Report of the Treasurer for the Year Ended December 31, 2013 (2014)

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Treasurer’s Statement settlements, the NAS will receive $500 million to To the Council of the National Academy of establish a new 30-year program on human health and Sciences: environmental protection in the Gulf of Mexico. The total will be invested in a wasting endowment, which will be This Report of the Treasurer of the National Academy of fully expended by the end of the program. The funds will Sciences presents the financial position and results of be received in the first 5 years of the program. As of June operations as well as a review of the endowment, trust, 2014, we have received $29 million. and other long-term investments portfolio activities of our Academy for the year ended December 31, 2013. In June 2013, an advisory group was appointed to lead the strategic planning and development of the new Gulf Overview Research Program. The advisory group draws science, engineering, and health expertise from the NAS, NAE, The income that supports the activities of the Academy IOM, and NRC, and includes experts from academia and comes from two major sources: program revenue received industry as well as those with deep connections to the from sponsors to pay for the myriad studies and other Gulf region. With 24 members, this group represents a activities undertaken each year by the National Research wide range of experience from diverse disciplines that Council (NRC), and a much smaller sum that we will be invaluable in shaping the program. Members of withdraw from our own endowment under the endowment the advisory group have been appointed to one-year terms spending policies adopted by the Council. Our total and are charged with creating a strategic vision to guide program revenue for 2013 experienced a decline of the program as it develops. approximately 4% below 2012 revenue, which brings the two-year decline to approximately 11%. In projecting program level in 2014, we feel that this decline will be NAS Highlights halted and that the program will remain steady at the 2013 level, and possibly a little higher. Endowment, Trust, and Other Long-term Investments Portfolio With respect to the second source of revenue, it has for many years been the policy of the Council to limit annual As the Chairman of the Finance Committee, I am endowment spending to 5% of the average value of responsible, along with the other committee members, for endowment for the twelve quarters ending in June of the the prudent management of the endowment and trust previous year. When the endowment declined fund. The goal of the endowment is to provide stable significantly in 2008, the Council made the prudent support for the Academy’s programs and activities over decision to hold spending to 4% and to avoid spending time while maintaining the value of the corpus of the whenever possible from specific endowment funds having endowment in real (inflation adjusted) terms. To achieve values below the original gift amount, starting in 2009. this goal, the Council, acting on the recommendation of These practices have continued each year through 2013; the Finance Committee, has historically authorized and for 2014, a conservative increase to a 4.25% draw has spending from the portfolio at a rate designed to maintain been set. The 2013 investment return on the endowment the purchasing power of the endowment over time. The was positive at approximately 12.6%. current spending rule caps annual spending at 5% of the trailing 12-quarter average market value of the portfolio. As I have already noted, the Council has limited spending As we noted in last year’s report, the federal government to 4% since 2009, with a planned spending rate of 4.25% announced toward the end of 2012, two settlements in 2014. concerning the 2010 Deepwater Horizon disaster, one with BP Exploration and Production, Inc. and one with During 2013, the endowment, along with the broader Transocean Deepwater, Inc. As part of each of these legal market, experienced a welcome increase in its asset value. 1 

The market value of the portfolio increased net of you know, some years are better than others and that is withdrawals and new contributions from $376.0 million why it is good to focus on the long-term return, for which on January 1, 2013, to $412.5 million at December 31, the NAS endowment is performing favorably compared to 2013. The portfolio returned 12.6% for the year, which its peers. was 3.1% lower than the benchmark return of 15.7%. While absolute performance results were satisfactory, One further comparison may be useful. In gross terms, performance relative to the benchmark was dampened including the returns on investments, the gifts received, primarily by the limited contribution from the venture and the withdrawals made for endowment expenditures, capital, private equity, and multi-strategy hedge funds. the increase in the value of the endowment over Decem- On the positive side, investments in small and mid-size ber 31, 2012 was 9.7%, significantly in excess of inflation U.S. stocks and real estate funds produced returns during the one-year period. On the same basis, the exceeding their respective benchmarks. endowment has increased by 53.8% over the ten year The actual portfolio allocation and policy guidelines as of period preceding December 31, 2013 for an average December 31, 2013, were as follows: (compounded) rate of return of 4.4%, again in excess of the 2.5% annual inflation rate for the comparable period. Portfolio Policy Allocation Guideline See Schedule 2-A on page 23 for details of Fixed-Income: investments by asset class. U.S. fixed income/cash 5% 9% Included in the $412.5 million total market value of Non-U.S. fixed income 6% 5% the portfolio as of December 31, 2013, are $7.4 Equities: million for the Woods Hole Endowment Funds, $76.2 U.S. Large Cap Funds 24% 19% million for the Institute of Medicine (IOM), and U.S. Small/Medium Cap Funds 11% 9% $11.1 million for The National Academies’ Non-U.S. Developed Markets 21% 20% Corporation (TNAC). TNAC, which is equally Non-U.S. Emerging Markets 13% 15% owned by the NAS and the National Academy of Real Estate 3% 3% Engineering Fund (NAEF), owns and operates the Hedge Funds and Alternative Beckman Center (see note 1 to the financial Investments 17% 20% statements on page 51). Total 100% 100% Withdrawals of $12.8 million were made to fund the President’s Committee, NAS General Fund’s activity, Market values of the portfolio, after withdrawals, for the and NAS prizes and awards for the current period. years ended December 31, 2013 and 2012, are displayed Additional withdrawals of $1.5 million were made to in the following chart (in thousands): fund Woods Hole, IOM, and TNAC activity. 2013 2012 NAS General Funds Cash and Fixed-Income Securities $ 44,997 $ 28,715 Equity Securities 367,506 347,235 The NAS General Funds Budget, which provides Total $ 412,503 $ 375,950 unrestricted resources to support the activities of the Academy, receives its funding from the unrestricted portion of the NAS Endowment. As noted above, the It is of some interest to compare our endowment Council has limited spending from the endowment, performance with that of similar organizations. A good including the unrestricted portion, to the range 4% to way of doing this is to review the results of the study of 4.25% since 2009. college and university endowments by the National Association of College and University Business Officers For 2013, funding for the General Funds Budget totaled which found that as of June 30, 2013, the average 1, 5, $5.2 million and expenditures totaled $4.8 million, and 10 year returns for endowments in the $100M - resulting in a surplus of approximately $353,000. $500M range were 11.9%, 3.8%, and 7.0% respectively. Comparable figures for 2012 were $4.6 million in The 1, 5, and 10 year returns of our endowment as of June 30, 2013 were 10.2%, 2.9%, and 7.4%, respectively. As 2 

revenues, $4.7 million in expenditures, resulting in a Prizes and Awards small deficit of approximately $100,000. Several award funds have existed for more than 100 The 2013 NAS General Funds activity is summarized as years, while others were established more recently. The follows (in thousands): Home Secretary oversees the nomination process that selects award recipients and recommends to the Council Revenues: (subject to legal and financial review) changes in the Unrestricted Endowment $ 4,039 award cycle, amounts of the honoraria, and any other Annual Giving from Members 586 administrative changes. Membership Dues 300 Annual Meeting 260 Journal Publications Other 5 Total Revenue $ 5,190 Financial results of the Proceedings of the National Academy of Sciences are shown below for the years ended December 31, 2013 and 2012 (in thousands): Expenses: Development Office $ 1,002 2013 2012 Member Services: Revenues: Annual Meeting 737 Subscriptions $ 8,720 $ 6,300 Other 256 Author charges 6,793 6,740 Programs/Projects: Other 28 102 Cultural Programs of the NAS 361 Total $ 15,541 $ 13,142 Evolution, Education & Communication 173 Expenses: Frontiers of Science 279 Publishing $ 8,030 $ 7,123 Committee on International Other 5,708 5,845 Security & Arms Control 219 Total $ 13,738 $ 12,968 InterAcademy Council 137 Foreign Meetings & Other Expenses 597 Net $ 1,803 $ 174 President’s Office 33 NAS Executive Office 224 Facilities NRC Operations 819 Total Expenses $ 4,837 NAS owns the following facilities: Surplus $ 353 Keck Center of the National Academies at 500 Fifth St., NW in Washington, D.C. Any surplus in the General Funds Budget at the end of the National Academy of Sciences Building at 2101 year is added to the NAS Reserve; similarly, deficits are Constitution Ave., NW in Washington, D.C. funded from the Reserve, which is invested in the NAS J. Erik Jonsson Center of the National Academies at Endowment and Trust Pool. The NAS Reserve had a 314 Quisset Dr. in Woods Hole, Massachusetts. market value of $5.1 million on December 31, 2013, to Arnold and Mabel Beckman Center at 100 Academy which the 2013 surplus will be added. in Irvine, California (jointly owned with NAEF through TNAC). The NAS Council has approved a General Funds Budget of $5.4 million for 2014, which is based on a slightly NAS will continue to lease the National Academies Data increased endowment expenditure rate of 4.25%. Center at 8619 Westwood Center Drive in Vienna, Virginia. 3 

Development Office Programs $2.6 million in gifts and pledges were received to support the Harvey V. Fineberg Impact Fund. The NAS, including the IOM, is grateful for the generous 204 IOM members made contributions, includ- support of members, friends, and philanthropic organiza- ing a gift of $1 million from John W. (IOM) and tions. Philanthropic support enables the Academies to Valerie Rowe. Other major gifts were received focus on innovative work that cuts across interdisciplinary from the George Family Foundation, the Carson boundaries and to resolve important national problems Family Charitable Trust, the Ambrose Monell that the government cannot or is not yet ready to sponsor. Foundation, and Presidents’ Circle members Ax- Most importantly, it helps us to initiate leading-edge el and Sara L. Schupf. Funds raised will help the studies, for which major funding is raised from other IOM address the challenges of healthcare deliv- sources. ery, cost, research, outcomes and education, and will be used to initiate studies, to educate the Unrestricted philanthropic support is a vital resource for public about how to protect and enhance health, the Academies. In 2013, the NAS and IOM received and to communicate findings from IOM reports nearly $4.5 million in unrestricted expendable support. to populations that would most benefit. Fund-raising efforts resulted in gifts to support the commemoration of the 150th anniversary of the NAS and We also received gifts this year for the unre- the establishment of IOM’s Harvey V. Fineberg Impact stricted endowment, the income from which can Fund, in honor of its departing president: be used in perpetuity for any need that the NAS identifies. 411 NAS members and 14 friends of the NAS contributed $423,000 to support the NAS annual Many gifts and grants were received for restricted fund, an increase of 34% over 2012. Of these, purposes to fund the numerous projects and activities 48 members made first time gifts and their gift of the NAS and IOM. The selected gifts described were matched by Philip (NAS/IOM) and Sima below highlight the scope of philanthropic support Needleman who established a fund-raising chal- received during 2013: lenge to encourage gifts from NAS members who had not previously supported the Academy. A $600,000 gift was made by Bruce M. (NAS) Additionally, $185,000 was contributed by and Betty Alberts to support the Christine members who made gifts to name a seat in the Mirzayan Science and Technology Policy Grad- NAS auditorium, and an unrestricted gift of re- uate Fellowship Program. The program, which tirement plan assets was received from the estate was launched by Dr. Alberts while he was presi- of John D. Corbett (NAS). dent of the NAS, enables young scientists, engineers, and healthcare professionals to engage $570,000 was received from the Burroughs in national science and technology policy issues Wellcome Fund, the Carnegie Corporation of while exploring career options. New York, ExxonMobil, the Kavli Foundation, the W.M. Keck Foundation, John D. and Cathe- The IOM received a grant of $1.1 million from rine T. MacArthur Foundation, and the Alfred P. the JPB Foundation to develop a framework for Sloan Foundation, as special unrestricted grants assessing the environmental, social, and health made in recognition of NAS’s 150th anniversary. effects associated with how food is grown, pro- cessed, distributed, and marketed within the U.S. Charitable gift annuities that will provide unre- food system. stricted support to the NAS and IOM increased in 2013 compared to 2012. $650,000 was re- $637,000 was received to support the NAS’s ceived from Eugene (NAS) and Ruth Roberts, C. Science and Entertainment Exchange, a program Thomas Caskey (IOM), and a friend of the NAS, that connects entertainment industry profession- Detlof Gloge. als with top scientists and engineers to inform science and engineering-related storylines in film 4 

and television. Support for the Exchange includ- $231.3 million (see following chart and the Statements of ed grants of $500,000 from Google, Inc. and Activities on page 49) and in the year ended December $100,000 from the California Endowment. 31, 2012, was $251.6 million. Richard C. (NAS/IOM) and Rita Atkinson made U.S. Government Revenues by Agency ($ in thousands) gifts totaling $420,000 to support a second recip- Agency for International Development $ 6,053 ient of the 2014 NAS prize for advances in Department of Agriculture 1,963 psychological and cognitive sciences; they en- Department of Commerce 7,751 dowed the prize in 2012. Additionally, the Department of Defense: Koshland Science Museum received significant Defense Threat Reduction Agency 2,184 support from Gail F. Koshland, and NAS staff Department of the Air Force 7,761 member James Reisa named the National Re- Department of the Army 10,087 search Council as a beneficiary of his retirement Department of Defense 4,828 plan to establish an endowment to support stud- Department of the Navy 13,552 ies, workshops and projects in the environmental Department of Education 36 sciences. Department of Energy 7,018 Department of Health and Human Services 15,522 The Committee on Human Rights of the NAS, Department of Homeland Security 3,116 IOM and NAE received $246,000, including an Department of the Interior 1,458 IRA distribution received from Martha Vaughan Department of Justice 1,619 (NAS), $70,000 from the estate of Avram Gold- Department of Labor 176 stein (NAS/IOM), and contributions from 190 Department of State 3,403 members of the NAS, IOM, and NAE. Department of Transportation 111,889 Department of Treasury 481 These gifts represent the many ways that members, Department of Veterans Affairs 4,282 friends, and organizations supported the NAS in 2013. Environmental Protection Agency 4,209 This support is essential to the Academy’s ability to fulfill Executive Office of the President 731 its mission as scientific adviser to the nation and we Government Accountability Office 418 deeply appreciate the philanthropic support from our Institute of Museum and Library Services 148 many donors. Marine Mammal Commission 43 National Aeronautics and Space Administration 7,586 National Geospatial-Intelligence Agency 70 NRC Highlights National Science Foundation 13,127 National Security Agency 39 Revenues National Transportation Safety Board 25 Nuclear Regulatory Commission 961 The two main sources of revenue for the NRC are the Office of the Director of National Intelligence 163 U.S. government and private / nonfederal entities. The Social Security Administration 93 total contract and grant revenue from both of these U.S. Arctic Research Commission 119 sources totaled $286.2 million in 2013 and $298.2 million Adjustment to Indirect Cost Receivable & Other 384 in 2012. Total U.S. Government Agencies $ 231,295 U.S. Government Contracts and Grants Private/Nonfederal Contracts and Grants NRC activities, conducted in response to requests from a broad range of U.S. government agencies, are funded Private sponsors provided for new initiatives and co- through cost-reimbursable non-fee contracts and grants. sponsored government projects by funding awards in the amount of $55.0 million in 2013, compared with $46.6 The total amount reimbursed by the U.S. government million in 2012. The private and nonfederal revenues agencies in the year ended December 31, 2013, was were comprised of contracts and grants ($51.4 million) 5 

and other contributions ($3.6 million). (See Statements of Overall Financial Condition Activities on page 48.) While program revenues declined this past year due to Other contributions revenue decreased from $5.9 federal budget constraints, the endowment experienced a million in 2012 to $3.6 million in 2013. strong year with a 12.6% return, which contributed to an increase in net assets. The main reason for the large Expenses increase in net assets for the year is the $471 million recognition of revenue in 2013 for the Gulf Research Almost all government and private contracts and grants Program. Funds for this program will be expended over are cost-reimbursable agreements. Therefore, even if the the life of the program, which is no more than 30 years. revenues and expenses are not equal in any one given year, the revenues and expenses will be the same over the 2013 2012 life of the award. Total Revenues $ 847.5 $ 370.2 Total Expenses 325.3 347.3 As in many universities and nonprofit institutions, indirect Change in Net Assets $ 522.2 $ 22.9 cost expenditures provide necessary support services and should be kept in reasonable proportion to program Net assets, or assets minus liabilities, can be a expenditures. Historically, NRC management has measurement of a not-for-profit organization’s ability to successfully maintained a relatively constant relationship reinvest net income toward their mission while also between program and support costs, i.e., the growth rate maintaining reserves and helping protect against inflation. of indirect costs has been approximately equal to the The NAS 2013 results of operations are further described growth rate of direct costs. During 2013, management in the financial statements starting on page 47. worked to reduce the indirect costs to keep them in line with declining program level. In 2013, total indirect expenses were $75.8 million compared to an approved Conclusion initial budget of $81.6 million. The 2014 indirect budget has been set at $74.6 million. I would like to thank the members of the Council, the Committee on Budget and Internal Affairs, the Finance Committee, and the NRC leadership for their continued Related Entities support. Also, special thanks are extended to the Office of the Chief Financial Officer, led by Mary “Didi” Salmon, Many financial transactions take place between the our CFO, for help in managing the Endowment and Trust member organizations of the National Academies. The Pool, providing steady oversight of the Academy’s NRC serves as the clearinghouse for these transactions. various budgets, and paying careful attention to the However, it is important to note that only the financial Academy’s financial systems, records and reports. activity and results of the NAS, NAE, IOM, and NRC are included in these financial statements. The financial activity and results of the National Academy of Engineering Fund (NAEF) and The National Academies’ Corporation (TNAC) are audited and reported separately. Financial information for the NAEF is available on Jeremiah P. Ostriker request from the NAE Finance Office; information for Treasurer TNAC is available from the NAS Controller’s Office. 6