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Report of the Treasurer of the National Academy of Sciences
Treasurer’s Statement
To the Council of the National Academy ofSciences:
This Report of the Treasurer of the National Academy ofSciences presents the financial position and results of operations as well as a review of the endowment, trust, and other long-term investments pool activities of our Academy for the year ended December 31, 2008.
Overview
First, we are delighted that we now have on board a new Chief Financial Officer for the National Academy of Sciences (NAS), Dr. Julie Englund. Dr. Englund has had a distinguished career in financial management, most recently as the Treasurer and Vice President for Finance at The Catholic University of America and previously as the Dean for Administration at the Harvard Law School. She has ably and efficiently taken the reins of her new NAS office at a time when the economic climate is, to say the least, complex.
Second, we function on the basis of two sources of income: that received through National Research Council (NRC) activities as compensation for the myriad of reports, studies, etc. produced each year and second, a much smaller sum that we obtain from our unrestricted endowment via the formula of the “spending rule” that we can use for essentially any purpose consistent with our charter. Regarding the first of these, the numbers are very heartening. Despite the difficult economic environment, our total program revenue for 2008 was above budget and a 7.1% increase over 2007. And for 2009, we are anticipating a still greater increase, currently estimated at 11% over the 2008 budget. There are many who deserve credit for this strong showing but not least among them is Dr. E.William Colglazier for his wise oversight as the Executive Officer of the NRC.
NAS Highlights
Development Office Programs
The NAS is grateful for the generous support of members, friends, and philanthropic organizations in 2008. The support received assists the NAS in taking a leadership and proactive role in addressing the issues and challenges facing our nation.
In 2008, despite the economic downturn, the NAS, including the Institute of Medicine (IOM), received a total of $14.1 million in new gifts and pledges, a decrease of only 4.1% from the previous year. Contributions to the NAS Annual Fund (plus other unrestricted funds) totaled $301,000 in 2008, which is essentially the same as the previous year. The gifts described below illustrate the scope of philanthropic support during 2008:
The NAS received two gifts totaling $2 million from Raymond and Beverly Sackler and their foundation to endow a bilateral scientific forum to be operated jointly by the NAS and the Royal Society in London. The forum will hold scientific conferences and meetings in both the United States and United Kingdom, and the topics, participants, activities, and goals of these conferences will be determined by a joint panel of the NAS and the Royal Society.
The NAS received a $140,000 charitable gift annuity from an NAS member and his wife, and a $50,000 bequest from another member.
The Norman F.Gant/American Board of Obstetrics and Gynecology (ABOG) Fellowship was endowed through a gift of $650,000 from ABOG. Part of a broader Anniversary Fellows program of the IOM, the Gant/ABOG fellowship will provide an exceptional learning and career development opportunity to obstetricians and gynecologists early in their careers. Fellows will continue with their main academic responsibilities while engaging part time over a two-year period in IOM’s health and science policy work.
The Committee on Human Rights received $329,000 in gifts in 2008, including support from 191 members of the NAS, IOM, and the National Academy of Engineering (NAE).
In June 2008, Eric C.Johnson was appointed chief advancement officer for the National Academies. Mr. Johnson, who had been vice president for development at both Rice University and Carnegie Mellon University, oversees development for all three Academies. Mr. Johnson has been charged with creating a stronger culture
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Report of the Treasurer of the National Academy of Sciences
Treasurer’s Statement
To the Council of the National Academy of Sciences:
This Report of the Treasurer of the National Academy of Sciences presents the financial position and results of operations as well as a review of the endowment, trust, and other long-term investments pool activities of our Academy for the year ended December 31, 2008.
Overview
First, we are delighted that we now have on board a new Chief Financial Officer for the National Academy of Sciences (NAS), Dr. Julie Englund. Dr. Englund has had a distinguished career in financial management, most recently as the Treasurer and Vice President for Finance at The Catholic University of America and previously as the Dean for Administration at the Harvard Law School. She has ably and efficiently taken the reins of her new NAS office at a time when the economic climate is, to say the least, complex.
Second, we function on the basis of two sources of income: that received through National Research Council (NRC) activities as compensation for the myriad of reports, studies, etc. produced each year and second, a much smaller sum that we obtain from our unrestricted endowment via the formula of the “spending rule” that we can use for essentially any purpose consistent with our charter. Regarding the first of these, the numbers are very heartening. Despite the difficult economic environment, our total program revenue for 2008 was above budget and a 7.1% increase over 2007. And for 2009, we are anticipating a still greater increase, currently estimated at 11% over the 2008 budget. There are many who deserve credit for this strong showing but not least among them is Dr. E.William Colglazier for his wise oversight as the Executive Officer of the NRC.
NAS Highlights
Development Office Programs
The NAS is grateful for the generous support of members, friends, and philanthropic organizations in 2008. The support received assists the NAS in taking a leadership and proactive role in addressing the issues and challenges facing our nation.
In 2008, despite the economic downturn, the NAS, including the Institute of Medicine (IOM), received a total of $14.1 million in new gifts and pledges, a decrease of only 4.1% from the previous year. Contributions to the NAS Annual Fund (plus other unrestricted funds) totaled $301,000 in 2008, which is essentially the same as the previous year. The gifts described below illustrate the scope of philanthropic support during 2008:
The NAS received two gifts totaling $2 million from Raymond and Beverly Sackler and their foundation to endow a bilateral scientific forum to be operated jointly by the NAS and the Royal Society in London. The forum will hold scientific conferences and meetings in both the United States and United Kingdom, and the topics, participants, activities, and goals of these conferences will be determined by a joint panel of the NAS and the Royal Society.
The NAS received a $140,000 charitable gift annuity from an NAS member and his wife, and a $50,000 bequest from another member.
The Norman F.Gant/American Board of Obstetrics and Gynecology (ABOG) Fellowship was endowed through a gift of $650,000 from ABOG. Part of a broader Anniversary Fellows program of the IOM, the Gant/ABOG fellowship will provide an exceptional learning and career development opportunity to obstetricians and gynecologists early in their careers. Fellows will continue with their main academic responsibilities while engaging part time over a two-year period in IOM’s health and science policy work.
The Committee on Human Rights received $329,000 in gifts in 2008, including support from 191 members of the NAS, IOM, and the National Academy of Engineering (NAE).
In June 2008, Eric C.Johnson was appointed chief advancement officer for the National Academies. Mr. Johnson, who had been vice president for development at both Rice University and Carnegie Mellon University, oversees development for all three Academies. Mr. Johnson has been charged with creating a stronger culture
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Report of the Treasurer of the National Academy of Sciences
of philanthropy by applying his experience in two top-25 universities to the development programs of the NAS and the other Academies. New programs and dedicated staff will focus on improving stewardship of all gifts; increasing annual unrestricted support; developing more planned gifts, such as charitable gift annuities, charitable remainder trusts, and bequests; and acquiring new endowment gifts and capital gifts to support the planned restoration of the NAS Building
Endowment, Trust, and Other Long-term Investments Pool
With the assistance of the Finance Committee, I am responsible for the prudent management of the endowment, trust, and other long-term investments (the “Pool”). The goal of the Pool is to provide stable support for the NAS General Fund; NAS programs, prizes and awards; 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 Pool over time by reinvesting a portion of the annual total investment return. The spending limitation caps annual spending at 5% of the three-year average market value of the participating funds in the Pool.
The Pool saw its’ market value decline from $438.0 million on 1/1/08 to $288.0 million on 12/31/08. The Pool returned −31.4% for the year, in line with the relevant market benchmarks and peer group endowments. Despite the broad diversification of the Pool’s investments, the markets in 2008 were characterized by indiscriminate selling that commenced with the September fall of Lehman Brothers and spread globally to the world’s stock and bond markets. Alternative investments in private equity and hedge funds fared only slightly better than the publicly traded markets but in the final analysis only cash and Treasury securities escaped the market sell off. The Pool’s holdings at year-end are more defensive than would be permitted by the long term policy guidelines but still include investments in equities of approximately 51%.
Market values of the Pool, after withdrawals, for the years ended December 31, 2008 and 2007, are displayed in the following chart:
(dollars in thousands)
2008
2007
Cash and Fixed-Income Securities
$63,624
$80,515
Equity Securities
224,398
357,530
Total
$288,022
$438,045
At the beginning of 2008, the Pool consisted of $438.0 million in assets. During the year, the Pool received contributions of $7.5 million, withdrew funds for programs of $18.0 million, and suffered investment losses of $139.5 million, resulting in an ending asset balance of $288.0 million. For the year, the Pool portfolio returned −31.4%, compared with a benchmark return of −31.5%. In 2007, the portfolio returned 11.2% versus 10.6% for the benchmark.
The Pool has consistently outperformed the market benchmarks over a long period. For the five years ending December 31, 2008, the Pool return is 2.6% compared to the market composite benchmark of 1.1% and, for the ten years ending December 31, 2008, the Pool return is 3.3% compared with the market composite benchmark of 2.3%.
In 2007, the NAS Finance Committee adopted the following investment structure for its asset allocation strategy. The comparison of these guidelines to the actual portfolio allocation at December 31, 2008, is as follows:
Overview of Current Investment Structure
Guideline
Portfolio Allocation
Fixed-Income:
U.S. Fixed/Cash
12.0%
10.6%
Non-U.S. Fixed
3.0%
11.5%
Equities:
U.S. Large Cap Funds
25.0%
15.6%
U.S. Small-Mid Cap Funds
12.0%
4.0%
Non-U.S. Stocks—Developed
20.0%
20.3%
Non-U.S. Stocks—Emerging
8.0%
8.7%
Real Estate Investments
5.0%
2.6%
Hedge Funds
12.0%
22.7%
Other Alternative Investments
3.0%
4.0%
Total
100.0%
100.0%
See Schedule 2-A on page 21 for details of investments by asset class.
The Finance Committee has opted to make only minor changes in the disposition of its investments
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Report of the Treasurer of the National Academy of Sciences
since July 1, 2008. While it is too soon to evaluate the merits of these changes, the initial returns on investment have been excellent.
Included in the $288.0 million total market value of the Pool as of December 31, 2008, are $5.6 million for the Woods Hole Endowment Funds, $47.4 million for the Institute of Medicine (IOM), and $7.2 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 1 to the financial statements on page 45).
Withdrawals of $14.6 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 $3.4 million were made to fund Woods Hole, IOM, and TNAC activity.
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 specified endowment, trust, and other long-term investment funds (see page 16 for detailed listing), based on the 5% spending rule.
For fiscal year 2008, the General Fund revenue totaled $7.0 million and expenditures totaled $5.4 million, resulting in a $1.6 million surplus. Comparable figures for fiscal year 2007 were $6.2 million in revenues, $5.3 million in expenditures, resulting in a surplus of $875,000.
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 operations during periods of revenue shortfalls. During 2008, President Ralph Cicerone has prudently spent less than the funds available, returning to the NAS Reserve $1.4 million. There are plans for a comparable degree of fiscal caution in 2009 as well. The remaining balance of the NAS Reserve at December 31, 2008, is $2.8 million. The $1.4 million surplus from fiscal year 2008 will be added to this balance in early 2009, for a net NAS Reserve balance of $4.2 million.
The 2008 NAS General Fund activity is summarized as follows:
(dollars in thousands)
Revenues:
Unrestricted Endowment
$5,638
Woods Hole Endowment
383
Communications Initiative Fund
206
Annual Giving from Members
193
Membership Dues
306
Annual Meeting
232
Short-Term Investment Interest, Royalties, etc.
33
Total Revenue
$6,991
Expenses:
Development Office
$1,240
Member Services:
Annual Meeting
618
Other
123
Programs/Projects:
Cultural Programs of the NAS
384
Evolution, Education & Communication
157
Communications Initiative
206
Frontiers of Science
300
Committee on International Security & Arms Control
190
Local High School Project
35
Committee on Women in Science & Engineering
26
InterAcademy Council
181
Woods Hole
225
Foreign Meetings
194
President’s Office
170
NAS Executive Office
95
NRC Operations
1,001
ISSUES Support
252
Miscellaneous
5
Total Expenses
$5,402
Surplus
$1,589
Disposition of Surplus:
Due to NAS Reserve
1,431
Due to Woods Hole Reserve
158
The NAS Council has approved a General Funds budget of $6.5 million for fiscal year 2009, which includes a planned surplus of $900,000.
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Report of the Treasurer of the National Academy of Sciences
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
Financial results of the Proceedings of the National Academy of Sciences are shown below for the years ended December 31, 2008 and 2007:
(dollars in thousands)
2008
2007
Revenues:
Subscriptions
$6,906
$5,856
Author charges
5,535
6,605
Other
121
95
Total
$12,562
$12,556
Expenses:
Printing
$6,048
$6,741
Other
6,429
5,539
Total
$12,477
$12,280
Net
$85
$276
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 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.
Last year, our Treasurer Ron Graham reported that we were working to preserve our option to expand the Keck building over the adjacent District of Columbia fire station. Since then, the District has advised us that it is undertaking a review of its city-wide property development strategy and is currently not interested in discussing development of the fire station property. This has allowed us to focus our attention on the NAS Building Restoration Project.
The plans for the NAS Building Restoration are nearing completion and the Council will make a decision on whether to go forward with the project this summer or to wait for a more propitious moment. We are hopeful that current economic conditions will keep the cost of the project down. At the same time, we have to recognize that these same conditions also make financial the project much more difficult than we anticipated just a year ago. To assist the Council in making this important decision, we are carefully monitoring the constantly changing financial landscape, analyzing our ability to take on new debt, and exploring what financial options may or may not be available for the project.
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 $256.2 million in 2008 and $245.7 million in 2007.
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, 2008, was $202.8 million (see following chart and the Statements of Activities
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Report of the Treasurer of the National Academy of Sciences
on page 43) and in the year ended December 31, 2007, was $178.0 million.
U.S. Government Revenues by Agency
(dollars in thousands)
Agency for International Development
$2,432
Department of Agriculture
1,327
Department of Commerce
7,793
Department of Defense:
Department of the Air Force
4,014
Department of the Army
12,171
Department of Defense
4,898
Department of the Navy
11,433
Department of Education
361
Department of Energy
8,477
Department of Health and Human Services
17,482
Department of Homeland Security
3,165
Department of Housing and Urban Development
343
Department of the Interior
2,651
Department of Justice
1,353
Department of Labor
59
Department of State
1,068
Department of Transportation
86,621
Department of Treasury
598
Department of Veterans Affairs
3,509
Election Assistance Commission
345
Environmental Protection Agency
5,634
Executive Office of the President
619
General Accounting Office
84
General Services Administration
6
Institute of Museum and Library Services
143
Marine Mammal Commission
78
National Aeronautics and Space Administration
8,411
National Geospatial-Intelligence Agency
120
National Science Foundation
13,971
National Security Agency
114
Nuclear Regulatory Commission
105
Office of the Director of National Intelligence
55
Social Security Administration
10
United States Postal Service
132
Adjustment to Indirect Cost Receivable & Other
3,228
Total U.S. Government Agencies
$202,810
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. However, in 2008, the NRC programs funded by the government increased by 13.9%. The increase was primarily attributable to programs sponsored by Department of Transportation. In 2007, the government funded programs had decreased 0.5% from the previous year.
Private/Nonfederal Contracts and Grants
Private sponsors supplemented government projects and provided for new initiatives by funding awards in the amount of $53.4 million in 2008, compared with $67.7 million in 2007. The private and nonfederal revenues were comprised of contracts and grants ($45.2 million) and other contributions ($8.2 million). (See Statements of Activities on page 43.)
The private contracts and grants decreased from $48.8 million in 2007 to $45.2 million in 2008. This is due to an overall decrease in the number of private awards received. In 2007, NAS received 112 new private awards. In 2008, that number decreased to 97.
The other contributions revenue decreased from $18.9 million in 2007 to $8.2 million in 2008. The 2007 figure was higher than usual due to a one-time $11.7 million contribution from TNAC to the NRC to be spent on programs conducted in whole or in part at the Beckman Center in Irvine, CA.
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, is a continual challenge. Historically, NRC management has successfully 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 2008, total indirect expenses were $66.9 million compared to an approved budget of $69.3 million. The NAS Council approved a 2009 indirect expense budget of $72.0 million, which includes a 3% increase to the total salary budget, which is distributed on the basis of merit. This increase was approved in order to maintain a competitive position for hiring and retaining staff in the Washington, DC, market.
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Report of the Treasurer of the National Academy of Sciences
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)
2008
2007
Total Revenues
$131.1
$320.5
Total Expenses
304.1
276.5
Change in Net Assets
$−173.0
$44.0
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 calendar year 2008, the NAS suffered a decrease in its net assets resulting primarily from significant investment losses recorded in the endowment, trust, and other long-term investments pool.
Conclusion
The NRC continued to demonstrate financial strength and stability during 2008, with revenues projected to increase during 2009. The indirect expenses have been well-managed during the year. As is the case for all endowments, the stock market’s immense sell-off has had a serious impact on the value of the NAS endowment, trust, and other long-term investments pool. We are weathering this storm with careful spending decisions now and planned for the future. The Finance Committee has made some changes to the Endowment investments and will continue to work to strengthen the portfolio.
I would like to thank the Council, the Committee on Budget and Internal Affairs, the Finance Committee, and NRC management for their continued input and support. Also, thanks to the Controller’s Office for preparation of the financial statements and to all of the finance staff for maintaining strong financial controls and reporting.
Jeremiah P.Ostriker
Treasurer
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