To the Council of the National Academy of Sciences:
This Report of the Treasurer 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, 2016.
The income that supports the activities of the Academy comes from two major sources: program revenue received from government and other sponsors to pay for the large number of studies and other activities undertaken each year by the National Research Council (NRC), and a much smaller sum that we withdraw from our own endowment under the endowment spending policies adopted by the Council.
NRC program level has remained relatively flat over the last three years with a modest increase projected for 2017. The trend of the 2011-2015 decline in annual federal funding, which has been partially offset by an increase in non-federal funding, showed signs of stabilizing and in some program areas improving in 2016. Between 2011 and 2016, the share of program work sponsored by the federal government declined by 12% while work sponsored by non-federal sources increased by the same amount. It will be very important for the future of the institution to continue vigorous efforts to diversify its sources of income.
With respect to amounts withdrawn annually from our endowment, a number of restricted funds support specific programs and awards, while a much smaller number of funds provide for unrestricted support of our mission. In today’s changing environment, unrestricted funds are particularly important, allowing NAS and NRC to respond quickly to unexpected events.
The Gulf Research Program started in 2013 and, over its mandated 30-year duration, will work to enhance oil system safety and the protection of human health and the environment in the Gulf of Mexico and other U.S. outer continental shelf areas by seeking to improve understanding of the region’s interconnecting human, environmental, and energy systems and fostering application of these insights to benefit Gulf communities, ecosystems, and the Nation. As of February 2017, NAS has received $385 million of the total $500 million in payments to be received. The NAS Finance Committee oversees the investment of the funds (with some government-specified restrictions), while the NAS Council oversees the strategic direction of the program. Any investment earnings are required to be spent on furthering the program goals.
Endowment, Trust, and Other Long-term Investments Portfolio
As the Chairman of the Finance Committee, I am responsible, along with the other committee members, for the prudent management of the endowment and trust fund. The goal of the endowment is to provide stable support for the Academy’s programs and activities over time. To achieve this goal, the Council, acting on the recommendation 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. The current spending rule caps annual spending at 5% of the trailing 12-quarter average market value of the portfolio. The Council limited spending to 4% from 2009 through 2013, increased spending to 4.25% in 2014, and increased it again to 4.50% from 2015 through 2017.
The market value of the portfolio increased net of withdrawals and new contributions from $419.9 million on January 1, 2016, to $442.7 million at December 31, 2016. The portfolio returned 8.7% for the year, which was 0.9% higher than the benchmark return of 7.8%. The NAS Endowment & Trust Pool outperformed its benchmark in part due to the strong performance of two of the largest U.S. equity holdings, Berkshire Hathaway and Renaissance Institutional Equities Fund, which outpaced the rising U.S. equity markets.
The market value of the portfolio as of December 31, 2016, was as follows:
|Amount (000's)||Percentage of Portfolio|
U.S. fixed income/cash
Non-U.S. fixed income
U.S. large equity
U.S. small/mid equity
Non-U.S. equity (developed)
Non-U.S. equity (emerging)
|Multi-strategy and private equity funds||143,829||33%|
- See Schedule 2-A for details of investments by asset class.
- Included in the $442.7 million total market value of the portfolio as of December 31, 2016, are $7.3 million for the Woods Hole Endowment Funds, $80.1 million for the National Academy of Medicine (NAM), and $12.1 million for The National Academies’ Corporation (TNAC). TNAC, which is equally owned by the NAS and the National Academy of Engineering Fund (NAEF), owns and operates the Beckman Center (see note 15 to the financial statements on page 83).
- Withdrawals of $14.9 million were made to fund the President’s Committee, NAS General Fund’s activity, and NAS prizes and awards for the current period. Additional withdrawals of $3.1 million were made to fund Woods Hole, NAM, and TNAC activity.
The return percentages for the portfolio as of December 31, 2016, as compared to the blended market benchmark (i.e. return calculated using the policy guideline and market indices), were as follows:
|Time Period||NAS Portfolio Return||Benchmark Return|
|Year ended 12/31/16||8.70%||7.80%|
|Five years ended 12/31/16||7.00%||7.80%|
|Ten years ended 12/31/16||3.60%||4.30%|
|7/1/89 – 12/31/16||7.90%||7.60%|
It is of some interest to compare our endowment asset allocation and performance with that of similar organizations. A good way of doing this is to review the results of the study of college and university endowments by the National Association of College and University Business Officers (NACUBO) which found that as of June 30, 2016, public institutions and private colleges/universities had asset allocations to alternative strategies of 47% and 55%, respectively. Additionally, from the same study, the average 1, 5, and 10 year returns for endowments in the $101M - $500M range were -2.4%, 5.1%, and 4.8%, respectively. The 1, 5, and 10 year returns of our endowment as of June 30, 2016 were
3.6%, 3.8%, and 4.3%, respectively. As you know, some years are better than others and that is why it is good to focus on the long-term return, for which the NAS endowment is slightly under-performing its peers, an issue about which the Finance Committee is actively engaged.
For many years, the NAS endowment investment strategy has been based on a diversified mix of traditional equity securities and a significant portion of fixed income investments. This provided returns that supported annual draws of 5% while protecting the endowment’s purchasing power. That strategy can no longer be relied on, as it fails to capture the complexity of today’s financial markets. In order to improve returns, the Finance Committee believes that the investment strategy needs to move further away from traditional equity and fixed income investments and toward alternative investments such as multi-strategy and private equity funds. By wise selection of alternative investments and of managers, the Finance Committee can minimize volatility and achieve returns which are better than the public equity markets. The process of reallocating assets began in 2016 and will continue until alternative strategies comprise approximately 50% of the portfolio.
NAS General Funds
The NAS General Funds Budget, which provides unrestricted resources to support the activities of the Academy, receives its funding from the unrestricted portion of the NAS Endowment. As noted above, the Council has limited spending from the endowment in past years, including the unrestricted portion, approving a spending rate of 4.5% in 2016.
For 2016, funding for the General Funds Budget totaled $6.3 million and expenditures totaled $5.7 million, resulting in a surplus of approximately $623,000. Comparable figures for 2015 were $5.8 million in revenues, $5.2 million in expenditures, resulting in a surplus of approximately $600,000.
The 2016 NAS General Funds activity is summarized as follows (in thousands):
|Annual Giving from Members||525|
|Cultural Program of the NAS||350|
|Committee on International|
|Security & Arms Control||224|
|The Value of Social Science Research||187|
|Foreign Meetings & Other Expenses||577|
|NAS Executive Office||804|
Any surplus in the General Funds Budget at the end of the year is added to the NAS Reserve; similarly, deficits are funded from the Reserve, which is invested in the NAS Endowment and Trust Pool. The NAS Reserve had a market value of $6.7 million on December 31, 2016, to which the 2016 surplus will be added. The NAS Council has approved a General Funds Budget of $6.1 million for 2017, which is based on a withdrawal rate of 4.50%.
Prizes and Awards
Several award funds have existed for more than 100 years, while others were established more recently. 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.
Financial results of the Proceedings of the National Academy of Sciences are shown below for the years ended December 31, 2016 and 2015 (in thousands):
NAS owns the following facilities:
- Keck Center of the National Academies at 500 Fifth St., NW in Washington, D.C.
- National Academy of Sciences Building at 2101 Constitution Ave., NW in Washington, D.C.
- J. Erik Jonsson Center of the National Academies at 314 Quisset Dr. in Woods Hole, Massachusetts.
- Arnold and Mabel Beckman Center at 100 Academy in Irvine, California (jointly owned with NAEF through TNAC).
NAS leases a facility at 8619 Westwood Center Drive in Vienna, Virginia for the National Academies Data Center.
Development Office Programs
The generous support of members, friends, and philanthropic organizations helps the Academies address emerging, cutting-edge issues, launch new programs and policy studies, and undertake new initiatives that are at the core of the organization’s mission. Gifts and grants were received for both unrestricted and restricted purposes to fund numerous projects and activities. The selected gifts described below highlight the scope of the philanthropic support received during 2016:
- The NAS established the Ralph J. and Carol M. Cicerone Endowment for NAS Missions. The Simons Foundation has made a generous $10 million challenge gift towards this fund to match all gifts, three year pledges made by 2018, and selected planned gifts. A total of $7.85 million in cash gifts and eligible pledge commitments have been secured towards this challenge gift.
- The Kavli Foundation pledged $10.5 million to establish the Fred Kavli Endowment Fund to benefit the NAS and serve its mission.
- The NAS annual fund received gifts from members and friends totaling over $436,000. The NAS membership participation rate for all giving was 22%. It is vitally important that we increase our giving rate to support the mission of our Academy. The willingness of large donors to give is often conditioned on evidence that our members support the mission of the Academy. If you are not a regular donor, I strongly urge you to become one, even if your annual gift is small.
- The NAM saw a 16% increase in the funds raised through its annual fund, bringing in $485,577 from members and friends of the NAM. An additional $48,160 was received in support of the Harvey V. Fineberg Impact Fund. The NAM participation rate for all giving was 27%.
- The Committee on Human Rights received more than $220,000 from members across the three Academies.
- Members and staff, both current and retired, made planned gift commitments to the NAS and NAM of over $1,051,000, including future support for the Committee on Human Rights and the Transportation Research Board. Donors took advantage of the IRA charitable rollover making gifts in excess of $111,000.
- The Foundation for Food and Agriculture Research together with the Bill and Melinda Gates Foundation provided support to endow the NAS Prize in Food and Agriculture Science. The $3,000,000 endowment will allow the NAS to recognize and promote excellence in research in the agricultural sciences. Additionally, the donors made an expendable gift of $125,000 for the 2017 inaugural prize.
- The Science and Entertainment Exchange, a program that connects entertainment industry professionals with top scientists and engineers to bring more realistic and positive portrayals of scientists and engineers to film and television received $625,000 from Google, Inc., the Tides Foundation upon the recommendation of the Google K-12 Education Outreach Fund, and the Downey Unified School District to provide a mentorship program for students.
- The National Academy of Medicine received $685,000 to support Vital Directions in Health and Health Care, a project to provide advice to the new U.S. presidential administration and other policy leaders about next steps in health care reform. Funds were received from the California Endowment, Commonwealth Fund, John A. Hartford Foundation, Robert Wood Johnson Foundation, Josiah Macy, Jr. Foundation, and the Gordon and Betty Moore Foundation.
- $9,400,000 was received from the Ford Foundation to continue to support the Ford Fellows Program, a postdoctoral fellowship program that the Academies has operated since 1979 with the aim of increasing the diversity of America’s college and university faculty and enriching the educational experience.
- $5,000,000 was received from the Robert Wood Johnson Foundation to launch a grant-making program by the Academies’ Gulf Research Program to develop the capacity of communities to better anticipate, plan for, and manage negative impacts of environmental change and disruptions that affect the Gulf of Mexico region.
- Grants totaling $1,400,000 were received from The Susan Thompson Buffett Foundation, William and Flora Hewlett Foundation, JPB Foundation, David and Lucile Packard Foundation, and Tara Health to support a study on the current state of the science related to the provision of safe, high quality abortion services in the United States.
- Grants of $400,000 were received from the Carnegie Corporation of New York and $137,500 from the William and Flora Hewlett Foundation to help support the Future of Voting, a study that will examine the current state of technologies, standards, and resources and offer recommendations that provide a vision of voting that is easier, accessible, reliable, and verifiable.
- $500,000 was received from the Blue Shield of California Foundation, the Bill and Melinda Gates Foundation, and the Melville Charitable Trust, to help conduct a study that will examine the extent to which housing programs and other interventions have reduced homelessness and improved health outcomes and affected health care costs in people experiencing homelessness.
- The study, Financing Early Care and Education with a Highly Qualified Workforce, received philanthropic support of $300,000 from the W.K. Kellogg Foundation, $150,000 from the Foundation for Child Development, $150,000 from the Bill and Melinda Gates Foundation, and $150,000 from the Heising-Simons Foundation.
Private gifts and grants are important sources of revenue in assisting the Academies’ in fulfilling its mission. We are deeply grateful for the philanthropic support received from our many friends of the Academies and members.
The two main sources of revenue for the NRC are the U.S. government and private/nonfederal entities. Total program revenues for 2016 were $289.2 million, an increase of 4.2% from 2015 actual revenues of $277.5 million.
U.S. Government Contracts and Grants
NRC activities, conducted in response to requests from a broad range of U.S. government agencies, are funded through cost-reimbursable non-fee contracts and grants.
The total amount reimbursed by the U.S. government agencies in the year ended December 31, 2016, was $216.6 million (see following chart and the Statements of Activities) and in the year ended December 31, 2015, was $206.6 million.
|U.S. Government Revenues by Agency ($ in thousands)|
|Agency for International Development||$||15,006|
|Department of Agriculture||2,871|
|Department of Commerce||7,648|
|Department of Defense:|
|Defense Threat Reduction Agency||730|
|Department of the Air Force||9,170|
|Department of the Army||9,197|
|Department of Defense||1,166|
|Department of the Navy||12,565|
|Department of Education||1,038|
|Department of Energy||9,330|
|U.S. Government Revenues by Agency ($ in thousands)|
|Department of Health and Human Services||21,262|
|Department of Homeland Security||2,492|
|Department of Housing and Urban Development||12|
|Department of the Interior||1,413|
|Department of Justice||838|
|Department of Labor||161|
|Department of State||2,966|
|Department of Transportation||78,000|
|Department of Treasury||21|
|Department of Veterans Affairs||3,421|
|Environmental Protection Agency||5,733|
|Executive Office of the President||234|
|Federal Reserve System||51|
|Government Accountability Office||876|
|General Services Administration||45|
|Marine Mammal Commission||1|
|National Aeronautics and Space Administration||8,014|
|National Endowment for the Humanities||3|
|National Geospatial-Intelligence Agency||269|
|National Science Foundation||14,849|
|National Security Agency||56|
|National Transportation Safety Board||19|
|Nuclear Regulatory Commission||114|
|Office of the Director of National Intelligence||2,009|
|Social Security Administration||2,044|
|U.S. Arctic Research Commission||67|
|Adjustment to Indirect Cost Receivable & Other||2,947|
|Total U.S. Government Agencies||$216,638|
Private/Nonfederal Contracts and Grants
Private sponsors provided for new initiatives and co-sponsored government projects by funding awards in the amount of $72.6 million in 2016, compared with $70.9 million in 2015. The private and nonfederal revenues were comprised of contracts and grants ($52.6 million) and other contributions ($20.0 million). (See Statements of Activities.)
Almost all government and private contracts and grants are cost-reimbursable agreements. Therefore, even if the revenues and expenses are not equal in any one given year, the revenues and expenses will be the same over the life of the award.
As in many universities and nonprofit institutions, indirect cost expenditures provide necessary support services and should be kept in reasonable proportion to program expenditures. Historically, NRC management has successfully maintained a relatively constant relationship between program and support costs, i.e., the growth rate of indirect costs has been approximately equal to the growth rate of direct costs. In 2016, total indirect expenses were $77.2 million compared to an approved budget of $78.9 million. For 2017, the indirect budget is set at $79.4 million to align with an increased program level and provide funding for needed upgrades in technology.
Many financial transactions take place between the member organizations of the National Academies. 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, NAE, NAM, 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 request from the NAE Finance Office; information for TNAC is available from the NAS Controller’s Office.
Overall Financial Condition
The main reason for the increase in net assets during 2016 is the increase in market value of the investment portfolio.
Net assets, or assets minus liabilities, can be a measurement of a not-for-profit organization’s ability to reinvest net income toward its mission while also maintaining reserves and helping protect against inflation. The NAS 2016 results of operations are further described in the financial statements starting on page 53.
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 support. Also, special thanks are extended to the Office of the Chief Financial Officer, led by Mary “Didi” Salmon, our CFO, for help in managing the Endowment and Trust Pool, providing steady oversight of the Academy’s various budgets, and paying careful attention to the Academy’s financial systems, records and reports.
William H. Press