Treasurer’s Statement

To the Council of the National Academy of Sciences:


This Report of the Treasurer of the National Academy of Sciences presents the financial position and results of operations as well as a review of the endowment, trust, and other long-term investments pool activities of our Academy for the year ended December 31, 2009.

Overview

The National Academy of Sciences (NAS) functions on the basis of two sources of income: that received through National Research Council (NRC) activities as compensation for the myriad reports, studies, etc. produced each year and second, a much smaller sum that we obtain from our endowment via the formula of the “spending rule” that we can use for essentially any purpose consistent with our charter. Regarding the first of these, the numbers are very heartening. Despite the difficult economic environment, our total actual program revenue for 2009 was 9.6% over 2008 actual revenue. And for 2010, we are anticipating continued growth, currently estimated at 6.0%. There are many who deserve credit for this strong showing but not least among them is Bill Colglazier for his wise oversight as the Executive Officer of the NRC.


As the recent economic problems have had a serious impact on the endowment’s value, management has adopted a prudent spending level, agreeing to a decreased spending level in 2009 to 4% of the 12 quarter average as of June 30, 2009, of unrestricted funds and to avoid spending whenever possible from underwater endowments (those with value below the original gift from restricted funds). Management agreed to the same 4% spending level for 2010.

NAS Highlights

Endowment, Trust, and Other Long-term Investments Pool

As the Chairman of the Finance Committee, I am responsible for the prudent management of the endowment, trust, and other long-term investments (the “Pool”). The goal of the Pool 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 historically adopted a “spending rule” designed to maintain the purchasing power of the Pool over time. The spending rule caps annual spending at 5 percent of the trailing 12 quarter average market value of the participating funds in the Pool.


During calendar year 2009, the market value of the Pool regained a portion of the value that was lost during the market downturn in 2008. Market value of the Pool increased net of withdrawals and new contributions from $288.0 million on January 1, 2009 to $344.4 million at December 31, 2009. The Pool returned 25.1% for the year which was lower than the 29.2% of the relevant benchmark. The performance of the hedge fund investments was the main contributing negative factor for the relative performance differential. Positive contributions to performance came from non-US emerging markets, small-mid US equity and fixed income funds. By actions of the Finance Committee in the latter part of 2008 and continuing in 2009, investments were made in a basket of securities in the natural resources and alternative energy arenas which have contributed significant positive returns to the Pool’s overall performance. A further action by the Committee led to the sale of poor performing investments in certain hedge funds.


Liquidity of the Pool investments is a concern of organizations that rely on income for operational needs and/or have bond obligations. It has been extensively publicized that several prominent university endowments had serious difficulties in extracting operating income from illiquid portfolios. A careful study of our portfolio by Chief Financial Officer, Julie Englund, shows it to be highly liquid, with 76% of the portfolio being available between 1-3 days; 83% is available within a month.


Market values of the Pool, after withdrawals, for the years ended December 31, 2009 and 2008, are displayed in the following chart:

 

(dollars in thousands)

 

2009

2008

Cash and Fixed-Income Securities

$ 47,697

$ 63,624

Equity Securities

296,683

224,398

Total

$ 344,380

$ 288,022

The Pool has consistently outperformed the market benchmarks over a long period. For the five years ending December 31, 2009, the Pool return is 4.6% compared to the market composite benchmark of 3.9% and, for the ten



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achieve this goal, the NAS Council, acting on the Treasurer’s Statement recommendation of the Finance Committee, has historically adopted a “spending rule” designed to maintain the purchasing power of the Pool over time. The spending rule caps annual spending at 5 percent of the To the Council of the National Academy of trailing 12 quarter average market value of the participat- Sciences: ing funds in the Pool. This Report of the Treasurer of the National Academy of During calendar year 2009, the market value of the Pool Sciences presents the financial position and results of regained a portion of the value that was lost during the operations as well as a review of the endowment, trust, market downturn in 2008. Market value of the Pool and other long-term investments pool activities of our increased net of withdrawals and new contributions from Academy for the year ended December 31, 2009. $288.0 million on January 1, 2009 to $344.4 million at December 31, 2009. The Pool returned 25.1% for the Overview year which was lower than the 29.2% of the relevant benchmark. The performance of the hedge fund investments was the main contributing negative factor for The National Academy of Sciences (NAS) functions on the relative performance differential. Positive contribu- the basis of two sources of income: that received through tions to performance came from non-US emerging National Research Council (NRC) activities as compensa- markets, small-mid US equity and fixed income funds. tion for the myriad reports, studies, etc. produced each year and second, a much smaller sum that we obtain from By actions of the Finance Committee in the latter part of our endowment via the formula of the “spending rule” 2008 and continuing in 2009, investments were made in a that we can use for essentially any purpose consistent basket of securities in the natural resources and alternative with our charter. Regarding the first of these, the numbers energy arenas which have contributed significant positive are very heartening. Despite the difficult economic returns to the Pool’s overall performance. A further environment, our total actual program revenue for 2009 action by the Committee led to the sale of poor perform- was 9.6% over 2008 actual revenue. And for 2010, we ing investments in certain hedge funds. are anticipating continued growth, currently estimated at 6.0%. There are many who deserve credit for this strong Liquidity of the Pool investments is a concern of showing but not least among them is Bill Colglazier for organizations that rely on income for operational needs his wise oversight as the Executive Officer of the NRC. and/or have bond obligations. It has been extensively publicized that several prominent university endowments As the recent economic problems have had a serious had serious difficulties in extracting operating income impact on the endowment’s value, management has from illiquid portfolios. A careful study of our portfolio adopted a prudent spending level, agreeing to a decreased by Chief Financial Officer, Julie Englund, shows it to be spending level in 2009 to 4% of the 12 quarter average as highly liquid, with 76% of the portfolio being available of June 30, 2009, of unrestricted funds and to avoid between 1-3 days; 83% is available within a month. spending whenever possible from underwater endow- ments (those with value below the original gift from Market values of the Pool, after withdrawals, for the years restricted funds). Management agreed to the same 4% ended December 31, 2009 and 2008, are displayed in the spending level for 2010. following chart: (dollars in thousands) NAS Highlights 2009 2008 Cash and Fixed-Income Securities $ 47,697 $ 63,624 Endowment, Trust, and Other Long-term Investments Equity Securities 296,683 224,398 Pool $ 344,380 $ 288,022 Total As the Chairman of the Finance Committee, I am The Pool has consistently outperformed the market responsible for the prudent management of the endow- benchmarks over a long period. For the five years ending ment, trust, and other long-term investments (the “Pool”). December 31, 2009, the Pool return is 4.6% compared to The goal of the Pool is to provide stable support for the the market composite benchmark of 3.9% and, for the ten NAS General Fund, NAS Trust and Award activities, and the Presidents' initiatives within the NRC program. To 1

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years ending December 31, 2009, the Pool return is 4.5% NAS General Fund compared with the market composite benchmark of 3.3%. The NAS General Fund accounts for the activities of the The Finance Committee will continue to monitor the Council, the Officers, and the Members. The primary performance of investments and the portfolio overall asset funding for these activities is received from specified allocation compared to policy, and to review possible endowment, trust, and other long-term investment funds future investments. The comparison of these guidelines to (see page 16 for detailed listing), normally based on the the actual portfolio allocation at December 31, 2009, is as 5% spending rule. follows: For fiscal year 2009, the General Fund revenue totaled Overview of Current Investment Structure $7.7 million and expenditures totaled $5.8 million, Portfolio Allocation Guideline resulting in a $1.9 million surplus. Comparable figures for Fixed- fiscal year 2008 were $7.0 million in revenues, $5.4 U.S. Fixed/Cash 12.0% 7.4% Income: million in expenditures, resulting in a surplus of $1.6 Non-U.S. Fixed 3.0% 6.4% million. Equities: U.S. Large Cap Funds 25.0% 19.4% U.S. Small-Mid Cap Funds 12.0% 9.9% Non-U.S. Stocks — Developed 20.0% 23.6% The NAS Reserve is the accumulation of prior year Non-U.S. Stocks — Emerging 8.0% 13.8% surpluses, and one of the anticipated and appropriate uses Real Estate Investments 5.0% 2.8% of the NAS Reserve is to provide a cushion for ongoing 12.0% 13.2% Hedge Funds operations during periods of revenue shortfalls. During 3.0% 3.5% Other Alternative Investments 2009, President Ralph Cicerone has prudently spent less 100.0% 100.0% Total than the funds available, returning to the NAS Reserve $1.6 million. There are plans for a comparable degree of fiscal caution in 2010 as well. The remaining balance of  See Schedule 2-A on page 21 for details of the NAS Reserve at December 31, 2009, is $4.4 million. investments by asset class. The $1.6 million of the surplus from fiscal year 2009 will be added to this balance in early 2010, for a net NAS  Included in the $344.4 million total market value of Reserve balance of $6.0 million. the Pool as of December 31, 2009, are $6.6 million for the Woods Hole Endowment Funds, $57.9 million The 2009 NAS General Fund activity is summarized as for the Institute of Medicine (IOM), and $8.8 million follows: for The National Academies’ Corporation (TNAC). TNAC, which is equally owned by the NAS and the (dollars in thousands) National Academy of Engineering Fund (NAEF), Revenues: owns and operates the Beckman Center (see note 1 to Unrestricted Endowment $ 5,896 the financial statements on page 45). Woods Hole Endowment 401 Communications Initiative Fund 201  Withdrawals of $15.5 million were made to fund the Annual Giving from Members 327 Membership Dues 252 President’s Committee, NAS General Fund’s activity, Annual Meeting 207 and prizes and awards for the current period. NAS Reserve 385 Additional withdrawals of $2.2 million were made to Short-Term Investment Interest, fund Woods Hole, IOM, and TNAC activity. Royalties, etc. 46 $ 7,715 Total Revenue 2

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Journal Publications Expenses: Development Office $ 1,570 Financial results of the Proceedings of the National Member Services: Academy of Sciences are shown below for the years ended Annual Meeting 647 December 31, 2009 and 2008: Other 191 Programs/Projects: (dollars in thousands) Cultural Programs of the NAS 395 2009 2008 Evolution, Education & Communication 158 Revenues: Communications Initiative 446 Subscriptions $ 6,820 $ 6,906 Frontiers of Science 144 Author charges 6,174 5,535 Committee on International Other 119 121 Security & Arms Control 196 Total $ 13,113 $ 12,562 Local High School Project 40 Committee on Women in Science, Engineering Expenses: and Medicine 98 Publishing $ 6,387 $ 6,048 InterAcademy Council 109 Other 7,038 6,429 Woods Hole 248 Total $ 13,425 $ 12,477 Foreign Meetings 125 President’s Office 103 $ (312) $ 85 Net NAS Executive Office 55 NRC Operations 1,025 ISSUES Support 265 Miscellaneous 19 Facilities $ 5,834 Total Expenses NAS owns the following facilities: $ 1,881 Surplus Keck Center of the National Academies at 500 Fifth  Disposition of Surplus: St., NW in Washington, D.C. Due to NAS Reserve 1,571 National Academy of Sciences Building at 2101  Due to Woods Hole Reserve 160 Constitution Ave., NW in Washington, D.C. Due to Communications Initiative Reserve 150 J. Erik Jonsson Center of the National Academies at  The NAS Council has approved a General Funds budget 314 Quisset Dr. in Woods Hole, Massachusetts. of $4.8 million for fiscal year 2010, which is less than the Arnold and Mabel Beckman Center at 100 Academy  amount available by $252,000. This budget level was in Irvine, California (jointly owned with NAEF accomplished by reducing the budget through prudent through TNAC). reductions to existing programs as well as the transfer of some programs to unrestricted funds. NAS is leasing the following facilities: Prizes and Awards Terrell Place Office Building (two suites) at 575  Seventh St. NW in Washington, D.C. Several award funds have existed for more than 100 National Academies Data Center at 8619 Westwood  years, while others were established more recently. The Center Drive in Vienna, Virginia. Home Secretary oversees the nomination process that National Academy Press Printing Facility at 8700  selects award recipients and recommends to the Council Spectrum Drive in Landover, Maryland. (subject to legal and financial review) changes in the Proceedings of the National Academy of Sciences  award cycle, amounts of the honoraria, and any other Office at 700 Eleventh St. NW in Washington, D.C. administrative changes. The plans for the restoration of the historic Constitution Avenue NAS Building are moving ahead. The contractor provided a Guaranteed Maximum Price for the project in April 2010. Bonds were issued in late May 2010 with 3

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of the NAS, IOM and the National Academy of construction beginning in June 2010. The project is Engineering (NAE). expected to be completed by April 2012. • Three NAS members reported that they had included Development Office Programs the Academy in their estate plans, including one at the level of $100,000. The NAS is grateful for the generous support of members, friends, and philanthropic organizations in 2009. The The NAS Development Office also undertook a comprehensive review of all funds in the NAS endow- support received assists the NAS in taking a leadership ment. They are collecting the gift agreements and other and proactive role in addressing the issues and challenges records governing the use of each of the more than 100 facing our nation. funds. To be completed in 2010, this project will document the purpose of each endowment as designated The NAS Development Office continues to seek and by the donor to help guide the appropriate use of the receive private philanthropic support from members, distributions, identify any opportunities to better utilize friends and organizations. This has been a truly critical endowments, and develop an effective program of source of strength in building the endowment and all regularly reporting to living donors on the use of their members are encouraged to help support the NAS. The endowments. availability of funds derived from our own endowments assists the NAS in initiating studies in sensitive areas, and Over thirteen percent of the Academy’s endowment has in taking a leadership role in addressing the issues and come from estate gifts, largely from members or their challenges facing our nation. spouses. Deferred gifts, such as bequests, charitable gift annuities, and charitable remainder trusts represent an In 2009, the NAS, including the IOM, received a total of increasingly important source of philanthropic support for $12.2 million in new gifts and pledges, a decrease of 8% NAS. Accordingly, the NAS Development Office is from the previous year. Contributions to the NAS Annual undertaking an effort to significantly increase deferred Fund were essentially the same as 2008, although there gifts through regular informative mailings to members, was a gratifying 21% increase in the number of members educational seminars on estate planning, and visible who made gifts in this economically challenging recognition for this kind of support. The Heritage Society environment. The IOM Annual Fund receipts were up was created in 2005 to recognize members who provide 52% over 2008, and the number of members contributing for the NAS in their estates or make other deferred gifts. increased by more than a third. The gifts described below A permanent, professional position has been established illustrate the scope of philanthropic support during 2009: to support these efforts across all three academies. • The NAS received a $1.5 million gift from the Carnegie Corporation to underwrite the expenses of NRC Highlights the Christine Mirzayan Science & Technology Graduate Fellowship Program for the next several years. The NAS will use this budget relief to under- Revenues take an ambitious effort to permanently endow this highly successful program, which engages selected The two main sources of revenue for the NRC are the recent graduates in the analytical process that informs U.S. government and private / nonfederal entities. The U.S. science and technology policy. total contract and grant revenue from both of these sources totaled $259.7 million in 2009 and $256.2 million • The IOM secured $750,000 in commitments from in 2008. two individual philanthropists for the IOM Initiatives Fund. This new fund will be used to convene ex- ploratory symposia and workshops and to initiate U.S. Government Contracts and Grants studies to examine those health and healthcare issues that may be too politically sensitive or too long term NRC activities conducted in response to requests from a to attract timely support. The IOM plans to secure a broad range of U.S. government agencies are funded total of $1.5 million for the Fund by the end of 2010. through cost-reimbursable non-fee contracts and grants. • The Committee on Human Rights received $317,000 The total amount reimbursed by the U.S. government in gifts in 2009, including support from 191 members agencies in the year ended December 31, 2009, was 4

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$215.0 million (see following chart and the Statements of Private/Nonfederal Contracts and Grants Activities on page 43) and in the year ended December Private sponsors supplemented government projects and 31, 2008, was $202.8 million. provided for new initiatives by funding awards in the amount of $44.7 million in 2009, compared with $53.4 U.S. Government Revenues by Agency (dollars in thousands) Agency for International Development $ 1,487 million in 2008. The private and nonfederal revenues Department of Agriculture 2,280 were comprised of contracts and grants ($39.0 million) Department of Commerce 11,097 and other contributions ($5.7 million). (See Statements of Department of Defense: Activities on page 43.) Department of the Air Force 5,283 Department of the Army 10,564 The private contracts and grants decreased from  Department of Defense 6,419 $45.2 million in 2008 to $39.0 million in 2009. This Department of the Navy 11,563 is due to an overall decrease in the number of private Department of Education 1,116 Department of Energy 8,555 awards received. In 2008, NAS received 97 new Department of Health and Human Services 27,152 private awards. In 2009, that number decreased to Department of Homeland Security 3,462 73. Department of Housing and Urban Development 16 Department of the Interior 2,179 Other contributions revenue decreased from $8.2  Department of Justice 1,256 million in 2008 to $5.7 million in 2009. In 2008, the Department of Labor 415 NAS received two gifts totaling $2.0 million from Department of State 2,411 Raymond and Beverly Sackler and their foundation Department of Transportation 95,121 Department of Treasury 964 to endow a bilateral scientific forum to be operated Department of Veterans Affairs 2,453 jointly by the NAS and the Royal Society in London. Election Assistance Commission 202 Environmental Protection Agency 4,829 Expenses Executive Office of the President 1,646 General Accounting Office 219 The NRC programs include funding from government and General Services Administration 90 private sources. Almost all contracts and grants are cost- Institute of Museum and Library Services 195 Marine Mammal Commission 70 reimbursable agreements. Therefore, even if the revenues National Aeronautics and Space Administration 9,652 and expenses are not equal in any one given year, the National Science Foundation 13,321 revenues and expenses will be the same over the life of Nuclear Regulatory Commission 41 the award. Social Security Administration 717 Adjustment to Indirect Cost Receivable & Other (9,818) As in many universities and nonprofit institutions, Total U.S. Government Agencies $ 214,957 managing indirect expenditures for funding the necessary support services, while keeping these costs in reasonable Overall, the financial results for 2009 were better than proportion to program expenditures, is a continual expected. The 6.0% increase in program revenues challenge. Historically, NRC management has represents the largest one-year percentage increase in successfully maintained a relatively constant relationship program revenues since 2002. This growth is expected to between program and support costs, i.e., the growth rate continue in 2010 with an estimated increase in NRC of indirect costs has been approximately equal to the program revenues of 6.0%. growth rate of direct costs. In 2009, total indirect expenses were $70.7 million compared to an approved budget of $72.0 million. The NAS Council approved a 2010 indirect expense budget of $77.0 million, which includes a 2.5% increase to the total salary budget, which is 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

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Related Entities Conclusion There are many financial transactions exchanged between The NRC demonstrated strong financial growth during the member organizations of the National Academies. The 2009, with revenues projected to continue to grow in NRC serves as the clearinghouse for these transactions. 2010. Indirect expenses have been well-managed during However, it is important to note that only the financial the year. As is the case for all endowments, the stock activity and results of the NAS, NAE, IOM, and NRC are market’s major decline in 2008 has had a serious impact included in these financial statements. The financial on the value of our endowment although it has experi- activity and results of the National Academy of enced strong rebuilding in 2009. The Finance Committee Engineering Fund (NAEF) and The National Academies’ has made some changes to the endowment investments Corporation (TNAC) are audited and reported separately. and will continue to work to strengthen the portfolio. Financial information for the NAEF is available on request from the NAE Finance Office; information for I would like to thank the Council, the Committee on TNAC is available from the NAS Controller’s Office. Budget and Internal Affairs, the Finance Committee, and NRC management for their continued input and support. Overall Financial Condition Also, thanks go to the Office of the Chief Financial Officer for careful and steady oversight of the budgets, for Each year, the overall financial condition of the NAS can preparation of the financial statements, and its help with be reviewed by taking into account the increase or oversight of the endowment. decrease in the net assets of the organization. During calendar year 2009, the NAS has been able to grow its net assets through increased program revenues and recovery Jeremiah P. Ostriker of a significant portion of the investment losses suffered Treasurer in 2008. The 2008 investment losses are reflected in lower revenue total for 2008 in the chart below: (dollars in millions) 2009 2008 Total Revenues $ 370.1 $ 130.8 Total Expenses 307.4 303.8 $ 62.7 $ (173.0) Change in Net Assets These NAS 2009 results of operations are further described in the financial statements starting on page 42. 6