NATIONAL ACADEMY OF SCIENCES
December 31, 2011 and 2010
(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.
(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:
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.
NAS manages the operations of the Beckman Center. There were no contributions from TNAC to the NRC during 2011 and 2010 to support operations of the Beckman Center. TNAC contributed $0 and $5,000 to the NRC for the years ended December 31, 2011 and 2010, respectively, to be spent on programs conducted in whole or in part at the Beckman Center.
(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
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financial activities and results of IOM are included in the NATIONAL ACADEMY OF SCIENCES NAS financial statements. Notes to (d) National Academy of Engineering Financial Statements The National Academy of Engineering (NAE) was established in 1964 under the charter of NAS as a related December 31, 2011 and 2010 parallel organization, autonomous in its governance, administration, and the selection of its members. NAE shares with NAS the responsibility for advising the (1) ORGANIZATION AND RELATED federal government on scientific issues. The NAE ENTITIES conducts independent program activities and activities through the NRC. The results of both of these activities (a) National Academy of Sciences are included in the NAS financial statements. The National Academy of Sciences (NAS) was formed (e) National Academy of Engineering Fund under a charter that was passed as an Act of Incorporation by the United States Congress and signed into law on The National Academy of Engineering Fund (NAEF) is a March 3, 1863. NAS operates as a private cooperative separately incorporated not-for-profit organization society of distinguished scholars engaged in scientific or established and controlled by NAE to raise funds to engineering research, dedicated to the furtherance of support its goals. The financial activities and results of science and its use for the general welfare. NAEF are not included in the NAS financial statements. (b) National Research Council (f) The National Academies’ Corporation Most of the activities undertaken by NAS are carried out The National Academies’ Corporation (TNAC) was through the divisions and boards of the National Research separately incorporated in 1986 as a not-for-profit Council (NRC). The NRC draws on a wide cross section corporation for the purpose of constructing and maintain- of the nation’s leading scientists and engineers for ing a study and conference facility. This facility, the advisory services to government agencies and Congress. Arnold and Mabel Beckman Center, located in Irvine, To respond effectively to both the disciplinary concerns California, operates to expand and support the general of the research community and the complex interdiscipli- activities of NAS, NRC, IOM, and NAE. TNAC is nary problems facing American society, NRC is organ- controlled by NAS and NAEF. The financial position and ized into the following five major divisions responsible results of TNAC are not consolidated in the NAS for most study activities: financial statements. • Behavioral and Social Sciences and Education NAS manages the operations of the Beckman Center. • Earth and Life Studies There were no contributions from TNAC to the NRC • Engineering and Physical Sciences during 2011 and 2010 to support operations of the • Policy and Global Affairs Beckman Center. TNAC contributed $0 and $5,000 to the • Transportation Research Board NRC for the years ended December 31, 2011 and 2010, respectively, to be spent on programs conducted in whole NRC activities are under the control of the NAS govern- or in part at the Beckman Center. ance structure and, therefore, are included in the NAS financial statements. (2) SUMMARY OF SIGNIFICANT (c) Institute of Medicine ACCOUNTING POLICIES The Institute of Medicine (IOM), established in 1970, (a) Basis of Accounting conducts studies of policy issues related to health and medicine. IOM issues position statements on these Net assets, revenues, gains, and losses are classified based policies, cooperates with the major scientific and on the existence or absence of donor-imposed restrictions. professional societies in the field, identifies qualified Accordingly, net assets of NAS are classified and individuals to serve on study groups in other organiza- reported as follows: tional units, and disseminates information to the public and the relevant professions. IOM was established as a Permanently restricted – Net assets subject to do- separate membership organization within NAS. The nor-imposed stipulations that they be maintained in 45
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perpetuity by NAS. Generally, the donors of these assets NAS performs certain fundraising activities on behalf of permit NAS to use all or part of the income earned on NAEF. NAS collected a total of $3.5 million and related investments for general or specific purposes. $4.1 million in 2011 and 2010, respectively, on behalf of NAEF. NAS disbursed $3.7 million and $4.1 million to Temporarily restricted – Net assets subject to do- NAEF from these collected amounts in 2011 and 2010, nor-imposed stipulations that may or will be met either by respectively. Amounts collected but not yet remitted to actions of NAS and/or the passage of time. When a donor NAEF are included in other current liabilities in the restriction expires, temporarily restricted net assets are statements of financial position reclassified to unrestricted net assets. (e) Contracts and Grants Unrestricted – Net assets arising from exchange transac- The majority of NAS activities are performed under tions and contributions not subject to donor-imposed cost-reimbursable contracts with the U.S. government. stipulations. For the years ended December 31, 2011 and 2010, the (b) Cash Equivalents Department of Transportation provided 44% and 45%, respectively, of NAS government grant and contract NAS reports liquid, temporary investments purchased revenue. with original maturities of three months or less as cash equivalents. NAS records federal contracts as exchange transactions, recognizing revenue as recoverable costs are incurred. (c) Investments Revenues from nonfederal grants qualifying as contribu- Investments are stated at fair value. Changes in the fair tions are recorded by NAS upon notification of the grant value of investments are reported within investment award. Such grants are classified as temporarily restricted income in the statements of activities. net assets when use of the grant funds is limited to specific areas of study or is designated for use in future Certain investments are pooled for long-term investment periods. purposes. Investments in the pool are administered as an open-end investment trust, with shares of the pool funds Contracts receivable consisted of $28.7 million of billed expressed in terms of participating capital units (PCUs). receivables and $63.7 million of unbilled receivables as of PCU values are used to determine equity in the allocation December 31, 2011. Contracts receivable consisted of of investment income among funds in the pool whenever $38.2 million of billed receivables and $20.2 million of additional funds are contributed or withdrawn. unbilled receivables as of December 31, 2010. (d) Contributions (f) Deferred Revenue Contributions, including unconditional promises to give, For both federal and nonfederal grants and contracts that are recognized as revenues in the period received. are determined to be exchange transactions, revenue is Conditional promises to give are not recognized until all recognized as the related costs are incurred. Funds conditions are substantially met. received in advance of being earned for these grants are recorded as deferred revenue in the statements of financial Gifts of land, buildings, or equipment are reported as position. unrestricted net assets unless explicit donor stipulations specify how the donated assets must be used. Temporary (g) Inventories restrictions on gifts that must be used to acquire long-lived assets are released in the period in which the Inventories are stated at the lower of cost or net realizable assets are acquired or placed in service. value and include both work in-process and finished goods related to publication activities. The majority of Allowances are recorded for estimated uncollectible NAS publication inventories and supplies reside with an contributions based upon management’s judgment and NAS unit, the National Academy Press (NAP). NAP uses analysis of the credit worthiness of the donor, past the full absorption costing methodology in pricing collection experience, and other relevant factors. Contri- finished products. This methodology includes direct butions to be received after one year are discounted at an printing and related indirect costs. Inventories are appropriate rate commensurate with risks involved. included in other current assets in the statements of Amortization of the discount is recorded as additional financial position. revenue and is used in accordance with donor-imposed restrictions, if any, on the contributions. 46
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(h) Property and Equipment (l) Recently Adopted Accounting Pronouncements Depreciation of NAS buildings and equipment is Effective December 31, 2010, NAS applied the guidance computed on a straight-line basis using the following in FASB Accounting Standards Update 2010-06, Fair lives: Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements, to its Asset Class Depreciable Lives financial assets and liabilities disclosed at fair value. This Buildings 40 years guidance requires fair value measurement disclosures for Buildings and leasehold Lesser of the remaining each class of assets and liabilities and enhanced disclo- improvements life of the building or sures for transfers among the fair value hierarchy. improvement (m) Use of Estimates Furniture and equipment 4 to 10 years Capitalized software 3 to 10 years The preparation of these financial statements in confor- mity with U.S. generally accepted accounting principles The Einstein Memorial sculpture is valued at cost and is requires management to make certain estimates and not depreciated. Construction-in-progress is not depreci- assumptions. These estimates and assumptions may affect ated until the related assets are placed in service. the reported amounts of assets and liabilities and disclo- Capitalized software is amortized over its depreciable life sures in the financial statements. Actual results could when it is ready for its intended use and placed in service. differ from those estimates. (i) Split-Interest Agreements (n) Reclassifications Charitable gift annuity agreements are classified as other Certain amounts from the prior year have been reclassi- assets and other long-term liabilities in the statements of fied to conform to the current year presentation. 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 (3) INVESTMENTS the assets is available for use by NAS as restricted or unrestricted assets in accordance with the donor’s designation. At December 31, 2011 and 2010, NAS had Investments, which are reported at fair value (except as charitable gift annuity assets of $2.0 million and noted), consisted of the following as of December 31, $2.1 million, respectively. NAS has recorded a liability of 2011 and 2010 (in thousands): $1.3 million and $1.3 million at December 31, 2011 and 2010, respectively, representing the present value of 2011 2010 estimated future cash payments to annuitants based on the Short-term investments: annuitant’s life expectancy. Cash equivalents $ 12,779 $ 12,503 Bonds and notes 32,129 31,666 (j) Income Taxes Equity securities 9,404 12,608 Total short-term investments $ 54,312 $ 56,777 NAS is exempt from federal income taxes under Sec- tion 501(c)(3) of the Internal Revenue Code, except for Long-term investments: unrelated business income. NAS recognizes the effect of Investment pool, including endowment assets: income tax positions only if those positions are more Cash equivalents $ 28,429 $ 6,381 likely than not of being sustained. NAS does not believe Bonds and notes 38,902 38,775 its financial statements include any uncertain tax posi- Equity securities 173,972 263,900 tions. Hedge funds 85,318 55,303 (k) Risks and Uncertainties Private equity 25,555 19,570 352,176 383,929 NAS invests in various investment securities. Investment Other long-term investments: securities are exposed to various risks such as interest Cash equivalents 882 3,004 rate, market and credit risks. Due to the level of risk Bonds and notes 17,483 16,463 associated with investment securities, it is at least Equity securities 21,484 19,666 reasonably possible that changes in the values of invest- 39,849 39,133 ment securities will occur in the near term and that such Total long-term investments $ 392,025 $ 423,062 changes could materially affect the amounts reported. 47
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NAS holds alternative investments, comprised of private market data for substantially the full term of the assets or equity securities and hedge funds, in its long-term liabilities. investment pool. At December 31, 2011 and 2010, these Level 3: Unobservable inputs that are supported by little funds had a fair value of approximately $110.8 million or no market activity and that are significant to the fair and $74.9 million, respectively. The hedge funds had an value of the asset or liabilities. unrealized loss of approximately $2.3 million for the year ended December 31, 2011 and an unrealized gain of The following discussion describes the valuation method- approximately $4.1 million for the year ended December ologies used for financial assets measured at fair value. 31, 2010. The unrealized loss or gain is included as a The techniques utilized in estimating the fair values are component of investment income in the accompanying affected by the assumptions used, including discount rates statements of activities. Private equity investments are and estimates of the amount and timing of future cash comprised of limited partnership interests. flows. Care should be exercised in deriving conclusions about NAS’ business, its value or financial position based TNAC, a related entity, invests certain of its assets in the on the fair value information of financial assets presented NAS long-term investment pool. TNAC investments below. participate in the investment pool proportionally with all other funds in this pool. Fair value estimates are made at a specific point in time, based on available market information and judgments The NAS obligation to TNAC for these funds held in about the financial asset, including estimates of timing, trust, which totaled approximately $9.2 million and amount of expected future cash flows and the credit $9.9 million as of December 31, 2011 and 2010, respec- standing of the issuer. In some cases, the fair value tively, is reported as funds held on behalf of others in the estimates cannot be substantiated by comparison to statements of financial position. independent markets. In addition, the disclosed fair value Investment income is reported net of investment expenses may not be realized in the immediate settlement of the of approximately $599,000 and $446,000 for the years financial asset. Furthermore, the disclosed fair values do ended December 31, 2011 and 2010, respectively, and is not reflect any premium or discount that could result from comprised of the following (in thousands): offering for sale at one time an entire holding of a particular financial asset. Potential taxes and other expenses that would be incurred in an actual sale or 2011 2010 settlement are not reflected in amounts disclosed. Interest and dividends income $ 15,536 $ 9,610 Net (loss)/gain on investments (36,264) 49,231 The following methods and assumptions were used to Total investment (loss) income $ (20,728) $ 58,841 estimate the fair value of each class of financial instru- ments: The carrying value of cash equivalents such as money (4) FAIR VALUE MEASUREMENTS market funds approximates the fair value because of the short maturity of these investments. These amounts are Fair value is defined as the exchange price that would be disclosed in Level 1. received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for NAS’ fixed maturity investments (bonds and notes), other the asset or liability in an orderly transaction between than U.S. Treasury securities, generally do not trade on a market participants on the measurement date. FASB ASC daily basis. The fair value estimates of such debt securi- Topic 820 establishes a fair value hierarchy, which ties are based on prices provided by NAS’ investment requires an entity to maximize the use of observable managers and custodian bank. Both the investment inputs and minimize the use of unobservable inputs when managers and the custodian bank use a variety of pricing measuring fair value. The standard describes three levels sources to determine market valuations. Each designate of inputs that may be used to measure fair value: specific pricing services or indexes for each sector of the market based upon the provider’s expertise. NAS’ debt Level 1: Quoted prices in active markets for identical securities portfolio is highly liquid, which allows for a assets or liabilities. high percentage of the portfolio to be priced through Level 2: Observable inputs other than Level 1 prices such pricing services. Accordingly, the estimates of fair value as quoted prices for similar assets or liabilities; quoted for such debt securities are included in Level 2 inputs. prices in markets that are not active; or other inputs that The estimated values of U.S. Treasury securities are based are observable or can be corroborated by observable on actively traded market prices and are accordingly included in the bonds and notes amount in Level 1. 48
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Fair values of exchange-traded equity securities have therefore included in Level 1. Charitable gift annuity been determined by NAS from observable market investments and deferred compensation investments are quotations on major trade exchanges. Accordingly, such held in debt and equity mutual funds along with some equity securities are disclosed in Level 1. U.S. Treasury securities, all of which are included in Level 1. The deferred compensation obligation to NAS also invests in debt and equity mutual funds. For employees is equal to the fair value of the investments purposes of the fair value disclosure, mutual funds are held and is disclosed in the same levels as the investment presented based on the class of the underlying investment assets. holdings. The fair values of such mutual funds are based on observable market information from active markets. NAS has interest rate swap agreements covering the Accordingly, the estimates of fair value for such mutual variable-rate bonds payable. The fair value of the swaps funds are included in Level 1. are determined using pricing models based on observable market data such as prices of instruments with similar Fair value of alternative investments including private maturities and characteristics, interest rate yield curves, equity securities and hedge funds is based on the alterna- and measures of interest rate volatility. The value was tive investment fund managers’ net asset value (NAV). determined after considering the potential impact of Valuations provided by alternative investment fund collateralization and netting agreements, adjusted to managers include estimates, appraisals, assumptions and reflect nonperformance risk of both the counterparty and methods that are reviewed by management. When NAS. Accordingly, the interest rate swaps are included in necessary, NAS adjusts NAV for contributions, distribu- Level 2. tions, or general market conditions subsequent to the latest NAV valuation date when calculating fair value. The funds held on behalf of others liability approximates Since the most significant valuation inputs are not the investments held in NAS’ long-term investment pool observable in the marketplace, the alternative investment on behalf of TNAC. Therefore, the liability is disclosed in valuations are disclosed in Level 2 or Level 3. The the same levels as the investment assets. distinction is that those funds which are available for The following table presents NAS’ fair value hierarchy redemption in the near term at NAV are included in for those assets and liabilities measured at fair value on a Level 2. recurring basis at December 31, 2011 (in thousands): Funds on deposit with trustee are held in U.S. Treasury securities or funds of U.S. Treasury securities and Fair value measurements using Fair Level 1 Level 2 Level 3 value Financial Assets: Short-term and long-term investments: Cash equivalents $ 42,090 $ 42,090 $ - $ - Bonds and notes U.S. treasuries/government bonds 8,310 7,367 943 - Mortgage-backed securities 37,603 17,014 20,589 - Corporate bonds 20,737 11,009 9,728 - Non-U.S. fixed income 21,864 21,864 - - Equity securities U.S. large stock 47,994 47,994 - - U.S. small/mid cap 43,441 43,441 - - Non-U.S. stocks (developed countries) 57,056 57,056 - - Non-U.S. stocks (emerging countries) 44,653 44,653 - - Real estate stocks 11,716 11,716 - - Hedge funds Fund of fund – multi-strategies 26,540 - 26,540 - Multi-strategies/multi-vehicle 11,223 - - 11,223 Fixed income single strategy 2,448 - 2,448 - Long/short equity 45,107 - 37,382 7,725 Private equity Asia 20,450 - - 20,450 Global 3,560 - - 3,560 49
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Fair Fair value measurements using (Continued) value Level 1 Level 2 Level 3 Domestic 1,545 - - 1,545 Total short-term and long-term investments 446,337 304,204 97,630 44,503 Deposit with trustee Bonds and notes U.S. treasuries/government bonds 22,512 22,512 - - Total deposit with trustee 22,512 22,512 Charitable gift annuity assets: Cash equivalents 74 74 - - Bonds and notes U.S. treasuries/government bonds 75 75 - - Mortgage-backed securities 397 397 - - Corporate bonds 93 93 - - Equity securities U.S. small/mid cap 1,329 1,329 - - Total charitable gift annuity assets 1,968 1,968 - - Deferred compensation assets: Bonds and notes U.S. treasuries/government bonds 76 76 - - Corporate bonds 434 434 - - Equity securities U.S. large stock 187 187 - - U.S. small/mid cap 1,002 1,002 - - Non-U.S. stocks (developed countries) 232 232 - - Total deferred compensation assets 1,931 1,931 - - Total financial assets $ 472,748 $ 330,615 $ 97,630 $ 44,503 Financial Liabilities: Funds held on behalf of others $ 9,185 $ 6,293 $ 1,731 $ 1,161 Deferred compensation liability 1,931 1,931 - - Interest rate swaps 14,109 - 14,109 - Total financial liabilities $ 25,225 $ 8,224 $ 15,840 $ 1,161 The following table presents NAS’ fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis at December 31, 2010 (in thousands): Fair value measurements using Fair value Level 1 Level 2 Level 3 Financial Assets: Short-term and long-term investments: Cash equivalents $ 21,888 $ 21,888 $ - $ - Bonds and notes U.S. treasuries/government bonds 6,964 5,844 1,120 - Mortgage-backed securities 32,044 16,980 15,064 - 50
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Fair Fair value measurements using (Continued) value Level 1 Level 2 Level 3 Corporate bonds 26,122 11,146 14,976 - Non-U.S. fixed income 21,774 21,774 - - U.S. large stock 70,619 70,619 - - U.S. small/mid cap 67,547 67,547 - - Non-U.S. stocks (developed countries) 89,016 89,016 - - Non-U.S. stocks (emerging countries) 57,054 57,054 - - Real estate stocks 11,938 11,938 - - Hedge funds Fund of fund – multi-strategies 27,104 - 27,104 - Multi-strategies/multi-vehicle 11,028 - - 11,028 Fixed income single strategy 1,185 - 1,185 - Long/short equity 15,986 - 2,500 13,486 Private equity Asia 12,725 - - 12,725 Global 4,840 - - 4,840 Domestic 2,005 - - 2,005 Total short-term and long-term investments 479,839 373,806 61,949 44,084 Deposit with trustee: Bonds and notes U.S treasuries/government bonds 47,216 47,216 - - Total deposit with trustee 47,216 47,216 - - Charitable gift annuity assets: Cash equivalents 56 56 - - Bonds and notes U.S treasuries/government bonds 66 66 - - Mortgage-backed securities 376 376 - - Corporate bonds 86 86 - - Equity securities U.S. small/mid cap 1,475 1,475 - - Total charitable gift annuity assets 2,059 2,059 - - Deferred compensation assets: Cash equivalents 13 13 - - Bonds and notes U.S. treasuries/government bonds 97 97 - - Corporate bonds 426 426 - - Equity securities U.S. large stock 164 164 - - U.S. small/mid cap 1,279 1,279 - - Non-U.S. stocks (developed countries) 339 339 - - Total deferred compensation assets 2,318 2,318 - - Total financial assets $ 531,432 $ 425,399 $ 61,949 $ 44,084 Financial Liabilities: Funds held on behalf of others $ 9,918 $ 7,984 $ 795 $ 1,139 Deferred compensation liability 2,318 2,318 - - Interest rate swaps 10,534 - 10,534 - Total financial liabilities $ 22,770 $ 10,302 $ 11,329 $ 1,139 51
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The following table presents the changes in Level 3 assets measured at fair value on a recurring basis for the year ended December 31, 2011 (in thousands): Balance Net gain Transfers Balance January 1, (loss) on out of December 31, 2011 investments Purchases Sales Level 3 (a) 2011 Hedge funds: Multi-strategies/multi-vehicle $ 11,028 $ 195 $ - $ - $ - $ 11,223 Long/short equity 13,486 (2,798) 5,000 - (7,963) (b) 7,725 Private equity: Asia 12,725 7,203 1,703 (1,181) - 20,450 Global 4,840 457 25 (1,762) - 3,560 Domestic 2,005 208 - (668) - 1,545 $ 44,084 $ 5,265 $ 6,728 $ (3,611) $ (7,963) $ 44,503 The following table presents the changes in Level 3 assets measured at fair value on a recurring basis for the year ended December 31, 2010 (in thousands): Balance Net gain Transfers Balance January 1, (loss) on out of December 31, 2010 investments Purchases Sales Level 3 (a) 2010 Hedge funds: Multi-strategies/multi-vehicle $ 10,000 $ 1,028 $ - $ - $ - $ 11,028 Fixed income single strategy (b) 1,281 (96) - - (1,185) - Long/short equity - 486 13,000 - - 13,486 Private equity: Asia 4,990 6,407 1,428 (100) - 12,725 Global 5,073 481 90 (804) - 4,840 Domestic 1,972 251 - (218) - 2,005 $ 23,316 $ 8,557 $ 14,518 $ (1,122) $ (1,185) $ 44,084 Notes: (a) NAS’ policy is to recognize transfers in and transfers out as of the end of the reporting period in which the event or change in circumstances occurred. (b) Transferred from Level 3 to Level 2 due to expiration of lock up period allowing for redemption in the near term. The following table presents the nature and risk of assets with fair values estimated using NAV held at December 31, 2011 (in thousands): Unfunded Redemption Fair value Commitments Redemption Frequency Notice Period Fund of hedge funds – multi-strategies (a) $ 26,540 N/A Quarterly 90 days Hedge fund – multi-strategies/multi-vehicle (b) 11,223 N/A Annually 365 days Hedge fund – fixed income single strategy (c) 2,448 N/A Quarterly 30 days Hedge fund – long/short equity strategy (d) 45,107 N/A Monthly/Quarterly/Annually 45/60/90 days Private equity – Asia (e) 20,450 3,738 N/A N/A Private equity – Global (f) 3,560 302 N/A N/A Private equity – Domestic (g) 1,545 303 N/A N/A Total $ 110,873 $ 4,343 Notes: made using equity long/short, event driven, relative value, and tactical trading strategies. The funds have investments (a) This class includes investments in funds of hedge in multiple investees which may trade various financial funds that use multiple strategies to obtain total returns on instruments such as, but not limited to, securities sold a leveraged basis. Direct and indirect investments are short, futures, forwards, swaps, and written options. The 52
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fair values of the investments in this class have been redeemed with the funds. Instead, the nature of the estimated using the NAV per share of the investments. investments in this class is that distributions are received through liquidation of the underlying assets of the funds. (b) This class includes investments in a multi-strategy, It is estimated that the underlying assets of the funds will multi-vehicle hedge fund with the objective of maximiz- be liquidated over 1 to 10 years. ing long-term, risk-adjusted returns and capital apprecia- tion by investing in securities, investment funds, discre- (f) This class includes several global private equity funds tionary accounts, and investment partnerships across a with diverse portfolios consisting primarily of venture broad range of marketable and alternative asset classes. capital funds, leveraged buyout funds, mid-stage growth Asset classes include domestic and international market- capital funds, and international private equity funds. able equity securities, hedged equity, real estate, natural These investments are focused on several industries resource, fixed income, and private equity and absolute including, but not limited to, insurance, services, and return strategies, primarily focused in the United States. consumer-related industries. The fair values of these The fair values of the investments in this class have been investments have been estimated using the NAV of NAS’ estimated using the NAV per share of the investments. ownership interest in partners’ capital. These investments can never be redeemed with the funds. Instead, the nature (c) This class includes investments in a single strategy of the investments in this class is that distributions are hedge fund focused on undervalued fixed income received through liquidation of the underlying assets of securities. Investments held by this fund consist of the funds. It is estimated that the underlying assets of the U.S. government agency mortgage-backed securities and funds will be liquidated over 1 to 4 years. derivatives, primarily in the form of collateralized mortgage obligations. Securities are generally held in the (g) This class includes several domestic private equity portfolio as long as interest rates and repayment rates are funds which make investments in domestic equity unfolding as anticipated. The majority of the investment securities, warrants or other securities that are generally return is expected to come from trading mortgage-backed not actively traded at the time of investment. These securities in an attempt to maximize interest income. The investments are focused on several industries including, fair values of the investments in this class have been but not limited to, insurance, financial services, con- estimated using the NAV per share of the investments. sumer-related, and communications. The fair values of these investments have been estimated using the NAV of (d) This category is comprised of long-short equity hedge NAS’ ownership interest in partners’ capital. These funds investing in securities of U.S. companies as well as investments can never be redeemed with the funds. securities of developed and emerging countries. The Instead, the nature of the investments in this class is that geographical allocation among U.S. equity funds, global distributions are received through liquidation of the funds and emerging market funds is approximately 49%, underlying assets of the funds. It is estimated that the 44% and 7%, respectively. Each of these funds buys underlying assets of the funds will be liquidated over 1 securities long and sells short securities with the ability to year. use leverage. These funds can also invest in derivative instruments such as forward, futures and options con- tracts. The fair values of the investments in this category (5) PROPERTY AND EQUIPMENT have been estimated using the net asset value per share of the investments. Currently, approximately $37.4 million Property and equipment as of December 31, 2011 and of investments in this category is redeemable within the 2010, is comprised of the following (in thousands): near term from December 31, 2011. The remaining investments are redeemable annually on the anniversary 2011 2010 of the investment. Land $ 29,689 $ 29,689 Furniture and equipment 31,298 28,811 (e) This class includes several private equity funds that invest in equity, debt or debt-oriented instruments, Buildings and improvements 109,631 109,518 primarily in privately held companies which own or Capitalized software 11,631 6,219 contractually control operating entities located in the Construction in progress 41,921 14,207 Peoples’ Republic of China and India. Investments held in Software development in process - 5,062 India primarily include equity securities of “early to early Leasehold improvements 4,701 4,635 growth stage” companies in multiple sectors, except real 228,871 198,141 estate. The fair values of these investments have been Less accumulated depreciation and estimated using the NAV of NAS’ ownership interest in (69,220) (63,188) amortization partners’ capital. These investments can never be Total property and equipment, net $ 159,651 $ 134,953 53
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(6) CONTRIBUTIONS RECEIVABLE (9) TEMPORARILY RESTRICTED NET ASSETS Contributions not yet collected are included in contribu- tions and other receivables (current) and contributions Temporarily restricted net assets were available for the receivable (long-term) in the statements of financial following purposes as of December 31, 2011 and 2010 position, and mature as follows (in thousands): (in thousands): Year ending December 31: 2011 2010 Less than one year $ 7,863 Sponsored research and advisory programs $140,334 $156,557 One to five years 20,495 General endowment 68,311 79,400 More than five years 1,937 Prizes and awards 23,681 26,385 30,295 Woods Hole facility 2,678 3,360 Less: Total temporarily restricted net assets $235,004 $265,702 Discount at rates from 1.20% to 6.75% to estimated net present value (1,530) Allowance for uncollectible contributions (700) Temporarily restricted net assets were released from 28,065 restriction for the following purposes during the years Less current portion (7,163) ended December 31, 2011 and 2010 (in thousands): Total contributions receivable, long-term $ 20,902 2011 2010 At December 31, 2010, the discount on contributions Sponsored research and advisory programs $ 28,206 $ 32,040 receivable was approximately $2.2 million at rates General endowment 4,532 4,927 ranging from 3.00% to 6.75% and the allowance for Prizes and awards 933 799 uncollectible contributions was approximately $701,000. Woods Hole facility 277 372 Total temporarily restricted net assets $ 33,948 $ 38,138 released from restriction (7) DEFERRED REVENUE Deferred revenue consisted of the following as of (10) ENDOWMENT December 31, 2011 and 2010 (in thousands): (a) Permanently Restricted Net Assets 2011 2010 Advances from private grants and contract The income generated by permanently restricted net sponsors $15,771 $15,828 assets is available to support donor-specified programs. Advances from U.S. government sponsors 12,539 7,320 As of December 31, 2011 and 2010, NAS held the Publication subscriptions and other 4,787 4,859 following permanently restricted net assets, classified by Total deferred revenue $33,097 $28,007 the purpose for which the income is to be used (in thousands): (8) LINE OF CREDIT 2011 2010 Sponsored research and advisory programs $ 80,972 $ 77, 682 NAS is party to a $34 million unsecured line of credit General Endowment 32,374 32,032 from Bank of America, which bears interest at LIBOR Prizes and awards 5,116 5,116 plus 0.65% and expires on August 30, 2012. Effective November 1, 2010, NAS is also party to a $15 million Woods Hole facility 3,539 3,539 unsecured line of credit from Wells Fargo, which bears Total permanently restricted net assets $122,001 $118,369 interest at LIBOR plus 0.65% and expires on April 30, 2013. Interest expense related to the lines of credit for the years ended December 31, 2011 and 2010, was approxi- (b) Endowment Assets mately $216,000 and $84,000, respectively. The NAS endowment consists of approximately 110 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 54
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endowment funds. The investments of the endowment are (7) The investment policy of the institution. included in the NAS long-term investment pool, as Return Objectives and Strategies described in note 3. NAS has adopted an investment and spending policy for Interpretation of Relevant Law endowment assets that is designed to provide a predict- NAS has interpreted the District of Columbia “Uniform able stream of funding to programs supported by the Prudent Management of Institutional Funds Act of 2007” endowment while seeking to protect the real purchasing (the Act) as requiring NAS, absent explicit donor power of the assets from inflation. Accordingly, NAS has stipulations to the contrary, to act in good faith and with adopted guidelines which feature a material commitment the care that an ordinarily prudent person in a like to equity and equity-like investments. position would exercise under similar circumstances in The asset allocation guidelines are as follows: making determinations to appropriate or accumulate endowment funds, taking into account both its obligation Guideline to preserve the value of the endowment and its obligation Asset Category percentage to use the endowment to achieve the purposes for which it was donated. NAS classifies as permanently restricted net U.S. large stocks 19% assets (a) the original value of gifts donated to the U.S. small/mid cap stocks 9 permanent endowment, (b) the original value of subse- Non-U.S. stocks (developed countries) 20 quent gifts to the permanent endowment, and Non-U.S. stocks (emerging countries) 15 (c) accumulations to the permanent endowment required Real estate stocks 3 by the applicable donor gift instrument. The remaining Total equity 66 portion of donor-restricted endowment funds that are not classified as permanently restricted are classified as U.S. fixed/cash 9 temporarily restricted net assets until those amounts are Non-U.S. fixed 5 appropriated for expenditure by NAS. In making a Total fixed 14 determination to appropriate or accumulate, NAS adheres to the standard of prudence prescribed by the Act and Hedge funds and alternative considers the following factors: investments 20% Total 100% (1) The duration and preservation of the endowment fund; (2) The purposes of the institution and the endowment NAS has adopted a spending policy that limits the annual fund; spending to 5% of the three-year average fair value of the (3) General economic conditions; participating funds in the endowment portfolio. This is (4) The possible effect of inflation or deflation; consistent with NAS’ objective to maintain the purchas- (5) The expected total return from income and the ing power of the endowment assets held in perpetuity as appreciation of investments; well as to provide additional real growth through new (6) Other resources of the institution; and gifts and investment return. Changes in endowment assets for the fiscal year ended December 31, 2011 are as follows (in thousands): Temporarily Permanently Unrestricted restricted restricted Total Endowment assets, January 1, 2011 $ - $ 180,868 $ 114,202 $ 295,070 Investment return (loss): Interest and dividend income - 10,445 - 10,445 Net loss on investments (160) (27,530) - (27,690) Total investment return (loss) (160) (17,085) - (17,245) Contributions - - 5,615 5,615 Amounts appropriated for expenditure - (11,205) - (11,205) 55
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Temporarily Permanently (Continued) Unrestricted restricted restricted Total Other changes: 2010 appropriation expended in 2011 - (2,613) - (2,613) Unspent purpose restricted appropriations - 4,429 - 4,429 Accrued expenses withdrawn in 2012 - 637 - 637 Endowment assets, December 31, 2011 $ (160) $ 155,031 $ 119,817 $ 274,688 Changes in endowment assets for the fiscal year ended December 31, 2010 are as follows (in thousands): Temporarily Permanently Unrestricted restricted restricted Total Endowment assets, January 1, 2010 $ (214) $ 152,382 $ 111,055 $ 263,223 Investment return: Interest and dividend income - 5,021 - 5,021 Net gain on investments 214 34,530 - 34,744 Total investment return 214 39,551 - 39,765 Contributions - - 3,147 3,147 Amounts appropriated for expenditure - (11,074) - (11,074) Other changes: 2009 appropriation expended in 2010 - (2,604) - (2,604) Unspent purpose restricted appropriations - 2,443 - 2,443 Accrued expenses withdrawn in 2011 - 170 - 170 Endowment assets, December 31, 2010 $ - $ 180,868 $ 114,202 $ 295,070 Funds with Deficiencies 2011 2010 Transportation Research Board $126,172 $112,445 From time to time, the fair value of assets associated Policy and Global Affairs 58,527 55,117 with individual donor-restricted endowment funds may Institute of Medicine 37,459 32,116 fall below the original value of the gift donated to the Earth and Life Sciences 21,720 21,371 permanent endowment. Deficiencies of this nature are Engineering and Physical Sciences 20,380 18,250 reported as unrestricted net assets. At December 31, Behavioral and Social Sciences and 2011, there were three endowment funds with a fair Education 11,775 12,042 value below the original value of the gift. These Proceedings of the National Academy of deficiencies were primarily a result of unfavorable Sciences 12,370 11,762 market fluctuations that occurred shortly after the National Academy Press 3,964 4,412 investment of new permanently restricted contributions. National Academy of Engineering 3,614 3,158 Subsequent gains that restore the fair value of the assets Koshland Science Museum 2,316 1,850 of the endowment fund to the required level are NAS 11,008 7,834 classified as an increase in unrestricted net assets. At Total program expenses $309,305 $280,357 December 31, 2010, there were no endowment funds with a fair value below the original value of the gift. (12) RECOVERY OF INDIRECT COSTS (11) PROGRAM EXPENSES NAS receives indirect cost recovery on its federal contracts and grants. An overhead assessment is applied Program expenses for the years ended December 31, to direct salaries, accrued leave, fringe benefits, and 2011 and 2010 are summarized as follows (in thou- services provided by outside contractors (e.g., tempo- sands): rary personnel agencies, consultants) on NAS property. A general and administrative assessment (G&A) is 56
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applied to direct costs and overhead less subcontract building on Constitution Avenue in Washington, D.C. costs and stipends. Therefore, both the overhead and and pay for certain costs of issuance. The restoration is G&A rates are applied to projects incurring direct expected to be completed in May 2012. salaries and other direct costs such as travel. If a The bond proceeds are held by a Trustee and invested in program does not require direct salaries, such as a travel U.S. government obligations or funds of U.S. govern- grant program, a subcontract/flow-through administra- ment obligations. The Trustee reimburses NAS and tion rate is applied. Certain off-site work (not performed third-party vendors for expenditures related to the on NAS property) is assessed reduced overhead rates. restoration project. NAS bills for indirect cost recovery throughout the year based on negotiated rates. At the end of each year, NAS NAS is obligated under the revenue bonds as follows (in compares actual expenses incurred in each of its cost thousands): pools to the amounts recovered based on its billing rates. The difference is recorded as its indirect cost 2011 2010 carryforward. If NAS over recovers on its indirect costs Series 2008A revenue bonds, term, at during the year, a liability is recorded. If NAS under flexible rates (0.2% in 2011 and 0.3% recovers, a receivable is recorded. in 2010) maturing at various dates from January 1, 2029 through 2039 $ 66,325 $ 66,325 NAS has a cumulative net overrecovery of approxi- Series 2009A revenue bonds, term, at mately $9.9 million and $4.8 million as of Decem- flexible rates (0.3% in 2011 and 0.3% ber 31, 2011 and 2010, respectively. The overrecovery in 2010) maturing at various dates from January 1, 2010 through 2028 54,220 56,220 is included in the deferred revenue balance in the statements of financial position. Series 2010A revenue bonds, serial, with interest rates ranging from 3.0% to 5.0%, maturing at various dates from April 1, 2013 through 2030 29,385 29,385 (13) BUILDING PROJECT AND FINANCING Series 2010A revenue bonds, term, Interest rate 5%, maturing April 1, 2035 13,205 13,205 Interest rate 5%, maturing April 1, 2040 16,960 16,960 (a) Building Project Revenue Bonds Total bonds, at face value 180,095 182,095 In January 1999, the District of Columbia issued Series Plus unamortized premium 1,108 1,244 1999A, Series 1999B, and Series 1999C tax-exempt revenue bonds on behalf of NAS. Proceeds from the Total bonds payable 181,203 183,339 sale of the revenue bonds financed the cost of the Less current portion (included in other acquisition of 44,250 square feet of land and related current liabilities) (2,241) (2,137) construction of an office building, as well as paid Bonds payable, long-term $ 178,962 $ 181,202 certain costs of issuing the bonds. This building consolidates most of NAS’ program activities into one location. The serial and term bonds represent unsecured general obligations of NAS. In June 2008, the District of Columbia issued Series 2008A tax-exempt revenue bonds in the amount of Interest on the 2008A and 2009A bonds is payable $66,325,000 on behalf of NAS. The proceeds were used monthly. Interest on the 2010A bonds is payable to refund the Series 1999B and Series 1999C revenue semiannually every April 1 and October 1. bonds, as well as pay certain costs of issuing the bonds. The term bonds maturing on April 1, 2035, and April 1, In April 2009, the District of Columbia issued Series 2040, are subject to mandatory redemption by operation 2009A tax-exempt revenue bonds in the amount of of sinking fund installments. Installment payments for $57,500,000 on behalf of NAS. The proceeds were used the term bond maturing April 1, 2035, begin on April 1, to refund the Series 1999A revenue bonds, as well as 2031, and range from $2.4 to $2.9 million per year pay certain costs of issuing the bonds. through the maturity date. Installment payments for the term bond maturing April 1, 2040, begin on April 1, In May 2010, the District of Columbia issued Series 2036, and range from $3.1 to $3.8 million per year 2010A tax-exempt revenue bonds in the amount of through the maturity date. $59,550,000 on behalf of NAS. These bonds were sold to finance the cost to restore the NAS headquarters 57
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Scheduled maturities and sinking fund requirements are tions in cash flows resulting from interest rate risk. By as follows (in thousands): using derivative financial instruments to hedge expo- sures to changes in interest rates, NAS exposes itself to credit risk and market risk. Credit risk is the failure of Years ending December 31: the counterparty to perform under the terms of the 2012 $ 2,100 derivative contract. When the fair value of a derivative 2013 3,325 contract is positive, the counterparty owes NAS, which 2014 3,475 creates credit risk for NAS. When the fair value of a 2015 3,645 derivative contract is negative, NAS owes the counter- 2016 3,820 party, and therefore, it does not possess credit risk. NAS Thereafter 163,730 minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterpar- $ 180,095 ties. In May 2009, NAS entered into an additional swap The carrying value of bonds payable in the financial agreement as a result of a counterparty exercising a statements was approximately $2.5 million less than fair swaption related to the Series 1999A Revenue Bonds. value as of December 31, 2011 and approximately $3.7 The variable-to-fixed swap requires NAS to pay 5.00% million greater than fair value as of December 31, 2010. on a notional amount of $55 million and to receive a Interest expense on the bonds payable for 2011 and floating rate equal to 67% of 1-month LIBOR plus 2010 totaled $2.9 million and $2.0 million, respectively. 0.41%. Of this amount, $2.4 million and $1.4 million was NAS entered into this variable-to-fixed swap agreement capitalized as part of the building restoration project for in order to preserve the synthetic variable rate achieved 2011 and 2010, respectively. through the 1999 swap agreement once the fixed-rate (b) Interest Rate Swaps Series 1999A bonds were refunded with the vari- able-rate Series 2009A bonds. In October 1999, NAS entered into a swap agreement, with an effective date of February 1, 2000, relating to With regard to the fixed-to-variable interest rate swap, the $66 million face amount of its Series 1999A revenue NAS recorded a gain on the change in the fair value of bonds. The agreement provides for NAS to receive its swap agreement of $20,000 and $17,000, for the 4.97% in interest on a notional amount of $65 million years ended December 31, 2011 and 2010, respectively, and to pay interest at a floating rate option based on the which is included in other income in the accompanying weekly interest rate resets of tax-exempt variable-rate statements of activities. The fair value of the interest issues per the Securities Industry and Financial Markets rate swap was recorded as an asset of $37,000 and Association (SIFMA) Municipal Swap Index. NAS $17,000 as of December 31, 2011 and 2010, respec- amended the agreement for the 2005 – 2020 period by tively, and is included in other assets in the statements agreeing to give up the benefit of any 30-day period of financial position. during which the SIFMA index remains below 2.25% Pertaining to the swaption and resultant vari- for the entire 30 days. Each time this occurs, the rate on able-to-fixed interest rate swap, NAS recorded a loss on the swap portfolio reverts to the fixed rate noted above the change in the fair value of approximately for that month only. $3.6 million and $1.3 million, respectively, for the years NAS entered into this fixed-to-variable swap agreement ended December 31, 2011 and 2010. The loss is to manage its exposure to interest rate changes. The included in other income in the statements of activities. fixed-rate debt obligations exposed NAS to variability The fair value of the swap is recorded as a liability of in the cost recovery stream due to changes in interest $14.1 million and $10.5 million as of December 31, rates. NAS recovers the costs of borrowing through a 2011 and 2010, respectively, and is included in other capital investment incentive rate that is set by the current liabilities and other long-term liabilities. U.S. government and is tied to a variable index. If interest rates increase, the capital investment incentive recovery increases. (14) NOTE PAYABLE Conversely, if interest rates decrease, the capital During 2006, NAS entered into a loan agreement with investment incentive recovery decreases. Therefore, Bank of America for an amount up to $5 million. The NAS entered into a derivative instrument that ties the principal balance of this note is payable in equal fixed-rate debt to a variable index to manage fluctua- 58
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monthly installments until January 1, 2012. On benefit-eligible employees may become eligible for December 31, 2011 and 2010, the principal balance was service retiree benefits if they reach age 60 while approximately $0.1 million and $0.8 million, respec- working for NAS and complete 5 years of service in a tively. The note bears interest at 30-day LIBOR plus 40 benefit-eligible status for medical and life insurance basis points. The interest rate at December 31, 2011 and benefits. In addition, certain health and life insurance 2010 was 0.69% and 0.66%, respectively. 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 (15) EMPLOYEE BENEFITS they are eligible for disability benefits from the Social Security Administration. Life insurance benefits are (a) Retirement Plans provided based on coverage at date of disability and health insurance may be continued if the disabled retiree NAS has a noncontributory defined contribution had participated in an NAS health insurance plan for retirement plan covering substantially all of its employ- 5 years at the date of disability. Insurance companies ees (based on certain benefit eligibility requirements). whose premiums are determined on an experience-rated The funding vehicles under the plan consist of group basis provide life and health insurance benefits for investments issued by Teachers Insurance and Annuity retirees. Medicare supplement insurance is not experi- Association (TIAA) and College Retirement Equities ence rated. The retiree welfare benefit plan is contribu- Fund (CREF), known collectively as TIAA-CREF, as tory for health insurance purposes for employees who well as mutual funds issued by TIAA-CREF and other retired on or after January 1, 1990. Participant contribu- third-parties. Participants in this plan vest immediately. tions for health insurance are based on a percentage of NAS has received a favorable determination letter from the monthly premium paid by NAS (from 25% to the IRS on the qualification of this plan under Sec- 100%). The participant contribution is also based on tion 401(a) of the Internal Revenue Code. their date of retirement, length of service and choice of In addition, NAS has a voluntary employee contribution health insurance carrier. retirement plan that is funded solely by employee NAS has elected to recognize the initial postretirement contributions made on a pretax salary-reduction basis benefit obligation over a period of 20 years. The under Section 403(b) of the Internal Revenue Code. The accrued postretirement benefit obligation is reported in funding vehicles under the plan consist of group accrued employee benefits in the statements of financial investments issued by TIAA and CREF, as well as position. mutual funds issued by TIAA-CREF, Vanguard Fiduciary Trust Company, and other third-parties. Postretirement changes other than net periodic benefit cost are as follows (in thousands): Pension expense for the years ended December 31, 2011 and 2010, amounted to approximately $12.4 million and $12.0 million, respectively. The NAS policy is to fund 2011 2010 pension benefits as they are earned. The NAS normal Net actuarial loss $ 3,908 $ 424 retirement age is 60, but there is no mandatory age for Recognized net actuarial loss (214) (190) retirement. Recognized prior service cost (210) (210) Recognized net initial obligation (26) (26) (b) Deferred Compensation Total $ 3,458 $ (2) NAS holds long-term investments as part of a frozen deferred compensation arrangement for certain employ- ees. The fair value of these investments was approxi- Items not yet recognized as a component of net periodic mately $1.9 million and $2.3 million as of Decem- benefit cost at December 31, 2011 and 2010 are as ber 31, 2011 and 2010, respectively, which is reported follows (in thousands): within other assets in the statements of financial position. The related obligation is included in accrued 2011 2010 employee benefits in the statements of financial Net actuarial loss $ 7,441 $ 3,747 position. Prior service cost 722 932 Unrecognized net initial obligation 64 90 (c) Postretirement and Postemployment Benefits Total $ 8,227 $ 4,769 NAS provides certain health and life insurance benefits for employees retired due to length of service. All 59
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The estimated amounts, measured at year-end, that are The assumptions used to calculate the accumulated expected to be recognized in the net periodic benefit postretirement benefit obligation for the years ended cost over the next fiscal year for the postretirement December 31, 2011 and 2010 are as follows: benefit plan are as follows (in thousands): 2011 2010 2011 2010 Discount rate 4.50% 5.25% Prior service cost $ 210 $ 210 Recognized actuarial loss 692 302 Recognized net initial obligation 26 26 Total $ 928 $ 538 NAS postretirement benefit plan asset allocations at December 31, 2011 and 2010, by asset class are as follows: The following table presents the changes in benefit obligations, changes in plan assets, funded status, and 2011 2010 the components of net periodic benefit cost for the year ended December 31, 2011 and 2010 (in thousands): Cash 4% 5% Bonds and notes 34 38 2011 2010 Equity securities 62 57 Change in benefit obligations: 100% 100% Benefit obligation, January 1 $ 22,484 $ 19,914 Service cost 669 625 Interest cost 1,156 1,168 The investment objective of the Plan is to produce a rate Plan participants contributions 119 105 of return over the long term that will provide for fund Actuarial loss 2,188 1,307 growth, protect against the effect of inflation, and Benefits provided (678) (635) provide for some stability in different market environ- Benefits obligation, December 31 25,938 22,484 ments. The fund is diversified between fixed income and equity investments. With this diversification and Change in plan assets, combined: investment in broader market funds, there is reasonable Fair value of plan assets, January 1 20,185 17,701 assurance that no single security or class of securities Actual return on plan assets (205) 2,210 will have a disproportionate impact on the Plan assets. Employer contributions 849 891 The Plan assets are invested with a long-term growth Benefits paid (625) (617) strategy, with a 70% equity guideline. Fair value of plan assets, December 31 20,204 20,185 $ (5,734) $ (2,299) Funded status The overall long-term rate of return was developed by estimating the long-term real rate of return for the Components of net periodic benefit Plan’s asset mix, while taking into account the effects of cost: inflation. This estimate was developed by evaluating the Service cost $ 669 $ 625 history and similar asset allocation of the NAS Endow- Interest cost 1,156 1,168 ment. Expected return on plan assets (1,514) (1,328) Recognized prior service cost 210 210 The following table presents the fair value hierarchy for Recognized actuarial loss 214 190 the postretirement benefit plan assets at December 31, Recognized net initial obligation 26 26 2011 (in thousands): Net periodic benefit cost $ 761 $ 891 Fair Fair value measurements using Value Level 1 Level 2 Level 3 Financial Assets: The assumptions used to determine net periodic benefit Retiree Welfare Benefit Plan investments: cost for years ended December 31, 2011 and 2010 are as Cash equivalents $ 760 $ 760 $ - $ - follows: Bonds and notes U.S. treasuries/ 2011 2010 774 774 - - gov. bonds Discount rate 5.25% 6.00% Mortgage-backed 1,748 - 1,748 - securities Expected long-term return on plan assets 7.50 7.50 4,280 4,280 - - Corporate bonds 60
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The measurement date of the plan assets and benefit Fair Fair value measurements using obligations for 2011 and 2010 is December 31, 2011 (Continued) Value Level 1 Level 2 Level 3 and 2010, respectively. Equity securities U.S. small/mid 9,820 9.820 - - cap The trend rate for growth in healthcare costs used in Non-U.S. stocks calculating the accumulated postretirement benefit (developed obligation was 8.0% for under age 65 and 6.0% for over countries) 2,620 2,620 age 65 declining gradually to 5% in the year 2017 and Non-U.S. stocks (emerging 2013 for under age 65 and over age 65, respectively, for countries) 202 202 - - year ended December 31, 2011. The trend rate for Total investments $20,204 $18,456 $ 1,748 $ - growth in healthcare costs was 8.5% for under age 65 and 6.5% for over age 65 declining gradually to 5% in The following table presents the fair value hierarchy for the year 2017 and 2013 for under age 65 and over age the postretirement benefit plan assets at December 31, 65, respectively, for year ended December 31, 2010. 2010 (in thousands): 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 Fair Fair value measurements using Value Level 1 Level 2 Level 3 assumed healthcare cost trend rate at December 31, Financial Assets: 2011, would have resulted in an estimated $3.1 million Retiree Welfare Benefit Plan investments: increase or $2.5 million decrease in the postretirement Cash equivalents $ 1,034 $ 1,034 $ - $ - benefit obligation and an estimated $252,000 increase or Bonds and notes $205,000 decrease in the 2011 benefit expense. U.S. treasuries/ gov. bonds 2,395 2,395 - - The effect of a 1% change in the assumed healthcare Mortgage-backed cost trend rate at December 31, 2010, would have securities 1,294 - 1,294 - resulted in an estimated $2.4 million increase or Corporate bonds 3,879 3,879 - - $2.0 million decrease in the postretirement benefit Equity securities obligation and an estimated $226,000 increase or U.S. small/mid cap 9,823 9,823 - - $186,000 decrease in the 2010 benefit expense. Non-U.S. stocks (developed countries) 1,760 1,760 - - (16) CONDITIONAL ASSET Total investments $ 20,185 $18,891 $ 1,294 $ - RETIREMENT OBLIGATION The methods and assumptions used to estimate the fair NAS recorded an asset retirement obligation for which value of each class of financial instrument are further fair value of the liability could be reasonably estimated discussed in footnote 4, Fair Value Measurements. relating to the regulatory remediation of asbestos and other hazardous materials in one of its office buildings. NAS expects to contribute to the Plan the actuarially During 2010, NAS remediated a significant portion of determined net periodic cost for 2012, which is the asbestos and hazardous materials. During 2011, approximately $1,362,000. NAS remediated additional asbestos and hazardous materials with the remaining remediation expected to The following benefit payments, which reflect future occur in early 2012. NAS recognized a gain on the services, are expected to be paid in future years as settlement of the asset retirement obligation of $785,000 noted, as of December 31, 2011 (in thousands): for the year ended December 31, 2010, which is included in other income in the statement of activities. 2012 $ 953 For the years ended December 31, 2011 and 2010, NAS 2013 1,138 has a liability of $60,000 for the remaining remediation 2014 1,269 costs included in other long-term liabilities in the 2015 1,391 statements of financial position. 2016 1,433 2017-2021 7,846 $ 14,030 61
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Rental expense amounted to approximately $4.1 million (17) RELATED PARTY TRANSACTIONS and $3.0 million for the years ended December 31, 2011 and 2010, respectively. The NAS Council has authorized two agreements providing noninterest-bearing, collateralized advances During the year ended December 31, 2011, NAS to two employees in connection with the purchase of exercised an option to terminate one of its leases early. each employee’s residence. The agreements between the The lease was originally scheduled to end December 31, parties were executed in May 2005 and May 2007. They 2017, and under the revised agreement will end on each provide that the repayment obligation will be December 31, 2012. NAS’ obligation under the lease adjusted to allocate to each party its proportional share will terminate on that date. of the appreciation or depreciation in the value of the residence, which is based on the relative financing (b) Contingencies percentage provided by each party. The agreements will terminate upon pay-back of the advance, sale of the NAS receives a portion of its revenues directly or property, or the end of each individual’s employment indirectly from federal government grants and contracts, with NAS, which will not exceed 12 years. The all of which are subject to audit by the Defense Contract estimated present value of the receivables is Audit Agency, which has completed its examinations $3.0 million at December 31, 2011 and 2010, and is through December 31, 2005. A contingency exists included in other assets in the statements of financial relating to unexamined periods and final settlements of position. 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. (18) COMMITMENTS AND CONTINGENCIES (c) Litigation NAS is involved in one litigation matter. While the (a) Leases ultimate outcome of the litigation is uncertain, NAS NAS is committed to several noncancelable operating management believes that it has a strong legal position, leases for office space. Future minimum rental pay- intends to vigorously defend against any liability, and ments due under noncancelable operating leases are as has concluded that the probable outcome will not have a follows (in thousands): material impact on NAS. Years ending December 31: (19) SUBSEQUENT EVENT 2012 $ 2,234 2013 422 2014 435 NAS has evaluated subsequent events from the state- ment of financial position date through June 1, 2012, the 2015 448 date at which the financial statements were available to 2016 113 be issued, and determined that there are no other items $ 3,652 to disclose. 62