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Report of the Treasurer for the Year Ended December 31, 2012 (2013)

Chapter: III. Financial Condition

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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
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Auditing Committee

 

 

 

June 15, 2013

 

 

 

Dr. Ralph J. Cicerone
President
National Academy of Sciences

Dear Dr. Cicerone:

In accordance with paragraph 11 of section II of the Bylaws of the National Academy of Sciences, the firm of KPMG LLP was retained by the Auditing Committee on behalf of the Council to conduct an audit of the accounts of the Treasurer for the year ended December 31, 2012, and to report to the Auditing Committee.

The independent accountants have completed their audit and submitted their report. In accordance with paragraph 13 of section II of the Bylaws, the Auditing Committee has reviewed the report and recommends to the Council that it be accepted and that the opinion of the independent accountants be published with the report of the Treasurer.

 

Respectfully submitted,

 

Auditing Committee

 

 

 

 

 

THE NATIONAL ACADEMIES

Advisers to the Nation on Science, Engineering, and Medicine

2101 Constitution Avenue, NW Washington, DC 20418
Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
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KPMG LLP
Suite 12000
1801 K Street, NW
Washington, DC 20006

 

 

 

Independent Auditors’ Report

 

 

The Auditing Committee
National Academy of Sciences:

Report on the Financial Statements

We have audited the accompanying financial statements of the National Academy of Sciences (NAS), which comprise the statements of financial position as of December 31, 2012 and 2011, and the related statements of activities, and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to NAS’ preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of NAS’ internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

 

 

 

 

KPMG LLP is a Delaware limited liability partnership,
the U.S. member firm of KPMG International Cooperative
(“KPMG International”), a Swiss entity.

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

Opinion

In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of NAS as of December 31, 2012 and 2011, and the changes in its net assets and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

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May 17, 2013

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

NATIONAL ACADEMY OF SCIENCES
Statements of Financial Position
December 31, 2012 and 2011
(In thousands)

Assets       2012           2011    
Current assets:        

Cash and cash equivalents

$ 2,429     $ 1,433    

Short-term investments (note 3 and 4)

  60,691       54,312    

Contracts receivable

  87,321       92,410    

Contributions and other receivables, net (note 6)

  13,931       9,579    

Bond proceeds held with trustee (note 4 and 13)

  -       22,512    

Other current assets

  6,664       7,584    

Total current assets

  171,036       187,830    
             
Other assets (notes 2, 13, 15, and 17)   6,366       6,965    
Long-term investments (note 3 and 4)   413,560       392,025    
Contributions receivable, net (note 6)   14,950       20,902    
Property and equipment, net (notes 5 and 16)   180,790       159,651    
Einstein Memorial   1,723       1,723    

Total assets

$ 788,425     $     769,096    
         
Liabilities and Net Assets        

Liabilities:

       

Current liabilities:

       

Accounts payable and accrued expenses

$ 45,986     $ 59,192    

Deferred revenue (notes 7 and 12)

  31,703       33,097    

Lines of credit (note 8)

  35,069       20,885    

Other current liabilities (notes 13 and 14)

  5,238       4,330    

Total current liabilities

  117,996       117,504    
         

Bonds payable (note 13)

  175,507       178,962    

Funds held on behalf of others (note 3 and 4)

  10,006       9,185    

Accrued employee benefits (note 15)

  6,934       7,665    

Other long-term liabilities (notes 2, 13, and 16)

  14,783       15,516    

Total liabilities

  325,226       328,832    
         

Net assets:

       

Unrestricted

  90,167       83,259    

Temporarily restricted (note 9)

  247,348       235,004    

Permanently restricted (note 10)

  125,684       122,001    

Total net assets

  463,199       440,264    
         

Commitments and contingencies (notes 3, 12, 13, 15, 18, and 19)

       

Total liabilities and net assets

$ 788,425     $ 769,096    

See accompanying notes to financial statements.

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

 

NATIONAL ACADEMY OF SCIENCES
Statements of Activities
Years ended December 31, 2012 and 2011
(In thousands)

2012 2011
Unrestricted Temporarily restricted Permanently restricted Totals Unrestricted Temporarily restricted Permanently restricted Totals
Revenues, gains, and other support:
Government contracts and grants (note 12) $ 251,585 - - 251,585 $ 277,117 - - 277,117
Private contracts and grants 17,565 23,136 - 40,701 18,310 21,959 - 40,269
Other contributions 1,817 435 3,683 5,935 1,719 240 3,632 5,591
Fees and publications 17,631 - - 17,631 19,204 - - 19,204
Investment income (loss) (note 3) 11,651 29,578 - 41,229 (1,779) (18,949) - (20,728)
Other income (note 13) 13,114 - - 13,114 9,044 - - 9,044
Net assets released from restriction (note 9) 40,805 (40,805) - - 33,948 (33,948) - -
Total revenues, gains, and other support 354,168 12,344 3,683 370,195 357,563 (30,698) 3,632 330,497
Expenses (notes 13, 15, and 16):
Programs (note 11) 289,508 - - 289,508 309,305 - - 309,305
Management and general 56,109 - - 56,109 48,165 - - 48,165
Fundraising 2,355 - - 2,355 2,430 - - 2,430
Total expenses 347,972 - - 347,972 359,900 - - 359,900
Postretirement changes other than net periodic benefit cost (note 15) (712) - - (712) 3,458 - - 3,458
Change in net assets 6,908 12,344 3,683 22,935 (5,795) (30,698) 3,632 (32,861)
Net assets at beginning of year 83,259 235,004 122,001 440,264 89,054 265,702 118,369 473,125
Net assets at end of year $ 90,167 247,348 125,684 463,199 $ 83,259 235,004 122,001 440,264

See accompanying notes to financial statements.

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

 

NATIONAL ACADEMY OF SCIENCES
Statements of Cash Flows
Years ended December 31, 2012 and 2011
(In thousands)

  2012   2011

Cash flows from operating activities:

     

Change in net assets

$   22,935   $   (32,861)

Adjustments to reconcile change in net assets to net cash used in operating activities:

     

Depreciation and amortization

7,897   6,759

Loss on disposal of property and equipment

788   -

Bad debt expense

146   104

Net loss/(gain) on investments

(30,193)   36,264

Net loss/(gain) on investments held on behalf of others

(669)   951

Amounts collected on behalf of others

(4,178)   (3,828)

Amounts remitted on behalf of others

3,881   3,791

Change in value of interest rate swap

(495)   3,752

Change in value of split-interest agreements

70   (65)

Contributions restricted for construction or endowment

(3,014)   (5,665)

(Increase) decrease in assets:

     

Other receivables

1,454   4,572

Contracts receivable

5,089   (33,984)

Other current assets

920   (1,756)

Other assets

692   587

Increase (decrease) in liabilities:

     

Accounts payable and accrued expenses

(13,206)   12,076

Deferred revenue

(1,394)   5,090

Other current liabilities

(284)   (225)

Funds held on behalf of others

821   (733)

Other long-term liabilities

(217)   (1,438)

Accrued employee benefits

(731)   3,047

Net cash used in operating activities

(9,688)   (3,562)
       

Cash flows from investing activities:

     

Additions to property and equipment

(29,964)   (31,594)

Sales or maturities of investments

187,021   288,233

Purchases of investments

(183,920)   (291,726)

Net cash used in investing activities

(26,863)   (35,087)

Cash flows from financing activities:

     

Contributions restricted for construction or endowment

3,014   5,665

Proceeds from line of credit

181,868   147,518

Payments on line of credit

(167,684)   (136,633)

Payments on bank note

(63)   (694)

Payments on bond principal

(2,100)   (2,000)

Decrease in bond proceeds held by trustee

22,512   24,704

Net cash provided by financing activities

37,547   38,560

Net increase (decrease) in cash and cash equivalents

996   (89)

Cash and cash equivalents, beginning of year

1,433   1,522

Cash and cash equivalents, end of year

$     2,429   $     1,433
       

Supplemental disclosure of cash flow information:

     

Interest paid

$     5,303   $     5,429

See accompanying notes to financial statements.

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

NATIONAL ACADEMY OF SCIENCES
Notes to
Financial Statements
December 31, 2012 and 2011

(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:

 

•    Behavioral and Social Sciences and Education

•    Earth and Life Studies

•    Engineering and Physical Sciences

•    Policy and Global Affairs

•    Transportation Research Board

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.

(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 perpetuity by NAS. Generally, the donors of these assets permit NAS to use all or part of the income earned on related investments for general or specific purposes.

Temporarily restricted – Net assets subject to donor-imposed stipulations that may or will be met either by actions of NAS and/or the passage of time. When a donor

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets.

Unrestricted – Net assets arising from exchange transactions and contributions not subject to donor-imposed stipulations.

(b) Cash Equivalents

NAS reports liquid, temporary investments purchased with original maturities of three months or less as cash equivalents.

(c) Investments

Investments are stated at fair value. Changes in the fair value of investments are reported within investment income in the statements of activities.

Certain investments are pooled for long-term investment purposes. Investments in the pool are administered as an open-end investment trust, with shares of the pool funds expressed in terms of participating capital units (PCUs). PCU values are used to determine equity in the allocation of investment income among funds in the pool whenever additional funds are contributed or withdrawn.

(d) Contributions

Contributions, including unconditional promises to give, are recognized as revenues in the period received. Conditional promises to give are not recognized until all conditions are substantially met.

Gifts of land, buildings, or equipment are reported as unrestricted net assets unless explicit donor stipulations specify how the donated assets must be used. Temporary restrictions on gifts that must be used to acquire long-lived assets are released in the period in which the assets are acquired or placed in service.

Allowances are recorded for estimated uncollectible contributions based upon management’s judgment and analysis of the credit worthiness of the donor, past collection experience, and other relevant factors. Contributions to be received after one year are discounted at an appropriate rate commensurate with risks involved. Amortization of the discount is recorded as additional revenue and is used in accordance with donor-imposed restrictions, if any, on the contributions.

NAS performs certain fundraising activities on behalf of NAEF. NAS collected a total of $3.9 million and $3.5 million in 2012 and 2011, respectively, on behalf of NAEF. NAS disbursed $3.8 million and $3.7 million to NAEF from these collected amounts in 2012 and 2011, respectively. Amounts collected but not yet remitted to NAEF are included in other current liabilities in the statements of financial position.

(e) Contracts and Grants

The majority of NAS activities are performed under cost-reimbursable contracts with the U.S. government. For the years ended December 31, 2012 and 2011, the Department of Transportation provided 40% and 44%, respectively, of NAS government grant and contract revenue.

NAS records federal contracts as exchange transactions, recognizing revenue as recoverable costs are incurred.

Revenues from nonfederal grants qualifying as contributions are recorded by NAS upon notification of the grant award. Such grants are classified as temporarily restricted net assets when use of the grant funds is limited to specific areas of study or is designated for use in future periods.

Contracts receivable consisted of $33.7 million of billed receivables and $53.6 million of unbilled receivables as of December 31, 2012. Contracts receivable consisted of $28.7 million of billed receivables and $63.7 million of unbilled receivables as of December 31, 2011.

(f) Deferred Revenue

For both federal and nonfederal grants and contracts that are determined to be exchange transactions, revenue is recognized as the related costs are incurred. Funds received in advance of being earned for these grants are recorded as deferred revenue in the statements of financial position.

(g) Inventories

Inventories are stated at the lower of cost or net realizable value and include both work in-process and finished goods related to publication activities. The majority of NAS publication inventories and supplies reside with an NAS unit, the National Academy Press (NAP). NAP uses the full absorption costing methodology in pricing finished products. This methodology includes direct printing and related indirect costs. Inventories are included in other current assets in the statements of financial position.

(h) Property and Equipment

Depreciation of NAS buildings and equipment is computed on a straight-line basis using the following lives:

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

Asset Class

 

Depreciable Lives

Buildings

 

40 years

Buildings and leasehold improvements

 

Lesser of the remaining life of the building or improvement

Furniture and equipment

 

4 to 10 years

Capitalized software

 

3 to 10 years

The Einstein Memorial sculpture is valued at cost and is not depreciated. Construction-in-progress is not depreciated until the related assets are placed in service. Capitalized software is amortized over its depreciable life when it is ready for its intended use and placed in service.

(i) Split-Interest Agreements

Charitable gift annuity agreements are classified as other assets and other long-term liabilities in the statements of 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 the assets is available for use by NAS as restricted or unrestricted assets in accordance with the donor’s designation. At December 31, 2012 and 2011, NAS had charitable gift annuity assets of $2.1 million and $2.0 million, respectively. NAS has recorded a liability of $1.3 million and $1.3 million at December 31, 2012 and 2011, respectively, representing the present value of estimated future cash payments to annuitants based on the annuitant’s life expectancy.

(j) Income Taxes

NAS is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code, except for unrelated business income. NAS recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. NAS does not believe its financial statements include any uncertain tax positions.

(k) Risks and Uncertainties

NAS invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported.

(l) Recently Adopted Accounting Pronouncements

Effective December 31, 2012, NAS applied the guidance in Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This update provides guidance on how fair value measurement should be applied where existing GAAP already requires or permits fair value measurements. In addition, this guidance requires expanded disclosures regarding fair value measurements. The adoption of the measurement guidance did not have a material impact on the financial statements.

(m) Use of Estimates

The preparation of these financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures in the financial statements. Actual results could differ from those estimates.

(n) Reclassifications

Certain amounts from the prior year have been reclassified to conform to the current year presentation.

(3) INVESTMENTS

Investments, which are reported at fair value (except as noted), consisted of the following as of December 31, 2012 and 2011 (in thousands):

  2012 2011

Short-term investments:

   

Cash equivalents

$  5,520 $  12,779

Bonds and notes

45,269 32,129

Equity

9,902 9,404

Total short-term investments

$  60,691 $  54,312
     

Long-term investments:

   

Investment pool, including endowment assets:

   

Cash equivalents

$  5,413 $  28,429

Bonds and notes

23,302 38,902

Equity

259,788 207,239

Hedge funds

66,790 52,051

Private equity

20,657 25,555
  375,950 352,176

Other long-term investments:

   

Cash equivalents

1,549 882

Bonds and notes

17,163 17,483

Equity

18,898 21,484
  37,610 39,849

Total long-term investments

$  413,560 $  392,025
Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

NAS holds alternative investments, comprised of private equity securities and hedge funds, in its long-term investment pool. At December 31, 2012 and 2011, these funds had a fair value of approximately $130.4 million and $110.8 million, respectively. The hedge funds had an unrealized gain of approximately $5.0 million for the year ended December 31, 2012 and an unrealized loss of approximately $2.3 million for the year ended December 31, 2011. The unrealized gain or loss is included as a component of investment income in the accompanying statements of activities. Private equity investments are comprised of limited partnership interests.

TNAC, a related entity, invests certain of its assets in the NAS long-term investment pool. TNAC investments participate in the investment pool proportionally with all other funds in this pool.

The NAS obligation to TNAC for these funds held in trust, which totaled approximately $10.0 million and $9.2 million as of December 31, 2012 and 2011, respectively, is reported as funds held on behalf of others in the statements of financial position.

Investment income is reported net of investment expenses of approximately $699,000 and $599,000 for the years ended December 31, 2012 and 2011, respectively, and is comprised of the following (in thousands):

  2012 2011

Interest and dividends income

$         11,036 $         15,536

Net gain/(loss) on investments

30,193 (36,264)

Total investment income (loss)

$         41,229 $      (20,728)

(4) FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC Topic 820 establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liabilities.

The following discussion describes the valuation methodologies used for financial assets measured at fair value. The techniques utilized in estimating the fair values are affected by the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. Care should be exercised in deriving conclusions about NAS’ business, its value or financial position based on the fair value information of financial assets presented below.

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial asset, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial asset. Furthermore, the disclosed fair values do not reflect any premium or discount that could result from 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 settlement are not reflected in amounts disclosed.

The following methods, assumptions, and inputs were used to estimate the fair value of each class of financial instruments:

The carrying value of cash equivalents such as money market funds approximates the fair value because of the short maturity of these investments. These amounts are disclosed in Level 1.

NAS’ fixed maturity investments (bonds and notes), other than U.S. Treasury securities, generally do not trade on a daily basis. The fair value estimates of such debt securities are based on prices provided by NAS’ investment managers and custodian bank. Both the investment managers and the custodian bank use a variety of pricing sources to determine market valuations. Each designate specific pricing services or indexes for each sector of the market based upon the provider’s expertise. NAS’ debt securities portfolio is highly liquid, which allows for a high percentage of the portfolio to be priced through pricing services. Accordingly, the estimates of fair value for such debt securities are included in Level 2 inputs. The estimated values of U.S. Treasury securities are based on actively traded market prices and are accordingly included in the bonds and notes amount in Level 1.

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

Fair values of exchange-traded equity securities have been determined by NAS from observable market quotations on major trade exchanges. Accordingly, such equity securities are disclosed in Level 1.

NAS also invests in debt and equity mutual funds. For purposes of the fair value disclosure, mutual funds are presented based on the class of the underlying investment holdings. The fair values of such mutual funds are based on observable market information from active markets. Accordingly, the estimates of fair value for such mutual funds are included in Level 1.

Fair value of alternative investments including private equity securities and hedge funds is based on the alternative investment fund managers’ net asset value (NAV). For purposes of the fair value disclosure, long-short equity hedge funds are presented based on the class of the underlying equity exposure. Valuations provided by alternative investment fund managers include estimates, appraisals, assumptions and methods that are reviewed by management. When necessary, NAS adjusts NAV for contributions and distributions subsequent to the latest NAV valuation date when calculating fair value. NAS analyzes the NAVs provided by alternative investment fund managers on a regular basis considering relevant economic and market conditions, applicable benchmarks and our understanding of the nature and related risks of the investments. Since the most significant valuation inputs are not observable in the marketplace, the alternative investment valuations are disclosed in Level 2 or Level 3. The distinction is that those funds which are available for redemption in the near term at NAV are included in Level 2.

Funds on deposit with trustee are held in U.S. Treasury securities or funds of U.S. Treasury securities and therefore included in Level 1. Charitable gift annuity investments and deferred compensation investments are held in debt and equity mutual funds along with some U.S. Treasury securities, all of which are included in Level 1. The deferred compensation obligation to employees is equal to the fair value of the investments held and is disclosed in the same levels as the investment assets.

NAS has interest rate swap agreements covering the variable-rate bonds payable. The fair value of the swaps are determined using pricing models based on observable market data such as prices of instruments with similar maturities and characteristics, interest rate yield curves, and measures of interest rate volatility. The value was determined after considering the potential impact of collateralization and netting agreements, adjusted to reflect nonperformance risk of both the counterparty and NAS. Accordingly, the interest rate swaps are included in Level 2.

The funds held on behalf of others liability approximates the investments held in NAS’ long-term investment pool on behalf of TNAC. Therefore, the liability is disclosed in the same levels as the investment assets.

NAS’ policy is to recognize transfers between levels of the fair value hierarchy as of the end of the reporting period in which the event or change in circumstances occurred. During 2012, there were no transfers among levels. During 2011, certain investments were transferred from Level 3 to Level 2 due to the expiration of lock up periods allowing for redemption in the near term.

The following table presents NAS’ fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis at December 31, 2012 (in thousands):

Fair value Fair value measurements using
Level 1 Level 2 Level 3
Financial Assets:
Short-term and long-term investments:
Cash equivalents $ 12,482 $ 12,482 $ - $ -
Bonds and notes
U.S. treasuries/government bonds 7,610 7,610 - -
Mortgage-backed securities 31,946 1,020 30,926 -
Corporate bonds 23,935 12,458 11,477 -
Non-U.S. fixed income 22,243 22,243 - -
Equity
U.S. large equity 104,008 70,411 24,768 8,829
U.S. small/mid equity 46,789 46,789 - -
Non-U.S. equity (developed) 74,407 65,040 9,367 -
Non-U.S. equity (emerging) 50,007 50,007 - -
Real estate 13,377 13,377 - -
Hedge funds
Fund of funds – multi-strategies 27,175 - 27,175 -
Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×
Fair value Fair value measurements using
Level 1 Level 2 Level 3
Multi-strategies/multi-vehicle 35,170 - 22,965 12,205
Fixed income single strategy 4,445 - 4,445 -
Private equity
Asia 16,360 - - 16,360
Global 2,999 - - 2,999
Domestic 1,298 - - 1,298
Total short-term and long-term investments 474,251 301,437 131,123 41,691
Charitable gift annuity assets:
Cash equivalents 39 39 - -
Bonds and notes
U.S. treasuries/government bonds 153 153 - -
Mortgage-backed securities 340 340 - -
Corporate bonds 105 105 - -
Equity
U.S. small/mid equity 1,477 1,477 - -
Total charitable gift annuity assets 2,114 2,114 - -
Deferred compensation assets:
Cash equivalents 61 61 - -
Bonds and notes
Corporate bonds 344 344 - -
Equity
U.S. large equity 169 169 - -
U.S. small/mid equity 967 967 - -
Non-U.S. equity (developed) 231 231 - -
Total deferred compensation assets 1,772 1,772 - -
Total financial assets $ 478,137 $ 305,323 $ 131,123 $ 41,691
Financial Liabilities:
Funds held on behalf of others $ 10,006 $ 6,535 $ 2,361 $ 1,110
Deferred compensation liability 1,806 1,806 - -
Interest rate swaps 13,589 - 13,589 -
Total financial liabilities $ 25,401 $ 8,341 $ 15,950 $ 1,110

The following table presents NAS’ fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis at December 31, 2011 (in thousands):

Fair value Fair value measurements using
Level 1 Level 2 Level 3
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
U.S. large equity 70,157 47,994 14,438 7,725
U.S. small/mid equity 43,441 43,441 - -
Non-U.S. equity (developed) 65,019 57,056 7,963 -
Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×
Fair value Fair value measurements using
Level 1 Level 2 Level 3
Non-U.S. equity (emerging) 47,794 44,653 3,141 -
Real estate 11,716 11,716 - -
Hedge funds
Fund of fund – multi-strategies 26,540 - 26,540 -
Multi-strategies/multi-vehicle 23,063 - 11,840 11,223
Fixed income single strategy 2,448 - 2,448 -
Private equity
Asia 20,450 - - 20,450
Global 3,560 - - 3,560
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
U.S. small/mid equity 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
U.S. large equity 187 187 - -
U.S. small/mid equity 1,002 1,002 - -
Non-U.S. equity (developed) 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
Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

The following table presents the changes in Level 3 assets measured at fair value on a recurring basis for the year ended December 31, 2012 (in thousands):

Balance beginning of year Net gain (loss) on investments Purchases Sales Transfers out of level 3 Balance end of year
Equity:
U.S. large equity $ 7,725 $ 1,104 $ - $ - $ - $ 8,829
Hedge funds:
Multi-strategies/multi-vehicle 11,223 982 - - - 12,205
Private equity:
Asia 20,450 (3,836) 967 (1,221) - 16,360
Global 3,560 (23) - (538) - 2,999
Domestic 1,545 (109) - (138) - 1,298
$ 44,503 $ (1,882) $ 967 $ (1,897) $ - $ 41,691

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 beginning of year Net gain (loss) on investments Purchases Sales Transfers out of level 3 Balance end of year
Equity:
U.S. large equity $ 6,716 $ (1,491) $ 2,500 $ - $ - $ 7,725
Non-U.S. equity (developed) 6,770 (1,307) 2,500 - (7,963) -
Hedge funds:
Multi-strategies/multi-vehicle 11,028 195 - - - 11,223
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 nature and risk of assets with fair values estimated using NAV held at December 31, 2012 (in thousands):

Fair value Unfunded commitments Redemption frequency Redemption notice period
U.S. large equity (a) $ 33,597 N/A Quarterly/Annually 45 days/365 days
Non- U.S. equity (developed) (b) 9,367 N/A Monthly 45 days
Fund of hedge funds – multi-strategies (c) 27,175 N/A Quarterly 90 days
Hedge fund – multi-strategies/multi-vehicle (d) 35,170 N/A Quarterly/Annually 45 days/365 days
Hedge fund – fixed income single strategy (e) 4,445 N/A Quarterly 30 days
Private equity – Asia (f) 16,360 5,770 N/A N/A
Private equity – Global (g) 2,999 234 N/A N/A
Private equity – Domestic (h) 1,298 303 N/A N/A
Total $ 130,411 $ 6,307

Notes:

(a) This category relates to long-short equity hedge funds comprised of equity investments in U.S. large cap. Each of these funds buys investments long and sells short with the ability to use leverage. These funds can also invest in derivative instruments such as forward, futures and option contracts. The fair values of the investments in this category have been estimated using the net asset value per share of the investments. Approximately $24.8 million of investments in this category is redeemable within the near term from December 31, 2012.

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

(b) This category relates to a long-short equity hedge fund comprised of equity investments in Non-U.S. developed countries. This fund buys investments long and sells short with the ability to use leverage. This fund can also invest in derivative instruments such as forward, futures and option contracts. The fair value of the investment in this category has been estimated using the net asset value per share of the investment. Approximately $9.4 million of investment in this category is redeemable within the near term from December 31, 2012.

(c) This class includes investments in funds of hedge funds that use multiple strategies to obtain total returns on a leveraged basis. Direct and indirect investments are made using equity long/short, event driven, relative value, and tactical trading strategies. The funds have investments in multiple investees which may trade various financial instruments such as, but not limited to, securities sold short, futures, forwards, swaps, and written options. The fair values of the investments in this class have been estimated using the NAV per share of the investments.

(d) This class includes investments in multi-strategy, multi-vehicle hedge funds with the objective of maximizing long-term, risk-adjusted returns and capital appreciation by investing in securities, investment funds, discretionary accounts, and investment partnerships across a broad range of marketable and alternative asset classes. Asset classes include domestic and international marketable equity securities, hedged equity, real estate, natural resource, fixed income, and private equity and absolute return strategies, primarily focused in the United States. The fair values of the investments in this class have been estimated using the NAV per share of the investments.

(e) This class includes investments in a single strategy hedge fund focused on undervalued fixed income securities. Investments held by this fund consist of U.S. government agency mortgage-backed securities and derivatives, primarily in the form of collateralized mortgage obligations. Securities are generally held in the portfolio as long as interest rates and repayment rates are unfolding as anticipated. The majority of the investment return is expected to come from trading mortgage-backed securities in an attempt to maximize interest income. The fair values of the investments in this class have been estimated using the NAV per share of the investments.

(f) This class includes several private equity funds that invest in equity, debt or debt-oriented instruments, primarily in privately held companies which own or contractually control operating entities located in the People’s Republic of China and India. Investments held in India primarily include equity securities of “early to early growth stage” companies in multiple sectors, except real estate. The fair values of these investments have been estimated using the NAV of NAS’ ownership interest in partners’ capital. These investments can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over 1 to 10 years.

(g) This class includes several global private equity funds with diverse portfolios consisting primarily of venture capital funds, leveraged buyout funds, mid-stage growth capital funds, and international private equity funds. These investments are focused on several industries including, but not limited to, insurance, services, and consumer-related industries. The fair values of these investments have been estimated using the NAV of NAS’ ownership interest in partners’ capital. These investments can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over 1 to 3 years.

(h) This class includes several domestic private equity funds which make investments in domestic equity securities, warrants or other securities that are generally not actively traded at the time of investment. These investments are focused on several industries including, but not limited to, insurance, financial services, consumer-related, and communications. The fair values of these investments have been estimated using the NAV of NAS’ ownership interest in partners’ capital. These investments can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over 1 year.

(5) PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2012 and 2011, is comprised of the following (in thousands):

  2012    2011   

Land

$  29,689 $  29,689

Furniture and equipment

31,167 31,298

Buildings and improvements

174,395 109,631

Capitalized software

13,291 11,631

Construction in progress

312 41,921

Leasehold improvements

3,327 4,701
  252,181 228,871

Less accumulated depreciation and amortization

(71,391) (69,220)

Total property and equipment, net

$   180,790 $   159,651
Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

(6) CONTRIBUTIONS RECEIVABLE

Contributions not yet collected are included in contributions and other receivables (current) and contributions receivable (long-term) in the statements of financial position, and mature as follows (in thousands):

Year ending December 31:

 

Less than one year

$         11,733

One to five years

15,844
  27,577

Less:

 

Discount at rates from 0.73% to 6.75% to estimated net present value

(894)

Allowance for uncollectible contributions

(845)
  25,838

Less current portion

(10,888)

Total contributions receivable, long-term

$         14,950

At December 31, 2011, the discount on contributions receivable was approximately $1.5 million at rates ranging from 1.20% to 6.75% and the allowance for uncollectible contributions was approximately $700,000.

(7) DEFERRED REVENUE

Deferred revenue consisted of the following as of December 31, 2012 and 2011 (in thousands):

  2012 2011

Advances from private grants and contract sponsors

$16,767 $15,771

Advances from U.S. government sponsors

8,368 12,539

Publication subscriptions and other

6,568 4,787

Total deferred revenue

$31,703 $33,097

(8) LINES OF CREDIT

Until December 2012, NAS was party to a $34 million unsecured line of credit from Bank of America, which bore interest at LIBOR plus 0.65%. NAS was also party to a $15 million unsecured line of credit from Wells Fargo, which bore interest at LIBOR plus 0.65%.

In December 2012, NAS terminated the lines of credit with Bank of America and Wells Fargo and entered into two new line of credit agreements. Under the new lines of credit, NAS is party to a $35 million line of credit from Wells Fargo, which bears interest at LIBOR plus 0.55% and expires on December 3, 2013, and a $15 million line of credit from TD Bank, which bears interest at LIBOR plus 0.65% and expires on August 31, 2013. NAS has pledged and granted to each bank a security interest in NAS’ gross revenues.

Interest expense related to the lines of credit for the years ended December 31, 2012 and 2011, was approximately $213,000 and $216,000, respectively.

(9) TEMPORARILY RESTRICTED NET ASSETS

Temporarily restricted net assets were available for the following purposes as of December 31, 2012 and 2011 (in thousands):

  2012 2011

Sponsored research and advisory programs

$143,984 $140,134

General endowment

74,007 68,311

Prizes and awards

26,334 23,881

Woods Hole facility

3,023 2,678

Total temporarily restricted net assets

$247,348 $235,004

Temporarily restricted net assets were released from restriction for the following purposes during the years ended December 31, 2012 and 2011 (in thousands):

  2012 2011

Sponsored research and advisory programs

$  35,561 $  28,205

General endowment

4,203 4,532

Prizes and awards

779 934

Woods Hole facility

262 277

Total temporarily restricted net assets released from restriction

$  40,805 $  33,948

(10) ENDOWMENT

(a) Permanently Restricted Net Assets

The income generated by permanently restricted net assets is available to support donor-specified programs. As of December 31, 2012 and 2011, NAS held the following permanently restricted net assets, classified by the purpose for which the income is to be used (in thousands):

  2012 2011

Sponsored research and advisory programs

$  84,505 $  80,972

General Endowment

32,524 32,374

Prizes and awards

5,116 5,116

Woods Hole facility

3,539 3,539

Total permanently restricted net assets

$  125,684 $  122,001
Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

(b) Endowment Assets

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 endowment funds. The investments of the endowment are included in the NAS long-term investment pool, as described in note 3.

Interpretation of Relevant Law

NAS has interpreted the District of Columbia “Uniform Prudent Management of Institutional Funds Act of 2007” (the Act) as requiring NAS, absent explicit donor stipulations to the contrary, to act in good faith and with the care that an ordinarily prudent person in a like position would exercise under similar circumstances in making determinations to appropriate or accumulate endowment funds, taking into account both its obligation to preserve the value of the endowment and its obligation to use the endowment to achieve the purposes for which it was donated. NAS classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment required by the applicable donor gift instrument. The remaining portion of donor-restricted endowment funds that are not classified as permanently restricted are classified as temporarily restricted net assets until those amounts are appropriated for expenditure by NAS. In making a determination to appropriate or accumulate, NAS adheres to the standard of prudence prescribed by the Act and considers the following factors:

 

(1)   The duration and preservation of the endowment fund;

(2)   The purposes of the institution and the endowment fund;

(3)   General economic conditions;

(4)   The possible effect of inflation or deflation;

(5)   The expected total return from income and the appreciation of investments;

(6)   Other resources of the institution; and

(7)   The investment policy of the institution.

Return Objectives and Strategies

NAS has adopted an investment and spending policy for endowment assets that is designed to provide a predictable stream of funding to programs supported by the endowment while seeking to protect the real purchasing power of the assets from inflation. Accordingly, NAS has adopted guidelines which feature a material commitment to equity and equity-like investments.

The asset allocation guidelines are as follows:

Asset category Guideline percentage

U.S. large equity

19%       

U.S. small/mid cap equity

9       

Non-U.S. equity (developed)

20       

Non-U.S. equity (emerging)

15       

Real estate

3       

Total equity

66       
   

U.S. fixed income/cash

9       

Non-U.S. fixed income

5       

Total fixed

14       
   

Multi-strategy and private equity funds

20       

Total

100%       

NAS has adopted a spending policy that limits the annual spending to 5% of the three-year average fair value of the participating funds in the endowment portfolio. This is consistent with NAS’ objective to maintain the purchasing power of the endowment assets held in perpetuity as well as to provide additional real growth through new gifts and investment return.

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

Changes in endowment assets for the fiscal year ended December 31, 2012 are as follows (in thousands):

Unrestricted Temporarily restricted Permanently restricted Total
Endowment assets, beginning of year $ (160) $ 155,031 $ 119,817 $ 274,688
Investment return:
Interest and dividend income - 7,262 - 7,262
Net gain on investments 158 19,459 - 19,617
Total investment return 158 26,721 - 26,879
Contributions - - 3,014 3,014
Amounts appropriated for expenditure - (10,681) - (10,681)
Other changes:
2011 appropriation expended in 2012 - (5,066) - (5,066)
Unspent purpose restricted appropriations - 5,864 - 5,864
Accrued expenses withdrawn in 2013 - 260 - 260
Endowment assets, end of year $ (2) $ 172,129 $ 122,831 $ 294,958

Changes in endowment assets for the fiscal year ended December 31, 2011 are as follows (in thousands):

Unrestricted Temporarily restricted Permanently restricted Total
Endowment assets, beginning of year $ - $ 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)
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, end of year $ (160) $ 155,031 $ 119,817 $ 274,688

Funds with Deficiencies

From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the original value of the gift donated to the permanent endowment. Deficiencies of this nature are reported as unrestricted net assets. At December 31, 2012, there was one endowment fund with a fair value below the original value of the gift. At December 31, 2011, there were three endowment funds with a fair value below the original value of the gift. These deficiencies were primarily a result of unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions. Subsequent gains that restore the fair value of the assets of the endowment fund to the required level are classified as an increase in unrestricted net assets.

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

(11) PROGRAM EXPENSES

Program expenses for the years ended December 31, 2012 and 2011 are summarized as follows (in thousands):

  2012 2011

Transportation Research Board

$100,840 $126,172

Policy and Global Affairs

66,521 58,527

Institute of Medicine

45,779 37,459

Earth and Life Studies

17,688 21,720

Engineering and Physical Sciences

17,828 20,380

Behavioral and Social Sciences and Education

10,825 11,775

Proceedings of the National Academy of Sciences

12,968 12,370

National Academy Press

3,096 3,964

National Academy of Engineering

3,879 3,614

Koshland Science Museum

2,307 2,316

NAS

7,777 11,008

Total program expenses

$289,508 $309,305

(12) RECOVERY OF INDIRECT COSTS

NAS receives indirect cost recovery on its federal contracts and grants. An overhead assessment is applied to direct salaries, accrued leave, fringe benefits, and services provided by outside contractors (e.g., temporary personnel agencies, consultants) on NAS property. A general and administrative assessment (G&A) is applied to direct costs and overhead less subcontract costs and stipends. Therefore, both the overhead and G&A rates are applied to projects incurring direct salaries and other direct costs such as travel. If a program does not require direct salaries, such as a travel grant program, a subcontract/flow-through administration rate is applied. Certain off-site work (not performed on NAS property) is assessed reduced overhead rates.

NAS bills for indirect cost recovery throughout the year based on negotiated rates. At the end of each year, NAS compares actual expenses incurred in each of its cost pools to the amounts recovered based on its billing rates. The difference is recorded as its indirect cost carryforward. If NAS over recovers on its indirect costs during the year, a liability is recorded. If NAS under recovers, a receivable is recorded.

NAS has a cumulative net overrecovery of approximately $5.1 million and $9.9 million as of December 31, 2012 and 2011, respectively. The overrecovery is included in the deferred revenue balance in the statements of financial position.

(13) BUILDING PROJECT AND FINANCING

(a) Building Project Revenue Bonds

In January 1999, the District of Columbia issued Series 1999A, Series 1999B, and Series 1999C tax-exempt revenue bonds on behalf of NAS. Proceeds from the sale of the revenue bonds financed the cost of the acquisition of 44,250 square feet of land and related construction of an office building, as well as paid certain costs of issuing the bonds. This building consolidates most of NAS’ program activities into one location.

In June 2008, the District of Columbia issued Series 2008A tax-exempt revenue bonds in the amount of $66,325,000 on behalf of NAS. The proceeds were used to refund the Series 1999B and Series 1999C revenue bonds, as well as pay certain costs of issuing the bonds.

In April 2009, the District of Columbia issued Series 2009A tax-exempt revenue bonds in the amount of $57,500,000 on behalf of NAS. The proceeds were used to refund the Series 1999A revenue bonds, as well as pay certain costs of issuing the bonds.

In May 2010, the District of Columbia issued Series 2010A tax-exempt revenue bonds in the amount of $59,550,000 on behalf of NAS. These bonds were sold to finance the cost to restore the NAS headquarters building on Constitution Avenue in Washington, D.C. and pay for certain costs of issuance. The restoration was completed in 2012.

The bond proceeds were held by a Trustee and invested in U.S. government obligations or funds of U.S. government obligations. The Trustee reimbursed NAS and third-party vendors for expenditures related to the restoration project.

In December 2012, NAS remarketed the Series 2008A and 2009A bonds as direct bank purchases. The Series 2008A bonds were purchased by Wells Fargo Municipal Capital Strategies LLC; the Series 2009A bonds were purchased by TD Bank, N.A. Both agreements stipulate mandatory repurchase in December 2020 at which point NAS could renew the direct purchase agreements, remarket the bonds, or repurchase the bonds.

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

NAS is obligated under the revenue bonds as follows (in thousands):

  2012 2011

Series 2008A revenue bonds, term, at flexible rates (0.3% in 2012 and 0.2% in 2011) maturing at various dates from January 1, 2013 through 2039

$  66,325 $  66,325

Series 2009A revenue bonds, term, at flexible rates (0.3% in 2012 and 0.3% in 2011) maturing at various dates from January 1, 2012 through 2028

52,120 54,220

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

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

Total bonds, at face value

177,995 180,095

Plus unamortized premium

967 1,108
     

Total bonds payable

178,962 181,203

Less current portion (included in other current liabilities)

(3,455) (2,241)

Bonds payable, long-term

$  175,507 $  178,962

The serial and term bonds represent unsecured general obligations of NAS.

Interest on the 2008A and 2009A bonds is payable monthly. Interest on the 2010A bonds is payable semiannually every April 1 and October 1.

The term bonds maturing on April 1, 2035, and April 1, 2040, are subject to mandatory redemption by operation of sinking fund installments. Installment payments for the term bond maturing April 1, 2035, begin on April 1, 2031, and range from $2.4 to $2.9 million per year through the maturity date. Installment payments for the term bond maturing April 1, 2040, begin on April 1, 2036, and range from $3.1 to $3.8 million per year through the maturity date.

Scheduled maturities and sinking fund requirements are as follows (in thousands):

Years ending December 31:

 

2013

$         3,325

2014

3,475

2015

3,645

2016

3,820

2017

4,005

Thereafter

159,725
  $         177,995

The carrying value of bonds payable in the financial statements was approximately $5.2 million and $2.5 million less than fair value as of December 31, 2012 and 2011, respectively. NAS estimated the fair value of bonds payable through valuations provided by an independent financial institution. If measured at fair value in the statement of financial position, the bonds payable would be categorized as Level 2 in the fair value hierarchy.

Interest expense on the bonds payable for 2012 and 2011 totaled $2.9 million and $2.9 million, respectively. Of this amount, $1.1 million and $2.4 million was capitalized as part of the building restoration project for 2012 and 2011, respectively.

(b) Interest Rate Swaps

In October 1999, NAS entered into a swap agreement, with an effective date of February 1, 2000, relating to the $66 million face amount of its Series 1999A revenue bonds. The agreement provides for NAS to receive 4.97% in interest on a notional amount of $65 million and to pay interest at a floating rate option based on the weekly interest rate resets of tax-exempt variable-rate issues per the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index. NAS amended the agreement for the 2005 – 2020 period by agreeing to give up the benefit of any 30-day period during which the SIFMA index remains below 2.25% for the entire 30 days. Each time this occurs, the rate on the swap portfolio reverts to the fixed rate noted above for that month only.

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

NAS entered into this fixed-to-variable swap agreement to manage its exposure to interest rate changes. The fixed-rate debt obligations exposed NAS to variability in the cost recovery stream due to changes in interest rates. NAS recovers the costs of borrowing through a capital investment incentive rate that is set by the U.S. government and is tied to a variable index. If interest rates increase, the capital investment incentive recovery increases.

Conversely, if interest rates decrease, the capital investment incentive recovery decreases. Therefore, NAS entered into a derivative instrument that ties the fixed-rate debt to a variable index to manage fluctuations in cash flows resulting from interest rate risk. By using derivative financial instruments to hedge exposures to changes in interest rates, NAS exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes NAS, which creates credit risk for NAS. When the fair value of a derivative contract is negative, NAS owes the counterparty, and therefore, it does not possess credit risk. NAS minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties.

In May 2009, NAS entered into an additional swap agreement as a result of a counterparty exercising a swaption related to the Series 1999A Revenue Bonds. The variable-to-fixed swap requires NAS to pay 5.00% on a notional amount of $55 million and to receive a floating rate equal to 67% of 1-month LIBOR plus 0.41%.

NAS entered into this variable-to-fixed swap agreement in order to preserve the synthetic variable rate achieved through the 1999 swap agreement once the fixed-rate Series 1999A bonds were refunded with the variable-rate Series 2009A bonds.

With regard to the fixed-to-variable interest rate swap, NAS recorded a gain on the change in the fair value of its swap agreement of $163,000 and $20,000, for the years ended December 31, 2012 and 2011, respectively, which is included in other income in the accompanying statements of activities. The fair value of the interest rate swap was recorded as an asset of $201,000 and $37,000 as of December 31, 2012 and 2011, respectively, and is included in other assets in the statements of financial position.

Pertaining to the swaption and resultant variable-to-fixed interest rate swap, NAS recorded a gain on the change in the fair value of approximately $516,000 for the year ended December 31, 2012 and a loss of approximately $3.6 million for the year ended December 31, 2011. The gain and loss, respectively, are included in other income in the statements of activities. The fair value of the swap is recorded as a liability of approximately $13.6 million and $14.1 million as of December 31, 2012 and 2011, respectively, and is included in other current liabilities and other long-term liabilities.

(14) NOTE PAYABLE

During 2006, NAS entered into a loan agreement with Bank of America for an amount up to $5 million. The principal balance of this note was payable in equal monthly installments until January 1, 2012. There was no outstanding principal balance due on the note as of December 31, 2012. On December 31, 2011, the principal balance was approximately $0.1 million. The note bore interest at 30-day LIBOR plus 40 basis points. The interest rate at December 31, 2011 was 0.69%.

(15) EMPLOYEE BENEFITS

(a) Retirement Plans

NAS has a noncontributory defined contribution retirement plan covering substantially all of its employees (based on certain benefit eligibility requirements). The funding vehicles under the plan consist of group investments issued by Teachers Insurance and Annuity Association (TIAA) and College Retirement Equities Fund (CREF), known collectively as TIAA-CREF, as well as mutual funds issued by TIAA-CREF, Vanguard Fiduciary Trust Company, and other third-parties. Participants in this plan vest immediately. NAS has received a favorable determination letter from the IRS on the qualification of this plan under Section 401(a) of the Internal Revenue Code.

In addition, NAS has a voluntary employee contribution retirement plan that is funded solely by employee contributions made on a pretax salary-reduction basis under Section 403(b) of the Internal Revenue Code. The funding vehicles under the plan consist of group investments issued by TIAA and CREF, as well as mutual funds issued by TIAA-CREF, Vanguard Fiduciary Trust Company, and other third-parties.

Pension expense for the years ended December 31, 2012 and 2011, amounted to approximately $12.6 million and $12.4 million, respectively. The NAS policy is to fund pension benefits as they are earned. The NAS normal

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

retirement age is 60, but there is no mandatory age for retirement.

(b) Deferred Compensation

NAS holds long-term investments as part of a frozen deferred compensation arrangement for certain employees. The fair value of these investments was approximately $1.8 million and $1.9 million as of December 31, 2012 and 2011, respectively, which is reported within other assets in the statements of financial position. The related obligation is included in accrued employee benefits in the statements of financial position.

(c) Postretirement and Postemployment Benefits

NAS provides certain health and life insurance benefits for employees retired due to length of service. All benefit-eligible employees may become eligible for service retiree benefits if they reach age 60 while working for NAS and complete 5 years of service in a benefit-eligible status for medical and life insurance benefits. In addition, certain health and life insurance 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 they are eligible for disability benefits from the Social Security Administration. Life insurance benefits are provided based on coverage at date of disability and health insurance may be continued if the disabled retiree had participated in an NAS health insurance plan for 5 years at the date of disability. Insurance companies whose premiums are determined on an experience-rated basis provide life and health insurance benefits for retirees. Medicare supplement insurance is not experience rated. The retiree welfare benefit plan is contributory for health insurance purposes for employees who retired on or after January 1, 1990. Participant contributions for health insurance are based on a percentage of the monthly premium paid by NAS (from 25% to 100%). The participant contribution is also based on their date of retirement, length of service and choice of health insurance carrier.

NAS has elected to recognize the initial postretirement benefit obligation over a period of 20 years. The accrued postretirement benefit obligation is reported in accrued employee benefits in the statements of financial position.

Postretirement changes other than net periodic benefit cost are as follows (in thousands):

  2012 2011

Net actuarial loss

$         216 $         3,908

Recognized net actuarial loss

(692) (214)

Recognized prior service cost

(210) (210)

Recognized net initial obligation

(26) (26)

Total

$         (712) $         3,458

Items not yet recognized as a component of net periodic benefit cost at December 31, 2012 and 2011 are as follows (in thousands):

  2012 2011

Net actuarial loss

$       6,964 $       7,441

Prior service cost

512 722

Unrecognized net initial obligation

39 64

Total

$         7,515 $         8,227

The estimated amounts, measured at year-end, that are expected to be recognized in the net periodic benefit cost over the next fiscal year for the postretirement benefit plan are as follows (in thousands):

  2012 2011

Prior service cost

$         210 $         210

Recognized actuarial loss

583 692

Recognized net initial obligation

26 26

Total

$         819 $         928

The following table presents the changes in benefit obligations, changes in plan assets, funded status, and the components of net periodic benefit cost for the year ended December 31, 2012 and 2011 (in thousands):

  2012 2011

Change in benefit obligations:

   

Benefit obligation, beginning of year

$         25,938 $         22,484

Service cost

803 669

Interest cost

1,146 1,156

Actuarial loss

1,443 2,188

Benefits provided

(644) (678)

Benefits obligation, end of year

28,796 25,938
Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×
  2012 2011

Change in plan assets, combined:

   

Fair value of plan assets, beginning of year

20,204 20,185

Actual return on plan assets

2,742 (205)

Employer contributions

1,362 849

Benefits paid

(640) (625)

Fair value of plan assets, end of year

23,668 20,204

Funded status

$         (5,128) $         (5,734)
     

Components of net periodic benefit cost:

   

Service cost

$         803 $         669

Interest cost

1,146 1,156

Expected return on plan assets

(1,515) (1,514)

Recognized prior service cost

210 210

Recognized actuarial loss

692 214

Recognized net initial obligation

26 26

Net periodic benefit cost

$         1,362 $         761

The assumptions used to determine net periodic benefit cost for years ended December 31, 2012 and 2011 are as follows:

  2012 2011

Discount rate

4.50% 5.25%

Expected long-term return on plan assets

7.50 7.50

Rate of increase in healthcare costs

 

Under age 65

7.50 8.00

Over age 65

5.50 6.00

The assumptions used to calculate the accumulated postretirement benefit obligation for the years ended December 31, 2012 and 2011 are as follows:

  2012 2011

Discount rate

4.00% 4.50%

Rate of increase in healthcare costs for next year

   

Under age 65

8.00 7.50

Over age 65

5.00 5.50

The trend rate for growth in healthcare costs was assumed to decline gradually beginning in 2016 to 5% in the year 2021 for under age 65 and to remain at 5% for over age 65 for the year ended December 31, 2012. The trend rate for growth in healthcare costs was assumed to decline gradually to 5% in the year 2017 and 2013 for under age 65 and over age 65, respectively, for the year ended December 31, 2011.

The healthcare cost trend rate assumption has a significant impact on the postretirement benefit costs and obligations. The effect of a 1% increase in the assumed healthcare cost trend rate would have resulted in the following effects (in thousands):

  2012 2011

Postretirement benefit obligation

$  3,535 $  3,087

Benefit expense

305 252

The effect of a 1% decrease in the assumed healthcare cost trend rate would have resulted in the following effects (in thousands):

  2012 2011

Postretirement benefit obligation

$  (2,902) $  (2,543)

Benefit expense

(244) (205)

NAS postretirement benefit plan asset allocations at December 31, 2012 and 2011, by asset class are as follows:

  2012 2011

Cash

7% 4%

Bonds and notes

36 34

Equity

57 62
  100% 100%

The investment objective of the Plan is to produce a rate of return over the long term that will provide for fund growth, protect against the effect of inflation, and provide for some stability in different market environments. The fund is diversified between fixed income and equity investments. With this diversification and investment in broader market funds, there is reasonable assurance that no single security or class of securities will have a disproportionate impact on the Plan assets. The Plan assets are invested with a long-term growth strategy, with a 70% equity guideline.

The overall long-term rate of return was developed by estimating the long-term real rate of return for the Plan’s asset mix, while taking into account the effects of inflation. This estimate was developed by evaluating the history and similar asset allocation of the NAS Endowment.

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

The following table presents the fair value hierarchy for the postretirement benefit plan assets at December 31, 2012 (in thousands):

Fair Value Fair value measurements using
Level 1 Level 2
Financial Assets:
Retiree Welfare Benefit Plan investments:
Cash equivalents $ 1,759 $ 1,759 $ -
Bonds and notes
U.S. treasuries/gov.
bonds 1,119 1,119 -
Mortgage-backed
securities 1,667 - 1,667
Corporate bonds 5,792 4,697 1,095
Equity
U.S. small/mid equity 9,850 9,850 -
Non-U.S. equity
(developed) 3,233 3,233 -
Non-U.S. equity
(emerging) 248 248 -
Total investments $ 3,668 $ 20,906 $ 2,762

The following table presents the fair value hierarchy for the postretirement benefit plan assets at December 31, 2011 (in thousands):

Fair Value Fair value measurements using
Level 1 Level 2
Financial Assets:
Retiree Welfare Benefit
Plan investments:
Cash equivalents $ 760 $ 760 $ -
Bonds and notes U.S. treasuries/gov. bonds 774 774 -
Mortgage-backed securities 1,748 - 1,748
Corporate bonds 4,280 4,280 -
Equity securities
U.S. small/mid equity 9,820 9,820 -
Non-U.S. equity (developed) 2,620 2,620 -
Non-U.S. equity (emerging) 202 202 -
Total investments $ 20,204 $ 18,456 $ 1,748

The methods and assumptions used to estimate the fair value of each class of financial instrument are further discussed in footnote 4, Fair Value Measurements.

NAS expects to contribute to the Plan the actuarially determined net periodic cost for 2013, which is approximately $1.1 million.

The following benefit payments, which reflect future services, are expected to be paid in future years as noted, as of December 31, 2012 (in thousands):

2013

$         1,003

2014

1,222

2015

1,407

2016

1,472

2017

1,568

2018-2022

8.,408
  $         15,080

The measurement date of the plan assets and benefit obligations for 2012 and 2011 is December 31, 2012 and 2011, respectively.

(16) CONDITIONAL ASSET RETIREMENT OBLIGATION

NAS recorded an asset retirement obligation for which fair value of the liability could be reasonably estimated relating to the regulatory remediation of asbestos and other hazardous materials in one of its office buildings. Remediation of the asbestos and other hazardous materials began in 2010 and was completed in 2012. NAS recognized a gain on the settlement of the asset retirement obligation of $56,000 for the year ended December 31, 2012, which is included in other income in the statement of activities. As of December 31, 2012, NAS had no remaining liability for remediation costs. As of December 31, 2011, NAS had a liability of $60,000 for the remaining remediation costs included in other long-term liabilities in the statement of financial position.

(17) RELATED PARTY TRANSACTIONS

The NAS Council has authorized two agreements providing noninterest-bearing, collateralized advances to two employees in connection with the purchase of each employee’s residence. The agreements between the parties were executed in May 2005 and May 2007. They each provide that the repayment obligation will be adjusted to allocate to each party its proportional share of the appreciation or depreciation in the value of the residence, which is based on the relative financing percentage provided by each party. The agreements will terminate upon pay-back of the advance, sale of the property, or the end of each individual’s employment with NAS, which will not exceed 12 years. The estimated present value of the receivables is $3.2 million and $3.0 million at December 31, 2012 and

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
×

2011, respectively, and is included in other current assets and other assets in the statements of financial position.

(18) COMMITMENTS AND CONTINGENCIES

(a) Leases

NAS is committed to one noncancelable operating lease for space. Future minimum rental payments due under the noncancelable operating lease are as follows (in thousands):

Years ending December 31:

 

2013

$         422

2014

435

2015

448

2016

545

2017

589

Thereafter

5,585
  $         8,024

Rental expense amounted to approximately $2.0 million and $4.1 million for the years ended December 31, 2012 and 2011, respectively.

During the year ended December 31, 2011, NAS exercised an option to terminate one of its leases early. The lease was originally scheduled to end December 31, 2017, and under the revised agreement ended on December 31, 2012. NAS’ obligation under the lease terminated on that date.

(b) Contingencies

NAS receives a portion of its revenues directly or indirectly from federal government grants and contracts, all of which are subject to audit by the Defense Contract Audit Agency, which has completed its examinations through December 31, 2005. A contingency exists relating to unexamined periods and final settlements of 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.

(19) SUBSEQUENT EVENTS

As a result of a plea agreement between the federal government and BP Exploration and Production, Inc. (BP) related to the 2010 Deepwater Horizon disaster, the U.S. Department of Justice asked NAS to establish a program focused on human health and environmental protection in the Gulf of Mexico. A total of $350 million will be paid from BP to NAS to fund this program under an agreement entered into by BP and NAS. A separate plea agreement between Transocean Deepwater Inc. (Transocean) and the federal government resulted in an additional $150 million towards this program. The Transocean payments are covered by an agreement between NAS and Transocean. The plea agreements were finalized in January and February 2013, respectively. The first payments for the program from BP and Transocean will be received in 2013, with the remaining payments received over five years and four years, respectively, beginning in 2014. The payments will be based on the schedules in the respective agreements between NAS and BP and NAS and Transocean.

NAS has evaluated subsequent events from the statement of financial position date through May 17, 2013, the date at which the financial statements were available to be issued, and determined that there are no other items to disclose.

Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2013. Report of the Treasurer for the Year Ended December 31, 2012. Washington, DC: The National Academies Press. doi: 10.17226/18388.
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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 is obtained from our endowment under the endowment spending policies adopted by the Council. 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 recommendations 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.

This Report of the Treasure 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, 2012. While this book provides essential financial summary to key personnel, it also serves as a vital informative resource for various members of the public, private, and governmental sectors

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