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 portfolio activities of our Academy for the year ended December 31, 2011.
Overview
The income that supports the activities of the Academy 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 Research Council (NRC), and a much smaller sum that we obtain from our own endowment under the endowment spending policies adopted by the Council. Regarding the first of these, the 2011 results are very positive. Our total program revenue for 2011 was nearly 10% above 2010 revenue, an all-time high for the NRC. There are many NRC volunteers and staff who deserve credit for this strong showing and we are truly indebted to each one for their commitment to the mission of our organization.
With respect to the second source of revenue, it has for many years been the policy of the Council to limit annual endowment spending to 5% of the average value of endowment for the twelve quarters ending in June of the previous year. When the endowment declined significantly in 2008, the Council made the prudent decision to hold spending to 4% and to avoid spending whenever possible from endowments with value below the original gift amount, starting in 2009. These practices will continue for endowment spending in 2012.
As you know, our former Executive Officer, Bill Colglazier left the NAS in June 2012 and joined the State Department as the Secretary’s science and technology advisor. Since Bill’s departure, Jim Hinchman, our Deputy Executive Officer has been filling this role on an interim basis. On January 27, 2012, President Cicerone announced the appointment of Bruce B. Darling as the new Executive Officer of the NAS and the NRC. Bruce is currently vice president for laboratory management at the University of California and will join the staff in the summer of 2012. As President Cicerone stated, "His experience in managing major science enterprises for the federal government on behalf of leading academic institutions will serve us well."
NAS Highlights
Endowment, Trust, and Other Long-term Investments Portfolio
As the Chairman of the Finance Committee, I am responsible, along with the other committee members, for the prudent management of the endowment, trust, and other long-term investments portfolio (the “Portfolio”). 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 recommendation 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. The current spending rule caps annual spending at 5 percent of the trailing 12-quarter average market value of the Portfolio. As I have already noted, the Council has limited spending to 4% since 2009.
During 2011, the portfolio, along with the broader market, experienced a relatively small decline. This still leaves us in recovery territory after the 2008 market downturn. The market value of the portfolio decreased net of withdrawals and new contributions from $383.9 million on January 1, 2011, to $352.2 million at December 31, 2011. The portfolio returned -5.6% for the year which was 0.7% lower than the relevant benchmark return of -4.9%. The portfolio was helped greatly by the performance of its private equity and venture capital investments in China and India. The hedge fund investments in the portfolio had relatively poor returns this year, as hedge funds in general encountered their most difficult year in the last decade. During the year, the Finance Committee felt that it was prudent to temporarily hold more cash in the portfolio for a short period of time to protect the portfolio against the possibility of a severe market disruption.
Toward the end of 2011 and beginning of 2012, the portfolio became fully invested once again. In the first quarter of 2012, the portfolio returned 7.3% compared to a benchmark return of 9.1%. For the ten years ended
March 31, 2012, the portfolio returned 6.5% compared to a benchmark return of 5.8%.
The actual portfolio allocation and policy guidelines as of December 31, 2011, were as follows:
Portfolio Allocation | Policy Guideline | |
Fixed-Income: | ||
U.S. Fixed/Cash | 13% | 9% |
Non-U.S. Fixed | 6% | 5% |
Equities: | ||
U.S. Large Cap Funds | 14% | 19% |
U.S. Small-Mid Cap Funds | 6% | 9% |
Non-U.S. Stocks – Developed | 14% | 20% |
Non-U.S. Stocks – Emerging | 12% | 15% |
Real Estate Investments | 3% | 3% |
Hedge Funds and Alternative | ||
Investments | 32% | 20% |
Total | 100% | 100% |
Market values of the Portfolio, after withdrawals, for the years ended December 31, 2011 and 2010, are displayed in the following chart (in thousands):
2011 | 2010 | |||
Cash and Fixed-Income Securities | $ | 67,331 | $ | 45,156 |
Equity Securities | 284,845 | 338,773 | ||
Total | $ | 352,176 | $ | 383,929 |
For the five years ending December 31, 2011, the Portfolio return is 0.8%, which equaled the market composite benchmark of 0.8% and, for the ten years ending December 31, 2011, the Portfolio return was 5.9% compared with the market composite benchmark of 4.3%.
- See Schedule 2-A on page 22 for details of investments by asset class.
- Included in the $352.2 million total market value of the Portfolio as of December 31, 2011, are $6.4 million for the Woods Hole Endowment Funds, $62.2 million for the Institute of Medicine (IOM), and $9.2 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 $13.5 million were made to fund the President’s Committee, NAS General Fund’s activity, and NAS prizes and awards for the current period. Additional withdrawals of $2.0 million were made to fund Woods Hole, IOM, and TNAC activity.
NAS General Funds
The NAS General Funds, which provides unrestricted resources to support the activities of the Academy, receives its funding from the unrestricted portion of the NAS Endowment. As noted above, the Council has limited spending from the endowment, including the unrestricted portion, to 4% since 2009.
For fiscal year 2011, the General Funds revenue totaled $4.8 million and expenditures totaled $4.4 million, resulting in a $341,000 surplus. Comparable figures for fiscal year 2010 were $5.2 million in revenues, $4.6 million in expenditures, resulting in a $586,000 surplus.
The 2011 NAS General Funds activity is summarized as follows (in thousands):
Revenues: | ||
Unrestricted Endowment | $ | 4,101 |
Annual Giving from Members | 285 | |
Membership Dues | 230 | |
Annual Meeting | 155 | |
Other | 17 | |
Total Revenue | $ | 4,788 |
Expenses: | ||
Development Office | $ | 1,054 |
Member Services: | ||
Annual Meeting | 665 | |
Other | 207 | |
Programs/Projects: | ||
Cultural Programs of the NAS | 260 | |
Evolution, Education & Communication | 117 | |
Frontiers of Science | 241 | |
Committee on International | ||
Security & Arms Control | 194 | |
InterAcademy Council | 100 | |
Foreign Meetings | 619 | |
President’s Office | 116 | |
NAS Executive Office | 74 | |
NRC Operations | 801 | |
Total Expenses | $ | 4,447 |
Surplus | $ | 341 |
Any surplus in the General Funds Budget at the end of the year is transferred to the NAS Reserve. Similarly, deficits are funded from the Reserve. The Reserve is invested in the NAS endowment, trust and other long-term investments portfolio. The NAS Reserve had a market value of $4.9 million on December 31, 2011, to which the 2011 surplus will be added.
The NAS Council has approved a General Funds Budget of $4.7 million for 2012.
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, 2011 and 2010 (in thousands):
2011 | 2010 | |||
Revenues: | ||||
Subscriptions | $ | 6,238 | $ | 6,880 |
Author charges | 6,841 | 7,234 | ||
Other | 118 | 141 | ||
Total | $ | 13,197 | $ | 14,255 |
Expenses: | ||||
Publishing | $ | 6,653 | $ | 6,468 |
Other | 5,717 | 5,294 | ||
Total | $ | 12,370 | $ | 11,762 |
Net | $ | 827 | $ | 2,493 |
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 leased the following facilities during 2011:
- Terrell Place (two suites) at 575 Seventh St. NW in Washington, D.C.
- National Academies Data Center at 8619 Westwood Center Drive in Vienna, Virginia.
- Proceedings of the National Academy of Sciences temporary office at 700 Eleventh St. NW in Washington, D.C.
- Temporary office space at 555 12th Street, N.W., Washington, D.C.
- Temporary warehouse space at 6313 Gravel Ave, Alexandria, Virginia.
Restoration of the National Academy of Sciences Building in Washington, D.C. has been underway since June 2010. We are elated that the building was completed and hosted the 149th Annual meeting of the NAS at the end of April 2012. The total cost of the project was approximately $60 million. The work was financed through the issuance of tax-exempt fixed rate bonds, which will be repaid principally from the revenue received from sponsors of NRC studies and other activities that take place in the building. The project has restored and improved the building’s historic spaces, increased accessibility, updated the infrastructure, and made the building into a modern conference center and office building.
In connection with the reopening of the National Academy of Sciences Building the leases for temporary office space in downtown Washington were terminated. Later this year the lease for space in Terrell Place will also be terminated and the staff relocated to the Keck Center. Please see page 6 for photographs of the newly restored NAS building.
Development Office Programs
The NAS is grateful for the generous support of members, friends, and philanthropic organizations in 2011. The fund-raising effort continues to focus on building endowment and expendable unrestricted sources for the
NAS, including the Institute of Medicine (IOM). Unrestricted gifts and endowment earnings are vital resources that help the NAS to initiate studies in sensitive areas and to take a leadership role in addressing the complex issues facing our nation.
In 2011, the NAS and IOM received more than $1.2 million in unrestricted expendable support. This includes strong support of the annual funds. NAS members contributed $284,000, a 12% increase over the 2010 support provided. Unrestricted support was also received through the NAS Building Seat Naming Campaign. NAS members donated $445,000 to name 89 seats in the newly restored NAS auditorium.
Gifts and grants were also received to establish named endowments and fund the many projects and activities of the NAS and IOM. The selected gifts described below highlight the scope of philanthropic support received during 2011:
- The Raymond and Beverly Sacker Foundation generously donated $2.1 million to the NAS in honor of the NAS President, Ralph J. Cicerone, to establish the Raymond and Beverly Sackler Science Fund. Earnings from this endowed fund will provide support for studies and projects in the areas of basic biology and biomedical science – including the convergence of biology, physics, mathematics, and engineering sciences – in addressing problems in biomedical science and human health.
- The IOM received grants totaling $9.9 million from Kaiser Permanente and the Michael and Susan Dell Foundation to support a partnership between the IOM and HBO Documentary Films, in association with the National Institutes of Health and the Centers for Disease Control and Prevention, to educate citizens about the causes and consequences of the obesity epidemic in the United States.
- The NAS’s Marian Koshland Science Museum received a gift of $943,000 from the Daniel E. Koshland, Jr. Family Fund to support the general purposes of the Museum.
- The NAS received a final distribution of $254,000 from the estate of Dorothea and Herbert Simon (NAS), which supplements the distributions that have been received from the estate over the last ten years, and brings the total donation to the Dorothea and Herbert Simon Fund to $899,000. The funds were bequeathed for the general purposes of the NAS.
- The Committee on Human Rights of the NAS, IOM and National Academy of Engineering (NAE) received $309,000 in gifts including support from 136 members of the NAS, IOM, and NAE.
Overall, gifts for the NAS permanent endowment in 2011 totaled $2.4 million, as compared to less than $200,000 in 2010. Gifts for the NAS unrestricted endowment in 2011 totaled $296,000 as compared to $41,000 in 2010. These gifts are representative of the generous support the NAS received from many members, friends, and organizations in 2011. This support is vitally important in better positioning the Academy to fulfill its critical mission as scientific adviser to our nation.
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 $325.8 million in 2011 and $286.8 million in 2010.
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, 2011, was $277.1 million (see following chart, in thousands, and the Statements of Activities on page 43) and in the year ended December 31, 2010, was $242.7 million.
U.S. Government Revenues by Agency | ||
Agency for International Development | $ | 613 |
Chemical Safety Board | 346 | |
Department of Agriculture | 1,738 | |
Department of Commerce | 12,231 | |
Department of Defense: | ||
Department of the Air Force | 8,279 |
U.S. Government Revenues by Agency | ||
Department of the Army | 10,545 | |
Department of Defense | 8,283 | |
Department of the Navy | 10,673 | |
Department of Education | 1,569 | |
Department of Energy | 11,795 | |
Department of Health and Human Services | 38,011 | |
Department of Homeland Security | 1,849 | |
Department of the Interior | 2,551 | |
Department of Justice | 1,985 | |
Department of Labor | 553 | |
Department of State | 6,216 | |
Department of Transportation | 122,615 | |
Department of Treasury | 1,356 | |
Department of Veterans Affairs | 2,998 | |
Environmental Protection Agency | 6,093 | |
Executive Office of the President | 1,784 | |
General Accounting Office | 66 | |
General Services Administration | 211 | |
Institute of Museum and Library Services | 151 | |
Marine Mammal Commission | 74 | |
National Aeronautics and Space Administration | 9,177 | |
National Geospatial-Intelligence Agency | 334 | |
National Science Foundation | 18,602 | |
National Security Agency | 209 | |
National Transportation Safety Board | 22 | |
Nuclear Regulatory Commission | 843 | |
Office of the Director of National Intelligence | 240 | |
Social Security Administration | 158 | |
Adjustment to Indirect Cost Receivable & Other | (5,055) | |
Total U.S. Government Agencies | $ | 277,117 |
Private/Nonfederal Contracts and Grants
Private sponsors supplemented government projects and provided for new initiatives by funding awards in the amount of $48.7 million in 2011, compared with $44.1 million in 2010. The private and nonfederal revenues were comprised of contracts and grants ($40.5 million) and other contributions ($8.2 million). (See Statements of Activities on page 43.)
- In 2011, NAS received 76 new private contracts and grants compared with 92 in 2010. While the number of new awards decreased from 2010 to 2011, the average new donation amount increased by approximately 29%. The result being that private contracts and grants increased from $35.5 million in 2010 to $40.5 million in 2011.
- Other contributions revenue decreased from $8.6 million in 2010 to $8.2 million in 2011.
Expenses
Almost all government and private 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, allowing adequate indirect cost expenditures for 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 2011, total indirect expenses were $74.4 million compared to an approved budget of $77.0 million and NAS recovered $6.2 million more from sponsors than was spent. In the immediate future, the indirect rates will decrease slightly in order to compensate for this over-recovery. The NAS Council has approved a 2012 indirect expense budget of $82.3 million.
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, 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
This year was quite a strong year for the NRC, reaching its all-time high program level. While the program level has been healthy, the NAS Endowment, trust, and other long term investments portfolio experienced a decline, along with the broader market. This decline in the portfolio is the main reason for the 2011 decrease in net assets, as shown below (in millions).
2011 | 2010 | |||
Total Revenues | $ | 330.5 | $ | 375.6 |
Total Expenses | 363.4 | 332.5 | ||
Change in Net Assets | $ | (32.9) | $ | 43.1 |
Net assets, or assets minus liabilities, can be a measurement of a not-for-profit organization’s ability to reinvest net income toward their mission while also maintaining reserves and helping protect against inflation. The NAS 2011 results of operations are further described in the financial statements starting on page 42.
Conclusion
I would like to thank the members of the Council, the Committee on Budget and Internal Affairs, the Finance Committee, and the NRC leadership for their continued support. Also, thanks are extended to the Office of the Chief Financial Officer for its help in managing the Endowment and Trust Pool, its steady oversight of the Academy’s various budgets, and its careful attention to the Academy’s financial systems, records and reports.
Jeremiah P. Ostriker
Treasurer
Photographs of the newly restored NAS building:
Images Courtesy of CPNAS © Maxwell MacKenzie