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 and other long-term investments portfolio activities of our Academy for the year ended December 31, 2021.

Overview

The income that supports the activities of the Academy comes from two major sources: program revenue received from government and other sponsors to pay for the large number of studies and other activities undertaken each year by the National Academies of Sciences, Engineering, and Medicine (the Academies), and a much smaller sum that we withdraw from our own NAS endowment under the endowment spending policies adopted by the Council.

With respect to amounts withdrawn annually from the NAS endowment, a number of restricted fund accounts support specific programs and awards, while a much smaller number of fund accounts provide unrestricted support for our mission. In today’s challenging environment, unrestricted funds are particularly important, allowing the Academies to respond quickly to unexpected events. The General Funds section below describes the annual unrestricted spending.

This last year presented many opportunities and challenges for the institution, as the COVID-19 pandemic continued to affect operations. During 2021, the Academies continued remote work for all staff and held meetings for committee and other convening activities primarily virtually. The continuation of virtual activity has been successful, with each part of the institution adapting its operations to perform efficiently and effectively in this remote environment.

With very low levels of travel and meeting activity for 2021 due to the pandemic, the modest year over year increase in National Research Council (NRC) program level was a combination of even less travel and meetings expenditures than in 2020, offset by growth in direct labor with the addition of over 30 direct staff. Indirect costs for 2021 were less than both the 2020 results and the 2021 plan, as expected travel and in-person meetings did not occur.

NAS Highlights

Endowment and Other Long-term Investments Portfolio

As the chair of the NAS Investment Committee, I am responsible, along with the other committee members, for the prudent management of the endowment fund. The goal of the endowment is to provide stable support for the Academy’s programs and activities over time. To achieve this goal, the Council, acting on the recommendation of the Investment 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. The Council limited spending to 4% from 2009 through 2013, increased spending to 4.25% in 2014, increased it again to 4.5% from 2015 through 2020, and decreased it to 4.0% for 2021.

The market value of the portfolio increased, net of withdrawals and new contributions, from $643.3 million at January 1, 2021 to $729.2 million at December 31, 2021.

• Included in the $729.2 million total market value of the portfolio at December 31, 2021, are $9.7 million for the Woods Hole Endowment Funds, $132.6 million for the National Academy of Medicine (NAM), and $14.6 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 14 to the financial statements).
• Withdrawals of $19.6 million were made to fund the Presidents’ Committee, NAS General Fund’s activity, and NAS prizes and awards for the current period. Additional withdrawals of $2.6 million were made to fund Woods Hole, NAM, and TNAC activity.

The approximate asset allocation of the portfolio as of December 31, 2021 was as follows:

The portfolio returned 16.0% for 2021, which was 3.1% higher than the reference portfolio return of 12.9%. The reference portfolio is a purely passive portfolio comprised of 75% MSCI All Country World Index Net and 25% Bloomberg Barclays U.S. Treasury 7-10 Year Index. The NAS Endowment & Other Long-Term Investments Pool outperformed its reference portfolio primarily due to strong performance by private equity and venture funds. It should be noted that the reference portfolio is a “reference” and not a “benchmark” that we wish to achieve: its historical volatility is generally higher than we wish to accept, even at the cost of our foregoing some excess returns in “up” years.

The return and volatility percentages for the portfolio as of December 31, 2021, as compared to the reference portfolio were as follows:

NAS Indirect and General Funds Budget

The NAS Indirect and General Funds Budget, which provides support for the activities of the Academy, receives its funding from the NRC indirect cost pools (as a cost reimbursement for allowable expenditures) and a draw from the portion of the NAS Endowment not subject to donor-imposed restrictions. As noted above, the Council has limited spending from the endowment in past years, including the unrestricted portion, approving a spending rate of 4.0% in 2021.

For 2021, funding for the NAS Indirect and General Funds Budget totaled $10.0 million and expenditures totaled $7.8 million, resulting in a surplus of approximately $2.2 million. This larger than usual surplus was due to the lower cost of operations in a virtual environment. This included a second year of hosting an all-virtual NAS annual meeting, which was again a success, including continued high attendance levels at its business session and for its webcast public sessions. Comparable annual figures for 2020 were $10.4 million in revenues, $8.4 million in expenditures, resulting in a surplus of approximately $2 million.

The 2021 NAS Indirect and 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 NAS Reserve, which is invested in the NAS Endowment and Other Long-Term Investments Pool. The Reserve had a market value of $11.6 million on December 31, 2021, to which the 2021 surplus will be added. The Academy’s goal is to maintain a reserve balance equal to approximately one year’s annual draw from the NAS Unrestricted Endowment. As the balance in the NAS Reserve has grown beyond that amount, during 2022 the NAS Council approved reallocating $7 million from the NAS Reserve to the NAS General Endowment. This will increase the annual draw on the NAS General Endowment to support Academy operations. The NAS Council has approved an Endowment draw of 4.0% for 2022 and approved an Indirect and General Funds Budget of $10.4 million for 2022. The Council kept the 2021 endowment draw rate at 4.0% in an effort to continue with lower spending from the endowment during these uncertain times and with a view toward the long-term health and good stewardship of the NAS endowment resources.

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

The Proceedings of the National Academy of Sciences (PNAS) is an integral part of the membership activities of the Academy, and as such, the revenue and expense totals shown below (in thousands) are part of the overall financial results of the total membership activities and the financial structure of the institution as a whole.

^*Includes variable payment for general and administrative services in accordance with the institution's government compliant cost accounting practices.

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 in Vienna, Virginia for the National Academies Data Center.

Development Office Programs

The Development Office is supported by all three academies and operates for the benefit of all Academies programs. (Note that the National Academy of Engineering Funds (NAEF) is a separately incorporated tax-exempt organization established by NAE to raise funds to support its goals.) The generous support of members, friends, and organizations helps the National Academies address critical societal and global issues by inspiring bold scientific investigation, synthesizing data-driven evidence, and providing authoritative advice. Highlights from the year include:

• The Councils of the National Academy of Sciences (NAS) and the National Academy of Medicine (NAM) both reached 100% giving participation.
• The NAS received $8.1 million over five years from Schmidt Futures to establish the Eric and Wendy Schmidt Awards for Excellence in Science Communication.

• NAS members donated $1.7 million in total support for the NAS, an increase of 31% above 2020. Of this total, $780,000 came through the Annual Fund, with 24% of NAS members making at least one donation. This compares to 26% for NAE and 34% for NAM.
• The NAM publicly launched the $100 million Campaign for the NAM during their Annual Meeting, the largest of its kind in the Academy’s history. As of December 31, 2021, $91.5 million had been raised toward the goal of $100 million. Highlights included $6.6 million from the Robert Wood Johnson Foundation ($5 million for the Culture of Health and $1.6 million toward a new fellowship) and $5.5 million to support the Climate and Health Grand Challenge.
• NAM members and friends donated over $1.1 million in unrestricted support. Of that total, $827,000 was raised through the Annual Fund. The number of NAM members who made at least one donation increased 5%, from 29% in 2020 to 34% in 2021.
• 25 NAS members and 30 NAM members joined our lifetime giving societies in 2021, including one new Lincoln Society member ($1 million+), one new Franklin Society member ($500,000-$999,999), three new Curie Society members ($250,000-$499,999), and five new Einstein Society members ($100,000-$249,999). Additional new members joined the Heritage Society (new planned gifts), the Elkan Blout Society ($20,000-$99,999 for NAS Members), and the NAM Society ($20,000-$99,999 for NAM Members and friends).
• A new leadership annual giving society, The Great Hall Society, was launched to celebrate Academy members and friends who donate at least $5,000 to the National Academies in a calendar year. Society members are honored at two levels: Gold ($10,000 or more) and Silver ($5,000-$9,999).

We are deeply grateful for this philanthropic support. Every gift helps the Academies provide independent, objective advice to inform policy with evidence, spark progress and innovation, and confront challenging issues for the benefit of society.

NRC Highlights

NRC program activities are often referred to as “NASEM” (National Academies of Sciences, Engineering, and Medicine) activities, reflecting the high degree of cooperation among the three academies and the formal representation of all three on the NRC Governing Board. The NAS Council, however, is the legal fiduciary for all NRC activity.

Overall, the NRC program level increased approximately 1.0% from 2020 to 2021, after decreasing 14.1% from 2019 to 2020. This increase is due to a 5.0% increase in direct labor from 2020 to 2021, offset by a decrease in travel and in-person meeting expenses from the first quarter of 2020 to the first quarter of 2021. The effect of the pandemic on travel and meetings expense continued through 2021, with these expenses totaling $1.1 million, approximately 5% of pre-pandemic levels.

Over the last few years, the annual NRC total program has been sponsored approximately 70% by public sources, both federal and nonfederal, and approximately 30% by private sources (25% external and 5% endowment funds from the Academies). It remains important for the future of the institution that we continue vigorous efforts to diversify its sources of income, noting that the long-term trend of federal funding (relative to total program) is downward.

U.S. Government Contracts and Grants

One main source of funding for NRC activities is U.S. government contracts and grants. These activities are conducted in response to requests from a broad range of U.S. government agencies and are primarily funded through cost-reimbursable non-fee contracts and grants.

NAS recognizes revenue on federal contracts and grants as recoverable costs are incurred. Accordingly, revenues will be equal to expenses in each year. The total amount of revenue from contracts and grants with U.S. government agencies in the year ended December 31, 2021, was $174.5 million (see following chart and the Statements of Activities) and in the year ended December 31, 2020, was $190.5 million.

Private/Nonfederal Contracts and Grants

The other main source of funding for NRC activities is private/nonfederal contracts and grants. NAS recognizes revenue on private contracts and grants either as recoverable costs are incurred or at the time the contract or grant is awarded, depending on the nature of the agreement. If revenue is recognized at the time the contract or grant is awarded, the net assets associated with that award are released from restriction as the costs are incurred. Accordingly, private/nonfederal funding (private contracts and grants revenue plus the net assets released from restriction) will be equal to private/nonfederal expenses in each year. Private sponsors provided for new initiatives and co-sponsored government projects by funding activities (accounted for as programmatic and related indirect expenditures) in the amount of $89.2 million in 2021, compared with $81.6 million in 2020. (See Statements of Activities.)

The Gulf Research Program started in 2013 and, over its mandated 30-year duration, will work to enhance oil system safety and the protection of human health and the environment in the Gulf of Mexico and other U.S. outer continental shelf areas by seeking to improve understanding of the region’s interconnecting human, environmental, and energy systems and fostering application of these insights to benefit Gulf communities, ecosystems, and the nation. The NAS Investment Committee oversees the investment of the (initially) $500 million in funds for the program (with some government-specified restrictions), while the NAS Council oversees the strategic direction of the program. Investment earnings are required to be spent on furthering the program goals, while investment losses reduce the ultimate program funds accordingly. The market value of the Gulf Research Fund investment was $589.4 million at December 31, 2021, as inception-to-date investment earnings have more than offset program expenses to date. The Gulf Research Program spent $23.7 million and $21.5 million in 2021 and 2020, respectively.

Indirect Expenses

As in many universities and nonprofit institutions, indirect cost expenditures provide necessary support services and must be kept in reasonable proportion to program expenditures. Historically, NRC management has 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 2021, indirect expenses totaled $77.2 million, 0.3% less than 2020 and 3.9% less than the original 2021 budget. This lower expenditure level is partly due to the virtual work environment which resulted in lower travel and meeting costs. For 2022, the indirect budget is set at $84.6 million to invest in technology and related advancements, and which will continue to reasonably align indirect costs to support the projected 11% increase in program revenue for 2022.

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.

Conclusion

I thank the members of the Council, its Committee on Budget and Internal Affairs, the Investment Committee, and the Academies’ leadership for their continued involvement. Also, special thanks are extended to the Office of the Chief Financial Officer, led by Mary “Didi” Salmon, our CFO, for their professionalism in managing Academy resources, providing steady oversight of the Academy’s various budgets, and paying careful attention to the Academy’s financial systems, records and reports.