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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
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
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
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
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
