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, 2015.

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 2015 experienced an increase of approximately 0.9% above 2014 revenue. In projecting program level in 2016, we anticipate a program level similar to the 2015 program; with a slightly higher level of on-site programmatic work, and a smaller amount of subcontracting.

As the program level has increased slightly over the last two years and looks stable for 2016, we are focusing on the changing sources of our program funding. In 2011, the $330 million of program work was sponsored 84% by the federal government and 16% from non-federal sources. In 2015, the $279 million program was sponsored 74% by the federal government and 26% from nonfederal sources. The decline in the federal funding both in volume and in percentage over the last five years is a trend known to many in the research field. We are working to grow the non-federally sponsored work, with the area of medicine and health research having led the way. Over the last 5 years the annual federal funding has declined from approximately $278 to $207 million, a 25% decline; fortunately, the funding from private and our own sources has increased from $52 to $72 million, a 38% increase. It will be very important for the future of the institution to continue vigorous efforts to diversify its sources of income.

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 2016, we have received $235 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 followed by an increase to 4.5% approved for 2015 and 2016.

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 4.50% in 2015 and 2016.

The market value of the portfolio decreased net of withdrawals and new contributions from $423.0 million on January 1, 2015, to $419.9 million at December 31, 2015. The portfolio returned -1.0% for the year, which was 0.7% higher than the benchmark return of -1.7%. The negative return was primarily due to a decline in the global equity markets driven by fears of an economic slowdown. Despite the downturn, the NAS portfolio outperformed its benchmark due to strong performances from hedged U.S. equity and alternative investments.

The market value of the portfolio, along with the actual portfolio allocation and policy guidelines as of December 31, 2015, were as follows:

The return percentages for the portfolio as of December 31, 2015, as compared to the blended market benchmark (i.e. return calculated using the policy guideline and market indices), were as follows:

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, 2015, the average 1, 5, and 10 year returns for endowments in the $100M - $500M range were 2.0%, 9.5%, and 6.2% respectively. The 1, 5, and 10 year returns of our endowment as of June 30, 2015 were 4.0%, 8.9%, and 6.2%, 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. Including the return on investments and the gifts received and the withdrawals made for endowment expenditures, the endowment asset value has increased by 19.2% over the ten year period preceding December 31, 2015 for an average (compounded) rate of growth of 1.8%, in line with the 1.8% annual inflation rate for the comparable period.

• See Schedule 2-A on page 24 for details of investments by asset class.
• Included in the $419.9 million total market value of the portfolio as of December 31, 2015, are $7.0 million for the Woods Hole Endowment Funds, $76.3 million for the National Academy of Medicine (NAM), and $11.2 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 56).
• Withdrawals of $12.7 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 $6.7 million were made to fund Woods Hole, NAM, 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 and 4.50% in 2015.

For 2015, funding for the General Funds Budget totaled $5.8 million and expenditures totaled $5.2 million, resulting in a surplus of approximately $600,000. Comparable figures for 2014 were $5.6 million in revenues, $4.8 million in expenditures, resulting in a surplus of approximately $849,000.

The 2015 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 $5.4 million on December 31, 2015, to which the 2015 surplus will be added.

The NAS Council has approved a General Funds Budget of $6.0 million for 2016, which is based on an 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, 2015 and 2014 (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 NAM, 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 2015, the NAS and NAM received approximately $1.4 million in unrestricted expendable support. These funds were raised through support of the annual funds and the NAM’s Harvey V. Fineberg Impact Fund:

• There were 403 NAS members and 25 friends of the NAS who contributed $516,000 to support the NAS annual fund, an increase of 7% over 2014. Of these, 32 members made first time gifts. Additionally, the NAS received a bequest of $100,000 for unrestricted purposes from the estate of Alexander Rich (NAS/NAM).
  
  
• The NAM saw an 18% increase in the funds raised through its annual fund campaign, bringing in over $417,000 from 500 members and 23 friends of the NAM. An additional $196,900 was raised from 63 donors to support the Harvey V. Fineberg Impact Fund – a fund established in 2013 that helps the NAM to address the challenges of healthcare delivery, cost, research, outcomes, and education, and helps to disseminate findings and recommendations to populations who would mostly benefit.

Many gifts and grants were received for restricted purposes to fund numerous projects and activities, including endowment funds that will support activities in perpetuity. The selected gifts described below highlight the scope of philanthropic support received during 2015:

• The NAS received a gift from Raymond and Beverly Sackler and the Raymond and Beverly Sackler Foundation to endow the Convergence Research Prize Fund. The aim of this prize is to recognize significant advances in research made possible by the integration of two or more disciplines in the STEM fields.
  
  
• The Kavli Foundation renewed their support of the Kavli Frontiers of Science program with a gift of $5,750,000 to the NAS. This commitment will fund the symposia for young scientists for an additional ten years.
  
  
• 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 funding totaling $675,000 from Howard Hughes Medical Institute, Hillman Family Foundation, Google, and The Walt Disney Company.
  
  
• The Academies received a total of $10 million from the Robert Wood Johnson Foundation to support programs and activities related to establishing a culture of health initiative. Half of these funds will establish an endowment within the NAM that will benefit the culture of health program, the remaining $5 million is to be expended over the next five years and will enable the Health and Medicine Division, formerly the IOM, to undertake a series of studies and other activities focused on the social policies that promote health and well-being at the community level.
  
  
• The NAM added to its Anniversary Fellows program by establishing a fellowship in bioethics supported by the Greenwall Foundation. A gift of $750,000 established an endowment and an additional $76,000 in expendable funds allowed the fellowship to start immediately.
  
  
• A generous $3.5 million was raised from the Paul Allen Family Foundation, the Ford Foundation, Bill and Melinda Gates Foundation, Mr. Ming Wai Lau, the Gordon and Betty Moore Foundation, and the Wellcome Trust to support the work of the Global Health Risk Framework Commission for which the NAM served as secretariat. The Commission issued

• recommendations for mitigating the global health and security issues related to infectious disease outbreaks and pandemic preparedness.

• 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 Academies of Sciences, Engineering and Medicine. Significant support received in 2015 included: grants of $300,000 from The Greenwall Foundation, $300,000 from The Wellcome Trust, and $100,000 from the John D. and Catherine T. MacArthur Foundation to support the convening of an international summit and conduct a consensus study on the scientific, medical, and ethical considerations of human gene-editing; a grant of $1,000,000 from the Carnegie Corporation of New York to support the first phase of a project that will lead to the creation of a novel, large-scale national resource that will provide researchers and policy analysts with on-demand links to data sets from the Census, IRS, Social Security, the American Community Survey, and other sources to inform studies of educational, occupational, and economic mobility across and within generations; a grant of $800,000 from the Peter G. Peterson Foundation to convene a series of workshops focused on improving the effectiveness, efficiency, and value in caring for those patients who are high risk and high cost; and the Heising-Simons Foundation, Robert and Mary Litterman Foundation, and the David and Lucile Packard Foundation, supported the “Extreme Weather Events and Climate Change Attribution” study – a fast-track examination of the science of attribution of extreme weather to human-caused climate change and natural variability.
  
  
• The Committee on Human Rights of the NAS, NAE, and NAM received support from 180 members across the three academies raising more than $175,000. This amount includes renewed support from Martha Vaughan (NAS) who made a generous gift of $59,210.
  
  
• The NAS and NAM received revocable and irrevocable gift expectancies totaling more than $5 million dollars for the year. This includes a long-term committee member who informed the institution of her intention to bequeath funds to establish an endowment that will provide perpetual support for the programs and activities of the Board on Health Care Services.

These gifts represent the many ways that members, friends, and organizations supported the NAS and NAM in 2015. This support is essential to the Academy’s ability to fulfill its mission as scientific adviser to the nation. We are deeply grateful for the philanthropic support received 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 $277.5 million in 2015 and $293.5 million in 2014.

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, 2015, was $206.6 million (see following chart and the Statements of Activities on page 54) and in the year ended December 31, 2014, was $231.2 million.

Private/Nonfederal Contracts and Grants

Private sponsors provided for new initiatives and cosponsored government projects by funding awards in the amount of $70.9 million in 2015, compared with $62.3 million in 2014. The private and nonfederal revenues were comprised of contracts and grants ($50.0 million) and other contributions ($20.9 million). (See Statements of Activities on page 54.) Other contributions revenue increased from $13.0 million in 2014 to $20.9 million in 2015.

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. In 2015, management approved a slightly increased indirect cost level in line with the increased program level. In 2015, total indirect expenses were $72.4 million compared to an approved budget of $76.6 million. For 2016, the cash-basis indirect budget reflects an additional pay period of labor compared to 2015, and is set at $78.9 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, 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.

Overall Financial Condition

The main reason for the decrease in net assets during 2015 is the decline in market value of the investment portfolio.

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 2015 results of operations are further described in the financial statements starting on page 53.

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

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