREMENT OBLIGATION In March 2005, the Financial Accounting Standards Board (FASB) issued the FASB Interpretation No. 47 (FIN 47). This interpretation clarifies the term “conditional asset retirement obligation” as it is used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, and requires a liability to be recorded if the fair value of the obligation to retire an asset can be reasonably estimated. Asset retirement obligations covered by FIN 47 include those for which an entity has a legal obligation to perform an asset retirement activity. However, the timing and/or method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. In accordance with FIN 47, NAS recorded an asset retirement obligation for which fair value of the liability could be reasonably estimated relating to the regulatory remediation of asbestos and other hazardous materials in one of its office buildings. Accordingly, NAS recorded a charge to management and general expense of $1.5 million for the year ended December 31, 2007. NAS recorded a liability for asset retirement obligations of $1.7 million in other long-term liabilities and increased the carrying value of the related building assets by $364,000, less accumulated depreciation of $291,000. During 2008, NAS recognized accretion expense of $80,000, increasing the value of the liability to approximately $1.8 million at December 31, 2008. There were no additional liabilities incurred or settled and no revisions to estimated cash flows in 2008.
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Report of the Treasurer of the National Academy of Sciences (16) RELATED PARTY TRANSACTIONS The NAS Council has authorized two agreements providing noninterest bearing, collateralized advances to two employees in connection with the purchase of each employee’s residence. The agreements between the parties were executed in May 2005 and May 2007. They each provide that the repayment obligation will be adjusted to allocate to each party its proportional share of the appreciation or depreciation in the value of the residence, which is based on the relative financial percentage provided by each party. The agreements will terminate upon pay-back of the advance, sale of the property, or the end of each individual’s employment with NAS, which will not exceed 12 years. The estimated present value of the receivables at December 31, 2008 and 2007, is $3.3 million and $3.5 million, respectively, and is included in other assets on the statements of financial position. (17) COMMITMENTS AND CONTINGENCIES (a) Leases NAS is committed to several noncancelable operating leases for office space. Future minimum rental payments due under noncancelable operating leases are as follows (dollars in thousands): Year ending December 31: 2009 $2,440 2010 2,380 2011 2,017 2012 1,686 2013 1,730 Thereafter 5,119 $15,372 Rental expense amounted to approximately $2.1 million for both years ended December 31, 2008 and 2007, respectively. (b) Contingencies NAS receives a portion of its revenues directly or indirectly from federal government grants and contracts, all of which are subject to audit by the Defense Contract Audit Agency, which has completed its examinations through December 31, 2005. A contingency exists relating to unexamined periods and final settlements of examined periods to refund any amounts received in excess of allowable costs. Management is of the opinion that no material liability will result from such audits. (c) Litigation NAS is involved in one litigation matter. While the ultimate outcome of the litigation is uncertain, NAS management believes that it has a strong legal position, intends to vigorously defend against any liability, and has concluded that the probable outcome will not have a material impact on NAS. (18) RISKS AND UNCERTAINTIES NAS invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported. (19) SUBSEQUENT EVENT As described in Note 12(b), NAS is party to a swaption agreement. On March 17, 2009, the counterparty exercised its option to require NAS to enter into an additional swap agreement related to the Series 1999A Revenue Bonds. The swap becomes effective on May 1, 2009, requiring NAS to pay 5.00% on a notional amount of $55 million and to receive a floating rate equal to 67% of 1-month LIBOR plus 0.41%. On April 30, 2009 the District of Columbia issued $57.5 million of variable rate tax exempt revenue bonds on behalf of NAS. The proceeds were used to refund the existing Series 1999A fixed rate revenue bonds in the amount of $55.3 million and pay for certain costs of issuance.
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Report of the Treasurer of the National Academy of Sciences OFFICERS Ralph J.Cicerone, President Barbara A.Schaal, Vice President John I.Brauman, Home Secretary Michael T.Clegg, Foreign Secretary Jeremiah P.Ostriker, Treasurer FINANCE COMMITTEE Jeremiah P.Ostriker, Chair Elwyn R.Berlekamp Claude R.Canizares Ralph J.Cicerone Ronald L.Graham David M.Kipnis Lawrence R.Klein William J.Rutter Paul A.Samuelson IOM Representative: Gail Cassell BUDGET AND INTERNAL AFFAIRS COMMITTEE Jeremiah P.Ostriker, Chair Rita R.Colwell Sharon R.Long Elliot M.Meyerowitz Stanley B.Prusiner Barbara A.Schaal AUDITING COMMITTEE Purnell W.Choppin, Chair Susan Gottsman Ronald L.Graham Gerald M.Rubin Sean C.Solomon FINANCIAL MANAGEMENT STAFF Julie Englund, Chief Financial Officer Didi Salmon, Controller