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 and other long-term investments portfolio activities of our Academy for the year ended December 31, 2019.

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 increased approximately 8.5% from 2018 to 2019, after remaining relatively flat for several years through 2018. The trend of declines in annual public funding over the last few years reversed to a 4% increase in 2019. Private funding, which has increased over the years, increased again from 2018 to 2019, through additional outside funding and additional spending in the Gulf Research Program. Over the last few years, the NRC program has been sponsored approximately 70% by public sources, both federal and nonfederal, and approximately 30% by private sources (25% external and 5% Endowment funds from the Academies). It remains important for the future of the institution that we 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With respect to amounts withdrawn annually from our endowment, a number of restricted funds support specific programs and awards, while a much smaller number of funds provide for unrestricted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 and Other Long-term Investments Portfolio

As the chair of the NAS Investment Committee, I am responsible, along with the other committee members, for the prudent management of the endowment 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 Investment 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 2019.

The market value of the portfolio increased net of withdrawals and new contributions from $510.7 million at January 1, 2019 to $592.0 million at December 31, 2019. The market value of the portfolio as of December 31, 2019, was as follows:

• Included in the $592.0 million total market value of the portfolio as of December 31, 2019, are $8.2 million for the Woods Hole Endowment Funds, $106.9 million for the National Academy of Medicine (NAM), and $13.3 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).
• 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 $3.3 million were made to fund Woods Hole, NAM, and TNAC activity.

The portfolio returned 14.7% for 2019, which was 8.0% lower than the reference portfolio return of 22.1%. The reference portfolio is a purely passive portfolio comprised of 75% MSCI All Country World Index Net and 25% Bloomberg Barclays U.S. Treasury 7-10 Year Index. The NAS Endowment & Other Long-Term Investments Pool underperformed the reference portfolio primarily due to alternative investments in general and hedge funds in particular lagging the strong public market returns. This is partially an offset to the positive relative returns for the hedge funds for 2018, for which period the NAS portfolio had an annual return of -2.43% compared to a reference portfolio annual return of -6.50%. It should be noted that the reference portfolio is a “reference” and not a “benchmark” that we wish to achieve: its historical volatility is significantly higher than we wish to accept, even at the cost of our foregoing some excess returns in “up” years.

The return and volatility percentages for the portfolio as of December 31, 2019, as compared to the reference portfolio were as follows:

Endowment Investment Management

During the year, the NAS Investment Committee decided to hire an Outsourced Chief Investment Office (OCIO) to manage the NAS Endowment. After an extensive search process, NAS hired Investure, a full-service investment firm located in Charlottesville, VA, serving twelve endowment clients with approximately $14 billion in assets under management. The investment management of the NAS Endowment officially transitioned to Investure on November 1, 2019.

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 2019.

For 2019, funding for the Indirect and General Funds Budget totaled $10.3 million and expenditures totaled $9.6 million, resulting in a surplus of approximately $641,000. Comparable figures for 2018 were $10.2 million in revenues, $9.8 million in expenditures, resulting in a surplus of approximately $387,000.

The 2019 NAS Indirect and General Funds activity is summarized as follows (in thousands):

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 Other Long-Term Investments Pool. The Reserve had a market value of $8.0 million on December 31, 2019, to which the 2019 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 2020 and approved an Indirect and General Funds Budget of $10.5 million for 2020.

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.

^*Includes variable payment for general and administrative services in accordance with the institution’s government compliant cost accounting practices.

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 2019:

• Robert L. James funded The James Prize in Science and Technology Integration to recognize researchers who adopt or adapt information or techniques from outside their fields to solve a major contemporary challenge with a $2 million endowment.
• The WEM Foundation established the Whitney and Elizabeth MacMillan Fund. This $1 million endowment will support the general missions of the NAS.
• The Blavatnik Family Foundation funded a five year joint program between the NAS and the Israel Academy of Sciences and Humanities to assist outstanding scientists in the United States and in Israel for the mutual benefit of the scientific communities of the two countries with a $1 million gift.
• The NAS raised over $603,000 through its annual fund from members and friends, with 24% of the membership making a gift.
• All members of the NAS Council made a gift to the NAS for the third year in a row. Continued 100% participation by the Council is an important benchmark that helps the NAS leverage giving from other donors.
• The National Academy of Medicine (NAM) raised $570,000 through its annual fund from members and friends. The NAM participation rate for all giving was 30%. NAM Endowment assets are pooled with the NAS Endowment and managed by the NAS Investment Committee.
• In honor of the 50th anniversary of the founding of the Institute of Medicine (IOM) and 5 years as the NAM, the 50th Anniversary Giving Challenge was launched. The goals are to increase gifts at the $50,000 or more level, recurring gifts, the giving participation of NAM members, and the number of giving society members.

Private gifts and grants are important sources of revenue that assist 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, 2019, was $213.5 million (see following chart and the Statements of Activities) and in the year ended December 31, 2018, was $207.5 million.

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 $103.3 million in 2019, compared with $86.1 million in 2018. (See Statements of Activities.)

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. The NAS Investment Committee oversees the investment of the $500 million in funds for the program (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, while investment losses reduce the ultimate program funds accordingly. The Gulf Research program spent $30.2 million and $18.2 million in 2019 and 2018, respectively.

Indirect Expenses

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 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 2019, total indirect expenses were $77.8 million compared to an approved budget of $81.1 million. For 2020, the indirect budget is set at $78.9 million to reasonably align indirect costs with projected program revenue, which is estimated to remain fairly constant in 2020. The indirect budget for 2020 includes funding to continue NAS’ efforts 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 increase in net assets during 2019 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 2019 results of operations are further described in the financial statements starting on page 49.

Conclusion

I would like to thank the members of the Council, the Committee on Budget and Internal Affairs, the Investment 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 Academy resources, providing steady oversight of the Academy’s various budgets, and paying careful attention to the Academy’s financial systems, records and reports.