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Treasurer’s Statement University of California and will join the staff in the summer of 2012. As President Cicerone stated, "His experience in managing major science enterprises for the federal government on behalf of leading academic To the Council of the National Academy of institutions will serve us well." Sciences: NAS Highlights This Report of the Treasurer of the National Academy of Sciences presents the financial position and results of Endowment, Trust, and Other Long-term Investments operations as well as a review of the endowment, trust, Portfolio and other long-term investments portfolio activities of our Academy for the year ended December 31, 2011. As the Chairman of the Finance Committee, I am responsible, along with the other committee members, for Overview the prudent management of the endowment, trust, and other long-term investments portfolio (the “Portfolio”). The income that supports the activities of the Academy The goal of the endowment is to provide stable support comes from two major sources: program revenue received for the Academy’s programs and activities. To achieve from sponsors to pay for the myriad studies and other this goal, the Council, acting on the recommendation of activities undertaken each year by the National Research the Finance Committee, has historically authorized Council (NRC), and a much smaller sum that we obtain spending from the Portfolio at a rate designed to maintain from our own endowment under the endowment spending the purchasing power of the endowment over time. The policies adopted by the Council. Regarding the first of current spending rule caps annual spending at 5 percent of these, the 2011 results are very positive. Our total the trailing 12-quarter average market value of the program revenue for 2011 was nearly 10% above 2010 Portfolio. As I have already noted, the Council has revenue, an all-time high for the NRC. There are many limited spending to 4% since 2009. NRC volunteers and staff who deserve credit for this strong showing and we are truly indebted to each one for During 2011, the portfolio, along with the broader market, their commitment to the mission of our organization. experienced a relatively small decline. This still leaves us in recovery territory after the 2008 market downturn. The With respect to the second source of revenue, it has for market value of the portfolio decreased net of withdrawals many years been the policy of the Council to limit annual and new contributions from $383.9 million on January 1, endowment spending to 5% of the average value of 2011, to $352.2 million at December 31, 2011. The endowment for the twelve quarters ending in June of the portfolio returned -5.6% for the year which was 0.7% previous year. When the endowment declined signifi- lower than the relevant benchmark return of -4.9%. The cantly in 2008, the Council made the prudent decision to portfolio was helped greatly by the performance of its hold spending to 4% and to avoid spending whenever private equity and venture capital investments in China possible from endowments with value below the original and India. The hedge fund investments in the portfolio gift amount, starting in 2009. These practices will had relatively poor returns this year, as hedge funds in continue for endowment spending in 2012. general encountered their most difficult year in the last decade. During the year, the Finance Committee felt that As you know, our former Executive Officer, Bill Colgla- it was prudent to temporarily hold more cash in the zier left the NAS in June 2012 and joined the State portfolio for a short period of time to protect the portfolio Department as the Secretary’s science and technology against the possibility of a severe market disruption. advisor. Since Bill’s departure, Jim Hinchman, our Deputy Executive Officer has been filling this role on an Toward the end of 2011 and beginning of 2012, the interim basis. On January 27, 2012, President Cicerone portfolio became fully invested once again. In the first announced the appointment of Bruce B. Darling as the quarter of 2012, the portfolio returned 7.3% compared to new Executive Officer of the NAS and the NRC. Bruce is a benchmark return of 9.1%. For the ten years ended currently vice president for laboratory management at the 1
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• Withdrawals of $13.5 million were made to fund the March 31, 2012, the portfolio returned 6.5% compared to President’s Committee, NAS General Fund’s activity, a benchmark return of 5.8%. and NAS prizes and awards for the current period. Additional withdrawals of $2.0 million were made to The actual portfolio allocation and policy guidelines as of fund Woods Hole, IOM, and TNAC activity. December 31, 2011, were as follows: NAS General Funds Portfolio Policy Allocation Guideline The NAS General Funds, which provides unrestricted Fixed-Income: resources to support the activities of the Academy, U.S. Fixed/Cash 13% 9% receives its funding from the unrestricted portion of the Non-U.S. Fixed 6% 5% NAS Endowment. As noted above, the Council has Equities: limited spending from the endowment, including the U.S. Large Cap Funds 14% 19% unrestricted portion, to 4% since 2009. U.S. Small-Mid Cap Funds 6% 9% Non-U.S. Stocks – Developed 14% 20% For fiscal year 2011, the General Funds revenue totaled Non-U.S. Stocks – Emerging 12% 15% $4.8 million and expenditures totaled $4.4 million, Real Estate Investments 3% 3% resulting in a $341,000 surplus. Comparable figures for Hedge Funds and Alternative fiscal year 2010 were $5.2 million in revenues, $4.6 Investments 32% 20% million in expenditures, resulting in a $586,000 surplus. 100% 100% Total The 2011 NAS General Funds activity is summarized as Market values of the Portfolio, after withdrawals, for the follows (in thousands): years ended December 31, 2011 and 2010, are displayed in the following chart (in thousands): Revenues: Unrestricted Endowment $ 4,101 2011 2010 Annual Giving from Members 285 Cash and Fixed-Income Securities $ 67,331 $ 45,156 Membership Dues 230 Equity Securities 284,845 338,773 Annual Meeting 155 $ 352,176 $ 383,929 Total Other 17 $ 4,788 Total Revenue For the five years ending December 31, 2011, the Expenses: Portfolio return is 0.8%, which equaled the market Development Office $ 1,054 composite benchmark of 0.8% and, for the ten years Member Services: ending December 31, 2011, the Portfolio return was 5.9% Annual Meeting 665 compared with the market composite benchmark of 4.3%. Other 207 Programs/Projects: • See Schedule 2-A on page 22 for details of Cultural Programs of the NAS 260 investments by asset class. Evolution, Education & Communication 117 Frontiers of Science 241 • Included in the $352.2 million total market value of Committee on International the Portfolio as of December 31, 2011, are $6.4 Security & Arms Control 194 million for the Woods Hole Endowment Funds, $62.2 InterAcademy Council 100 million for the Institute of Medicine (IOM), and $9.2 Foreign Meetings 619 million for The National Academies’ Corporation President’s Office 116 (TNAC). TNAC, which is equally owned by the NAS NAS Executive Office 74 and the National Academy of Engineering Fund NRC Operations 801 (NAEF), owns and operates the Beckman Center (see $ 4,447 Total Expenses note 1 to the financial statements on page 45). $ 341 Surplus 2
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Any surplus in the General Funds Budget at the end of the J. Erik Jonsson Center of the National Academies at • year is transferred to the NAS Reserve. Similarly, deficits 314 Quisset Dr. in Woods Hole, Massachusetts. are funded from the Reserve. The Reserve is invested in Arnold and Mabel Beckman Center at 100 Academy • the NAS endowment, trust and other long-term invest- in Irvine, California (jointly owned with NAEF ments portfolio. The NAS Reserve had a market value of through TNAC). $4.9 million on December 31, 2011, to which the 2011 surplus will be added. NAS leased the following facilities during 2011: The NAS Council has approved a General Funds Budget Terrell Place (two suites) at 575 Seventh St. NW in • of $4.7 million for 2012. Washington, D.C. National Academies Data Center at 8619 Westwood • Prizes and Awards Center Drive in Vienna, Virginia. Proceedings of the National Academy of Sciences • Several award funds have existed for more than 100 temporary office at 700 Eleventh St. NW in years, while others were established more recently. The Washington, D.C. Home Secretary oversees the nomination process that Temporary office space at 555 12th Street, N.W., • selects award recipients and recommends to the Council Washington, D.C. (subject to legal and financial review) changes in the Temporary warehouse space at 6313 Gravel Ave, • award cycle, amounts of the honoraria, and any other Alexandria, Virginia. administrative changes. Restoration of the National Academy of Sciences Journal Publications Building in Washington, D.C. has been underway since June 2010. We are elated that the building was completed Financial results of the Proceedings of the National and hosted the 149th Annual meeting of the NAS at the Academy of Sciences are shown below for the years ended end of April 2012. The total cost of the project was December 31, 2011 and 2010 (in thousands): approximately $60 million. The work was financed through the issuance of tax-exempt fixed rate bonds, 2011 2010 which will be repaid principally from the revenue Revenues: received from sponsors of NRC studies and other Subscriptions $ 6,238 $ 6,880 activities that take place in the building. The project has Author charges 6,841 7,234 restored and improved the building’s historic spaces, Other 118 141 increased accessibility, updated the infrastructure, and made the building into a modern conference center and Total $ 13,197 $ 14,255 office building. Expenses: Publishing $ 6,653 $ 6,468 In connection with the reopening of the National Other 5,717 5,294 Academy of Sciences Building the leases for temporary Total $ 12,370 $ 11,762 office space in downtown Washington were terminated. $ 827 $ 2,493 Net Later this year the lease for space in Terrell Place will also be terminated and the staff relocated to the Keck Facilities Center. Please see page 6 for photographs of the newly restored NAS building. NAS owns the following facilities: Development Office Programs Keck Center of the National Academies at 500 Fifth • St., NW in Washington, D.C. The NAS is grateful for the generous support of members, National Academy of Sciences Building at 2101 friends, and philanthropic organizations in 2011. The • Constitution Ave., NW in Washington, D.C. fund-raising effort continues to focus on building endowment and expendable unrestricted sources for the 3
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been received from the estate over the last ten years, NAS, including the Institute of Medicine (IOM). and brings the total donation to the Dorothea and Unrestricted gifts and endowment earnings are vital Herbert Simon Fund to $899,000. The funds were resources that help the NAS to initiate studies in sensitive bequeathed for the general purposes of the NAS. areas and to take a leadership role in addressing the complex issues facing our nation. • The Committee on Human Rights of the NAS, IOM and National Academy of Engineering (NAE) re- In 2011, the NAS and IOM received more than $1.2 ceived $309,000 in gifts including support from 136 million in unrestricted expendable support. This includes members of the NAS, IOM, and NAE. strong support of the annual funds. NAS members contributed $284,000, a 12% increase over the 2010 Overall, gifts for the NAS permanent endowment in 2011 support provided. Unrestricted support was also received totaled $2.4 million, as compared to less than $200,000 in through the NAS Building Seat Naming Campaign. NAS 2010. Gifts for the NAS unrestricted endowment in 2011 members donated $445,000 to name 89 seats in the newly totaled $296,000 as compared to $41,000 in 2010. These restored NAS auditorium. gifts are representative of the generous support the NAS received from many members, friends, and organizations Gifts and grants were also received to establish named in 2011. This support is vitally important in better endowments and fund the many projects and activities of positioning the Academy to fulfill its critical mission as the NAS and IOM. The selected gifts described below scientific adviser to our nation. highlight the scope of philanthropic support received during 2011: NRC Highlights • The Raymond and Beverly Sacker Foundation generously donated $2.1 million to the NAS in honor Revenues of the NAS President, Ralph J. Cicerone, to establish the Raymond and Beverly Sackler Science Fund. The two main sources of revenue for the NRC are the Earnings from this endowed fund will provide sup- U.S. government and private / nonfederal entities. The port for studies and projects in the areas of basic total contract and grant revenue from both of these biology and biomedical science – including the con- sources totaled $325.8 million in 2011 and $286.8 million vergence of biology, physics, mathematics, and in 2010. engineering sciences – in addressing problems in biomedical science and human health. U.S. Government Contracts and Grants • The IOM received grants totaling $9.9 million from NRC activities, conducted in response to requests from a Kaiser Permanente and the Michael and Susan Dell broad range of U.S. government agencies, are funded Foundation to support a partnership between the IOM through cost-reimbursable non-fee contracts and grants. and HBO Documentary Films, in association with the National Institutes of Health and the Centers for Dis- The total amount reimbursed by the U.S. government ease Control and Prevention, to educate citizens agencies in the year ended December 31, 2011, was about the causes and consequences of the obesity $277.1 million (see following chart, in thousands, and the epidemic in the United States. Statements of Activities on page 43) and in the year ended December 31, 2010, was $242.7 million. • The NAS’s Marian Koshland Science Museum received a gift of $943,000 from the Daniel E. U.S. Government Revenues by Agency Koshland, Jr. Family Fund to support the general Agency for International Development $ 613 purposes of the Museum. Chemical Safety Board 346 Department of Agriculture 1,738 • The NAS received a final distribution of $254,000 Department of Commerce 12,231 from the estate of Dorothea and Herbert Simon Department of Defense: (NAS), which supplements the distributions that have Department of the Air Force 8,279 4
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approximately 29%. The result being that private U.S. Government Revenues by Agency (continued) contracts and grants increased from $35.5 million in Department of the Army 10,545 2010 to $40.5 million in 2011. Department of Defense 8,283 Department of the Navy 10,673 Other contributions revenue decreased from $8.6 • Department of Education 1,569 million in 2010 to $8.2 million in 2011. Department of Energy 11,795 Department of Health and Human Services 38,011 Expenses Department of Homeland Security 1,849 Department of the Interior 2,551 Almost all government and private contracts and grants Department of Justice 1,985 are cost-reimbursable agreements. Therefore, even if the Department of Labor 553 revenues and expenses are not equal in any one given Department of State 6,216 year, the revenues and expenses will be the same over the Department of Transportation 122,615 life of the award. Department of Treasury 1,356 Department of Veterans Affairs 2,998 As in many universities and nonprofit institutions, Environmental Protection Agency 6,093 allowing adequate indirect cost expenditures for necessary Executive Office of the President 1,784 support services, while keeping these costs in reasonable General Accounting Office 66 proportion to program expenditures is a continual General Services Administration 211 challenge. Historically, NRC management has Institute of Museum and Library Services 151 successfully maintained a relatively constant relationship Marine Mammal Commission 74 between program and support costs, i.e., the growth rate National Aeronautics and Space Administration 9,177 of indirect costs has been approximately equal to the National Geospatial-Intelligence Agency 334 growth rate of direct costs. In 2011, total indirect National Science Foundation 18,602 expenses were $74.4 million compared to an approved National Security Agency 209 budget of $77.0 million and NAS recovered $6.2 million National Transportation Safety Board 22 more from sponsors than was spent. In the immediate Nuclear Regulatory Commission 843 future, the indirect rates will decrease slightly in order to Office of the Director of National Intelligence 240 compensate for this over-recovery. The NAS Council has Social Security Administration 158 approved a 2012 indirect expense budget of $82.3 million. Adjustment to Indirect Cost Receivable & Other (5,055) Total U.S. Government Agencies $ 277,117 Related Entities Private/Nonfederal Contracts and Grants Many financial transactions take place between the Private sponsors supplemented government projects and member organizations of the National Academies. The provided for new initiatives by funding awards in the NRC serves as the clearinghouse for these transactions. amount of $48.7 million in 2011, compared with $44.1 However, it is important to note that only the financial million in 2010. The private and nonfederal revenues activity and results of the NAS, NAE, IOM, and NRC are were comprised of contracts and grants ($40.5 million) included in these financial statements. The financial and other contributions ($8.2 million). (See Statements of activity and results of the National Academy of Activities on page 43.) Engineering Fund (NAEF) and The National Academies’ Corporation (TNAC) are audited and reported separately. In 2011, NAS received 76 new private contracts and • Financial information for the NAEF is available on grants compared with 92 in 2010. While the number request from the NAE Finance Office; information for of new awards decreased from 2010 to 2011, the av- TNAC is available from the NAS Controller’s Office. erage new donation amount increased by 5
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Overall Financial Condition The NAS 2011 results of operations are further described in the financial statements starting on page 42. This year was quite a strong year for the NRC, reaching its all-time high program level. While the program level Conclusion has been healthy, the NAS Endowment, trust, and other long term investments portfolio experienced a decline, I would like to thank the members of the Council, the along with the broader market. This decline in the Committee on Budget and Internal Affairs, the Finance portfolio is the main reason for the 2011 decrease in net Committee, and the NRC leadership for their continued assets, as shown below (in millions). support. Also, thanks are extended to the Office of the Chief Financial Officer for its help in managing the 2011 2010 Endowment and Trust Pool, its steady oversight of the Total Revenues $ 330.5 $ 375.6 Academy’s various budgets, and its careful attention to Total Expenses 363.4 332.5 the Academy’s financial systems, records and reports. $ (32.9) $ 43.1 Change in Net Assets Net assets, or assets minus liabilities, can be a measurement of a not-for-profit organization’s ability to reinvest net income toward their mission while also Jeremiah P. Ostriker maintaining reserves and helping protect against inflation. Treasurer Photographs of the newly restored NAS building: Images Courtesy of CPNAS © Maxwell MacKenzie 6