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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 year ended December 31, 1999. . . . 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 is January 1 through December 31. Therefore, this report presents results for the fiscal year January 1, 1999, through December 31, 1999. To reflect this change, in our last report we reported 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 agreed to by our auditors, KPMG LLP. In order to consolidate the institution's program ac- tivities in 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 is to be built on the site, with construction beginning in the summer of 1999 with an anticipated completion date of Spring 2002. The project has been financed with $130 million of tax-exempt bonds over 40 years at an anticipated average interest rate of 4.4%. The annual debt service and operating expenses are projected to be less than the costs now incurred in the several leased facilities currently occupied by program staff. 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 1999 was a year of continued financial stability and im- proved reporting capability. The following are the financial highlights of 1999: This change accommodates budget planning based on more timely information. A significant number of Endowment and Trustlavestment Pool 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 had elapsed in our previous fiscal year schedule; thus, the indirect spending plan (which is linked to the esti- mates of program levels) previously had to be ap- proved months before there was any certainty that these funds could be recovered. The NAS Constitu- tion and Bylaws have been amended to reflect this change. · We are negotiating a contract to sell the Green/Harris complex, comprising of two buildings, to Georgetown University. The NAS will lease these buildings back from Georgetown University until the new facility at 500 5th street is available for occupancy in Spring 2002. There were several commercial and not-for- profit organizations actively competing to purchase the property, which resulted in our receiving a very competitive price of $42.5 million. . . . 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, 1999, are the amounts of $45.6 million, $21.7 million, and $7.0 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 Market Value on December 31, 1999 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 . . Percent Dollar of Amount (in Target Portfolio thousands) 25% 0% 0% 30% 15% 15% 5% 5% 5% $ 66,684 5,226 10,841 88,760 43,442 51,792 7,634 3,844 3,215 $281,438 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 12.8% before withdrawals was realized from the investment pool in 1999, compared with our benchmark composite of 17.3% for the same period. Dividends and interest from investments dur- ing 1999 were $16.7 million. For the ten-year period ending at December 31, 1999, the total return for the portfolio was 12.26%, exceeding the composite benchmark of 12.19% for the same period. Details are provided in Schedule 2. Withdrawals of $6.2 million were made to fund the President's Committee, NAS General Funds activity, and prizes and awards for the current period. · The market value of the NAS Endowment and Trust Investment Pool increased by $24.3 million (9.4%), after withdrawals, during the year ended December 31, 1999. Starting at $257.1 million on December 31, 1998, the market value reached $281.4 million on December 31, 1999. Market value of the Endowment and Trust Investment Pool for the year ended Decem- ber 31, 1999, for the six months ended December 31, 2 1998, and for the year ended June 30, 1998, is displayed below: ($ in thousands) 1999 FY99T FY98 $ 85,966 $ 92,672 $ 82,104 195,472 164,502 181,089 $281,438 $257,174 $263,193 Cash and Fixed-Income Securities Equity Securities Total . Fixed-income securities for the year ended December 31, 1999, are two real estate mortgages totaling $10.8 million for two office buildings 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 $34.0 million on December 31,1999. These funds are held in short- term investments for program and operational liquid- ity requirements. During the year ended December 31, 1999, interest revenue net of refunds to sponsors of $1.0 million was earned from this class of invest- ments. On December 31, 1999, the Academy's short- term instruments were earning interest at varying rates. The current yield on December 31, 1999, ranged from 6.25 to 6.94%. (Details are provided in Schedule 3 on page 28~. Development Office Programs . After formal unification of the NAS, NAE, and IOM development offices and the recruitment of our new chief advancement officer, Michael O' Mahoney, in late 1998, 1999 saw the office's staffing completed with the hiring of NAS, NAE, and IOM major gift officers and senior development officers in foundation relations, corporate relations, and development mar- keting. The office has energetically expanded its ac- tivities to gather both core and program support, with new efforts in member annual giving and planned giving, individual major gifts, and foundation and corporate support.
. . Total member giving in 1999 was $679,183, of which $134,838 was contributed during the fall's Annual Fund Solicitation. Sixteen percent of NAS members (265 individuals) made a charitable contribution to the Academy in 1999. With expanded outreach to members for example, through dissemination of new planned giving information and the new Library Collections program the Development Office hopes to raise the member participation rate to at least 25% in FY2000. The Presidents' Circle, comprising a group of more than 100 friends of the Academies drawn from busi- ness and industry, continued to be an important source of support through its contributions to unrestricted and program funds. Over and above their annual gifts of $332,374, Presidents' Circle members contributed $112,656 in 1999 to underwrite expanded dissemina- tion of the popular version of the study How People Learn. · An increasing focus of the Development Office's efforts in 2000 and 2001 will be NAS programs that advance and guide the scientific enterprise. The Fron- tiers of Science seminars, the Committee on Human Rights, and the Academy's fellowship and internship programs are prime examples of NAS activities that need and merit continuing member financial support. The Academy is uniquely positioned to sponsor these activities, and no one better understands their signifi- cance than NAS members. 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 . . 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 Leased Owned 109,626 48,000 17,676 Assessed Value $68.1 million $14.0 million $2.3 million Main Building Beckman Center Woods Hole Green/Harr~s 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. Expenses are paid out of NRC working capital as they are incurred. Invoices are then submitted to federal government agencies for reimbursement. Some agencies of the U.S. government provide for advance payment to the NRC. Revenue is equal to the expenses incurred for these government-sponsored activities. The total amount reimbursed by U.S. government agencies in the year ended December 31, 1999, was $160.2 million (see Figure 1 below). On the other hand, activities supported by private nonfederal agencies are usually financed by grants and agreements that pro- vide for the funds to be paid to the Academy in a lump sum or fixed incremental payments in advance of the expenses being incurred. These funds are available for expenditure on these projects during the current year and frequently also in subsequent years.
FIGURE 1: Revenue in 1999 by Source U.S. GOVERNMENT AGENCIES (GRANTS AND CONTRACTS) Agency for International Development Defense Special Weapons Defense Supply Service Department of Agnculture Department of Commerce Department of Defense $ 740,368 749,423 692,147 739,976 6,681,126 522,179 L)elense rlechn~cal lntormat~on (:enter (588) Department of the Air Force 2,735,163 Department of the Army 13,333,900 Department of the Navy 6,587,600 Department of Education 5,625,498 Department of Energy 20,841,658 Department of Health and Human Services 16,342,656 Department of Housing and Urban Development 22,727 Department of the Intenor 3,037,984 Department of Justice 655,357 Department of Labor 184,019 Department of State 1,164,816 Department of Transportation 33,383,641 Environmental Protection Agency 5,769,363 Executive Office of the President 921,744 Federal Emergency Management Agency 90,465 General Services Administration 65,896 National Aeronautics arid Space Administration 18,411,172 National Science Foundation 13,096,909 National Security Agency 85,620 Nuclear Regulatory Commission 115,112 Smithsonian Institution 5 Social Security Administration U.S. Consumer Product Safety Commission 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 TOTAL PRIVATE AND NONFEDERAL SOURCES Expenses . 4 FIGURE 2 Ten-Year History of NRC Expenses by Purpose ($ in thousands) S250,000 $200.000 $100,000 $50,000 - $o .IIllUlUlUlI I I I ~ 1991 1992 1993 1994 1995 1996 1997 1998 1999T 1999 REFLECTS FISCAL YEAR TOTALS THROUGH 1999 Government Contracts and Grants = Nongovernment Funded Activities 121 Publications Activities ~ Administrative and Other Specific figures for 1999 and FY99T as shown graphically above Government Contracts and Grants Nongovernment Funded Activities Total direct program expense Publication Activities ($ in thousands) 1999 FY99T Total Administrative and Other 658,314 526,211 44,621 4,521,263 1,820,189 $160,166,534 $ 26,779,232 5,589,176 $ 32,368,408 As shown in Figure 2, the total direct program ex- pense for the NAS, NRC, and IOM for the year ended December 31, 1999, from government and private funds amounted to $148.2 million. These costs in- clude staff salaries, travel and meeting costs, consult- ants' fees, and dissemination costs. Expenses related to publication activities were $11.8 million. Adminis- trative and other expenses were $60.9 million, which are reimbursed through our indirect rates. For a description of those rates, see note 10, page 49. Grand total . . $120,101 28,155 $148,256 1 1,868 $160,124 60,977 $221,101 $65,260 12,953 $78,213 5,485 $83,698 24,376 $108,074 Combined expenses totaled $221.1 million for the year ended December 31, 1999. 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 $100,000 on an annual basis. During FY95 the Management Review Committee established a review process for projects in danger of reaching an overrun status, thus protecting the integrity of the Academy's Endowment and Trust Investment Funds. Certain necessary and appropriate expenditures are not allowable as charges to the Indirect Cost Pool or as direct charges to government contracts and grants. These expenditures include such items as Academy- sponsored initiatives, expenses of Academy members and officers not allowable as indirect costs, fund-
raising activities, contract and grant overruns, costs disallowed by federal auditors, and expenses associ- ated with the annual meeting of the Academy. To meet these budgeted expenditures, interest earnings on short-term investments and an allocation from the unrestricted endowment pool are used. The current approved spending rate from the unrestricted endow- ment is 5% of the three-year average market value. Journal Publications . Financial results of the Proceedings of the National Academy of Sciences are included in the publications line of the statement of activities for the year ended December 31, 1999. A financial summary of the results of the Proceedings is shown below for the years ended December 31, 1999, and December 31, 1998: 1999 ($ in thousands) 1998 Revenue: Subscriptions Author charges Other Total Expenses: Printing Other Total Net $4,537 2,392 322 $7,251 $6,510 $4,104 2,106 300 $4,020 3,097 7,117 $6,456 $4,075 2,381 $ 134 $ 54 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 December 2001, by which the Academy pays UTD $125,000 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 NAB and the NAEF is available on request from the NAB 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, 1999, and the results of operation for the year 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 com- ing year. Respectfully submitted, RONALD GRAHAM, Treasurer s
