Treasurer’s Statement

To the Council of the National Academy of Sciences:

This report, “Treasurer's Report to the Council of the National Academy of Sciences,” presents the financial position and results of operations as well as a review of the endowment and trust activities of our Academy for the year ended December 31, 2006.

NAS Highlights

Development Office Programs

The National Academy of Sciences (NAS) is grateful for the generous support of members, friends, and philanthropic organizations in 2006, support that is vital to our continued success in addressing current and emerging challenges facing not only the scientific community and science policymakers but the well-being and economic prosperity of all our citizens.


In 2006, the National Academy of Sciences received new gifts and pledges totaling $14.58 million, an increase of more than 20 percent. The Academy’s fundraising efforts featured a series of notable contributions from individuals and foundations. These contributions have enabled the Academy to pursue important new initiatives.


Highlights of the year’s Development efforts included:

  • A $636,900 gift from Kenneth E. Behring to benefit the Marian Koshland Science Museum. The grant will enable the Museum, in cooperation with the National Research Council’s (NRC) Water Science and Technology Board and the Office of International Programs, to create a virtual, multimedia exhibit — Drinking Water is Essential — to examine the need for safe drinking water around the world. Aimed at an international audience, the exhibit will survey the range of solutions and technologies available to increase the quality and quantity of drinkable water worldwide.

  • The National Academies received just over 100 grants from private foundations in 2006. Notable among these are a $1.8 million pledge from the Atlantic Philanthropies for a study of Adolescent Health Care Services and Models of Care for Treatment, Prevention, and Healthy Development; a $975,000 grant from the John D. and Catherine T. MacArthur Foundation to support the work of the Committee on International Security and Arms Control to reduce the dangers of nuclear and biological weapons; and $700,000 from the Andrew W. Mellon Foundation to support an assessment of research doctorate programs.

  • The Institute of Medicine (IOM) exceeded the $2.5 million goal for the Kellogg Health of the Public Fund. With the original $2.5 million gift from the W.K. Kellogg Foundation and its additional match, this endowment will total $7.5 million. The funds are used to broadly disseminate IOM reports to key audiences in communities nationwide.

  • The Einstein Society, which recognizes donors who have made cumulative gifts of $100,000 or more to the Academies, welcomed 17 new members in its second year, bringing the total membership to 110. The Elkan Blout Society, which honors donors who have made cumulative gifts of $20,000 to $99,999 to the NAS, added seven new members, bringing the total membership to 58. And five individuals joined the Heritage Society in 2006. The 73 members of this planned giving society have bolstered the future of the Academies through estate-based gifts such as bequest intentions and charitable gift annuities.

  • The Prometheus Report, a colorful extension of our mission to better steward and educate donors, is a new publication that highlights philanthropy at the National Academies. Mailed to NAS, National Academy of Engineering (NAE), and IOM members and friends twice a year, the newsletter will tell the inspiring stories of our donors, explore their motivations for supporting the Academies, and report on the diverse programs made possible by their philanthropy.



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Report of the Treasurer to the Council of the National Academy of Sciences Treasurer’s Statement To the Council of the National Academy of Sciences: This report, “Treasurer's Report to the Council of the National Academy of Sciences,” presents the financial position and results of operations as well as a review of the endowment and trust activities of our Academy for the year ended December 31, 2006. NAS Highlights Development Office Programs The National Academy of Sciences (NAS) is grateful for the generous support of members, friends, and philanthropic organizations in 2006, support that is vital to our continued success in addressing current and emerging challenges facing not only the scientific community and science policymakers but the well-being and economic prosperity of all our citizens. In 2006, the National Academy of Sciences received new gifts and pledges totaling $14.58 million, an increase of more than 20 percent. The Academy’s fundraising efforts featured a series of notable contributions from individuals and foundations. These contributions have enabled the Academy to pursue important new initiatives. Highlights of the year’s Development efforts included: A $636,900 gift from Kenneth E. Behring to benefit the Marian Koshland Science Museum. The grant will enable the Museum, in cooperation with the National Research Council’s (NRC) Water Science and Technology Board and the Office of International Programs, to create a virtual, multimedia exhibit — Drinking Water is Essential — to examine the need for safe drinking water around the world. Aimed at an international audience, the exhibit will survey the range of solutions and technologies available to increase the quality and quantity of drinkable water worldwide. The National Academies received just over 100 grants from private foundations in 2006. Notable among these are a $1.8 million pledge from the Atlantic Philanthropies for a study of Adolescent Health Care Services and Models of Care for Treatment, Prevention, and Healthy Development; a $975,000 grant from the John D. and Catherine T. MacArthur Foundation to support the work of the Committee on International Security and Arms Control to reduce the dangers of nuclear and biological weapons; and $700,000 from the Andrew W. Mellon Foundation to support an assessment of research doctorate programs. The Institute of Medicine (IOM) exceeded the $2.5 million goal for the Kellogg Health of the Public Fund. With the original $2.5 million gift from the W.K. Kellogg Foundation and its additional match, this endowment will total $7.5 million. The funds are used to broadly disseminate IOM reports to key audiences in communities nationwide. The Einstein Society, which recognizes donors who have made cumulative gifts of $100,000 or more to the Academies, welcomed 17 new members in its second year, bringing the total membership to 110. The Elkan Blout Society, which honors donors who have made cumulative gifts of $20,000 to $99,999 to the NAS, added seven new members, bringing the total membership to 58. And five individuals joined the Heritage Society in 2006. The 73 members of this planned giving society have bolstered the future of the Academies through estate-based gifts such as bequest intentions and charitable gift annuities. The Prometheus Report, a colorful extension of our mission to better steward and educate donors, is a new publication that highlights philanthropy at the National Academies. Mailed to NAS, National Academy of Engineering (NAE), and IOM members and friends twice a year, the newsletter will tell the inspiring stories of our donors, explore their motivations for supporting the Academies, and report on the diverse programs made possible by their philanthropy.

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Report of the Treasurer to the Council of the National Academy of Sciences Endowment and Trust Investment Pool With the assistance of the Finance Committee, I am responsible for the prudent management of the endowment and trust fund portfolio. The goal of the endowment is to provide stable support for the NAS General Fund, NAS Trust and Award activities, and the Presidents' initiatives within the NRC program. To achieve this goal, the NAS Council, acting on the recommendation of the Finance Committee, has adopted a spending limitation designed to maintain the purchasing power of the endowment over time by reinvesting a portion of the annual total investment return. The spending limitation caps annual spending at 5 percent of the three-year average market value of the participating funds in the investment pool. Each year, the investment performance of the NAS portfolio is compared to a composite market benchmark portfolio for the year. The benchmark portfolio is a composite index consisting of the Standard and Poor's 500 Index (35 percent), the Russell 2000 Index (15 percent), the EAFE Index (15 percent), the Emerging Markets Index (5 percent), the Lehman Aggregate (25 percent), and the Non U.S. dollar Fixed Income Index (5 percent), and was developed to reflect the target asset allocation within the NAS portfolio. Market values of the Endowment and Trust Investment Pool, after withdrawals, for the years ended December 31, 2006 and 2005, are displayed in the following chart:   (Dollars in thousands) 2006 2005 Cash and Fixed-Income Securities $ 52,291 $ 56,661 Equity Securities   353,265   294,900 Total $ 405,556 $ 351,561 At the beginning of 2006, the NAS Endowment consisted of $351.6 million in assets. During the year, the Endowment received contributions of $4.4 million, withdrew funds for programs of $15.5 million, and earned an investment gain of $65.1 million, resulting in an ending asset balance of $405.6 million. For the year, the portfolio returned 19.0%, compared with a benchmark return of 15.5%. In 2005, the portfolio returned 10.7% versus 6.9% for the benchmark. A significant portion of the exceptional results for 2006 were realized in the fourth quarter, during which the NAS portfolio returned 8.3% versus 6.5% for the benchmark. While the benchmark results speak to a strong performance in the securities markets in general, the Academy’s superior performance is attributable to several factors. Two investments had very strong performances in 2006: Berkshire Hathaway returned 24.3% for the year and one of the hedge funds returned 21% for the year. The commercial real estate investments continued to perform well with returns of 25% for the year. The NAS portfolio in general is overweight in non-US equities, which proved to be beneficial as the emerging market segment had a very strong year. NAS’ portfolio has consistently outperformed the market benchmarks over a long period. For the five years ending 12/31/06, the NAS return is 11.2%, compared to the market composite benchmark of 9.3% and for the ten years ending 12/31/06, the NAS return is 9.3%, compared with the market composite benchmark of 8.8%. The next chart presents the investment structure adopted by the NAS Finance Committee in 1995 for its asset allocation strategy and compares this target to the portfolio allocation at December 31, 2006. Overview of Current Investment Structure     Target Percent of Portfolio Fixed-Income: U.S. Fixed 25.0% 4.2%   U.S. High Yield 0.0% 1.3%   Non-U.S. Fixed 5.0% 2.6% Equities: U.S. Large Cap Funds 30.0% 22.9%   U.S. Small-Mid Cap Funds 15.0% 11.2%   Non-U.S.Stocks — Developed 15.0% 19.2%   Non-U.S. Stocks — Emerging 5.0% 8.9%   Hedge Funds 0.0% 17.1%   Private Placements 5.0% 3.4% Real Estate 0.0% 4.4% Cash Equivalents 0.0% 4.8% Total 100.0% 100.0% See Schedule 2-A on page 21 for details of investments by asset class. Included in the $405.6 million total market value of the Endowment and Trust Investment Pool as of December 31, 2006, are the amounts of $64.5 million, $23.0 million, and $8.3 million for the IOM, The National Academies Corporation (TNAC), and Woods Hole Endowment Funds, respectively.

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Report of the Treasurer to the Council of the National Academy of Sciences TNAC, which is equally owned by the NAS and the National Academy of Engineering Fund (NAEF), owns and operates the Beckman Center (see note 1 to the financial statements on page 43). Withdrawals of $10.0 million were made to fund the President’s Committee, NAS General Fund’s activity, and prizes and awards for the current period. Additional withdrawals of $5.5 million were made to fund IOM, Woods Hole, and TNAC activity. Prize and Award Trust Funds Several award trust 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. NAS General Fund The NAS General Fund accounts for the activities of the Council, the Officers, and the Members. The primary funding for these activities is received from the NAS Unrestricted Endowment, based on the 5% spending rule. For fiscal year 2006, the General Fund revenue totaled $5.6 million and expenditures totaled $5.3 million, resulting in a $319,000 surplus. Comparable figures for fiscal year 2005 were $5.6 million in revenues, $6.7 million in expenditures, resulting in a deficit of $1.1 million. The NAS Reserve is the accumulation of prior year surpluses, and one of the anticipated and appropriate uses of the NAS Reserve is to provide a cushion for ongoing operation during periods of revenue shortfalls. A balanced budget was approved for the fiscal year 2006 General Fund. The remaining balance of the NAS Reserve at December 31, 2006 is $3 million. The $319,000 surplus from fiscal year 2006 will be added to this investment in early 2007, for a net NAS Reserve balance of $3.3 million. The 2006 NAS General Fund activity is summarized as follows:   (Dollars in thousands) Revenue: Unrestricted Endowment $ 4,625 Woods Hole Endowment   310 Annual Giving from Members   263 Membership Dues   122 Annual Meeting   217 Short-Term Investment Interest, Royalties, etc.   37 Total Revenue $ 5,574 Expenses: Development Office $ 1,581 Member Services:   Annual Meeting   543 Other   103 Programs/Projects:   Office of Exhibitions & Cultural Programs   338 Frontiers of Science   212 Committee on International Security & Arms Control   165 Sackler Colloquia   375 Biographies of Women Scientists for Middle School Students   125 Committee on Women in Science & Engineering   25 InterAcademy Council   144 Woods Hole   288 Foreign Meetings   107 President’s Office   105 NAS Executive Office   270 NRC Operations   635 ISSUES Support   230 Staff Awards - Unallowable   9 Total Expenses $ 5,255 Surplus $ 319 The NAS Council has approved a balanced General Funds budget of $6.1 million for fiscal year 2007.

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Report of the Treasurer to the Council of the National Academy of Sciences Journal Publications Financial results of the Proceedings of the National Academy of Sciences are shown below for the years ended December 31, 2006, and December 31, 2005:   (Dollars in thousands)   2006 2005 Revenue: Subscriptions $ 6,889 $ 6,737 Author charges   4,716   4,357 Other   102   147 Total $ 11,707 $ 11,241 Expense: Printing $ 5,991 $ 5,858 Other   5,636   5,259 Total $ 11,627 $ 11,117 Net $ 80 $ 124 Facilities NAS owns the following facilities: The Keck Center of the National Academies at 500 Fifth St., NW in Washington, D.C. The National Academy of Sciences Building at 2101 Constitution Ave., NW in Washington, D.C. Jonsson Study Center at 314 Quisset Dr. in Woods Hole, Massachusetts. Arnold and Mabel Beckman Center at 100 Academy Drive in Irvine, California (jointly owned with NAEF through TNAC). NAS is leasing the following facilities: Terrell Place Office Building (two suites) at 575 Seventh St. NW in Washington, D.C. National Academies Data Center at 8619 Westwood Center Drive in Vienna, Virginia. National Academy Press Printing Facility at 8700 Spectrum Drive in Landover, Maryland. The Cecil and Ida Green Office Building at 2001 Wisconsin Ave. in Washington, D.C. I reported last year on our plans to relocate NRC staff from the Green Building in Georgetown to be in closer proximity to the NAS and Keck Buildings in downtown Washington, DC. During November and December 2007, the final three steps of this multi-year plan were successfully completed. The first step was to relocate the institutional data center to a more modern facility in the Virginia suburbs of Washington. This move included a long-deferred equipment upgrade. The second step was to move the Policy and Global Affairs Fellowship office, and the Office of Contracts and Grants to the Keck Building. The final step was to relocate the offices of the Chief Financial Officer and the administrative offices of Information and Technology Services to the Terrell Place Office Building one block from the Keck Building. These moves were all completed in accordance with the planned timeframe and budget. The Green building was vacated coincident with the occupancy of the Terrell Place Office Building. We continue to work toward an agreement with the National Capital Revitalization Corporation (NCRC) which will preserve the option to expand the Keck Building over the adjacent District of Columbia fire station. Although the NCRC retreated from its original plan to develop the site and lease it back to the NAS, the proposed agreement creates a window of approximately four years for our organization to reach a decision on developing the site ourselves. NRC Highlights Revenues The two main sources of revenue for the NRC are the U.S. government and private / nonfederal entities. The total contract and grant revenue from both of these sources totaled $237.9 million in 2006 and $236.4 million in 2005. U.S. Government Contracts and Grants NRC activities conducted in response to requests from a broad range of U.S. government agencies are funded through cost-reimbursable non-fee contracts and grants. The total amount reimbursed by the U.S. government agencies in the year ended December 31, 2006 was $178.9 million (see chart below and the Statements of Activities on page 41), and in the year ended December 31, 2005 was $179.9 million.

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Report of the Treasurer to the Council of the National Academy of Sciences U.S. Government Revenues by Agency (Dollars in thousands) Agency for International Development $ 2,668 Department of Agriculture   816 Department of Commerce   6,183 Department of Defense: Department of the Air Force   5,425 Department of the Army   12,324 Department of Defense   2,053 Department of the Navy   11,491 United States Marine Corp   22 Department of Education   2,462 Department of Energy   7,343 Department of Health and Human Services   20,216 Department of Homeland Security   1,195 Department of Housing and Urban Development   50 Department of the Interior   3,448 Department of Justice   753 Department of State   2,579 Department of Transportation   52,238 Department of Treasury   292 Election Assistance Commission   5 Environmental Protection Agency   5,994 Executive Office of the President   845 General Accounting Office   389 General Services Administration   47 National Aeronautics and Space Administration   8,841 National Geospatial Intelligence Agency   67 National Science Foundation   16,757 National Security Agency   73 Nuclear Regulatory Commission   352 Smithsonian Institution   15 Social Security Administration   5,747 U.S. Postal Service   36 Veterans Administration   6,854 Adjustment to Indirect Cost Receivable & Other   1,346 Total U.S. Government Agencies $ 178,926 In the past ten years, the basic core of NRC programs, which is represented by the government contracts and grants, has experienced relatively small percentage changes from one year to the next. In 2006, the NRC programs funded by the government decreased 0.5%. In 2005, the government funded programs had increased 2.0% from the previous year. Private/Nonfederal Contracts and Grants Private sponsors supplemented government projects and provided for new initiatives by funding $59.0 million of awards in 2006, compared with $56.5 million in 2005. The private and nonfederal revenues were received in the form of contracts and grants ($51.5 million) and other contributions ($7.5 million). (See Statements of Activities on page 41.) The private contracts and grants increased from $44.6 million in 2005 to $51.5 million in 2006. This is due to an overall increase in the amount of private award activity. In 2005, NAS received 84 new private awards. In 2006, that number increased to 131. Some of the larger private contributions received in 2006 were two awards from the Gates Foundation totaling $2 million, one award from the Atlantic Philanthropy Foundation for $1.8 million, one award from the Rockefeller Foundation for $1 million, a $1 million transfer from TNAC to sponsor programmatic activity at the Beckman Center, $500,000 from the Sloan Foundation, and $500,000 from the Kavli Foundation (in addition to the $5 million 10-year award received in 2005). The other contributions revenue decreased from $11.9 million in 2005 to $7.5 million in 2006. This decrease is primarily attributable to the fact that in 2005 NAS recorded approximately $8 million of the George and Cynthia Mitchell Foundation’s $10 million conditional matching pledge. During 2006, new permanently restricted contributions included many gifts related to the Kellogg Health of the Public Fund matching campaign. Contributions eligible for future matching included a gift of $250,000 from US Pharmacopeia and pledges from Rowe Foundation ($250,000), Eli Lilly Foundation ($225,000) and Ambrose Monnell Foundation ($150,000). Additionally, the Kellogg Foundation contributed a further $500,000 to match prior contributions. Expenses The NRC programs include funding from government and private sources. Almost all contracts and grants are cost-reimbursable agreements. Therefore, even if the revenues and expenses are not equal in any one given year, the revenues and expenses will be the same over the life of the award. As in many universities and nonprofit institutions, managing indirect cost expenditures for funding of necessary support services while keeping these costs in reasonable proportion to program expenditures continues to be a challenge. Historically, NRC management has

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Report of the Treasurer to the Council of the National Academy of Sciences successfully maintained a relatively steady relationship between program and support costs, i.e., the growth rate of indirect costs was approximately equal to the growth rate of direct costs. In 2006, total indirect expenses were $64.3 million compared to an approved budget of $65.0 million. As the 2007 program revenues are expected to remain consistent with the prior year, the NAS Council authorized a 2007 indirect expense budget of $67.9 million in order to maintain the desired relationship between indirect and direct costs. This budget includes a 4.0 percent increase in the base salary compensation structure in order to maintain a competitive position in the marketplace for hiring and retaining staff. Related Entities There are many financial transactions exchanged 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, IOM, and NRC are included in these financial statements. The financial activity and results of the National Academy of Engineering Fund (NAEF) and the National Academies Corporation (TNAC) are audited and reported separately. Financial information for the NAEF is available on request from the NAE Finance Office; information for TNAC is available from the NAS Controller’s Office. Overall Financial Condition The results of operations, per the NAS Statements of Activities, are summarized as follows:   (Dollars in millions) 2006 2005 Total Revenues $ 335.5 $ 302.8 Total Expenses   265.4   266.0 Change in Net Assets $ 70.1 $ 36.8 Each year, the overall financial condition of the NAS can be reviewed by taking into account the increase or decrease in the net assets of the organization. During 2005 and 2006, the NAS has been able to increase its net assets, due in large part to the favorable results from the Endowment investments and generous gifts from donors. Conclusion The NAS and NRC continued to demonstrate financial strength and stability during 2006. The NRC program remained stable, and the indirect expenses were well under control. The 19.0% investment return achieved in the NAS Endowment in 2006 will strengthen our ability to help provide more financial support to NAS initiatives in the future. Furthermore, the NAS continued to enjoy important financial support from members, friends, and philanthropic organizations. In conclusion, NAS continues to be in sound financial condition, which allows the institution to respond to the many opportunities and challenges presented by an ever-changing external environment. Ronald L. Graham Treasurer