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Report of the Treasurer of the National Academy of Sciences 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 portfolio activities of our Academy for the year ended December 31, 2010. Overview The income that supports the activities of the National Academy of Sciences (NAS) comes from two major sources: program revenue received from sponsors to pay for the myriad studies and other activities undertaken each year by the National Research Council (NRC), and a much smaller sum that we obtain from our endowment under the endowment spending policies adopted by the Council. Regarding the first of these, the 2010 results are very positive. Our total program revenue for 2010 was nearly 6% above 2009 revenue, and we are anticipating further growth, currently estimated at 10% in 2011. There are many NRC volunteers and staff who deserve credit for this strong showing. I want to single out for special recognition Bill Colglazier, who has announced that he is retiring this summer after nearly two decades of outstanding service as the Executive Officer of the NAS and the NRC. With respect to the second source of revenue, it has for many years been the policy of the Council to limit annual endowment spending to 5% of the average value of endowment for the twelve quarters ending in June of the previous year. When the endowment declined significantly in 2008, the Council made the prudent decision to hold spending in 2009 to 4% and to avoid spending whenever possible from endowments with value below the original gift amount. For 2010, the Council has again held endowment spending to the 4% level, in order to help endowment values to recover. The spending level for 2011 will also be 4%. Finally, I am delighted to report that on March 24, 2011 President Cicerone announced the promotion of Mary “Didi” Salmon to Chief Financial Officer of the NAS/NRC as per April 9, 2011. With previous expertise as a senior auditor for KPMG Didi has been at the NAS since 2001, most recently serving as Deputy Chief Financial Officer and Controller. Also, Jim Hinchman, who has been ably serving as interim CFO (in addition to his position as General Counsel) will move up to become the NAS/NRC Deputy Executive Officer and NRC Chief Operating Officer. NAS Highlights Endowment, Trust, and Other Long-term Investments Portfolio As the Chairman of the Finance Committee, I am responsible, along with the other committee members, for the prudent management of the endowment, trust, and other long-term investments portfolio (the “Portfolio”). The goal of the endowment is to provide stable support for the Academy’s programs and activities. To achieve this goal, the Council, acting on the recommendation of the Finance Committee, has historically authorized spending from the Portfolio at a rate designed to maintain the purchasing power of the endowment over time. The current spending rule caps annual spending at 5 percent of the trailing 12 quarter average market value of the Portfolio. As noted above, for 2010 the Council limited spending to 4%. During 2010, the market value of the Portfolio continued to regain a major portion of the value that was lost during the market downturn in 2008. The market value of the Portfolio increased net of withdrawals and new contributions from $344.4 million on January 1, 2010 to $383.9 million at December 31, 2010. The Portfolio returned 15.5% for the year which was 2.1% higher than the relevant benchmark return of 13.4%. Many of the portfolio holdings performed in line with the benchmark for the year. Shares of Berkshire Hathaway represent approximately 7% of the Portfolio holdings. For the year, Berkshire Hathaway outperformed the S&P 500 index by over 5%, helping the portfolio to outperform the benchmark. Liquidity of the Portfolio investments is a concern of organizations that rely on income for operational needs and/or have bond obligations. As NAS has outstanding bonds, liquidity of the portfolio is a factor that will continue to be monitored by rating agencies. At the end of 2010, the Portfolio remained highly liquid, with 73% of the portfolio being available between 1-3 days and 81% being available within a month.
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Report of the Treasurer of the National Academy of Sciences Market values of the Portfolio, after withdrawals, for the years ended December 31, 2010 and 2009, are displayed in the following chart: (dollars in thousands) 2010 2009 Cash and Fixed-Income Securities $ 45,156 $ 47,697 Equity Securities 338,773 296,683 Total $ 383,929 $ 344,380 The Portfolio has consistently outperformed the market benchmarks over a long period. For the five years ending December 31, 2010, the Portfolio return is 5.6% compared to the market composite benchmark of 5.1% and, for the ten years ending December 31, 2010, the Portfolio return is 5.9% compared with the market composite benchmark of 5.1%. At the end of 2010, the Finance Committee proposed, and the Council approved, changes in the guidelines for portfolio asset allocation. The Finance Committee moved the guidelines closer to what it has been allocating to our actual new investments in recent years. In general, the new guidelines decreased allocations to U.S. equities, increased allocations to non-U.S. equities and increased the allocation to hedge funds. The old guidelines that were in place through 2010 and were used for the benchmark calculations in this report are listed below. The new guidelines are also noted below and will be used for benchmark calculations starting in 2011. Overview of Current Investment Structure Guideline 2010 Portfolio Allocation Fixed-Income: U.S. Fixed/Cash 12.0% 6.1% Non-U.S. Fixed 3.0% 5.7% Equities: U.S. Large Cap Funds 25.0% 18.4% U.S. Small-Mid Cap Funds 12.0% 11.3% Non-U.S. Stocks — Developed 20.0% 21.5% Non-U.S. Stocks — Emerging 8.0% 14.5% Real Estate Investments 5.0% 3.0% Hedge Funds 12.0% 14.4% Other Alternative Investments 3.0% 5.1% Total 100.0% 100.0% Overview of Future Investment Structure Guideline 2011 Fixed-Income: U.S. Fixed/Cash 9.0% Non-U.S. Fixed 5.0% Equities: U.S. Large Cap Funds 19.0% U.S. Small-Mid Cap Funds 9.0% Non-U.S. Stocks — Developed 20.0% Non-U.S. Stocks — Emerging 15.0% Real Estate Investments 3.0% Hedge Funds 17.0% Other Alternative Investments 3.0% Total 100.0% See Schedule 2-A on page 21 for details of investments by asset class. Included in the $383.9 million total market value of the Portfolio as of December 31, 2010, are $7.1 million for the Woods Hole Endowment Funds, $66.4 million for the Institute of Medicine (IOM), and $9.9 million for The National Academies’ Corporation (TNAC). TNAC, which is equally owned by the NAS and the National Academy of Engineering Fund (NAEF), owns and operates the Beckman Center (see note 1 to the financial statements on page 45). Withdrawals of $15.3 million were made to fund the President’s Committee, NAS General Fund’s activity, and prizes and awards for the current period. Additional withdrawals of $1.8 million were made to fund Woods Hole, IOM, and TNAC activity. NAS General Fund The NAS General Funds, which provides unrestricted resources to support the activities of the Academy, receives its funding from the unrestricted portion of the NAS Endowment. As noted above, for 2009, 2010, and 2011, the Council has limited spending from the endowment, including the unrestricted portion, to 4%. For fiscal year 2010, the General Fund revenue totaled $6.4 million and expenditures totaled $5.6 million, resulting in a $756,000 surplus. Comparable figures for fiscal year 2009 were $7.7 million in revenues, $5.8 million in expenditures, resulting in a surplus of $1.9 million.
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Report of the Treasurer of the National Academy of Sciences Any surplus in the General Funds Budget at the end of the year is transferred to the NAS Reserve. Similarly, deficits are funded from the Reserve. The Reserve is invested in the NAS endowment, trust and other long-term investments portfolio. The NAS Reserve had a market value of $5.6 million on December 31, 2010, which is an increase of 27% over December 31, 2009. The 2010 NAS General Fund activity is summarized as follows: (dollars in thousands) Revenues: Unrestricted Endowment $ 4,429 Woods Hole Endowment 376 Communications Initiative Fund 277 Annual Giving from Members 358 Membership Dues 223 Annual Meeting 194 NAS Reserve 488 Short-Term Investment Interest, Royalties, etc. 13 Total Revenue $ 6,358 Expenses: Development Office $ 1,535 Member Services: Annual Meeting 656 Other 166 Programs/Projects: Cultural Programs of the NAS 353 Evolution, Education & Communication 141 Communications Initiative 729 Frontiers of Science 303 Committee on International Security & Arms Control 176 Local High School Project 36 InterAcademy Council 84 Woods Hole 244 Foreign Meetings 133 President’s Office 23 NRC Operations 961 NAS Executive Office 62 Total Expenses $ 5,602 Surplus $ 756 Disposition of Surplus: Due to NAS Reserve 586 Due to Woods Hole Reserve 133 Due to Communications Initiative Reserve 37 The NAS Council has approved a General Funds Budget of $4.7 million for 2011. Prizes and Awards Several award funds have existed for more than 100 years, while others were established more recently. The Home Secretary oversees the nomination process that selects award recipients and recommends to the Council (subject to legal and financial review) changes in the award cycle, amounts of the honoraria, and any other administrative changes. Journal Publications Financial results of the Proceedings of the National Academy of Sciences are shown below for the years ended December 31, 2010 and 2009: (dollars in thousands) 2010 2009 Revenues: Subscriptions $ 6,880 $ 6,820 Author charges 7,234 6,174 Other 141 119 Total $ 14,255 $ 13,113 Expenses: Publishing $ 6,468 $ 6,387 Other 5,294 7,038 Total $ 11,762 $ 13,425 Net $ 2,493 $ (312) Facilities NAS owns the following facilities: Keck Center of the National Academies at 500 Fifth St., NW in Washington, D.C. National Academy of Sciences Building at 2101 Constitution Ave., NW in Washington, D.C. J. Erik Jonsson Center of the National Academies at 314 Quisset Dr. in Woods Hole, Massachusetts. Arnold and Mabel Beckman Center at 100 Academy in Irvine, California (jointly owned with NAEF through TNAC).
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Report of the Treasurer of the National Academy of Sciences NAS is leasing the following facilities: Terrell Place Office Building (two suites) at 575 Seventh St. NW in Washington, D.C. National Academies Data Center at 8619 Westwood Center Drive in Vienna, Virginia. Proceedings of the National Academy of Sciences temporary office at 700 Eleventh St. NW in Washington, D.C. Temporary office space at 555 12th Street, N.W., Washington, D.C. Temporary warehouse space at 6313 Gravel Ave, Alexandria, Virginia. Restoration of the National Academy of Sciences Building in Washington, D.C. has been underway since June 2010. We are half way through the project and still on schedule for completion in time for the 2012 annual meeting. The total cost of the project will be about $60 million. The work is being financed through the issuance of tax exempt fixed rate bonds, which will be repaid principally from the revenue received from sponsors of NRC studies and other activities. Development Office Programs The NAS is grateful for the generous support of members, friends, and philanthropic organizations in 2010. The support received assists the NAS in taking a leadership and proactive role in addressing the issues and challenges facing our nation. The NAS Development Office continues to seek and receive private philanthropic support from members, friends and organizations. The fund-raising effort continues to focus on building the endowment and expendable unrestricted sources for the NAS, including the IOM. Unrestricted gifts and endowment earnings are important resources to helping the NAS initiate studies in sensitive areas and take a leadership role in addressing the complex issues facing our nation. In 2010, the NAS, including IOM, received a total of $20.4 million in new gifts and pledges, an increase of more than $8.2 million from the previous year. Much of this growth is due to an increase in private funding from corporations and foundations for IOM studies, round-tables and forums, which grew by more than 60%. Member giving to the annual fund of NAS remained strong. The NAS experienced an increase of more than 16% in member participation. Of the amount received in gifts, $898,000 was allocated to the NAS endowment. The selected gifts described below illustrate the scope of philanthropic support received during 2010: The NAS received a $602,000 distribution from the estate of Gerda K. Nelson, widow of NAS member Oliver E. Nelson, that will be added to the NAS General Endowment Fund. The NAS’s Marion Koshland Science Museum received a gift of $943,000 from the Daniel E. Koshland, Jr. Family Fund to support the Museum’s initiative to develop a long-range plan. A gift of $129,000 from Sydney Brenner (NAS member) to establish the Seymour Benzer Lectures. The lecture prize will be awarded to early-career scientists in genetics or neuroscience. The lectures are named for Dr. Brenner’s colleague and friend, Seymour Benzer, an NAS member who passed away in 2007. 246 donors gave a total of $333,000 to support the Committee on Human Rights in its efforts to protect the basic human rights of scientists, engineers, and health professional who are unjustly imprisoned around the world. While these gifts are only a select few, they are representative of the generous support of many members, friends, and philanthropic organizations for which we are extremely grateful. With these financial resources the Academy is better positioned to fulfill its mission of addressing the critical scientific and technical issues and challenges facing our nation. NRC Highlights Revenues The two main sources of revenue for the NRC are the U.S. government and private / nonfederal entities. The total contract and grant revenue from both of these sources totaled $286.8 million in 2010 and $259.7 million in 2009. U.S. Government Contracts and Grants NRC activities conducted in response to requests from a broad range of U.S. government agencies are funded through cost-reimbursable non-fee contracts and grants.
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Report of the Treasurer of the National Academy of Sciences The total amount reimbursed by the U.S. government agencies in the year ended December 31, 2010, was $242.7 million (see following chart and the Statements of Activities on page 43) and in the year ended December 31, 2009, was $215.0 million. U.S. Government Revenues by Agency (dollars in thousands) Agency for International Development $ 517 Chemical Safety Board 48 Department of Agriculture 2,379 Department of Commerce 12,195 Department of Defense: Department of the Air Force 5,621 Department of the Army 9,932 Department of Defense 6,648 Department of the Navy 11,906 Department of Education 1,918 Department of Energy 7,774 Department of Health and Human Services 28,859 Department of Homeland Security 1,922 Department of the Interior 2,360 Department of Justice 1,639 Department of Labor 42 Department of State 5,505 Department of Transportation 108,941 Department of Treasury 781 Department of Veterans Affairs 2,343 Election Assistance Commission 22 Environmental Protection Agency 5,942 Executive Office of the President 1,310 General Accounting Office 312 General Services Administration 200 Institute of Museum and Library Services 116 Marine Mammal Commission 45 National Aeronautics and Space Administration 7,607 National Geospatial-Intelligence Agency 335 National Science Foundation 15,981 National Security Agency 297 Nuclear Regulatory Commission 100 Office of the Director of National Intelligence 329 Social Security Administration 1,253 Adjustment to Indirect Cost Receivable & Other (2,431) Total U.S. Government Agencies $ 242,748 Private/Nonfederal Contracts and Grants Private sponsors supplemented government projects and provided for new initiatives by funding awards in the amount of $44.1 million in 2010, compared with $44.7 million in 2009. The private and nonfederal revenues were comprised of contracts and grants ($35.5 million) and other contributions ($8.6 million). (See Statements of Activities on page 43.) The private contracts and grants decreased from $39.0 million in 2009 to $35.5 million in 2010. While the number of new awards increased from 2009 to 2010, the average new donation amount decreased by approximately 35%. In 2009, NAS received 73 new private awards. In 2010, that number increased to 92. Other contributions revenue increased from $5.7 million in 2009 to $8.6 million in 2010 primarily due to a $2.0 million endowment contribution from Leonard D. Schaeffer to IOM. Expenses The NRC programs include funding from government and private sources. Almost all contracts and grants are cost-reimbursable agreements. Therefore, even if the revenues and expenses are not equal in any one given year, the revenues and expenses will be the same over the life of the award. As in many universities and nonprofit institutions, allowing adequate indirect cost expenditures for necessary support services, while keeping these costs in reasonable proportion to program expenditures is a continual challenge. Historically, NRC management has successfully maintained a relatively constant relationship between program and support costs, i.e., the growth rate of indirect costs has been approximately equal to the growth rate of direct costs. In 2010, total indirect expenses were $71.7 million compared to an approved budget of $77.0 million and NAS recovered $2.8 million more from sponsors than was spent. In the future, the indirect rates will decrease slightly in order to compensate for this over-recovery. The NAS Council has approved a 2011 indirect expense budget of $77.7 million. Related Entities There are many financial transactions exchanged between the member organizations of the National Academies. The NRC serves as the clearinghouse for these transactions.
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Report of the Treasurer of the National Academy of Sciences However, it is important to note that only the financial activity and results of the NAS, NAE, IOM, and NRC are included in these financial statements. The financial activity and results of the National Academy of Engineering Fund (NAEF) and The National Academies’ Corporation (TNAC) are audited and reported separately. Financial information for the NAEF is available on request from the NAE Finance Office; information for TNAC is available from the NAS Controller’s Office. Overall Financial Condition Each year, the overall financial condition of the NAS can be reviewed by taking into account the increase or decrease in the net assets of the organization. During calendar year 2010, the NAS has been able to grow its net assets through increased program revenues and continued recovery of a major portion of the investment losses suffered in 2008. (dollars in millions) 2010 2009 Total Revenues $ 375.6 $ 370.1 Total Expenses 332.5 307.4 Change in Net Assets $ 43.1 $ 62.7 The NAS 2010 results of operations are further described in the financial statements starting on page 42. Conclusion I would like to thank the Council, the Committee on Budget and Internal Affairs, the Finance Committee, and NRC leadership for their continued input and support. Also, thanks to the Office of the Chief Financial Officer for its help in managing the Endowment and Trust Portfolio, its steady oversight of the Academy’s various budgets, and its careful attention to the Academy’s financial systems, records and reports. Jeremiah P. Ostriker Treasurer