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Report of the Treasurer for the Year Ended December 31, 2018 (2019)

Chapter: Treasurer's Statement

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Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
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Treasurer’s Statement

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, 2018.

Overview

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.

Overall, the NRC program level has remained relatively flat over the last few years. The trend of 2011-2018 declines in annual federal funding continues to be partially offset by increases in non-federal funding. Between 2011 and 2018, the share of program work sponsored by the federal government declined by 17% 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With respect to amounts withdrawn annually from our endowment, a number of restricted funds support specific programs and awards, while a much smaller number of funds provide for unrestricted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 challenging environment, unrestricted funds are particularly important, allowing NAS and NRC to respond quickly to unexpected events. The General Funds section below describes the annual unrestricted spending.

NAS Highlights

Endowment, Trust, and Other Long-term Investments Portfolio

As the Chairman of the NAS 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 to 4.5% from 2015 through 2018.

For many years, the NAS endowment investment strategy was 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 risk-adjusted 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

Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
×

the portfolio. This change in strategy was formalized in an updated Investment Policy approved by the Council in August 2017. As of December 31, 2018 the portfolio was more closely aligned to Finance Committee goals with the trailing three-year volatility slightly above the target of 50% of the S&P 500 and alternative investments comprising 49% of the portfolio. The Committee is pleased that the portfolio fared better than the reference portfolio during the market downturn in 2018. I would like to thank the members of the Finance Committee for their astute guidance in this process (David Donoho, Rob Engle, Ron Graham, Jose Scheinkman, and Jim Simons).

The market value of the portfolio increased net of withdrawals and new contributions from $506.2 million at January 1, 2018 to $510.7 million at December 31, 2018. The market value of the portfolio as of December 31, 2018, was as follows:

  • Included in the $510.7 million total market value of the portfolio as of December 31, 2018, are $7.4 million for the Woods Hole Endowment Funds, $93.0 million for the National Academy of Medicine (NAM), and $12.3 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 14 to the financial statements on page 83).
  • Withdrawals of $15.5 million were made to fund the Presidents’ Committee, NAS General Fund’s activity, and NAS prizes and awards for the current period. Additional withdrawals of $4.0 million were made to fund Woods Hole, NAM, and TNAC activity.
Amount (000’s) Percentage of Portfolio
Fixed-Income:
U.S. fixed income/cash $ 40,669 8%
Non-U.S. fixed income 7,928 2%
Equities:
U.S. large equity 149,914 29%
U.S. small/mid equity 24,949 5%
Non-U.S. equity (developed) 56,281 11%
Non-U.S. equity (emerging) 20,558 4%
Real estate 5,982 1%
Multi-strategy and private equity funds 204,448 40%
Total $ 510,729 100%

The portfolio returned -2.43% for 2018, which was 4.07% higher than the reference portfolio return of -6.50%. The reference portfolio is a purely passive portfolio comprised of the following: S&P 500 Index 30%, Russell 2000 Index 5%, MSCI EAFE Index 28%, MSCI Emerging Market Index 7%, Barclay’s U.S. Capital Aggregate Index 25%, and 3-month Treasury Bills 5%. The NAS Endowment & Trust Pool outperformed the reference portfolio primarily due to higher investment returns for hedge funds compared to the market. It should be noted that the reference portfolio is a “reference” and not a “benchmark” that we wish to achieve: It’s historical volatility is significantly higher than we wish to accept, even at the cost of our foregoing some excess returns in “up” years.

Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
×

The return percentages for the portfolio as of December 31, 2018, as compared to the reference portfolio were as follows:

Time Period NAS Portfolio Return Reference Portfolio Return
Year ended 12/31/18 -2.43% -6.50%
Five years ended 12/31/18 4.80% 3.90%
Ten years ended 12/31/18 7.79% 8.00%
7/1/89 – 12/31/18 7.76% 7.40%

NAS Indirect and General Funds Budget

The NAS Indirect and General Funds Budget, which provides support for the activities of the Academy, receives its funding from the NRC indirect cost pools (as a cost reimbursement for allowable expenditures) and a draw from the portion of the NAS Endowment not subject to donor-imposed restrictions. 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 2018.

For 2018, funding for the Indirect and General Funds Budget totaled $10.2 million and expenditures totaled $9.8 million, resulting in a surplus of approximately $387,000. Comparable figures for 2017 were $10.0 million in revenues, $9.2 million in expenditures, resulting in a surplus of approximately $820,000.

The 2018 NAS Indirect and General Funds activity is summarized as follows (in thousands):

Revenues: Expenses:

Endowment Draw From Funds Without Donor Restrictions

$ 5,013

Governance

$ 2,516

Administration

1,839

Annual Giving from Members

685

Membership

1,373

Membership Dues

495

Development Office

2,051

Annual Meeting

287

NAS Program Activity

309

Indirect Cost Reimbursement for Allowable Expenditures

3,708

International Activity

628

NAS Contribution to Restoration Fund

470

Total Revenue

$ 10,188

Shared NRC Expenses

615

Total Expenses

$ 9,801
Surplus $ 387

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 NAS Reserve, which is invested in the NAS Endowment and Trust Pool. The Reserve had a market value of $6.8 million on December 31, 2018, to which the 2018 surplus will be added. The Academy’s goal is to maintain a reserve balance equal to approximately one year’s annual draw from the NAS Unrestricted Endowment. The NAS Council has approved an Endowment draw of 4.5% for 2019 and approved an Indirect and General Funds Budget of $10.2 million for 2019.

Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
×

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.

Journal Publications

The Proceedings of the National Academy of Sciences (PNAS) is an integral part of the membership activities of the Academy, and as such, the revenue and expense totals shown below (in thousands) are part of the overall financial results of the total membership activities and the financial structure of the institution as a whole.

2018 2017
Revenues:
Subscriptions $ 8,061 $ 6,300
Author Charges 6,403 7,263
Other 266 440
Total $ 14,730 $ 14,003
Expenses:
Publishing $ 5,398 $ 6,163
Other 6,671 6,519
Total $ 12,069 $ 12,682
Net $ 2,661 $ 1,321

Facilities

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 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 some of the philanthropic support received during 2018:

  • In May 2018, the NAS exceeded the $10 million challenge goal from the Simons Foundation to support The Ralph J. and Carol M. Cicerone Endowment for NAS Missions.
  • The NAS received a $1.5 million gift commitment from an anonymous donor to support the Christine Mirzayan Science and Technology Policy Graduate Fellowship Program.
Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
×
  • The NAS received gifts from members totaling $2.8 million, with 24% of the membership making a gift, an increase from 2017.
  • All members of the NAS Council made a gift to the NAS. This 100% participation is an important benchmark that will help the NAS leverage giving from other donors.
  • The NAS received $350,000 from the Gordon and Betty Moore Foundation to assist in funding “The Science Behind It” – a new interactive online NAS outreach program designed to engage the public about the importance of science. The program is scheduled to launch in May 2019.
  • The NAM raised $535,000 through its annual fund from members and friends. The NAM participation rate for all giving was 28%.
  • Fundraising for the NAM Longevity Grand Challenge Initiative was a priority for 2018 with $5 million raised for awards and prizes, as well as for work on the roadmap.
  • Donors made investments in the future work of the Academies with charitable gift annuities, IRA beneficiary designations, or bequests totaling $5 million in planned gifts to the NAS and NAM. Members continue to explore the IRA distribution and other planned giving opportunities to support the NAS and the NAM.

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 members and our many friends of the Academies.

NRC Highlights

U.S. Government Contracts and Grants

One main source of funding for NRC activities is U.S. government contracts and grants. These activities are conducted in response to requests from a broad range of U.S. government agencies and are primarily funded through cost-reimbursable non-fee contracts and grants.

NAS recognizes revenue on federal contracts and grants as recoverable costs are incurred. Accordingly, revenues will be equal to expenses in each year. The total amount of revenue from contracts with U.S. government agencies in the year ended December 31, 2018, was $207.5 million (see following chart and the Statements of Activities) and in the year ended December 31, 2017, was $212.0 million.

Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
×
U.S. Government Revenues by Agency ($ in thousands)
Agency for International Development $ 15,719
Arctic Research Commission 16
Department of Agriculture 1,201
Department of Commerce 6,363
Department of Defense:
Defense Threat Reduction Agency 1,922
Department of the Air Force 7,594
Department of the Army 9,714
Department of Defense 1,470
Department of the Navy 13,063
Department of Education 324
Department of Energy 8,021
Department of Health and Human Services 18,383
Department of Homeland Security 2,344
Department of Housing and Urban Development 38
Department of the Interior 2,060
Department of Justice 74
Department of Labor 142
Department of State 2,533
Department of Transportation 81,079
Department of Treasury 20
Department of Veterans Affairs 4,204
Environmental Protection Agency 3,329
Federal Reserve System 462
Government Accountability Office 399
General Services Administration 43
National Aeronautics and Space Administration 7,328
National Endowment for the Humanities 56
National Science Foundation 12,607
National Transportation Safety Board 34
Office of the Director of National Intelligence 5,479
Social Security Administration 2,073
Adjustment to Indirect Cost Receivable & Other (549)
Total U.S. Government Agencies $ 207,545

Private/Nonfederal Contracts and Grants

The other main source of funding for NRC activities is private/nonfederal contracts and grants. NAS recognizes revenue on private contracts and grants either as recoverable costs are incurred or at the time the grant is awarded, depending on the nature of the agreement. If revenue is recognized at the time the grant is awarded, the net assets associated with that grant are released from restriction as the costs are incurred. Accordingly, private/nonfederal funding (private contracts and grants revenue plus the net assets released from restriction) will be equal to private/nonfederal expenses in each year. Private sponsors provided for new initiatives and co-sponsored government projects by funding activities (accounted for as programmatic and related indirect expenditures) in the amount of $86.1 million in 2018, compared with $86.6 million in 2017. (See Statements of Activities.)

The Gulf Research Program started in 2013, with a mandated 30-year duration, and is working 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 December 2018, NAS has received the entire $500 million in payments that fund the program. The NAS Finance Committee oversees the investment of the funds (with some government-specified restrictions), while the NAS Council oversees the strategic

Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
×

direction of the program. Any investment earnings are required to be spent on furthering the programmatic goals of the Gulf Research Program.

Indirect Expenses

As in many universities and nonprofit institutions, indirect cost expenditures provide necessary support services for all programs and should be kept in reasonable proportion to program expenditures. Historically, NRC management has 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 2018, total indirect expenses were $76.1 million compared to an approved budget of $76.8 million. For 2019, the indirect budget is set at $81.1 million to reasonably align indirect costs with projected program revenue, which is estimated to increase in 2019. The increase in the indirect budget for 2019 also includes projected costs to improve the way we provide services to our sponsors and improve the efficiency of our supporting services.

Related Entities

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 decrease in net assets during 2018 is the decrease in market value of the investment portfolio.

2018 2017
Total Revenues $ 273.6 $ 405.5
Total Expenses 328.0 338.7

(Decrease) Increase in Net Assets

$ (54.4) $ 66.8

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 2018 results of operations are further described in the financial statements starting on page 51.

Conclusion

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

Treasurer

Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
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Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
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Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
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Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
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Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
×
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Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
×
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Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
×
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Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
×
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Suggested Citation:"Treasurer's Statement." National Academy of Sciences. 2019. Report of the Treasurer for the Year Ended December 31, 2018. Washington, DC: The National Academies Press. doi: 10.17226/25503.
×
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The income that supports the activities of the National Academy of Sciences (NAS) comes from two major sources: program revenue received from sponsors to pay for the myriad studies and other activities undertaken each year by the National Academies of Sciences, Engineering, and Medicine, and a much smaller sum that is obtained from our endowment under the endowment spending policies adopted by the Council. The goal of the endowment is to provide stable support for the Academy's programs and activities. To achieve this goal, the Council, acting on the recommendations 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.

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, 2018. While this book provides essential financial summary to key personnel, it also serves as a vital informative resource for various members of the public, private, and governmental sectors.

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