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