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Report of the Treasurer for the Year Ended December 31, 2019 (2020)

Chapter: III. Financial Condition

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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2020. Report of the Treasurer for the Year Ended December 31, 2019. Washington, DC: The National Academies Press. doi: 10.17226/25854.
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III. Financial Condition

Auditing Committee June 9, 2020 Dr. Marcia McNutt President National Academy of Sciences Dear Dr. McNutt: In accordance with paragraph 11 of section II of the Bylaws of the National Academy of Sciences, the firm of Grant Thornton LLP was retained by the Auditing Committee on behalf of the Council to conduct an audit of the accounts of the Treasurer for the year ended December 31, 2019, and to report to the Auditing Committee. The independent accountants have completed their audit and submitted their report. In accordance with paragraph 13 of section II of the Bylaws, the Auditing Committee has reviewed the report and recommends to the Council that it be accepted and that the opinion of the independent accountants be published with the report of the Treasurer. Respectfully submitted, Auditing Committee Claude R. Canizares, Chair Ronald L. Graham Jeremiah P. Ostriker Claire L. Parkinson William W. Stead 46

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS GRANT THORNTON LLP 1250 Connecticut Ave. NW, Suite 400 Washington, DC 20036-3531 D 202 296 7800 F 202 833 9165 S linkd.in/grantthorntonus twitter.com/grantthorntonus To the Auditing Committee of the National Academy of Sciences: We have audited the accompanying financial statements of the National Academy of Sciences (“NAS”), which comprise the statements of financial position as of December 31, 2019 and 2018, and the related statements of activities and cash flows for the years then ended, and the related notes to the financial statements. Management’s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to NAS’ preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of NAS’ internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. GT.COM Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and each of its member firms are separate legal entities and are not a worldwide partnership. 47

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the National Academy of Sciences as of December 31, 2019 and 2018, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Washington, DC June 12, 2020 48

NATIONAL ACADEMY OF SCIENCES Statements of Financial Position As of December 31, 2019 and 2018 (in thousands) 2019 2018 ASSETS CURRENT ASSETS Cash and cash equivalents (Note 2) $ 10,288 $ 18,131 Restricted cash (Note 2) 90 1,340 Contracts receivable, net (Notes 2 and 11) 62,082 58,968 Contributions and other receivables, net (Notes 2, 4 and 14) 21,114 18,209 Other current assets 12,580 11,707 Total current assets 106,154 108,355 Other assets (Notes 2, 13, and 15) 10,924 5,881 Investments (Note 3) 1,148,672 1,036,994 Contributions receivable, net (Notes 2 and 4) 7,287 8,869 Property and equipment, net (Note 5) 146,614 151,222 Einstein Memorial 1,723 1,723 Total assets $ 1,421,374 $ 1,313,044 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable and accrued expenses $ 32,400 $ 29,718 Deferred revenue and advances (Note 2) 47,238 41,840 Other current liabilities (Notes 2, 12, 14, and 15) 7,086 5,941 Total current liabilities 86,724 77,499 Bonds payable, net (Note 12) 149,038 153,336 Funds held on behalf of others (Note 3) 13,252 12,333 Accrued employee benefits (Note 13) 1,217 862 Other long-term liabilities (Notes 2, 12, and 15) 10,502 7,095 Total liabilities 260,733 251,125 Commitments and contingencies (Notes 3, 11, 12, 13, 15, and 16) NET ASSETS Without donor restrictions 125,774 111,097 With donor restrictions (Notes 8 and 9) 1,034,867 950,822 Total net assets 1,160,641 1,061,919 Total liabilities and net assets $ 1,421,374 $ 1,313,044 The accompanying notes are an integral part of these financial statements. 49

NATIONAL ACADEMY OF SCIENCES Statements of Activities For the years ended December 31, 2019 and 2018 (in thousands) 2019 2018 Without Donor With Donor Without Donor With Donor Restrictions Restrictions Total Restrictions Restrictions Total REVENUES, GAINS, AND OTHER SUPPORT Government contracts and grants (Notes 2 and 11) $ 213,489 $ - $ 213,489 $ 207,545 $ - $ 207,545 Private contracts and grants 16,768 35,293 52,061 13,079 36,879 49,958 Other contributions 1,374 5,546 6,920 1,737 3,637 5,374 Fees and publications 16,721 - 16,721 16,705 - 16,705 Investment income (loss) 18,179 127,187 145,366 (4,023) (19,816) (23,839) Other income (Note 12) 18,034 - 18,034 17,869 - 17,869 Net assets released from restriction (Note 8) 83,981 (83,981) - 73,065 (73,065) - Total revenues, gains, and other support 368,546 84,045 452,591 325,977 (52,365) 273,612 EXPENSES (Note 2) Programs (Note 10) 287,088 - 287,088 267,091 - 267,091 Management and general 63,541 - 63,541 59,038 - 59,038 Fundraising 3,738 - 3,738 4,205 - 4,205 Total expenses 354,367 - 354,367 330,334 - 330,334 Other components of net periodic benefit cost (Note 13) (539) - (539) (608) - (608) Postretirement changes other than net periodic benefit cost (Note 13) 41 - 41 (1,738) - (1,738) Change in net assets 14,677 84,045 98,722 (2,011) (52,365) (54,376) Net assets at beginning of year 111,097 950,822 1,061,919 113,108 1,003,187 1,116,295 Net assets at end of year $ 125,774 $ 1,034,867 $ 1,160,641 $ 111,097 $ 950,822 $ 1,061,919 The accompanying notes are an integral part of these financial statements. 50

NATIONAL ACADEMY OF SCIENCES Statements of Cash Flows For the years ended December 31, 2019 and 2018 (in thousands) 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ 98,722 $ (54,376) Adjustments to reconcile change in net assets to net cash (used in) provided by operating activities Depreciation and amortization 6,623 6,595 Loss on disposal of property and equipment 102 279 Bad debt expense 2,348 1,783 Net (gain) loss on investments (130,736) 44,229 Net (gain) loss on investments held on behalf of others (1,646) 525 Change in value of interest rate swap 163 (1,230) Change in value of split-interest agreements (857) 107 Contributions restricted for endowment (4,962) (6,837) (Increase) decrease in assets: Other receivables (1,524) 116,415 Contracts receivable (5,261) 7,534 Other current assets (873) (579) Other assets (3,965) (106) Increase (decrease) in liabilities: Accounts payable and accrued expenses 2,683 (4,179) Deferred revenue and advances 5,398 4,232 Other current liabilities 1,002 574 Funds held on behalf of others 919 (965) Accrued employee benefits 354 (1,137) Other long-term liabilities 3,054 8 Net cash (used in) provided by operating activities (28,456) 112,872 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (1,959) (1,454) Sales or maturities of investments 347,193 350,163 Purchases of investments (326,488) (443,451) Net cash provided by (used in) financing activities 18,746 (94,742) CASH FLOWS FROM FINANCING ACTIVITIES Contributions restricted for endowment 4,962 6,837 Proceeds from lines of credit 0 41,135 Payments on lines of credit 0 (45,916) Payments on bond principal (4,345) (3,740) Net cash provided by (used in) financing activities 617 (1,684) Net (decrease) increase in cash, cash equivalents, and restricted cash (9,093) 16,446 Cash, cash equivalents, and restricted cash, beginning of year 19,471 3,025 Cash, cash equivalents, and restricted cash, end of year $ 10,378 $ 19,471 Supplemental disclosure of cash flow information: Interest paid $ 5,139 $ 4,497 The accompanying notes are an integral part of these financial statements. 51

NATIONAL ACADEMY OF SCIENCES Notes to the Financial Statements December 31, 2019 and 2018 NOTE 1 – ORGANIZATION National Academy of Sciences The National Academy of Sciences (“NAS”) was formed under a charter that was passed as an Act of Incorporation by the United States Congress and signed into law on March 3, 1863. NAS operates as a private membership organization of distinguished scholars engaged in scientific or engineering research, dedicated to the furtherance of science and its use for the general welfare. National Research Council Most of the activities undertaken by NAS are carried out through the divisions and boards of the National Research Council (“NRC”). The NRC draws on a wide cross section of the nation’s leading scientists and engineers for advisory services to government agencies and Congress. To respond effectively to both the disciplinary concerns of the research community and the complex interdisciplinary problems facing American society, NRC performs its studies and workshops through the following major divisions: Behavioral and Social Sciences and Education; Earth and Life Studies; Engineering and Physical Sciences; Gulf Research Program; Health and Medicine; Policy and Global Affairs; and Transportation Research Board. NRC activities are under the control of the NAS governance structure and, therefore, are included in the NAS financial statements. National Academy of Medicine The Institute of Medicine (“IOM”), which was established in 1970, was reconstituted as the National Academy of Medicine (“NAM”) effective June 1, 2015. NAM is a separate membership organization within NAS, and issues position statements on policy issues related to health and medicine, cooperates with the major scientific and professional societies in the field, identifies qualified individuals to serve on study groups in other organizational units, and disseminates information to the public and the relevant professions. The financial activities and results of NAM are included in the NAS financial statements. National Academy of Engineering The National Academy of Engineering (“NAE”) was established in 1964 under the charter of NAS as a related parallel organization, autonomous in its governance, administration, and the selection of its members. NAE shares with NAS the responsibility for advising the federal government on scientific issues. The NAE conducts independent program activities and activities through the NRC. The results of both of these activities are included in the NAS financial statements. 52

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting Net assets and changes in net assets are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets are classified and reported as follows: Net assets without donor restrictions: net assets that are not subject to donor-imposed stipulations. Net assets with donor restrictions: net assets subject to donor-imposed stipulations that will be met by actions of NAS and/or the passage of time (Note 8). In addition, net assets with donor restrictions also include net assets whereby the respective donors have stipulated that the principal contributed be invested and maintained in perpetuity (Note 9). Income earned from these investments is available for expenditures according to restrictions, if any, imposed by donors. Cash Equivalents NAS reports liquid, temporary investments purchased with original maturities of three months or less as cash equivalents. Cash equivalents managed by NAS’ investment managers as part of its long-term investment strategy are included in investments. Restricted Cash Restricted cash includes deposits that are legally restricted for the repayment of NAS’ outstanding bonds. Investments Investments are stated at fair value. Changes in the fair value of investments are reported within investment income (loss) in the statement of activities. Purchases and sales of securities are reflected on a trade-date basis. Gains and losses on sales of securities are based on average cost and are recorded in the statement of activities in the period in which the securities are sold. Dividends are accrued based on the ex-dividend date. Interest is recognized as earned. Property and Equipment Depreciation of NAS’ property and equipment is computed on a straight-line basis using the following lives: Asset Class Depreciable Lives Buildings 40 years Building improvements Lesser of the remaining life of the building or improvement Leasehold improvements Lesser of the remaining life of the lease or improvement Furniture and equipment 3 to 20 years Capitalized software 3 to 10 years The Einstein Memorial sculpture is valued at cost and is not depreciated. Work in progress is not depreciated until the related assets are placed in service. Capitalized software is amortized over its depreciable life when it is ready for its intended use and placed in service. 53

Split-Interest Agreements Charitable gift annuity agreements are classified as other assets and other long-term liabilities in the statements of financial position. Periodically, NAS pays a fixed amount of the assets to the beneficiary designated by the donor. Upon termination of an annuity agreement, the remainder interest in the assets, if any, is available for use by NAS as net assets with or without donor restrictions in accordance with the respective donor’s stipulation. At December 31, 2019 and 2018, NAS had charitable gift annuity assets of approximately $4.4 million and $3.3 million, respectively, which is included in other assets in the accompanying statements of financial position. NAS has recorded a liability of approximately $2.6 million at December 31, 2019 and $2.2 million at December 31, 2018, representing the present value of estimated future cash payments to annuitants based on the annuitants’ life expectancies and other relevant factors, which is included in other current liabilities and other long-term liabilities in the accompanying statements of financial position. Revenue Recognition NAS generates revenues principally from: (i) contracts and grants; (ii) contributions; and (iii) fees and publications. Contracts and Grants The majority of NAS activities are performed under cost-reimbursable contracts and grants with the U.S. government and private entities. These contracts and grants are for various activities performed by NAS, including studies and workshops, as well as the administration of fellowship programs. For each of the years ended December 31, 2019 and 2018, the U.S. Department of Transportation accounted for 39% of NAS’ total government contracts and grants revenue. NAS recognizes government and private contracts and grants as either contributions or exchange transactions, depending on whether the transaction is reciprocal or nonreciprocal. For contributions, revenue is recognized when a contribution becomes unconditional. Typically, contract and grant agreements contain a right of return or right of release from obligation provision and NAS has limited discretion over how funds transferred should be spent. As such, NAS recognizes revenue for these conditional contributions when the related barrier(s) has been overcome. For contracts and grants treated as exchange transactions, NAS has a right to consideration from the sponsoring organization in an amount that corresponds directly with the value to the sponsoring organization of NAS’ performance completed to date (costs incurred). For these agreements, NAS recognizes revenue in the amount to which NAS has the right to invoice. Of the total government contracts and grants, approximately 16% and 18% were considered exchange transactions for the years ended December 31, 2019 and 2018, respectively. Of the total private contracts and grants, approximately 26% and 22% were considered exchange transactions for the years ended December 31, 2019 and 2018, respectively. Contracts and grants are generally invoiced monthly for recoverable costs incurred in the preceding month. Contracts receivable consisted of $28.7 million of billed receivables and $33.4 million of unbilled receivables, as of December 31, 2019, respectively. Contracts receivable consisted of $17.8 million of billed receivables, $38.4 million of unbilled receivables, and $2.8 million of indirect costs under-recovered on federal contracts and grants as of December 31, 2018, respectively. Receivables related to revenue from exchange contracts and grants is included in contracts receivable, net in the accompanying statements of financial position. As of December 31, 2019 and 2018, NAS was owed $25.3 million and $33.5 million, respectively, on these contracts and grants. As of December 31, 2017, NAS was owed $67.0 million on receivables related to revenue from exchange contracts and grants. Allowances are recorded for estimated uncollectible contracts and grants based upon management’s judgment and analysis of the creditworthiness of the sponsoring organization, past collection experience, and other relevant factors. As of December 31, 2019 and 2018, NAS had an allowance for estimated uncollectible contracts and grants of $1.4 million and $2.8 million, respectively, which is reported net of contracts receivable in the accompanying statements of financial position. For contracts and grants treated as contributions, NAS had approximately $272.3 million and $282.3 million in unrecognized conditional contributions as of December 31, 2019 and 2018, respectively. The revenue related to these awards is conditioned on NAS incurring allowable expenditures under the terms of the agreements. 54

Contributions Contributions, including unconditional promises to give, are recognized as revenues in the period received. Conditional promises to give are not recognized until all conditions are satisfied. Contributions with donor-imposed restrictions are released when a restriction expires, that is, when the stipulated time period has elapsed, when the stipulated purpose for which the resource was restricted has been fulfilled, or both. For restricted contributions that were initially classified as conditional, NAS has elected to recognize the revenue in net assets without donor restrictions if the restriction is met in the same period that the revenue is recognized. Revenues from non-federal grants qualifying as contributions are recorded by NAS upon notification of the grant award and satisfaction of all conditions, as applicable. Such grants are classified as net assets with donor restrictions when use of the grant funds is limited to specific areas of study or is restricted for use in future periods. Gifts of land, buildings, or equipment are reported as net assets without donor restrictions unless explicit donor stipulations specify how the donated assets must be used. Donor restrictions on gifts that must be used to acquire or construct long-lived assets are released in the period in which the assets are acquired and placed in service. Allowances are recorded for estimated uncollectible contributions based upon management’s judgment and analysis of the creditworthiness of the donor, past collection experience, and other relevant factors. Contributions to be received after one year are discounted at an appropriate rate commensurate with risks involved. Amortization of the discount is recorded as additional revenue and is used in accordance with donor-imposed restrictions, if any, on the contributions. In addition to the conditional contributions related to contracts and grants noted above, NAS had approximately $1.7 million in unrecognized conditional contributions as of December 31, 2019 and 2018. The contributions are conditioned on the awarding of a prize, holding various workshops, and conducting certain outreach activities. Gulf Research Program revenue relates to two agreements between NAS and BP Exploration and Production, Inc. (“BP”) and Transocean Deepwater Inc. (“Transocean”), respectively. As a result of separate plea agreements between those corporations and the federal government, related to the 2010 Deepwater Horizon disaster, NAS was asked to establish a program focused on human health and environmental protection in the Gulf of Mexico. BP paid $350.0 million over five years, and Transocean paid $150.0 million over four years, to fund this 30-year, $500.0 million program. The present value of these payments in 2013 was $471.4 million, which was recognized as revenue in that year. The final payment for this program was received during the year ended December 31, 2018. Fees and Publications NAS publishes a weekly multidisciplinary scientific journal (the Proceedings of the National Academy of Sciences, or “PNAS”), as well as reports and other publications. Subscription fees are paid in advance, and revenue from PNAS subscriptions is recognized over the subscription period, which is typically one calendar year. Page fees, paid by contributors to PNAS when their article has been accepted for publication, are recognized when the article is published. Since the contracts for fees and publications have an original expected duration of one year or less, NAS has elected the practical expedient and not disclosed the value of unsatisfied performance obligations and expected timing for completion related to fees and publications. Meetings NAS holds a number of meetings throughout the year for which it collects revenue in the form of registration and exhibitor fees, the largest of which is the Transportation Research Board Annual Meeting. Revenue related to these meetings is recognized when the meeting occurs and the associated performance obligations have been fulfilled. Revenue related to these meetings totaled $8.3 million and $7.9 million for the years ended December 31, 2019 and 2018, respectively, and is reflected in other income in the accompanying statements of activities. 55

Since the contracts for meetings have an original expected duration of one year or less, NAS has elected the practical expedient and not disclosed the value of unsatisfied performance obligations and expected timing for completion related to fees and publications. Deferred Revenue and Advances For both federal and non-federal grants and contracts that are determined to be exchange transactions, revenue is recognized in the amount to which NAS has the right to invoice. Funds received in advance of being earned for these grants are recorded as deferred revenue and advances in the statement of financial position. Similarly, funds received in advance of being earned for conditional contributions are recorded as deferred revenue and advances in the statements of financial position. Funds received in advance of being earned for exchange contracts and grants are recorded as deferred revenue and advances in the statements of financial position. As of December 31, 2019 and 2018, NAS had $28.2 million and $29.5 million in deferred revenue, respectively, for these contracts and grants. Of the $29.5 million in deferred revenue as of December 31, 2018, $13.5 million was recognized as revenue during the year ended December 31, 2019. Of the $29.3 million in deferred revenue as of December 31, 2017, $11.8 million was recognized as revenue during the year ended December 31, 2018. Other changes in the balances of deferred revenue and advances were caused by normal timing differences between the satisfaction of performance obligations and payment received from the sponsoring organizations. For exchange contracts and grants, which are recognized based on the right to invoice, NAS has elected the practical expedient and not to disclose information about unsatisfied performance obligations. For PNAS subscriptions, any subscription revenue received in advance of the subscription year is recorded as deferred revenue and advances in the statement of financial position. For PNAS subscriptions, $3.0 million in deferred revenue as of December 31, 2018 was recognized as revenue during the year ended December 31, 2019, and $2.9 million in deferred revenue as of December 31, 2017 was recognized as revenue during the year ended December 31, 2018. For meetings, any cash received in advance of the meeting taking place is recorded as deferred revenue and advances in the statement of financial position. For meetings, $5.5 million in deferred revenue as of December 31, 2018 was recognized as revenue during the year ended December 31, 2019, and $5.4 million in deferred revenue as of December 31, 2017 was recognized as revenue during the year ended December 31, 2018. Deferred revenue and advances consist of the following as of December 31, 2019 and 2018 (in thousands): 2019 2018 Advances from private grants and contract sponsors $ 29,255 $ 26,453 Advances from U.S. government sponsors 9,260 6,879 Meetings and publication subscriptions 8,723 8,508 Total deferred revenue and advances $ 47,238 $ 41,840 Income Taxes NAS follows guidance that clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return, including issues relating to financial statement recognition and measurement. This guidance provides that the tax effects from an uncertain tax position can only be recognized in the financial statements if the position is “more-likely- than-not” to be sustained if the position were to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. 56

NAS is exempt from federal income tax under Internal Revenue Code (“IRC”) Section 501(c)(3), though it is subject to tax on income unrelated to its exempt purpose, unless that income is otherwise excluded by the IRC. NAS has processes presently in place to maintain its tax-exempt status; to identify and report unrelated income; to determine its filing and tax obligations in jurisdictions for which it may have a nexus; and to identify and evaluate other matters that may be considered tax positions. The tax years ending December 31, 2019, 2018, 2017, and 2016 are still open to audit for both federal and state income tax purposes. NAS has determined that there are no material unrelated business activities or uncertain tax positions that require recognition or disclosure in the accompanying financial statements. Functional Allocation of Expenses NAS’ primary program service is conducting scientific research, convening meetings, and administering grant and fellowship programs. Natural expenses attributable to more than one functional expense category are allocated using a variety of cost allocation techniques, such as square footage and time and effort. 2019 (in thousands) Management and Programs General Fundraising Total Expenses Salaries and benefits $ 102,922 $ 34,933 $ 2,675 $ 140,530 Grants, prizes, and awards 72,624 354 - 72,978 Subcontracts 52,387 - 3 52,390 Occupancy, depreciation, amortization, and interest 10,327 11,130 163 21,620 Travel 18,834 1,795 162 20,790 Professional fees 8,427 9,450 237 18,115 Printing and publications 8,078 581 94 8,753 Conferences, conventions, and meetings 5,757 2,085 231 8,073 Information technology 4,140 394 117 4,651 Other 3,592 2,819 56 6,467 Total expenses $ 287,088 $ 63,541 $ 3,738 $ 354,367 2018 (in thousands) Management and Programs General Fundraising Total Expenses Salaries and benefits $ 99,274 $ 32,964 $ 2,974 $ 135,212 Grants, prizes, and awards 61,263 20 - 61,283 Subcontracts 50,718 16 3 50,737 Occupancy, depreciation, amortization, and interest 10,434 12,241 131 22,806 Travel 16,510 1,614 203 18,327 Professional fees 8,009 5,537 535 14,801 Printing and publications 8,352 527 74 8,953 Conferences, conventions, and meetings 5,655 2,199 148 8,002 Information technology 3,503 1,081 60 4,644 Other 3,373 2,839 77 6,289 Total expenses $ 267,091 $ 59,038 $ 4,205 $ 330,334 57

Risks and Uncertainties NAS invests in various investment vehicles. Investment vehicles are exposed to various risks, such as interest rate, market, and credit risks. Due to the level of risk associated with these investments, it is at least reasonably possible that changes in the values of investments will occur in the near-term and that such changes could materially affect the amounts reported. NAS maintains its cash and cash equivalents in various bank accounts and money market funds that, at times, may exceed federally insured limits. NAS’ cash and cash equivalents have been placed with high credit quality financial institutions. NAS has not experienced, nor does it anticipate, losses with respect to such accounts. Use of Estimates The preparation of these financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures in the financial statements. Actual results could differ from those estimates. Recently Adopted Accounting Pronouncements NAS adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), for the year ended December 31, 2019. This standard was issued by the Financial Accounting Standards Board (“FASB”) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU requires not-for-profit lessees to report a right-of-use asset along with a lease liability that arises from most leases. NAS used the practical expedients allowed by the standard to not reassess whether any expired or existing contracts are or contain leases, not reassess the lease classification for any expired or existing leases, and not reassess initial direct costs for any existing leases. NAS adopted ASU 2016-02 as of January 1, 2019 and, as a result, the statement of financial position as of December 31, 2019 includes the right-of-use asset and lease liability, which are not reflected in the statement of financial position as of December 31, 2018 (see Note 15). NOTE 3 - INVESTMENTS AND FAIR VALUE MEASUREMENTS Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB Accounting Standards Codification (“ASC”) Section 820 establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1- Quoted prices in active markets for identical assets or liabilities. Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The following discussion describes the valuation methodologies used for financial assets measured at fair value. The techniques utilized in estimating the fair values are affected by the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. Care should be exercised in deriving conclusions about NAS’ business, its value or financial position based on the fair value information of financial assets presented. 58

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial asset, including estimates of timing, amount of expected future cash flows, and the credit standing of the issuer. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial asset. Furthermore, the disclosed fair values do not reflect any premium or discount that could result from offering for sale at one time an entire holding of a particular financial asset. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed. The following methods, assumptions, and inputs were used to estimate the fair value of each class of financial instruments: The carrying value of cash equivalents such as money market funds approximates fair value because of the short maturity of these investments. These amounts are included in Level 1 of the fair value hierarchy. NAS’ fixed maturity investments (bonds and notes) include U.S. Treasury securities, mortgage-backed securities, corporate bonds, and mutual funds that invest in these types of securities. Other than U.S. Treasury securities and mutual funds, these investments generally do not trade on a daily basis. The fair value estimates of such debt securities are based on prices provided by NAS’ investment managers and custodian banks as of the reporting date. Both the investment managers and the custodian banks use a variety of pricing sources to determine market valuations. Each designate specific pricing services or indexes for each sector of the market based upon the provider’s expertise. NAS’ debt securities portfolio is highly liquid, which allows for a high percentage of the portfolio to be priced through pricing services. Accordingly, the estimates of fair value for such debt securities are included in Level 2 of the fair value hierarchy. The estimated values of U.S. Treasury securities and debt mutual funds are based on actively traded market prices and are, accordingly, included in the bonds and notes amount in Level 1 of the fair value hierarchy. Fair values of exchange-traded equity securities and mutual funds that invest in equity securities have been determined by NAS from observable market quotations on major trade exchanges. Accordingly, such equity securities are disclosed in Level 1 of the fair value hierarchy. Fair values of futures contracts are based on the most recent available closing quotations on an exchange. Accordingly, such futures contracts are disclosed in Level 1 of the fair value hierarchy. The reported fair value of alternative investments, including private equity securities and hedge funds, is based on the alternative investment fund managers’ net asset value (“NAV”) per ownership interest. Private equity investments are comprised of limited partnership interests. Valuations provided by alternative investment fund managers include estimates, appraisals, assumptions, and methods that are reviewed by management. When necessary, NAS adjusts NAV for contributions and distributions subsequent to the latest NAV valuation date when calculating fair value. NAS analyzes the NAVs provided by alternative investment fund managers on a regular basis considering relevant economic and market conditions, applicable benchmarks and its understanding of the nature and related risks of the investments. These investments are not leveled in the fair value hierarchy. NAS’ policy is to recognize transfers between levels of the fair value hierarchy as of the end of the reporting period in which the event or change in circumstances occurred. There were no transfers among levels during 2019 and 2018. Investments are held for the following purposes as of December 31, 2019 and 2018 (in thousands): 2019 2018 Program pool investments $ 47,577 $ 47,820 Gulf Research Program investments 504,891 459,728 Long-term investment pool, including endowment assets 549,581 491,571 Other investments 46,623 37,875 $ 1,148,672 $ 1,036,994 59

The following table presents NAS’ fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2019 (in thousands): Investments Measured at Total Level 1 Level 2 NAV Investments: Cash equivalents $ 113,962 $ 113,962 $ - $ - Bonds and notes: U.S. treasuries/government bonds 304,553 304,553 - - Corporate bonds 12,314 11,763 551 - Equity: U.S. large equity 229,925 229,925 - - U.S. small/mid equity 61,292 61,292 - - Non-U.S. equity (developed) 29,949 29,949 - - Non-U.S. equity (emerging) 211 211 - - Index futures contracts 339 339 - - Long/short equity hedge funds 104,415 - - 104,415 Hedge fund investments 256,672 - - 256,672 Private equity funds 34,419 - - 34,419 Total 1,148,051 $ 751,994 $ 551 $ 395,506 Cash held for investment 621 Total investments $ 1,148,672 Other assets: Charitable gift annuity assets $ 4,360 $ 3,411 $ 949 $ - Deferred compensation assets (Note 13) 1,217 1,199 18 - Total other assets $ 5,577 $ 4,610 $ 967 $ - 60

The following table presents NAS’ fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2018 (in thousands): Investments Measured at Total Level 1 Level 2 NAV Investments: Cash equivalents $ 22,556 $ 22,566 $ - $ - Bonds and notes: U.S. treasuries/government bonds 272,908 272,908 - - Mortgage-backed securities 868 - 868 - Corporate bonds 43,531 41,628 1,903 - Non-U.S. fixed income 7,928 7,928 - - Equity: - U.S. large equity 295,559 295,559 - - U.S. small/mid equity 60,511 60,511 - - Non-U.S. equity (developed) 61,308 61,308 - - Non-U.S. equity (emerging) 21,208 21,208 - - Real estate 5,982 5,982 - Long/short equity hedge funds 38,993 - - 38,993 Hedge fund investments 175,877 - - 175,877 Private equity funds 28,571 - - 28,571 Total 1,035,800 $ 789,588 $ 2,771 $ 243,441 Cash held for investment 1,194 Total investments $ 1,036,994 Other assets: Charitable gift annuity assets $ 3,261 $ 2,713 $ 548 $ - Deferred compensation assets (Note 13) 862 862 - - Total other assets $ 4,123 $ 3,575 $ 548 $ - The National Academies’ Corporation (“TNAC”, see Note 14), a related entity, invests certain of its assets in the NAS investment pool. TNAC investments participate in the investment pool proportionally with all other funds in this pool. The NAS obligation to TNAC for these funds held in trust, which totaled $13.3 million and $12.3 million as of December 31, 2019 and 2018, respectively, is reported as funds held on behalf of others in the accompanying statements of financial position. The funds held on behalf of others liability equals the investments held in NAS’ investment pool on behalf of TNAC. 61

The following table presents the nature and risk of assets with fair values estimated using NAV held at December 31, 2019 and 2018 (in thousands): As of December 31, 2019 NAV as of Unfunded December Redemption Redemption NAV Commitments 31, 2018 Frequency Notice Period Long/short equity hedge funds - U.S. large equity (a) $ 104,415 N/A $ 38,993 Quarterly 45 days/120 days Hedge fund – multi- Monthly/Quarterly 30 days/45 days/ strategies multi-vehicle (b) 256,672 N/A 175,877 Annually 365 days Private equity - Asia (c) 16,449 $ 1,448 18,404 N/A N/A Private equity - Global (d) 14,312 68,352 7,470 N/A N/A Private equity - Domestic (e) 3,658 1,348 2,697 N/A N/A Total $ 395,506 $ 71,148 $ 243,441 (a) This category relates to long-short equity hedge funds comprised of equity investments. Each of these funds buys investments long and sells short with the ability to use leverage. These funds can also invest in derivative instruments such as forward, futures, and option contracts. (b) This class includes investments in multi-strategy, multi-vehicle hedge funds with the objective of maximizing long- term, risk-adjusted returns, and capital appreciation by investing in securities, investment funds, discretionary accounts, and investment partnerships across a broad range of marketable and alternative asset classes. Asset classes include domestic and international marketable equity securities, hedged equity, real estate, natural resource, fixed income, and private equity and absolute return strategies, primarily focused in the United States. A portion of one fund in this category cannot be redeemed prior to December 2020. (c) This class includes several private equity funds that invest in equity, debt, or debt-oriented instruments, primarily in privately held companies, which own or contractually control operating entities located in the People’s Republic of China and India. Investments held in India primarily include equity securities of “early to early growth stage” companies in multiple sectors, except real estate. These investments can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over 1 to 10 years. (d) This class includes several global private equity funds with diverse portfolios consisting primarily of venture capital funds, leveraged buyout funds, midstage growth capital funds, assets of healthcare companies, and international private equity funds. These investments are focused on several industries including, but not limited to, insurance, services, and consumer-related industries. These investments can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over 1 to 6 years. (e) This class includes several domestic private equity funds, which invest in domestic equity securities, warrants, or other securities that are generally not actively traded at the time of investment. These investments are focused on several industries including, but not limited to, insurance, financial services, consumer-related, and communications. These investments can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over 1 to 7 years. 62

NOTE 4 - CONTRIBUTIONS RECEIVABLE, NET Contributions not yet collected are included in contributions and other receivables, net (current) and contributions receivable, net (long-term) in the accompanying statements of financial position, and mature as follows (in thousands): 2019 2018 Less than one year $ 13,631 $ 14,348 One to five years 7,088 8,267 Thereafter 600 1,200 21,319 23,815 Less: Discount at rates ranging from 2.00% to 3.35% (401) (598) Allowance for uncollectible contributions (200) (6) 20,718 23,211 Less: current portion (13,431) (14,342) Total contributions receivable, net, long-term $ 7,287 $ 8,869 NOTE 5 - PROPERTY AND EQUIPMENT, NET Property and equipment as of December 31, 2019 and 2018 is comprised of the following (in thousands): 2019 2018 Land $ 29,689 $ 29,689 Furniture and equipment 25,318 31,238 Buildings and improvements 177,868 177,896 Capitalized software 15,947 17,035 Work in progress 698 580 Leasehold improvements 4,073 4,073 253,593 260,511 Less: accumulated depreciation and amortization (106,979) (109,289) Total property and equipment, net $ 146,614 $ 151,222 Depreciation and amortization expense was $6.5 million for each of the years ended December 31, 2019 and 2018. NOTE 6 - LINES OF CREDIT Until September 2019, NAS maintained an available $35 million line of credit from Wells Fargo. In September 2019, NAS renewed its line of credit with Wells Fargo for $20 million from August 1, 2019 through December 31, 2019, for $30 million from January 1, 2020 through April 30, 2020, and for $20 million from May 1, 2020 through September 30, 2020. The line of credit from Wells Fargo bears interest at LIBOR plus 0.55% (2.31% and 3.06% as of December 31, 2019 and 2018, respectively) and expires on September 30, 2020. NAS also maintains an available $15 million line of credit from TD Bank, which bears interest at LIBOR plus 0.55% (2.31% and 3.07% as of December 31, 2019 and 2018, respectively) and expires on August 31, 2020. NAS has pledged and granted to each bank a security interest in NAS’ gross revenues. Interest expense related to the lines of credit for the years ended December 31, 2019 and 2018 totaled approximately $69,000 and $87,000, respectively. 63

NOTE 7 - FINANCIAL ASSETS AND LIQUIDITY Financial assets available for general expenditure, that is, without donor or contractual restrictions limiting their use, within one year of the date of the statements of financial position, are comprised of the following as of December 31, 2019 and 2018 (in thousands): 2019 2018 Financial assets: Cash and cash equivalents $ 10,288 $ 18,131 Contracts receivable, net 62,082 58,968 Contributions and other receivables, net, current 21,114 18,209 Investments 1,148,672 1,039,994 1,242,156 1,132,302 Plus endowment fund appropriation for the following year 5,388 5,159 Less those unavailable for general expenditures within one year, due to: Contractual or donor-imposed restrictions: Endowment funds (436,112) (387,286) Funds restricted by donors through time or purpose restrictions (591,476) (554,669) Internal designations (43,149) (40,567) Funds held on behalf of others (13,252) (12,333) (1,083,989) (994,855) Financial assets available to meet cash needs for general expenditures within one year $ 163,555 $ 142,606 NAS is substantially supported by cost reimbursable contracts and grants from federal and private sponsors, which includes indirect cost recovery (as further discussed in Note 11). A portion of private grants and other contributions carries donor restrictions. Because a donor’s restriction requires resources to be used in a particular manner or in a future period, NAS must maintain sufficient resources to meet those commitments to donors. Thus, certain financial assets may not be available for general expenditure within one year. As part of liquidity management, NAS has a practice to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, NAS invests cash in excess of daily requirements in short- and long-term investments. In the event of an unanticipated liquidity need, NAS could draw upon $35 million of available lines of credit (as further discussed in Note 6). In addition, NAS has $43 million in internally designated funds, which are available for general expenditure with appropriate internal approval. 64

NOTE 8 - NET ASSETS WITH DONOR RESTRICTIONS Net assets with donor restrictions are available for the following purposes as of December 31, 2019 and 2018 (in thousands): 2019 2018 Subject to expenditure for specific purpose: Gulf Research Program $ 506,081 $ 470,043 Other sponsored research and advisory programs 90,537 89,291 596,618 559,334 Investment in perpetuity, including amounts above the original gift amount ($182,527) which, once appropriated, are expendable to support: Other sponsored research and advisory programs 220,594 196,183 Prizes and awards 71,587 61,932 Woods Hole facility 7,875 7,183 General operations 138,193 126,190 438,249 391,488 Total net assets with donor restrictions $ 1,034,867 $ 950,822 Net assets were released from donor-imposed restrictions in satisfaction of the following purposes during the years ended December 31, 2019 and 2018 (in thousands): 2019 2018 Purpose-restricted releases: Gulf Research Program $ 30,174 $ 18,223 Other sponsored research and advisory programs 46,431 47,091 Prizes and awards 1,440 1,935 Woods Hole facility 333 328 78,378 67,577 Time-restricted releases 5,603 5,488 Net assets released from restrictions $ 83,981 $ 73,065 NOTE 9 - ENDOWMENT Endowment Assets The NAS endowment consists of 131 individual funds established to support general operations, sponsored research and advisory programs, prizes and awards, and the operations of the Woods Hole facility. The endowment solely comprises donor-restricted net assets. The investments of the endowment are included in the NAS investment pool, as described in Note 3. 65

Interpretation of Relevant Law NAS has interpreted the District of Columbia Uniform Prudent Management of Institutional Funds Act of 2007 (the “Act”) as requiring NAS, absent explicit donor stipulations to the contrary, to act in good faith and with the care that an ordinarily prudent person in a like position would exercise under similar circumstances in making determinations to appropriate for expenditure or accumulate endowment funds, taking into account both its obligation to preserve the value of the endowment and its obligation to use the endowment to achieve the purposes for which it was donated. NAS classifies as net assets with donor restrictions (a) the original value of gifts donated to its permanent endowment, (b) the original value of subsequent gifts to its permanent endowment, and (c) accumulations to its permanent endowment required by the applicable donor gift instrument. Appreciation on donor-restricted endowment funds is classified in net assets with donor restrictions until such amounts are appropriated for spending by the NAS Council in a manner consistent with the standard of prudence prescribed by the Act. In accordance with the Act, NAS considers the following factors in making a determination to appropriate investment funds attributable to donor-restricted endowments: (1) The duration and preservation of its endowment fund; (2) The purposes of the institution and its endowment fund; (3) General economic conditions; (4) The possible effect of inflation or deflation; (5) The expected total return from income and the appreciation of investments; (6) Other resources of the institution; and (7) The investment policy of the institution. Return Objectives and Strategies NAS has adopted investment and spending policies for endowment assets that are designed to provide a predictable stream of funding to programs supported by its endowment while seeking to protect the real purchasing power of the assets from inflation. Accordingly, NAS has adopted guidelines which feature a commitment to minimizing volatility while maximizing risk-adjusted return. NAS’ spending policy limits the annual spending to 5% of the three-year average fair value of the participating funds in the endowment portfolio. This is consistent with NAS’ objective to maintain the purchasing power of the endowment assets held in perpetuity, as well as to provide additional real growth through new gifts and investment return. Changes in endowment assets for the years ended December 31, 2019 and 2018 are as follows (in thousands): 2019 2018 Endowment assets with donor restrictions, beginning of year $ 386,517 $ 404,615 Investment return (loss), net 55,669 (9,081) Contributions 4,962 6,837 Amounts appropriated for expenditure (15,963) (15,854) Endowment assets with donor restrictions, end of year $ 431,185 $ 386,517 Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the original value of the gift donated to the permanent endowment. Deficiencies of this nature are reported as net assets with donor restrictions. For funds with a fair value below the original value of the gift, annual spending may be limited at the organization’s discretion until the fair value returns to the required level. At December 31, 2019, there were no endowment funds with a fair value below the original value of the gift. At December 31, 2018, there was one endowment fund with a fair value below the original value of the gift. The original fair value of the gift was $750,000 and the fair value as of December 31, 2018 was $744,000, resulting in a deficiency of $6,000. Subsequent gains that restore the fair value of the assets of the endowment fund to the required level are classified as an increase in net assets with donor restrictions. 66

NOTE 10 - PROGRAM EXPENSES Program expenses for the years ended December 31, 2019 and 2018 are summarized as follows (in thousands): 2019 2018 Transportation Research Board $ 84,690 $ 82,006 Policy and Global Affairs 70,214 69,684 Gulf Research Program 31,744 18,611 Health and Medicine 23,368 20,928 Engineering and Physical Sciences 16,571 15,624 Earth and Life Studies 16,057 16,852 Behavioral and Social Sciences and Education 12,773 13,290 Proceedings of the National Academy of Sciences 11,370 12,070 National Academy of Sciences Programs 7,467 7,221 National Academy of Medicine Programs 6,115 4,993 National Academy of Engineering Programs 3,575 2,415 National Academy Press 2,398 2,443 LabX 746 954 Total program expenses $ 287,088 $ 267,091 NOTE 11 - RECOVERY OF INDIRECT COSTS NAS receives indirect cost recovery on its federal contracts and grants. An overhead assessment is applied to direct salaries, accrued leave, fringe benefits, and services provided by outside contractors (e.g., temporary personnel agencies, consultants) on NAS property. A general and administrative assessment (“G&A”) is applied to direct costs and overhead less subcontract costs and stipends. Therefore, both the overhead and G&A rates are applied to projects incurring direct salaries and other direct costs such as travel. If a program does not require direct salaries, such as a travel grant program, a subcontract/flow-through administration rate is applied. Certain off-site work (not performed on NAS property) is assessed reduced overhead rates. NAS bills for indirect cost recovery throughout the year based on negotiated rates. At the end of each year, NAS compares actual expenses incurred in each of its cost pools to the amounts recovered based on its billing rates. The difference is recorded as its indirect cost carryforward. If NAS over recovers on its indirect costs during the year, a liability is recorded. If NAS under recovers, a receivable is recorded. NAS has a cumulative net over-recovery of approximately $2.8 million and a net under-recovery of approximately $2.8 million as of December 31, 2019 and 2018, respectively. The over-recovery is included in the deferred revenue and advances balance and the under-recovery is included in the contracts receivable, net balance in the accompanying statements of financial position. NOTE 12 - BUILDING PROJECT AND FINANCING Building Project Revenue Bonds In January 1999, the District of Columbia issued Series 1999A, Series 1999B, and Series 1999C tax-exempt revenue bonds in the amount of $130,960,000 on behalf of NAS. Proceeds from the sale of the revenue bonds financed the cost of the acquisition of 44,250 square feet of land and related construction of an office building, as well as to pay certain costs of issuing the bonds. This building consolidates most of NAS’ program activities into one location. In June 2008, the District of Columbia issued Series 2008A tax-exempt revenue bonds in the amount of $66,325,000 on behalf of NAS. The proceeds were used to refund the Series 1999B and Series 1999C revenue bonds, as well as to pay certain costs of issuing the bonds. 67

In April 2009, the District of Columbia issued Series 2009A tax-exempt revenue bonds in the amount of $57,500,000 on behalf of NAS. The proceeds were used to refund the Series 1999A revenue bonds, as well as pay certain costs of issuing the bonds. In May 2010, the District of Columbia issued Series 2010A tax-exempt revenue bonds in the amount of $59,550,000 on behalf of NAS. These bonds were sold to finance the cost to restore the NAS headquarters building on Constitution Avenue in Washington, DC and to pay for certain costs of issuance. The restoration was completed in 2012. In December 2012, NAS remarketed the Series 2008A and 2009A bonds as direct bank purchases. The Series 2008A bonds were purchased by Wells Fargo Municipal Capital Strategies LLC; the Series 2009A bonds were purchased by TD Bank, N.A. In May 2017, NAS refinanced the Series 2008A and Series 2009A bonds with the existing banks to extend the mandatory repurchase to May 2027, at which point NAS could renew the direct purchase agreements, remarket the bonds, or repurchase the bonds. In December 2017, the District of Columbia issued Series 2017A tax-exempt revenue bonds in the amount of $52,760,000 on behalf of NAS. The proceeds were used to advance refund a portion of the Series 2010A revenue bonds. The Series 2017A bonds were issued as direct bank purchases with Century Subsidiary Investments, Inc. III. In August 2019, NAS remarketed the Series 2008A bonds. $38,100,000 of the bonds were purchased by TD Bank, N.A and $19,000,000 of the bonds were purchased by Century Subsidiary Investments, Inc. III. The bonds held by TD Bank, N.A. have a mandatory repurchase date of July 31, 2034, at which point NAS could renew the direct purchase agreement, remarket the bonds, or repurchase the bonds. The bonds held by Century Subsidiary Investments, Inc. III mature April 1, 2040 and do not have a mandatory repurchase date. NAS is obligated under the revenue bonds as follows (in thousands): 2019 2018 Series 2008A revenue bonds, term, at flexible rates (2.8% in 2019 and 2.4% in 2018), maturing at various dates from January 1, 2019 through 2043 $ 57,100 $ 58,300 Series 2009A revenue bonds, term, at flexible rates (2.3% in 2019 and 2.0% in 2018), maturing at various dates from January 1, 2019 through 2049 44,520 45,770 Series 2010A revenue bonds, serial, with interest rates ranging from 4.0% to 5.0%, maturing at various dates from April 1, 2019 through 2020 1,505 2,945 Series 2017A revenue bonds, term, with fixed interest rates of 2.24% until July 15, 2018 and 2.41% until 4/1/2020, with flexible rates thereafter, maturing at various dates from April 1, 2019 through 2040 52,150 52,605 Total bonds, at face value 155,275 159,620 Plus: unamortized premium 1 12 Less: debt issuance costs (1,772) (1,940) Total bonds payable 153,504 157,692 Less: current portion (included in other current liabilities) (4,466) (4,356) Bonds payable, long-term $ 149,038 $ 153,336 The serial and term bonds represent unsecured general obligations of NAS. Interest on the 2008A and 2009A bonds is payable monthly. Interest on the 2010A and 2017A bonds is payable semiannually every April 1 and October 1. 68

Scheduled maturities are as follows (in thousands): Years ending December 31: 2020 $ 4,465 2021 4,845 2022 4,930 2023 4,995 2024 5,070 Thereafter 130,970 $ 155,275 Interest expense on the bonds payable for the years ended December 31, 2019 and 2018 totaled $4.0 million and $3.7 million, respectively. Interest Rate Swaps In October 1999, NAS entered into an interest-rate swap agreement, with an effective date of February 1, 2000, relating to the $66 million face amount of its Series 1999A revenue bonds. The agreement provides for NAS to receive 4.97% in interest on a notional amount of $65 million and to pay interest at a floating rate option based on the weekly interest rate resets of tax-exempt variable-rate issues per the Securities Industry and Financial Markets Association (“SIFMA”) Municipal Swap Index. NAS amended the agreement for the 2005-2020 period by agreeing to give up the benefit of any 30-day period during which the SIFMA index remains below 2.25% for the entire 30 days. Each time this occurs, the rate on the swap portfolio reverts to the fixed rate noted above for that month only. NAS entered into this fixed-to-variable swap agreement to manage its exposure to interest rate changes. The fixed-rate debt obligations exposed NAS to variability in the cost recovery stream due to changes in interest rates. NAS recovers the costs of borrowing through a capital investment incentive rate that is set by the U.S. government and is tied to a variable index. If interest rates increase, the capital investment incentive recovery increases. Conversely, if interest rates decrease, the capital investment incentive recovery decreases. Therefore, NAS entered into a derivative instrument that ties the fixed-rate debt to a variable index to manage fluctuations in cash flows resulting from interest rate risk. By using derivative financial instruments to hedge exposures to changes in interest rates, NAS exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes NAS, which creates credit risk for NAS. When the fair value of a derivative contract is negative, NAS owes the counterparty and, therefore, it does not possess credit risk. NAS minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties. In May 2009, NAS entered into an additional swap agreement as a result of a counterparty exercising a swaption related to the Series 1999A Revenue Bonds. The variable-to-fixed swap requires NAS to pay 5.00% on a notional amount of $55 million and to receive a floating rate equal to 67% of one-month LIBOR plus 0.41%. NAS entered into this variable-to-fixed swap agreement in order to preserve the synthetic variable rate achieved through the 1999 swap agreement once the fixed-rate Series 1999A bonds were refunded with the variable-rate Series 2009A bonds. With regard to the fixed-to-variable interest rate swap, NAS recorded a loss on the change in the fair value of its swap agreement of approximately $19,000 and $13,000 for the years ended December 31, 2019 and 2018, respectively, which is included in other income in the accompanying statements of activities. The fair value of the interest rate swap was recorded as an asset of $3,000 and $22,000 as of December 31, 2019 and 2018, respectively, and is included in other assets in the accompanying statements of financial position. 69

Pertaining to the swaption and resultant variable-to-fixed interest rate swap, NAS recorded a gain on the change in the fair value of approximately $0.05 million and $1.3 million for the years ended December 31, 2019 and 2018, respectively, which is included in other income in the accompanying statements of activities. The fair value of the swap is recorded as a liability of approximately $4.8 million as of December 31, 2019 and 2018, and is included in other current liabilities and other long-term liabilities in the accompanying statements of financial position. The fair value of the swaps are determined using pricing models based on observable market data such as prices of instruments with similar maturities and characteristics, interest rate yield curves, and measures of interest rate volatility. The value was determined after considering the potential impact of collateralization and netting agreements, adjusted to reflect nonperformance risk of both the counterparty and NAS. Accordingly, the interest rate swaps are included in Level 2 of the fair value hierarchy. NOTE 13 - EMPLOYEE BENEFITS Retirement Plans NAS has a noncontributory defined-contribution retirement plan covering substantially all of its employees (based on certain benefit eligibility requirements). The funding vehicles under the plan consist of group investments issued by Teachers Insurance and Annuity Association (“TIAA”) and College Retirement Equities Fund (“CREF”), (known collectively as TIAA), as well as mutual funds issued by TIAA, Vanguard Fiduciary Trust Company, and other third parties. Participants in this plan vest immediately. NAS has received a favorable determination letter from the Internal Revenue Service on the qualification of this plan under Section 401(a) of the IRC. In addition, NAS has a voluntary employee contribution retirement plan that is funded solely by employee contributions made on a pretax salary-reduction basis under Section 403(b) of the IRC. The funding vehicles under the plan consist of group investments issued by TIAA and CREF, as well as mutual funds issued by TIAA, Vanguard Fiduciary Trust Company, and other third parties. Pension expense for the years ended December 31, 2019 and 2018 amounted to $12.7 million and $12.4 million, respectively. NAS’ policy is to fund pension benefits as they are earned. NAS’ normal retirement age is 62, but there is no mandatory age for retirement. Deferred Compensation During the year ended December 31, 2019, NAS implemented a 457(b) plan (“457(b) Plan”). The purpose of the 457(b) Plan is to provide deferred compensation to employees who meet or exceed a base compensation threshold that is set by NAS. NAS also holds investments as part of a prior and now frozen deferred compensation arrangement for certain employees. The fair value of investments held for the two plans totaled $1.2 million and $862,000 as of December 31, 2019 and 2018, respectively, which is reported within other assets in the accompanying statements of financial position. The related obligation is included in accrued employee benefits in the accompanying statements of financial position. Deferred compensation investments are held in debt and equity mutual funds, as well as group investments issued by the plan custodian, which are valued using Level 1 and Level 2 inputs (Note 3). The deferred compensation obligation to employees is equal to the fair value of the investments held. 70

Postretirement and Postemployment Benefits NAS provides certain health and life insurance benefits for employees retired due to length of service. All benefit-eligible employees may become eligible for service retiree benefits if they reach age 60 while working for NAS and complete five years of service in a benefit-eligible status for medical and 10 years of service for life insurance benefits. In addition, certain health and life insurance benefits are provided for employees retired due to disability. A benefit-eligible employee may become eligible for disabled retiree benefits if deemed totally disabled under NAS’ long-term disability insurance or if they are eligible for disability benefits from the Social Security Administration. Life insurance benefits are provided based on coverage at date of disability and health insurance may be continued if the disabled retiree had participated in an NAS health insurance plan for five years at the date of disability. Insurance companies whose premiums are determined on an experience-rated basis provide life and health insurance benefits for retirees. Medicare supplement insurance is not experience rated. The retiree welfare benefit plan (the “Plan”) is contributory for health insurance purposes for employees who retired on or after January 1, 1992. Participant contributions for health insurance are based on a percentage of the monthly premium paid by NAS (from 25% to 100%). The participant contribution is also based on their date of retirement, length of service, and choice of health insurance carrier. The accrued postretirement benefit obligation is reported within other assets in the accompanying statements of financial position. Postretirement changes other than net periodic benefit cost are as follows (in thousands): 2019 2018 Net actuarial loss (gain) $ 669 $ (946) Recognized net actuarial loss (684) (848) Recognized prior service credit 56 56 Total $ 41 $ (1,738) Items not yet recognized as a component of net periodic benefit cost at December 31, 2019 and 2018 are as follows (in thousands): 2019 2018 Net actuarial loss $ 11,286 $ 11,301 Prior service credit (153) (210) Total $ 11,133 $ 11,091 The estimated amounts, measured at year-end, that are expected to be recognized in the net periodic benefit cost over the next fiscal year for the postretirement benefit plan are as follows (in thousands): 2019 2018 Prior service credit $ (56) $ (56) Recognized actuarial loss 602 684 Total $ 546 $ 628 71

The following table presents the changes in benefit obligations, changes in plan assets, funded status, and the components of net periodic benefit cost for the years ended December 31, 2019 and 2018 (in thousands): 2019 2018 Change in benefit obligation: Benefit obligation, beginning of year $ 42,828 $ 45,936 Service cost 1,431 1,672 Interest cost 1,788 1,582 Actuarial loss (gain) 6,036 (5,309) Benefits provided (1,154) (1,053) Benefit obligation, end of year 50,929 42,828 Change in plan assets: Fair value of plan assets, beginning of year 44,536 44,900 Actual return (loss) on plan assets 8,321 (1,381) Employer contributions 892 2,042 Benefits paid (1,154) (1,025) Fair value of plan assets, end of year 52,595 44,536 Funded status over funded $ 1,666 $ 1,708 2019 2018 Components of net periodic benefit cost: Service cost $ 1,431 $ 1,672 Interest cost 1,788 1,582 Expected return on plan assets (2,955) (2,982) Recognized prior service credit (56) (56) Recognized actuarial loss 684 848 Net periodic benefit cost $ 892 $ 1,064 The assumptions used to determine net periodic benefit cost for the years ended December 31, 2019 and 2018 are as follows: 2019 2018 Discount rate 4.25% 3.50 % Expected long-term return on plan assets 6.75% 6.75 % Rate of increase in healthcare costs: Under age 65 5.99% 6.21 % Over age 65 5.43% 5.54 % The assumptions used to calculate the accumulated postretirement benefit obligation for the years ended December 31, 2019 and 2018 are as follows: 2019 2018 Discount rate 3.27% 4.25% Rate of increase in healthcare costs for next year: Under age 65 5.77% 5.99% Over age 65 5.30% 5.43% The trend rate for growth in healthcare costs was assumed to decline gradually beginning in 2019 to 4.5% in the year 2038. 72

The healthcare cost trend rate assumption has a significant impact on the postretirement benefit costs and obligations. The effect of a 1% increase in the assumed healthcare cost trend rate would have resulted in the following effects (in thousands): 2019 2018 Postretirement benefit obligation $ 8,216 $ 6,289 Benefit expense 620 691 The effect of a 1% decrease in the assumed healthcare cost trend rate would have resulted in the following effects (in thousands): 2019 2018 Postretirement benefit obligation $ (6,516) $ (5,058) Benefit expense (480) (527) NAS postretirement benefit plan asset allocations at December 31, 2019 and 2018, by asset class, are as follows: 2019 2018 Cash 2% 3% Bonds and notes 45 52 Equity 53 45 100% 100% The investment objective of the plan is to produce a rate of return over the long-term that will provide for fund growth, protect against the effect of inflation, and provide for some stability in different market environments. The fund is diversified between fixed income and equity investments. With this diversification and investment in broader market funds, there is reasonable assurance that no single security or class of securities will have a disproportionate impact on plan assets. Plan assets are invested with a long-term growth with reduced volatility strategy. The overall long-term rate of return was developed by estimating the long-term real rate of return for the plan’s asset mix, while taking into account the effects of inflation. This estimate was developed by evaluating the history of investments with similar asset allocations. 73

The following table presents the fair value hierarchy for the postretirement benefit plan assets at December 31, 2019 (in thousands): Fair Value Measurements Using Total Level 1 Level 2 Financial assets: Retiree Welfare Benefit Plan investments: Cash equivalents $ 1,056 $ 1,056 $ - Bonds and notes: U.S. treasuries/government bonds 9,283 9,283 - Mortgage-backed securities 1,241 - 1,241 Corporate bonds 12,911 9,716 3,195 Non-U.S. fixed income 32 - 32 Equity: U.S. large equity 15,959 15,959 - U.S. small/mid equity 1,162 1,162 - Non-U.S. equity (developed) 10,701 10,701 - Total 52,345 $ 47,877 $ 4,468 Cash held for investment 250 Total investments $ 52,595 The following table presents the fair value hierarchy for the postretirement benefit plan assets at December 31, 2018 (in thousands): Fair Value Measurements Using Total Level 1 Level 2 Financial assets: Retiree Welfare Benefit Plan investments: Cash equivalents $ 1,089 $ 1,089 $ - Bonds and notes: U.S. treasuries/government bonds 8,743 8,743 - Mortgage-backed securities 3,117 - 3,117 Corporate bonds 11,209 8,925 2,284 Non-U.S. fixed income 29 - 29 Equity: U.S. large equity 10,770 10,770 - U.S. small/mid equity 3,274 3,274 - Non-U.S. equity (developed) 6,055 6,055 - Total 44,286 $ 38,856 $ 5,430 Cash held for investment 250 Total investments $ 44,536 The methods and assumptions used to estimate the fair value of each class of financial instrument are further discussed in Note 3. 74

NAS expects to contribute to the Plan the actuarially determined net periodic cost for 2020, which is approximately $657,000. The following benefit payments, which reflect future services, are expected to be paid in future years as noted, as of December 31, 2019 (in thousands): 2020 $ 1,554 2021 1,728 2022 1,843 2023 1,979 2024 2,132 2025-2029 12,113 $ 21,349 NOTE 14 - RELATED-PARTY TRANSACTIONS National Academy of Engineering Fund The National Academy of Engineering Fund (“NAEF”) is a separately incorporated tax-exempt organization established by NAE to raise funds to support its goals. The financial activities and results of NAEF are not included in the NAS financial statements. NAS performs certain activities in connection with fundraising by NAEF. NAS collected a total of $2.9 million and $3.5 million in 2019 and 2018, respectively, on behalf of NAEF. NAS disbursed $3.1 million and $3.2 million to NAEF from these collected amounts in 2019 and 2018, respectively. Amounts collected but not yet remitted to NAEF are included in other current liabilities in the statements of financial position. TNAC TNAC was separately incorporated in 1986 as a tax-exempt corporation for the purpose of constructing and maintaining a study and conference facility. This facility, the Arnold and Mabel Beckman Center, located in Irvine, California, operates to expand and support the general activities of NAS, NRC, NAM, and NAE. The financial position and results of TNAC are not consolidated in the NAS financial statements. NAS manages the operations of the Beckman Center. The amounts transferred from TNAC to NAS in 2019 and 2018 for Beckman Center Operations were $547,000 and $573,000, respectively. Employees The NAS Council has authorized an agreement providing a noninterest-bearing, collateralized advance to an employee in connection with the purchase of the employee’s residence. The agreement between the parties was executed in April 2013. The agreement was scheduled to terminate upon the first to occur of the date the individual ceases to occupy the property as principal residence, sale of the property, or the end of the individual’s employment with NAS. In 2019, the agreement was extended until December 31, 2020. The agreement, as amended, specified interest at the short-term Applicable Federal Rate for the period July 1, 2019 through December 31, 2019. The estimated present value of the receivable totaled $0.9 million and $1.5 million at December 31, 2019 and 2018, respectively, and is included in contributions and other receivables, net, in the accompanying statements of financial position. 75

NOTE 15 - COMMITMENTS AND CONTINGENCIES Leases NAS assesses contracts at inception to determine whether an arrangement is or includes a lease, which conveys NAS’ right to control the use of an identified asset for a period of time in exchange for consideration. NAS is committed to one noncancelable operating lease for space, for which a right-of-use asset and a lease liability are recorded on the accompanying 2019 statement of financial position. The lease expires on March 31, 2026 and contains no renewal or termination options, or any restrictions or covenants. The lease contains no variable lease payments or residual value guarantees. The amount recognized as a right-of-use asset is included in other assets in the accompanying 2019 statement of financial position, while the related lease liability is included in other current liabilities and other long-term liabilities in the accompanying 2019 statement of financial position. NAS has elected the practical expedient to forgo applying the recognition requirements in ASC 842 to short-term leases. NAS has one short-term lease for copiers and related support and is recognizing the payments on a straight-line basis over the lease term. As of December 31, 2019, the right-of-use asset and lease liability were as follows (in thousands): Operating lease right-of-use asset $ 3,654 Operating lease liability: Other current liabilities 547 Other long-term liabilities 3,458 $ 4,005 During the year ended December 31, 2019, NAS had the following cash and non-cash activities associated with leases (in thousands): Cash paid for amounts included in the measurement of the lease liability Operating cash flows from operating leases $ 625 Lease costs: Operating lease 632 Short-term lease 83 $ 715 76

The maturity of the lease liability under NAS’ operating lease as of December 31, 2019 is as follows (in thousands): Operating Years ending December 31, Leases 2020 $ 644 2021 663 2022 683 2023 704 2024 725 Thereafter 934 Total lease payments 4,353 Less: imputed interest (348) Total lease liability $ 4,005 The amount of the right-of-use asset and lease liability were determined using a risk-free rate of 2.59%, based on the daily treasury yield on a seven-year note, which most closely approximated the remaining term of the lease at the date that the right-of-use asset and lease liability were recorded. As of December 31, 2018, future minimum rental payments due under the noncancelable operating lease were as follows (in thousands): Years ending December 31, 2019 $ 625 2020 644 2021 663 2022 683 2023 704 Thereafter 1,659 $ 4,978 Contingencies NAS receives a portion of its revenues directly or indirectly from federal government grants and contracts, all of which are subject to audit by the Defense Contract Audit Agency, which has completed its examinations through December 31, 2017. A contingency exists relating to unexamined periods and final settlements of examined periods to refund any amounts received in excess of allowable costs. Management is of the opinion that no material liability will result from such audits. In the normal course of business, NAS may from time to time be subject to various claims and lawsuits. Certain lawsuits may be covered, in full or in part, by external insurance coverage. In the opinion of management, there are no lawsuits outstanding that would have a material adverse effect on the financial statements of NAS. NOTE 16 - SUBSEQUENT EVENTS In March 2020, the World Health Organization declared that COVID-19 can be characterized as a pandemic, which continues to spread throughout the United States. In response to this pandemic, NAS has been successful in transitioning its work, including in-person meetings and conferences, to virtual operations and events. These developments are expected to decrease contract and grant revenues in 2020, accompanied by a reduction in travel and meeting expenditures. NAS has evaluated subsequent events from the statement of financial position date through June 12, 2020, the date at which the financial statements were issued, and determined that there are no additional items to disclose or adjustments to record. 77

OFFICERS Marcia McNutt, President Diane E. Griffin, Vice President Susan Wessler, Home Secretary John Hildebrand, Foreign Secretary William H. Press, Treasurer INVESTMENT COMMITTEE William H. Press, Chair Ashvin Chhabra David Donoho Robert Engle Ronald L. Graham Marcia McNutt E. Albert Reece Jose A. Scheinkman James H. Simons BUDGET AND INTERNAL AFFAIRS COMMITTEE William H. Press, Chair S. James Gates, Jr. Diane E. Griffin Caroline S. Harwood Thomas D. Pollard Sean C. Solomon AUDITING COMMITTEE Claude R. Canizares, Chair Ronald L. Graham Jeremiah P. Ostriker Claire L. Parkinson William W. Stead FINANCIAL MANAGEMENT STAFF Didi Salmon, Chief Financial Officer Laura Douglas, Controller 79

Report of the Treasurer for the Year Ended December 31, 2019 Get This Book
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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, 2019. 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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