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OCR for page 1
Treasurer's Statement
To the Council of the National Academy of
S.
clences:
· This report, "Treasurer's Report to the Council of the
National Academy of Sciences," presents the financial
position and results of operations as well as a review
of the endowment and trust activities of our Academy
for the period July 1, 1998, through December 31,
1998.
· At its April 1998 annual meeting, the Academy ap
proved a change to the fiscal year for which financial
information is reported. The new fiscal year will be
January 1 through December 31. To reflect this
change, we are reporting results for the six-month
transition period July 1, 1998, through December 31,
1998 (FY99T). We will not be presenting prior-year
comparative data as we normally do, as agreed to by
our auditors, KPMG LLP.
· This change will make possible budget planning based
on more timely information. A significant number of
new awards are received in the final month of the
federal fiscal year, which ends on September 30. As a
result, estimates of program expenditures for the
period July through June are not firm until October.
By this time, more than 25% of the fiscal year has
elapsed; thus, the indirect spending plan (which is
linked to the estimates of program levels) previously
had to be approved months before there was any
certainty that these funds could be recovered. The
NAS Constitution and Bylaws have been amended to
reflect this change.
· During the past year the Academy has continued to
address the technical issues related to the year 2000
problem (Y2K). The Office of Information Technol
ogy Services, working closely with the National
Academy Press and the Office of the Chief Financial
Officer, is currently working on the testing and
remediation phase of ensuring that our systems are
Y2K compliant. Our computing environment is rela
tively uncomplicated in that our major systems (pay
roll, accounting, e-mail) are "off the shelf" with no
major in-house modifications. Most of our standard
applications and technical infrastructure are new and
Y2K compliant.
.
.
In order to consolidate the program activities of the
NRC into one location, the NAS Council authorized a
facility planning project in December 1996 and in
August 1998 approved the purchase of a site at 500
5th Street, NW, in the East Capitol business district of
Washington, D.C. An 11-story office building will be
built on this site beginning in the summer of 1999 with
an anticipated completion date of fall 2001. The
project will be financed with $130 million of tax-
exempt bonds over 40 years at an average interest rate
of 4.4%. The annual debt service and operating ex-
penses are projected to be less than the current costs
incurred in the several leased facilities currently occu-
pied by NRC programs. No assets of the NAS were
pledged as security for the new building.
I would like to thank the Council, the Committee on
Budget and Internal Affairs, the Finance Committee,
and the NRC Management Review Committee for
their continued input and support. I believe that
FY99T was one of continued financial stability and
improved reporting capability.
The following are the financial highlights of [seal year
1999 T:
Endowment and Trust Investment Pool
.
.
.
As Treasurer, with the assistance of the Finance
Committee, I am responsible for prudent management
of the Endowment and Trust Investment Funds of the
NAS. The investment strategy concentrates on en-
hancing total return with diligence toward preserving
the principal and protecting against the effects of
inflation.
The Finance Committee periodically reviews the
spending rate policy for income from the NAS invest-
ment portfolio. The current recommendation, which
was approved by the NAS Council in fiscal year 1993,
limits annual expenditures to 5% of the Endowment
and Trust Investment Funds, averaged over the pre-
ceding three years.
Included in the total market value of the Endowment
and Trust Investment Pool as of December 31, 1998,
are the amounts of $41.8 million, $19.9 million, and
$6.5 million for the IOM, TNAC, and Woods Hole
Endowment Funds, respectively. TNAC denotes The
National Academies' Corporation (Beckman Center),
1
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which is equally owned by the National Academy of
Sciences and the National Academy of Engineering
Fund (see note 1, page 45~.
· All Endowment and Trust Investment Funds are
pooled for investment purposes. A detailed analysis of
the funds in the Endowment and Trust Investment
Pool is summarized in Schedules 1 and 1-A (pages 8
and 18).
TABLE 1: Overview of Current Investment Structure
Fixed-Income: U.S. Fixed
Non-U.S. Fixed
Mortgages (at cost)
Equities: U.S. Large Cap Funds
Small Cap Funds
Non-U.S. Developed Markets
Non-U.S. Emerging Markets
Private Commitments
Cash Equivalents
Total
.
15% 65%
0% 20%
20% 55%
10% 25%
5% 20%
0% 7%
0% 10%
0% 25%
Target Market Value on
Range December 31, 1998
Percent Dollar
of Amount (in
From To Portfolio thousands)
26%
2%
4%
32%
14%
16%
2%
1%
3%
$ 67,567
5,838
1 1,790
81,232
36,566
40,030
4,424
2,250
7,477
$257,174
During FY95 the Finance Committee adopted a policy
of the NAS to give long-term structure to its asset
allocation strategy (see Table 1~.
· A total return of-0.50% before withdrawals was
realized from the investment pool in FY99T, com-
pared with our benchmark composite of 4.8% for the
same period. Dividends and interest from investments
during FY99T were $9.5 million. Details are provided
in Schedule 2.
· Withdrawals of $4.8 million were made to fund the
President's Committee, NAS General Funds activity,
and prizes and awards for the current period. To
facilitate the allocation of the President's Committee
funds, an annual withdrawal was made even though
the reporting period was for six months. No more than
18 months' support will be withdrawn for the 18-
month period July 1, 1998, to December 31, 1999. It
should be noted that funds may not be expended even
though they were withdrawn from the pool.
· The market value of the NAS Endowment and Trust
Investment Pool decreased by $6.0 million (2.3%),
after withdrawals, during the six months ended De-
cember 31, 1998. Starting at $263.2 million on June
30,1998, the market value settled at $257.2 million on
2
December 31, 1998. Market value of the Endowment
and Trust Investment Pool for the six months ended
December 31, 1998, and for the years ended June 30,
1998 and 1997, is displayed below:
($ in thousands)
FY99T FY98 FY97
$ 92,672 $ 82,104 $ 62,916
164,502 181,089 168,932
$257,174 $263,193 $231,848
Cash and Fixed-Income Securities
Equity Securities
Total
.
Also included in the market value, shown as cash and
fixed-income securities for FY99T are two real estate
mortgages totaling $11.8 million for two office build-
ings located in Georgetown (see Schedule 2-A on
page 27.)
Short-Term Investment Pool
.
Short-term investments of general, private, and en-
dowment and trust funds amounted to $34.2 million
on December 31, 1998. These funds are held in short-
term investments for program and operational liquid-
ity requirements. During the six months ended De-
cember 31, 1998, interest revenue net of refunds to
sponsors of $1.0 million was earned from this class of
investments. On December 31, 1998, the Academy's
short-term instruments were earning interest at vary-
ing rates. The current yield on December 31, 1998,
ranged from 4.81 to 5.73%. (Details are provided in
Schedule 3 on page 28.)
Contributions
.
.
The development offices of the NAS, NAE, and IOM
were unified this year, leading the way for the collabo-
ration of the institutions on the joint capital campaign,
which began on July 1, 1997. The development office
serves the needs of the Academies in developing
private support from individuals, corporations, and
foundations to build endowment, sustain and increase
project support, and provide unrestricted contributions
for core needs and independent studies of the NAS,
NAE, IOM, and NRC.
The Elkan Blout Society was created in 1993 to
recognize members and friends of the NAS who make
planned gifts to the NAS to help build future endow-
ment resources for the organization. Twenty-eight
Academy members and friends have become Elkan
Blout Society members to date, making legacy gifts
OCR for page 3
such as bequests and life income gifts such as a
charitable remainder trust and charitable gift annu-
ities. The NAS Financial Advisor, a quarterly newslet-
ter, is provided to NAS members as an estate planning
tool.
· The IOM Society similarly honors members and
friends of the Institute of Medicine who plan major
gifts and legacies to endow the IOM's work. Ten
individuals and couples have been inducted since the
society was established in July 1997. As with the
NAS, privately donated endowment underwrites self-
initiated studies that frequently lie beyond the horizon
of present-day governmental concerns. For example,
before America was prepared to take action on AIDS,
the IOM independently outlined the scope of the crisis
and the framework for a national response. Planned
gifts to the IOM through charitable bequests, trusts,
annuities, and life insurance and current gifts of
assets such as appreciated real estate, securities, and
personal property endow ongoing independent work
of the IOM that enhances the nation's health and well-
being.
.
The Presidents' Circle, which now has 108 individual
members from business and industry, continues to
serve as a strong support group for the NAS, NAE,
and IOM. Its primary purpose is to increase public
understanding of the Academies and how their work
benefits the nation. Members contributed a total of
$198,000 in unrestricted funds in FY99T.
· The NAS Annual Fund was established in 1995 to
provide individuals with the opportunity to support
priority programs of the NAS Council that rely on
private contributions for support. In FY99T unre-
stricted contributions to the Annual Fund from NAS
members and others provided nearly $150,000. These
funds were used to support Teaching Evolution and
the Nature of Science and programs of the Office of
Public Understanding of Science to encourage quality
science programming on television and the develop-
ment of a new World Wide Web site providing science
experiments for high school students.
· Established in 1983, the Academy Industry Program
(AIP) is a corporate membership group that supports
the work of the Academies. The AIP offers a unique
opportunity for business leaders in research and devel-
opment to meet with the Academies' members and
staff to discuss emerging technological developments
and their effects on industry and society. AIP mem-
bers, when necessary, will provide information and
advice for Academies' studies.
. . . .
Prize and Award Trust Funds
.
Several award trust funds have existed for more than
100 years, while others were established more re-
cently. The Home Secretary oversees the nomination
process that selects award recipients and recommends
to the Council (subject to legal and financial review)
changes in the award cycle, amounts of the honoraria,
and any other administrative changes. Expenditures
from the award funds are limited by the 5% spending
rate policy recommended by the Finance Committee
and approved by the Council. (See Schedules 1 and
1-A on pages 8 and 18 for details on these funds.)
Operations
.
.
Leased Owned
109,626
48,000
12,412
The Management Review Committee periodically re-
views NRC administrative and financial operations to
ensure quality improvements. We have been success-
ful in limiting the growth of indirect costs through
proactive policy decisions and incentives. These con-
tainment measures also have had the positive effect of
limiting indirect cost rate increases and smoothing
fluctuations of indirect expenditures.
The Academy owns certain of the facilities used in its
operations and leases space in others.
Square Feet
Assessed
Value
$68.1 million
$12.3 million
$1.4 million
Main Building
Beckman Center
Woods Hole
Green/Harris
Other facilities
.
225,471
139,690 3,262
365,161 173,300
Not available
Most of the facilities are occupied by offices. The
Beckman Center and Woods Hole facilities are confer-
ence centers in Irvine, CA, and Woods Hole, MA,
respectively. The assessed values are based on tax
records for all facilities.
General Description of Revenue Sources
.
NRC activities conducted in response to requests of
the U.S. government are financed through cost-reim
OCR for page 4
bursable nonfee contracts and grants. The General
Fund of the NAS typically pays for expenses as they
are incurred. Invoices are then submitted to federal
government agencies for reimbursement. Some agen-
cies of the U.S. government provide for advance
payment to the NAS. Revenue is equal to the expenses
incurred for these government-sponsored activities.
The total amount reimbursed by U.S. government
agencies in FY99T was $84.3 million (see Figure 1
below). On the other hand, activities supported by
private nonfederal agencies are usually financed by
grants and agreements that provide for the funds to be
FIGURE 1: Revenue in FY99T by Source
U.S. GOVERNMENT AGENCIES
(GRANTS AND CONTRACTS)
Agency for International Development
Department of Defense
Department of the Air Force
Department of the Army
Defense Logistics Agency
Defense Supply Service
Defense Special Weapons Agency
Defense Technical Information Center
Department of the Navy
Department of Commerce
Department of Health and Human Services
Department of Energy
Department of Labor
Department of Transportation
Department of Education
Environmental Protection Agency
Executive Office of the President
Federal Emergency Management Agency
General Services Administration
Department of the Interior
Department of Justice
National Aeronautics arid Space Administration
Nuclear Regulatory Commission
National Security Agency
National Science Foundation
Smithsonian Institution
Social Security Administration
Department of State
U.S. Department of Agnculture
U.S. Postal Service
U.S. Treasury
Veterans Administration
Indirect cost underrecovery due from the government
TOTAL U.S. GOVERNMENT AGENCIES
PRIVATE AND NONFEDERAL SOURCES
Grants and contracts
Contnbutions
$84,347,173
$13,613,742
2,768,884
TOTAL PRIVATE AND NONFEDERAL SOURCES $16,382,626
4
FIGURE 2 Ten-Year History of NRC Expenses by Purpose
$250,000
$200,000
it, $150,000
0
<* $100,000
$50,000
$0
Total Administrative and Other
Grand total
~EllILT L!
:.,..
. . . . · . . . ·
..........
1990 1991 1992 1993 1994 1995 1996 1997 1998 1 999T
REFLECTS FISCAL YEAR TOTALS THROUGH FY99T
·Government Contracts and Grants [:lNongovernment Funded Activities
publications Activities Nonadministrative and Other
579,846
126,924
1,613,572 Specific figures for FY98 and FY99T as ($ in thousands)
6,577,233 shown graphically above
10 Government Contracts and Grants
1,052,089 Nongovernment Funded Activities
320,676 Total direct program expense
1,225 Publication Activities
3,356,101
3,469,395
7,060,922
16,334,763
11,508
13,364,868
3,479,892
2,533,147
777,038
127,581
64
1,045,231
249,765 Expenses
9,335,280
69,591
16
6,623,740
90
239,367
403,874
550,358
431
166,386
1,310,890
3,565,300
FY98
$1 15,820
25,280
$141,100
1 1,034
$152,134
50,845
$202,979
FY99T
$65,260
12,953
$78,213
5,485
$83,698
24,376
$108,074
paid to the Academy in a lump sum or fixed incremen-
tal payments in advance of the expenses being in-
curred. These funds are available for expenditure on
these projects during the current year and frequently
also in subsequent years.
.
As shown in Figure 2, the total direct program ex-
pense for the NAS, NRC, and IOM for FY99T from
government and private funds amounted to $78.2
million. These costs include staff salaries, travel and
meeting costs, consultants' fees, and dissemination
costs. Expenses related to publication activities were
$5.5 million. Administrative and other expenses were
$24.3 million, which are reimbursed through our
indirect rates. For a description of those rates, see note
9, page 48. Combined expenses totaled $108 million
for FY99T.
During the course of operating the programs of the
Academy complex, individual projects have, from
OCR for page 5
time to time, incurred expenses in excess of contract
and grant revenue allocated to them. In aggregate
these overruns normally amount to less than $100,000
on an annual basis. During FY95 the Management
Review Committee established a review process for
projects in danger of reaching an overrun status, thus
protecting the integrity of the Academy's Endowment
and Trust Investment Funds.
Certain necessary and appropriate expenditures are
not allowable as charges to the Indirect Cost Pool or as
direct charges to government contracts and grants.
These expenditures include such items as Academy-
sponsored initiatives, expenses of Academy members
and officers not allowable as indirect costs, fund-
raising activities, contract and grant overruns, costs
disallowed by federal auditors, and expenses associ-
ated with the annual meeting of the Academy. To meet
these budgeted expenditures, interest earnings on
short-term investments and an allocation from the
unrestricted endowment pool are used. The current
approved spending rate from the unrestricted endow-
ment is 5% of the three-year average market value.
Journal Publications
· Financial results of the Proceedings of the National
Academy of Sciences are included in the publications
line of the statement of activities in Exhibit B for the
six months ended December 31, 1998. A financial
summary of the results of the Proceedings is shown
below for the calendar years ended December 31,
1998, and December 31, 1997:
1998
($ in thousands)
1997
Revenue:
Subscriptions
Author charges
Other
Total Revenue
Expenses:
Printing
Other
Total Expenses
Net
$4,104
2,106
300
$3,741
1,866
219
$6,510$5,826
$4,075
2,381
$3,750
2,041
$6,456 $5,791
$ 54
$ 35
· It is the Academy's policy to close any surplus or
deficit to the indirect cost pool in the following fiscal
year. Thus, when revenues exceed expenses, the net
reduces the indirect cost rate. Conversely, when ex
penses exceed revenues, the net loss increases the
indirect cost rates.
.
The Academy entered into an agreement with the
University of Texas at Dallas (UTD) for it to become
the publisher of Issues in Science and Technology
(Issues). The current agreement is effective for a
period of three years, ending June 1999, by which the
Academy pays UTD $100,000 per year. All costs and
operational expenses associated with Issues are the
responsibility of UTD.
Related Entities
.
.
There are many financial transactions exchanged be-
tween the member organizations of the Academy
complex. The NRC serves as the clearinghouse for
these transactions. However, it is important to note
that only the financial activity and results of the NAS,
NRC, and IOM are included in these financial state
ments.
The financial activity and results of the National
Academy of Engineering, the National Academy of
Engineering Fund, and the National Academies Cor-
poration (Beckman Center) are audited and reported
separately. Financial information for the NAE and the
NAEF is available on request from the NAE Finance
Office; information for the Beckman Center is avail-
able from the NAS Accounting Office.
Conclusion
.
.
The financial statements and schedules that follow
reflect the sound financial condition of the National
Academy of Sciences as of December 31, 1998, and
the results of operation for the six-month period then
ended.
I would like to take this opportunity to commend all
staff and members who over the past years have
contributed so much to the achievements of the Acad-
emy. We are enthusiastically looking forward to an
even more exciting and productive future in the
coming year.
Respectfully submitted,
RONALD GRAHAM, Treasurer
s
OCR for page 6
Representative terms from entire chapter:
market value
