Report of the Treasurer for the Year Ended December 31, 2020 (2021)

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Treasurer’s Statement To the Council of the National Academy of Sciences: This Report of the Treasurer of the National Academy of Sciences presents the financial position and results of operations as well as a review of the endowment and other long-term investments portfolio activities of our Academy for the year ended December 31, 2020. 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. This last year presented many challenges for the institution, as the COVID-19 pandemic began to effect operations in March 2020. At that time, the NAS/NRC decided to move to remote work for all staff and virtual meetings for committee and other convening activities. The move to virtual activity has been more successful than envisioned, with each part of the institution being able to operate surprisingly efficiently and effectively in such an environment. During the period from March through December 2020, the institution held hundreds of virtual webinars, workshops, lectures, and symposia, some with attendance into the thousands. The NRC released approximately 200 consensus studies, proceedings, and other publications during this period. With little-to-no travel and in-person meeting activity for nine months of the year as part of our program work during 2020 due to the pandemic, the NRC program level, although robust in activity, decreased in both revenues and expenses. This new way of operating is the reason for a smaller NRC program level in 2020 than in prior years. The indirect costs for 2020 were likewise less than last year and less than budgeted. With respect to amounts withdrawn annually from our endowment, a number of restricted funds support specific programs and awards, while a much smaller number of funds provide for unrestricted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. During 2020, the virtual operations due to the pandemic allowed NAS to spend less than budgeted, again due to a sharp decrease in travel and meeting costs. 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 again to 4.5% from 2015 through 2020. 1 

The market value of the portfolio increased net of withdrawals and new contributions from $592.0 million at January 1, 2020 to $643.3 million at December 31, 2020.  Included in the $643.3 million total market value of the portfolio as of December 31, 2020, are $8.7 million for the Woods Hole Endowment Funds, $115.9 million for the National Academy of Medicine (NAM), and $13.2 million for The National Academies’ Corporation (TNAC). TNAC, which is equally owned by the NAS and the National Academy of Engineering Fund (NAEF), owns and operates the Beckman Center (see note 14 to the financial statements on page 71).  Withdrawals of $16.6 million were made to fund the Presidents’ Committee, NAS General Fund’s activity, and NAS prizes and awards for the current period. Additional withdrawals of $4.4 million were made to fund Woods Hole, NAM, and TNAC activity. The approximate asset allocation of the portfolio as of December 31, 2020 was as follows: Cash Credit 2.3% Real assets 0.2% 0.4% Public equity Venture 45.5% 4.7% Fixed income 5.9% Private equity 9.7% Hedge funds 31.4% The portfolio returned 11.3% for 2020, which was 4.2% lower than the reference portfolio return of 15.5%. 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 investment valuations, particularly in the quantitative and long equity strategies, which have lagged the strong equity and U.S. Treasury market returns. It should be noted that the reference portfolio is a “reference” and not a “benchmark” that we wish to achieve: its historical volatility is generally 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, 2020, as compared to the reference portfolio were as follows: NAS Portfolio Reference Portfolio Time Period Return Volatility Return Volatility Year ended 12/31/20 11.25% 17.82% 15.54% 18.71% Five years ended 12/31/20 9.15% 9.44% 10.59% 10.86% Ten years ended 12/31/20 6.58% 8.85% 8.25% 10.13% 2 

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 2020. For 2020, funding for the NAS Indirect and General Funds Budget totaled $10.4 million and expenditures totaled $8.4 million, resulting in a surplus of approximately $2 million. This larger than usual surplus was due to the lower cost of operations in a virtual environment. This included hosting an all-virtual NAS annual meeting, which was a success, with more than double the number of members attending its business session, and with audiences numbering as many as 16,000 for its webcast public sessions. Comparable figures for 2019 were $10.3 million in revenues, $9.6 million in expenditures, resulting in a surplus of approximately $641,000. The 2020 NAS Indirect and General Funds activity is summarized as follows (in thousands): Revenues: Expenses: Endowment Draw From Funds Governance $ 2,676 Without Donor Restrictions $ 5,388 Administration 1,344 Annual Giving from Members 672 Membership 1,357 Membership Dues 527 Development Office 1,201 Annual Meeting 1 NAS Program Activity 377 Indirect Cost Reimbursement for International Activity 301 Allowable Expenditures 3,795 NAS Contribution to Restoration Fund 470 Total Revenue $ 10,383 Shared NRC Expenses 692 Total Expenses $ 8,418 Surplus $ 1,965 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 $7.5 million on December 31, 2020, to which the 2020 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. Currently, the NAS Reserve has a larger balance, which is prudent in these uncertain times. The Council has spent some of the Reserve on COVID-19 related programmatic activity to help in the pandemic response effort. The NAS Council has approved an Endowment draw of 4.0% for 2021 and approved an Indirect and General Funds Budget of $9.0 million for 2021. The Council lowered the 2021 endowment draw rate in an effort to lower spending from the endowment during these uncertain times and with a view toward the long-term health and good stewardship of the NAS endowment resources. 3 

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. 2020 2019 Revenues: Subscriptions $ 11,665 $ 8,501 Author Charges 6,528 6,513 Other 1 248 Total $ 18,194 $ 15,262 Expenses: Publishing $ 4,990 $ 3,955 General Services * 6,694 5,406 Operations 6,510 5,901 Total $ 18,194 $ 15,262 *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. 4 

Development Office Programs The generous support of members, friends, and organizations helps the Academies address critical societal and global issues by inspiring bold scientific investigation, synthesizing data-driven evidence, and providing authoritative advice. The past year was very challenging for many reasons; nevertheless, unrestricted gifts and project grants exceeded expectations. This allowed us to act proactively and effectively in response to society’s pressing challenges. Highlights from the year include:  Giving by the NAS, the National Academy of Engineering (NAE), and the National Academy of Medicine (NAM) Councils reached 100% participation, the fourth consecutive year for the NAS. Support by its leadership is an important benchmark of commitment for an organization and provides a compelling message and motivator for others.  The NAS raised over $700,000 in new gifts and pledges through its annual fund from members and friends, with 24% of the membership participating with a contribution.  The NAE raised over $2 million in unrestricted funds from members and friends, with 25% participation from the NAE membership. 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 NAEF financial activities and results are not included in the NAS financial statements.  The NAM raised nearly $900,000 in unrestricted funds through the annual fund and major gifts from members and friends, with 29% of the NAM membership making a gift.  The NAS received an unrestricted $1.9 million realized bequest from the estate of Mary Jane Osborn. Dr. Osborn was an NAS Member (elected 1978) who died in 2019. In addition to this realized bequest, an additional $1.1 million in planned gifts were documented in 2020 to support the future of the NAS.  With a gift of $2.4 million from the Gordon and Betty Moore Foundation, NAM established the NAM Scholars in Diagnostic Excellence Program to develop a pipeline of young investigators to advance the field.  Three new lifetime giving societies were established to recognize philanthropy at the Academies from members and friends; we welcomed twenty-five NAS and NAM members to the Abraham Lincoln Society ($1,000,000+), the Benjamin Franklin Society ($500,000 - $999,999), and the Marie Curie Society ($250,000-$499,999). We are deeply grateful for this philanthropic support. Every gift helps the Academies promote its core mission and provide independent, objective advice to inform policy with evidence, spark progress and innovation, and confront challenging issues for the benefit of society. NRC Highlights Although robust operations continued in a remote environment, the year showed a decrease in program level for the National Research Council (NRC) due to decreases in travel and meetings expenses related to the COVID-19. Overall, the NRC program level decreased approximately 14.1%, from 2019 to 2020, after increasing 8.5% from 2018 to 2019. This decrease is due to the 75% reduction in travel and meetings expense for 2020. This decrease is partially offset by higher than budgeted direct labor, which shows an increase from 2019. 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. 5 

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, 2020, was $190.5 million (see following chart and the Statements of Activities on page 48) and in the year ended December 31, 2019, was $213.5 million. U.S. Government Revenues by Agency ($ in thousands) Agency for International Development $ 13,244 Department of Agriculture 417 Department of Commerce 7,237 Department of Defense: Defense Threat Reduction Agency 1,046 Department of the Air Force 10,489 Department of the Army 7,072 Department of Defense 1,082 Department of the Navy 12,958 Department of Energy 7,480 Department of Health and Human Services 20,685 Department of Homeland Security 1,912 Department of Housing and Urban Development 43 Department of the Interior 1,655 Department of Labor 1,036 Department of State 1,666 Department of Transportation 76,708 Department of Treasury 19 Department of Veterans Affairs 2,936 Environmental Protection Agency 1,709 Executive Office of the President 49 Federal Reserve System 351 Government Accountability Office 447 General Services Administration 97 National Aeronautics and Space Administration 6,517 National Endowment for the Humanities 127 National Science Foundation 12,728 Office of the Director of National Intelligence 2,425 Social Security Administration 4,075 Adjustment to Indirect Cost Receivable & Other (5,663) Total U.S. Government Agencies $ 190,547 6 

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 $81.6 million in 2020, compared with $103.3 million in 2019. (See Statements of Activities on page 48.) 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 market value of the Gulf Research Fund investment was $559.0 million at December 31, 2020. The Gulf Research program spent $21.5 million and $30.0 million in 2020 and 2019, 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 2020, total indirect expenses were $77.0 million compared to an approved budget of $78.9 million. This lower spending is partly due to lower travel and meeting costs. For 2021, the indirect budget is set at $80.3 million to reasonably, but cautiously, align indirect costs to support the projected 7% increase in program revenue for 2021. The indirect budget for 2021 includes funding to continue the NRC’s efforts to improve both the services provided to our sponsors and the efficiency of our operations. 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. 7 

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. William H. Press Treasurer 8