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 portfolio activities of our Academy for the year ended December 31, 2014.

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 withdraw from our own endowment under the endowment spending policies adopted by the Council. Our total NRC program revenue for 2014 experienced an increase of approximately 1% above 2013 revenue. In projecting program level in 2015, we anticipate a program level similar to the 2014 program; with a slightly higher level of on-site programmatic work, and a smaller amount of subcontracting.

The Gulf Research Program started in 2013 and will become a larger part of the programmatic activity over the next few years. Over its 30-year duration, The Gulf Research Program will seek to improve understanding of the interconnecting human, environmental, and energy systems of the Gulf of Mexico and other U.S. outer continental shelf areas, and foster application of these insights to benefit Gulf communities, ecosystems, and the Nation. As of February 2015, we have received $95 million of the total $500 million in payments to be received. The NAS Council is overseeing the investment of the funds and the strategic direction of the program in accordance with agreements arising out of the settlement of the federal government’s criminal complaints against BP Exploration and Production, Inc. and Transocean Deepwater, Inc.

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 from specific endowment funds having values below the original gift amount, starting in 2009. These practices continued through 2013. For 2014, a conservative increase to a spending rate of 4.25% was approved and a planned spending rate of 4.50% has been approved for 2015. The 2014 investment return on the endowment was positive at approximately 5.3%.

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 and trust fund. The goal of the endowment is to provide stable support for the Academy’s programs and activities over time while maintaining the value of the corpus of the endowment in real (inflation adjusted) terms. 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% of the trailing 12-quarter average market value of the portfolio. As I have already noted, the Council limited spending to 4% from 2009 through 2013, increased spending to 4.25% in 2014, and has approved a planned spending rate of 4.50% in 2015.

The market value of the portfolio increased net of withdrawals and new contributions from $412.5 million on January 1, 2014, to $423.0 million at December 31, 2014. The portfolio returned 5.3% for the year, which was 1.3% higher than the benchmark return of 4.0%. The strongest contributors to the return for the year were U.S. equities. The private equity and venture capital funds also had good years overall and produced returns exceeding their benchmarks. Both developed and emerging non-U.S. equities had negative returns for the year, in line with their respective benchmarks.

The actual portfolio allocation and policy guidelines as of December 31, 2014, were as follows:

Market values of the portfolio, after withdrawals, for the years ended December 31, 2014 and 2013, are displayed in the following chart (in thousands):

It is of some interest to compare our endowment performance with that of similar organizations. A good way of doing this is to review the results of the study of college and university endowments by the National Association of College and University Business Officers which found that as of June 30, 2014, the average 1, 5, and 10 year returns for endowments in the $100M - $500M range were 15.5%, 11.8%, and 7.1% respectively. The 1, 5, and 10 year returns of our endowment as of June 30, 2014 were 14.9%, 10.7%, and 6.9%, respectively. As you know, some years are better than others and that is why it is good to focus on the long-term return, for which the NAS endowment is performing similarly compared to its peers.

One further comparison may be useful. In gross terms, including the return on investments, the gifts received, and the withdrawals made for endowment expenditures, the increase in the value of the endowment over December 31, 2013 was 2.0%, exceeding the 0.8% inflation rate during the one year period. On the same basis, the endowment asset value has increased by 30.7% over the ten year period preceding December 31, 2014 for an average (compounded) rate of return of 2.7%, again in excess of the 2.1% annual inflation rate for the comparable period.

• See Schedule 2-A on page 23 for details of investments by asset class.
• Included in the $423.0 million total market value of the portfolio as of December 31, 2014, are $7.4 million for the Woods Hole Endowment Funds, $79.9 million for the Institute of Medicine (IOM), and $11.6 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 54).
• Withdrawals of $11.6 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 $2.1 million were made to fund Woods Hole, IOM, and TNAC activity.

NAS General Funds

The NAS General Funds Budget, 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, increasing to 4.25% in 2014.

For 2014, funding for the General Funds Budget totaled $5.6 million and expenditures totaled $4.8 million, resulting in a surplus of approximately $848,000. Comparable figures for 2013 were $5.2 million in revenues, $4.8 million in expenditures, resulting in a surplus of approximately $353,000.

The 2014 NAS General Funds activity is summarized as follows (in thousands):

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 Reserve, which is invested in the NAS Endowment and Trust Pool. The NAS Reserve had a market value of $5.2 million on December 31, 2014, to which the 2014 surplus will be added.

The NAS Council has approved a General Funds Budget of $5.8 million for 2015, which is based on a slightly increased endowment expenditure rate of 4.50%.

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, 2014 and 2013 (in thousands):

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 at 8619 Westwood Center Drive in Vienna, Virginia for the National Academies Data Center.

Development Office Programs

The NAS, including the IOM, is grateful for the generous support of members, friends, and philanthropic organizations. Philanthropic support enables the Academies to focus on innovative work that cuts across interdisciplinary boundaries and to resolve important national problems that the government cannot or is not yet ready to sponsor. It also helps us to initiate leading-edge studies, for which major funding is raised from other sources.

Unrestricted philanthropic support is a vital resource for the Academies. In 2014, the NAS and IOM received approximately $1.85 million in unrestricted expendable support. These funds were raised through support of the annual funds and the IOM’s Harvey V. Fineberg Impact Fund:

• There were 415 NAS members and 28 friends of the NAS who contributed $483,000 to support the NAS annual fund, an increase of 13% over 2013. Of these, 35 members made first time gifts including a $50,000 gift from the Simons Foundation, directed to the NAS by James Simons (NAS), and these gifts were matched by Philip (NAS/IOM) and Sima Needleman, who established a $150,000 fund-raising challenge to encourage gifts from NAS members who had not previously supported the Academy. Additionally, the NAS Auditorium seat naming campaign continued to garner interest with 19 additional seats being named that raised $95,000 for the NAS building fund.
• The IOM saw a 20% increase in the funds raised through its annual fund campaign, bringing in $354,000 from 470 members and 12 friends of the IOM. Contributing to the success was a $25,000 matching gift challenge by Herbert Pardes (IOM) for gifts made on the day of giving. More than $54,000 was raised on that day. An additional $1,014,000 was raised from 135 donors, including a $630,000 gift that was made anonymously, to support the Harvey V. Fineberg Impact Fund – a fund-raising initiative launched in 2013 to provide resources that will help the IOM address the challenges of healthcare delivery, cost, research, outcomes, and education, and help the IOM communicate findings from IOM reports to populations who would most benefit.

Many gifts and grants were received for restricted purposes to fund the numerous projects and activities of the NAS and IOM. The selected gifts described below highlight the scope of philanthropic support received during 2014:

• The NAS received more than $5.1 million in endowment gifts, including $3.6 million from the estates of Sheila and Michael Held to endow a prize in mathematical programming; $1.5 million from the Research Corporation for Science Advancement to establish the John P. Schaefer Fund from which earnings will be used to fund an award to recognize achievement in scientific discovery. This endowment gift was supplemented with an expendable gift of $125,000, available for immediate use and the presentation of the first award in 2015; and $100,000 — with an additional commitment of $150,000 — from Ralph (NAS) and Carol Cicerone to create a named endowment fund that will provide support for priority programs.
• Gifts and grants from foundations, corporations and other private sources are key resources for funding the studies, workshops, forums, roundtables and other projects of the National Research Council and the IOM. Examples of support received in 2014 are: grants of $900,000 from the John D. and Catherine T. MacArthur Foundation and $200,000 from the Robert Wood Johnson Foundation to support a study on how to improve the use of economic analysis to inform investment in interventions to improve outcomes for children, youth, and families; grants of $550,008 from the Bill and Melinda Gates Foundation, and $150,000 each from the Alfred P. Sloan Foundation and the William and Flora Hewlett Foundation were received to support the study, “How People Learn II,” an update and extension of the report issued in 2000; and a consortium of ten funders came together to support the IOM study on family caregiving in the United States, with the Archstone Foundation, the John A. Hartford Foundation, and an anonymous donor each contributing $400,000.
• The IOM received commitments totaling $1.5 million to endow two Anniversary Fellowships, one in emergency medicine and the other in osteopathic medicine. The IOM’s Anniversary Fellows Program allows early career health science scholars to participate in the work of the IOM, significantly contributing to their career development. The gifts to endow these fellowships were made by the American Board of Emergency Medicine (ABEM) and a consortium of funders: the American Osteopathic Association, the American Osteopathic Foundation, and the American Association of Colleges of Osteopathy. ABEM and the consortium supplemented the endowment gifts with expendable gifts of $76,000 each so that the fellowships could start immediately.
• NAS’s programs to enhance the public’s engagement with science received strong support. The Science & Entertainment Exchange, a program that connects entertainment industry professionals with top scientists and engineers to bring more realistic science and positive portrayals of scientists and engineers to film and television received a grant of $600,000 from the Alfred P. Sloan Foundation. The Science & Engineering Ambassadors Program, a project that links

• scientists and engineers to local opinion leaders to promote and support informed community decision-making, received a grant of $200,000 from the Simons Foundation.

• The Committee on Human Rights of the NAS, IOM, and NAE received support from 111 members across the three academies raising $76,938. In addition, Martha Vaughan (NAS) made a very generous gift of $56,500.
• The NAS and IOM saw revocable and irrevocable gift expectancies grow by $3 million, including a $2 million beneficial interest in a trust to be received from the Ruth Easling Day Trust for the establishment of The Arthur L. Day (NAS) Memorial Fund.

These gifts represent the many ways that members, friends, and organizations supported the NAS in 2014. This support is essential to the Academy’s ability to fulfill its mission as scientific adviser to the nation and we deeply appreciate the philanthropic support from our many donors.

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 $293.5million in 2014 and $286.2 million in 2013.

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, 2014, was $231.2 million (see following chart and the Statements of Activities on page 52) and in the year ended December 31, 2013, was $231.3 million.

Private/Nonfederal Contracts and Grants

Private sponsors provided for new initiatives and cosponsored government projects by funding awards in the amount of $62.3 million in 2014, compared with $55.0 million in 2013. The private and nonfederal revenues were comprised of contracts and grants ($49.3 million) and other contributions ($13.0 million). (See Statements of Activities on page 52.)

• Other contributions revenue increased from $3.6 million in 2013 to $13.0 million in 2014.

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, indirect cost expenditures provide necessary support services and should be kept in reasonable proportion to program expenditures. 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. During 2013 and 2014, management worked to reduce the indirect costs to keep them in line with the declining and then stabilizing program level. In 2014, total indirect expenses were $71.1 million compared to an approved initial budget of $74.6 million. The 2015 indirect budget has been set at $76.6 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

The main reason for the large decrease in revenues from 2013 to 2014 is the $471 million of revenue recognized in 2013 for the Gulf Research Program. Funds for this program will be expended over the life of the program, which is no more than 30 years.

Net assets, or assets minus liabilities, can be a measurement of a not-for-profit organization’s ability to reinvest net income toward its mission while also maintaining reserves and helping protect against inflation. The NAS 2014 results of operations are further described in the financial statements starting on page 51.

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, special thanks are extended to the Office of the Chief Financial Officer, led by Mary “Didi” Salmon, our CFO, for help in managing the Endowment and Trust Pool, providing steady oversight of the Academy’s various budgets, and paying careful attention to the Academy’s financial systems, records and reports.

Jeremiah P. Ostriker
Treasurer