III. Financial Condition

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with US GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with US GAAS, we:

• Exercise professional judgment and maintain professional skepticism throughout the audit.
• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of NAS’ internal control. Accordingly, no such opinion is expressed.
• Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.
• Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about NAS’ ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit.

Melville, New York

June 14, 2022

NATIONAL ACADEMY OF SCIENCES

Statements of Activities

For the years ended December 31, 2021 and 2020

(in thousands)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

Net assets and changes in net assets are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets are classified and reported as follows:

Cash Equivalents

NAS reports liquid, temporary investments purchased with original maturities of three months or less as cash equivalents. Cash equivalents managed by NAS’ investment managers as part of its long-term investment strategy are included in investments.

Investments

Investments are stated at fair value. Changes in the fair value of investments are reported within investment income in the accompanying statements of activities.

Purchases and sales of securities are reflected on a trade-date basis. Gains and losses on sales of securities are based on average cost and are recorded in the statement of activities in the period in which the securities are sold. Dividends are accrued based on the ex-dividend date. Interest is recognized as earned.

Property and Equipment

Depreciation of NAS’ property and equipment is computed on a straight-line basis using the following lives:

The Einstein Memorial sculpture is valued at cost and is not depreciated. Work in progress is not depreciated until the related assets are placed in service. Capitalized software is amortized over its depreciable life when it is ready for its intended use and placed in service.

Split-Interest Agreements

NAS recognizes its remainder interest in charitable gift annuities when the agreement is signed and assets are received from the donor. Periodically, NAS pays a fixed amount of the assets to the beneficiary designated by the donor. Upon termination of an annuity agreement, the remainder interest in the assets, if any, is available for use by NAS as net assets with or without donor restrictions in accordance with the respective donor’s stipulation. At December 31, 2021 and 2020, NAS had charitable gift annuity assets of approximately $6.4 million and $5.4 million, respectively, which is included in other assets in the accompanying statements of financial position. At December 31, 2021 and 2020, $5.4 million and $4.8 million, respectively, of these assets were classified as level 1 and $1.0 million and $0.6 million, respectively were classified as level 2 in the fair value hierarchy (as described in Note 3). NAS has recorded a liability of approximately $3.2 million at December 31, 2021 and $2.9 million at December 31, 2020, representing the present value of estimated future cash payments to annuitants based on the annuitants’ life expectancies and other relevant factors, which is included in other current liabilities and other long-term liabilities in the accompanying statements of financial position.

Revenue Recognition

NAS generates revenues principally from: (i) contracts and grants; (ii) contributions; and (iii) fees and publications.

Contracts and Grants

The majority of NAS activities are performed under cost-reimbursable contracts and grants with the U.S. government and private entities. These contracts and grants are for various activities performed by NAS, including studies and workshops, as well as the administration of fellowship programs. For the years ended December 31, 2021 and 2020, the U.S. Department of Transportation accounted for 41% and 40%, respectively, of NAS’ total government contracts and grants revenue.

NAS recognizes government and private contracts and grants as either contributions or exchange transactions, depending on whether the transaction is reciprocal or nonreciprocal. For contributions, revenue is recognized when a contribution becomes unconditional. Typically, contract and grant agreements contain a right of return or right of release from obligation provision and NAS has limited discretion over how funds transferred should be spent. As such, NAS recognizes revenue for these conditional contributions when the related barrier(s) has been overcome.

For contracts and grants treated as exchange transactions, NAS has a right to consideration from the sponsoring organization in an amount that corresponds directly with the value to the sponsoring organization of NAS’ performance completed to date (costs incurred). For these agreements, NAS recognizes revenue in the amount to which NAS has the right to invoice. NAS has elected the practical expedient not to disclose information about unsatisfied performance obligations. Of the total government contracts and grants, approximately 20% and 18% were considered exchange transactions for the years ended December 31, 2021 and 2020, respectively. Of the total private contracts and grants, approximately 16% and 22% were considered exchange transactions for the years ended December 31, 2021 and 2020, respectively.

Contracts and grants are generally invoiced monthly for recoverable costs incurred in the preceding month. Contracts receivable consisted of $22.1 million of billed receivables and $30.4 million of unbilled receivables, as of December 31, 2021, respectively. Contracts receivable consisted of $18.2 million of billed receivables and $29.2 million of unbilled receivables, as of December 31, 2020, respectively. Receivables related to revenue from exchange contracts and grants is included in contracts receivable, net in the accompanying statements of financial position. As of December 31, 2021 and 2020, NAS was owed $14.1 million and $11.4 million, respectively, on these exchange contracts and grants. As of December 31, 2019, NAS was owed $25.3 million on receivables related to revenue from exchange contracts and grants.

Allowances are recorded for estimated uncollectible contracts and grants based upon management’s judgment and analysis of the creditworthiness of the sponsoring organization, past collection experience, and other relevant factors. At both December 31, 2021 and 2020, NAS had an allowance for estimated uncollectible contracts and grants of $1.5 million, which is reported net of contracts receivable in the accompanying statements of financial position.

For contracts and grants treated as contributions, NAS had $279.8 million and $285.3 million in unrecognized conditional contributions as of December 31, 2021 and 2020, respectively. The revenue related to these awards is conditioned on NAS incurring allowable expenditures under the terms of the agreements.

Contributions

Contributions, including unconditional promises to give, are recognized as revenues in the period received. Conditional promises to give are not recognized until all conditions are satisfied.

Contributions with donor-imposed restrictions are released when a restriction expires, that is, when the stipulated time period has elapsed, when the stipulated purpose for which the resource was restricted has been fulfilled, or both. For restricted contributions that were initially classified as conditional, NAS has elected to recognize the revenue in net assets without donor restrictions if the restriction is met in the same period that the revenue is recognized.

Revenues from non-federal grants qualifying as contributions are recorded by NAS upon notification of the grant award and satisfaction of all conditions, as applicable. Such grants are classified as net assets with donor restrictions when use of the grant funds is limited to specific areas of study or is restricted for use in future periods.

Gifts of land, buildings, or equipment are reported as net assets without donor restrictions unless explicit donor stipulations specify how the donated assets must be used. Donor restrictions on gifts that must be used to acquire or construct long-lived assets are released in the period in which the assets are acquired and placed in service.

Allowances are recorded for estimated uncollectible contributions based upon management’s judgment and analysis of the creditworthiness of the donor, past collection experience, and other relevant factors. Contributions to be received after one year are discounted at an appropriate rate commensurate with the risks involved. Amortization of the discount is recorded as additional contribution revenue and is used in accordance with donor-imposed restrictions, if any.

In addition to the conditional contributions related to contracts and grants noted above, NAS had $2.1 million and $2.4 million in unrecognized conditional contributions as of December 31, 2021 and 2020, respectively. The contributions are conditioned on the awarding of a prize, holding various workshops, and conducting certain outreach activities.

Fees and Publications

NAS publishes a weekly multidisciplinary scientific journal (the Proceedings of the National Academy of Sciences, or “PNAS”), as well as reports and other publications. Subscription fees are paid in advance, and revenue from PNAS subscriptions is recognized over the subscription period, which is typically one calendar year. Page fees, paid by contributors to PNAS when their article has been accepted for publication, are recognized when the article is published.

Since the contracts for fees and publications have an original expected duration of one year or less, NAS has elected the practical expedient and not disclosed the value of unsatisfied performance obligations and expected timing for completion related to fees and publications.

Meetings

NAS holds a number of meetings throughout the year for which it collects revenue in the form of registration and exhibitor fees, the largest of which is the Transportation Research Board Annual Meeting. Revenue related to these meetings is recognized when the meeting occurs and the associated performance obligations have been fulfilled. Revenue related to these meetings totaled $3.1 million and $6.9 million for the years ended December 31, 2021 and 2020, respectively, and is reflected in other income in the accompanying statements of activities.

Since the contracts for meetings have an original expected duration of one year or less, NAS has elected the practical expedient and not disclosed the value of unsatisfied performance obligations and expected timing for completion related to fees and publications.

Deferred Revenue and Advances

For both federal and non-federal grants and contracts that are determined to be exchange transactions, revenue is recognized in the amount to which NAS has the right to invoice. Funds received in advance of being earned for these grants are recorded as deferred revenue and advances in the accompanying statements of financial position. Similarly, funds received in advance of being earned for conditional contributions are recorded as deferred revenue and advances in the accompanying statements of financial position.

As of December 31, 2021 and 2020, NAS had $33.4 million and $30.4 million in deferred revenue, respectively, for these contracts and grants. Of the $30.4 million in deferred revenue as of December 31, 2020, $10.4 million was recognized as revenue during the year ended December 31, 2021. Of the $28.2 million in deferred revenue as of December 31, 2019, $9.8 million was recognized as revenue during the year ended December 31, 2020. Other changes in the balances of deferred revenue and advances were caused by normal timing differences between the satisfaction of performance obligations and payment received from the sponsoring organizations.

For PNAS subscriptions, any subscription revenue received in advance of the subscription year is recorded as deferred revenue and advances in the accompanying statements of financial position. For PNAS subscriptions, $2.6 million in deferred revenue as of December 31, 2020 was recognized as revenue during the year ended December 31, 2021 and $2.8 million in deferred revenue as of December 31, 2019 was recognized as revenue during the year ended December 31, 2020.

For meetings, any cash received in advance of the meeting taking place is recorded as deferred revenue and advances in the accompanying statements of financial position. For meetings, $2.3 million in deferred revenue as of December 31, 2020 was recognized as revenue during the year ended December 31, 2021 and $5.9 million in deferred revenue as of December 31, 2019 was recognized as revenue during the year December 31, 2020.

Deferred revenue and advances consist of the following as of December 31, 2021 and 2020 (in thousands):

Income Taxes

NAS follows guidance that clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return, including issues relating to financial statement recognition and measurement. This guidance provides that the tax effects from an uncertain tax position can only be recognized in the financial statements if the position is “more-likely-than-not” to be sustained if the position were to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged.

NAS is exempt from federal income tax under Internal Revenue Code (“IRC”) Section 501(c)(3), though it is subject to tax on income unrelated to its exempt purpose, unless that income is otherwise excluded by the IRC. NAS has processes presently in place to maintain its tax-exempt status; to identify and report unrelated income; to determine its filing and tax obligations in jurisdictions for which it may have a nexus; and to identify and evaluate other matters that may be considered tax positions. NAS has determined that there are no material unrelated business activities or uncertain tax positions that require recognition or disclosure in the accompanying financial statements.

Functional Allocation of Expenses

NAS’ primary program service is conducting scientific research, convening meetings, and administering grant and fellowship programs. Natural expenses attributable to more than one functional expense category are allocated using a variety of cost allocation techniques, such as square footage and time and effort.

Risks and Uncertainties

NAS invests in various investment vehicles. Investment vehicles are exposed to various risks, such as interest rate, market, and credit risks. Due to the level of risk associated with these investments, it is at least reasonably possible that changes in the values of investments will occur in the near-term and that such changes could materially affect the amounts reported. NAS maintains its cash and cash equivalents in various bank accounts and money market funds that, at times, may exceed federally insured limits. NAS’ cash and cash equivalents have been placed with high credit quality financial institutions. NAS has not experienced, nor does it anticipate, losses with respect to such accounts.

New Accounting Standard

During 2021, NAS adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2018-14, Compensation – Retirement Benefit: Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify specific requirements of disclosures, and add disclosure requirements identified as relevant. As required by ASU 2018-14, NAS applied the requirements on a retrospective basis to all periods presented.

Use of Estimates

The preparation of these financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures in the financial statements. Actual results could differ from those estimates.

NOTE 3 - INVESTMENTS AND FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB Accounting Standards Codification (“ASC”) Section 820 establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

The following discussion describes the valuation methodologies used for financial assets measured at fair value. The techniques utilized in estimating the fair values are affected by the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. Care should be exercised in deriving conclusions about NAS’ business, its value or financial position based on the fair value information of financial assets presented.

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial asset, including estimates of timing, amount of expected future cash flows, and the credit standing of the issuer. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial asset. Furthermore, the disclosed fair values do not reflect any premium or discount that could result from offering for sale at one time an entire holding of a particular financial asset. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed.

The following methods, assumptions, and inputs were used to estimate the fair value of each class of financial instruments:

The carrying value of cash equivalents such as money market funds approximates fair value because of the short maturity of these investments. These amounts are included in Level 1 of the fair value hierarchy.

NAS’ fixed maturity investments (bonds and notes) include U.S. Treasury securities, mortgage-backed securities, corporate bonds, and mutual funds that invest in these types of securities. Other than U.S. Treasury securities and mutual funds, these investments generally do not trade on a daily basis. The fair value estimates of such debt securities are based on prices provided by NAS’ investment managers and custodian banks as of the reporting date. Both the investment managers and the custodian banks use a variety of pricing sources to determine market valuations. Each designate specific pricing services or indexes for each sector of the market based upon the provider’s expertise. NAS’ debt securities portfolio is highly liquid, which allows for a high percentage of the portfolio to be priced through pricing services. Accordingly, the estimates of fair value for such debt securities are included in Level 2 of the fair value hierarchy. The estimated values of U.S. Treasury securities and debt mutual funds are based on actively traded market prices and are, accordingly, included in the bonds and notes amount in Level 1 of the fair value hierarchy.

Fair values of exchange-traded equity securities and mutual funds that invest in equity securities have been determined by NAS from observable market quotations on major trade exchanges. Accordingly, such equity securities are disclosed in Level 1 of the fair value hierarchy.

Fair values of futures contracts are based on the most recent available closing quotations on an exchange. Accordingly, such futures contracts are disclosed in Level 1 of the fair value hierarchy.

The reported fair value of alternative investments, including private equity securities and hedge funds, is based on the alternative investment fund managers’ net asset value (“NAV”) per ownership interest. Private equity investments are comprised of limited partnership interests. Valuations provided by alternative investment fund managers include estimates, appraisals, assumptions, and methods that are reviewed by management. When necessary, NAS adjusts NAV for contributions and distributions subsequent to the latest NAV valuation date when calculating fair value. NAS analyzes the NAVs provided by alternative investment fund managers on a regular basis considering relevant economic and market conditions, applicable benchmarks and its understanding of the nature and related risks of the investments. These investments are not leveled in the fair value hierarchy.

Investments are held for the following purposes as of December 31, 2021 and 2020 (in thousands):

The following table presents NAS’ fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2021 (in thousands):

The following table presents NAS’ fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2020 (in thousands):

The National Academies’ Corporation (“TNAC”, see Note 14), a related entity, invests certain of its assets in NAS investment pools. TNAC investments participate in the investment pools proportionally with all other funds in the pools.

The NAS obligation to TNAC for these funds held in trust, which totaled $15.1 million and $13.9 million as of December 31, 2021 and 2020, respectively, is reported as funds held on behalf of others in the accompanying statements of financial position. The funds held on behalf of others liability equals the investments held in NAS’ investment pools on behalf of TNAC.

The following table presents the nature and risk of assets with fair values estimated using NAV held at December 31, 2021 and 2020 (in thousands):

^(a) This category relates to long-short equity hedge funds comprised of equity investments. Each of these funds buys investments long and sells short with the ability to use leverage. These funds can also invest in derivative instruments such as forward, futures, and option contracts.

^(b) This class includes investments in multi-strategy, multi-vehicle hedge funds with the objective of maximizing long-term, risk-adjusted returns, and capital appreciation by investing in securities, investment funds, discretionary accounts, and investment partnerships across a broad range of marketable and alternative asset classes. Asset classes include domestic and international marketable equity securities, hedged equity, real estate, natural resource, fixed income, and private equity and absolute return strategies, primarily focused in the United States. Approximately 8% of this asset class is in the process of being liquidated.

^(c) This class includes several private equity funds that invest in equity, debt, or debt-oriented instruments, primarily in privately held companies, which own or contractually control operating entities located in the People’s Republic of China and India. Investments held in India primarily include equity securities of “early to early growth stage” companies in multiple sectors, except real estate. These investments can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over one to four years.

^(d) This class includes several global private equity funds with diverse portfolios consisting primarily of venture capital funds, leveraged buyout funds, midstage growth capital funds, assets of healthcare companies, and international private equity funds. These investments are focused on several industries including, but not limited to, insurance, services, and consumer-related industries. These investments can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through liquidation of the underlying assets of the funds. For funds for which the timing of liquidation of the underlying assets has been communicated, it is estimated that the underlying assets of the funds will be liquidated over five to eight years. For two funds in this category, the timing of liquidation has not been communicated.

^(e) This class includes one domestic private equity fund, which invests in publicly and privately held securities. These investments are focused in early-stage drug discovery companies. These investments can never be redeemed with the fund. Instead, the nature of the investments in this class is that distributions are received through liquidation of the underlying assets of the fund. It is estimated that the underlying assets of the fund will be liquidated over ten years.

NOTE 4 - CONTRIBUTIONS RECEIVABLE, NET

Contributions not yet collected are included in contributions and other receivables, net (current) and contributions receivable, net (long-term) in the accompanying statements of financial position, and mature as follows (in thousands):

NOTE 5 - PROPERTY AND EQUIPMENT, NET

Property and equipment as of December 31, 2021 and 2020 is comprised of the following (in thousands):

Depreciation and amortization expense was $6.0 million and $6.4 million for the years ended December 31, 2021 and 2020, respectively.

NOTE 6 - LINES OF CREDIT

NAS maintains an available line of credit from Wells Fargo, which bears interest at the London Inter-Bank Offered Rate (“LIBOR”) plus 0.53% (0.63% as of December 31, 2021) and expires on September 29, 2022. The available line of credit was $30 million prior to September 29, 2021 and $20 million from September 29, 2021 to December 31, 2021. The available line of credit increased to $30 million on January 1, 2022 and decreased back to $20 million on April 1, 2022 where it will remain until the expiration on September 29, 2022. Until September 29, 2021, the line of credit from Wells Fargo bore interest at LIBOR plus 0.95% (1.09% as of December 31, 2020).

NAS also maintains an available $20 million line of credit with TD Bank, N.A., which was decreased from $30 million in August 2021, and expires on October 31, 2023. This line of credit bears interest at Secured Overnight Financing Rate (“SOFR”) plus 0.63% (1.049% as of December 31, 2021). Until August 2021, the line of credit from TD Bank bore interest at LIBOR plus 1.15% (1.29% as of December 31, 2020).

NAS has pledged and granted to each bank a security interest in NAS’ gross revenues.

As of December 31, 2021 and 2020, respectively, there was no balance outstanding on either line of credit. Interest expense related to the lines of credit for the years ended December 31, 2021 and 2020 totaled approximately $154,000 and $74,000, respectively.

NOTE 7 - FINANCIAL ASSETS AND LIQUIDITY

Financial assets available for general expenditure, that is, without donor or contractual restrictions limiting their use, within one year of the date of the statements of financial position, are comprised of the following as of December 31, 2021 and 2020 (in thousands):

NAS is substantially supported by cost reimbursable contracts and grants from federal and private sponsors, which includes indirect cost recovery (as further discussed in Note 11). A portion of private grants and other contributions carries donor restrictions. Because a donor’s restriction requires resources to be used in a particular manner or in a future period, NAS must maintain sufficient resources to meet those commitments to donors. Thus, certain financial assets may not be available for general expenditure within one year. As part of liquidity management, NAS has a practice to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, NAS invests cash in excess of daily requirements in short- and long-term investments. In the event of an unanticipated liquidity need, NAS could draw upon $40 million of available lines of credit (as further discussed in Note 6). In addition, NAS has $49 million in internally designated funds, which are available for general expenditure with appropriate internal approval.

NOTE 8 - NET ASSETS WITH DONOR RESTRICTIONS

Net assets with donor restrictions are available for the following purposes as of December 31, 2021 and 2020 (in thousands):

Net assets were released from donor-imposed restrictions in satisfaction of the following purposes during the years ended December 31, 2021 and 2020 (in thousands):

The Gulf Research Program net assets relate to two agreements between NAS and BP Exploration and Production, Inc. (“BP”) and Transocean Deepwater, Inc. (“Transocean”), which resulted from separate plea agreements between those corporations and the federal government, related to the 2010 Deepwater Horizon disaster. In accordance with the agreements, NAS established a program in 2013 focused on human health and environmental protection in the Gulf of Mexico. BP paid $350.0 million over five years, and Transocean paid $150.0 million over four years, to fund this 30-year, $500.0 million program. The program funds, including all investment earnings thereon, will be expended by 2043.

NOTE 9 - ENDOWMENT

Endowment Assets

The NAS endowment consists of 133 individual funds established to support general operations, other sponsored research and advisory programs, prizes and awards, and the operations of the Woods Hole facility. The endowment solely comprises donor-restricted net assets. The investments of the endowment are included in the NAS investment pool, as described in Note 3.

Interpretation of Relevant Law

NAS has interpreted the District of Columbia Uniform Prudent Management of Institutional Funds Act of 2007 (the “Act”) as requiring NAS, absent explicit donor stipulations to the contrary, to act in good faith and with the care that an ordinarily prudent person in a like position would exercise under similar circumstances in making determinations to appropriate for expenditure or accumulate endowment funds, taking into account both its obligation to preserve the value of the endowment and its obligation to use the endowment to achieve the purposes for which it was donated. NAS classifies as net assets with donor restrictions (a) the original value of gifts donated to its permanent endowment, (b) the original value of subsequent gifts to its permanent endowment, and (c) accumulations to its permanent endowment required by the applicable donor gift instrument. Appreciation on donor-restricted endowment funds is classified in net assets with donor restrictions until such amounts are appropriated for spending by the NAS Council in a manner consistent with the standard of prudence prescribed by the Act. In accordance with the Act, NAS considers the following factors in making a determination to appropriate investment funds attributable to donor-restricted endowments:

1. The duration and preservation of its endowment fund;
2. The purposes of the institution and its endowment fund;
3. General economic conditions;
4. The possible effect of inflation or deflation;
5. The expected total return from income and the appreciation of investments;
6. Other resources of the institution; and
7. The investment policy of the institution.

Return Objectives and Strategies

NAS has adopted investment and spending policies for endowment assets that are designed to provide a predictable stream of funding to programs supported by its endowment while seeking to protect the real purchasing power of the assets from inflation. Accordingly, NAS has adopted guidelines which feature a commitment to minimizing volatility while maximizing risk-adjusted return.

NAS’ spending policy limits the annual spending to 5% of the three-year average fair value of the participating funds in the endowment portfolio. This is consistent with NAS’ objective to maintain the purchasing power of the endowment assets held in perpetuity, as well as to provide additional real growth through new gifts and investment return.

Changes in endowment assets for the years ended December 31, 2021 and 2020 are as follows (in thousands):

Funds with Deficiencies

From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the original value of the gift donated to the permanent endowment. Deficiencies of this nature are reported as net assets with donor restrictions. For funds with a fair value below the original value of the gift, annual spending may be limited at NAS’ discretion until the fair value returns to the required level. At December 31, 2021 and 2020, respectively, there were no endowment funds with a fair value below the original value of the gift. Subsequent gains that restore the fair value of the assets of the endowment fund to the required level are classified as an increase in net assets with donor restrictions.

NOTE 10 - PROGRAM EXPENSES

Program expenses for the years ended December 31, 2021 and 2020 are summarized as follows (in thousands):

NOTE 11 - RECOVERY OF INDIRECT COSTS

NAS receives indirect cost recovery on its federal contracts and grants. An overhead assessment is applied to direct salaries, accrued leave, fringe benefits, and services provided by outside contractors (e.g., temporary personnel agencies, consultants) on NAS property. A general and administrative assessment (“G&A”) is applied to direct costs and overhead less subcontract costs and stipends. Therefore, both the overhead and G&A rates are applied to projects incurring direct salaries and other direct costs such as travel. If a program does not require direct salaries, such as a travel grant program, a subcontract/flow-through administration rate is applied. Certain off-site work (not performed on NAS property) is assessed reduced overhead rates.

NAS bills for indirect cost recovery throughout the year based on negotiated rates. At the end of each year, NAS compares actual expenses incurred in each of its cost pools to the amounts recovered based on its billing rates. The difference is recorded as its indirect cost carryforward. If NAS over recovers on its indirect costs during the year, a liability is recorded. If NAS under recovers, a receivable is recorded.

NAS has a cumulative net over-recovery of approximately $25.2 million and $8.4 million as of December 31, 2021 and 2020, respectively. The over-recovery is included in the deferred revenue and advances balance in the accompanying statements of financial position.

NOTE 12 - BUILDING PROJECT AND FINANCING

Building Project Revenue Bonds

In January 1999, the District of Columbia issued Series 1999A, Series 1999B, and Series 1999C tax-exempt revenue bonds in the aggregate amount of $130,960,000 on behalf of NAS. Proceeds from the sale of the revenue bonds financed the cost of the acquisition of 44,250 square feet of land and related construction of an office building, as well as to pay certain costs of issuing the bonds. This building consolidates most of NAS’ program activities into one location.

In June 2008, the District of Columbia issued Series 2008A tax-exempt revenue bonds in the amount of $66,325,000 on behalf of NAS. The proceeds were used to refund the Series 1999B and Series 1999C revenue bonds, as well as to pay certain costs of issuing the bonds.

In April 2009, the District of Columbia issued Series 2009A tax-exempt revenue bonds in the amount of $57,500,000 on behalf of NAS. The proceeds were used to refund the Series 1999A revenue bonds, as well as pay certain costs of issuing the bonds.

In May 2010, the District of Columbia issued Series 2010A tax-exempt revenue bonds in the amount of $59,550,000 on behalf of NAS. These bonds were sold to finance the cost to restore the NAS headquarters building on Constitution Avenue in Washington, DC and to pay for certain costs of issuance. The restoration was completed in 2012.

In December 2012, NAS remarketed the Series 2008A and 2009A bonds as direct bank purchases. The Series 2008A bonds were purchased by Wells Fargo Municipal Capital Strategies LLC; the Series 2009A bonds were purchased by TD Bank, N.A. In May 2017, NAS refinanced the Series 2008A and Series 2009A bonds with the existing banks to extend the mandatory repurchase to May 2027, at which point NAS could renew the direct purchase agreements, remarket the bonds, or repurchase the bonds.

In December 2017, the District of Columbia issued Series 2017A tax-exempt revenue bonds in the amount of $52,760,000 on behalf of NAS. The proceeds were used to complete an advance refunding of a portion of the Series 2010A revenue bonds. The Series 2017A bonds were issued as direct bank purchases with Century Subsidiary Investments, Inc. III (Century Bank), which was acquired by Eastern Bankshares (Eastern Bank) in November 2021.

In August 2019, NAS remarketed the Series 2008A bonds. $38,100,000 of the bonds were purchased by TD Bank, N.A and $19,000,000 of the bonds were purchased by Century Bank, which was acquired by Eastern Bank in November 2021. The bonds held by TD Bank, N.A. have a mandatory repurchase date of July 31, 2034, at which point NAS could renew the direct purchase agreement, remarket the bonds, or repurchase the bonds. The bonds held by Eastern Bank mature April 1, 2040 and do not have a mandatory repurchase date.

NAS is obligated under the revenue bonds as follows (in thousands):

The serial and term bonds represent unsecured general obligations of NAS. Interest on the 2008A, 2009A, and 2017A bonds is payable monthly.

Scheduled maturities are as follows (in thousands):

Interest expense on the bonds payable for the years ended December 31, 2021 and 2020 totaled $1.1 million and $1.9 million, respectively.

Interest-Rate Swaps

In May 2009, NAS entered into a swap agreement as a result of a counterparty exercising a swaption related to the Series 1999A Revenue Bonds. The variable-to-fixed swap requires NAS to pay 5.00% on a notional amount of $55 million and to receive a floating rate equal to 67% of one-month LIBOR plus 0.41%.

NAS entered into this variable-to-fixed swap agreement in order to preserve the synthetic variable rate achieved through a previous swap agreement once the fixed-rate Series 1999A bonds were refunded with the variable-rate Series 2009A bonds.

NAS recorded a gain on the change in the fair value of the swap of approximately $1.6 million and $0.08 million for the years ended December 31, 2021 and 2020, respectively, which is included in other income in the accompanying statements of activities. The fair value of the swap is recorded as a liability of approximately $3.3 million and $4.9 million as of December 31, 2021 and 2020, respectively, and is included in other current liabilities and other long-term liabilities in the accompanying statements of financial position.

The fair value of the swap is determined using pricing models based on observable market data such as prices of instruments with similar maturities and characteristics, interest rate yield curves, and measures of interest rate volatility. The value was determined after considering the potential impact of collateralization and netting agreements, adjusted to reflect nonperformance risk of both the counterparty and NAS. Accordingly, the interest-rate swap is included in Level 2 of the fair value hierarchy.

NOTE 13 - EMPLOYEE BENEFITS

Retirement Plans

NAS has a noncontributory defined-contribution retirement plan covering substantially all of its employees (based on certain benefit eligibility requirements). The funding vehicles under the plan consist of group investments issued by Teachers Insurance and Annuity Association (“TIAA”) and College Retirement Equities Fund (“CREF”), (known collectively as “TIAA”), as well as mutual funds issued by TIAA, Vanguard Fiduciary Trust Company, and other third parties. Participants in this plan vest immediately. NAS has received a favorable determination letter from the Internal Revenue Service on the qualification of this plan under Section 401(a) of the IRC.

In addition, NAS has a voluntary employee contribution retirement plan that is funded solely by employee contributions made on a pretax salary-reduction basis under Section 403(b) of the IRC. The funding vehicles under the plan consist of group investments issued by TIAA and CREF, as well as mutual funds issued by TIAA, Vanguard Fiduciary Trust Company, and other third parties.

Pension expense for the years ended December 31, 2021 and 2020 amounted to $13.2 million and $12.9 million, respectively. NAS’ policy is to fund pension benefits as they are earned. NAS’ normal retirement age is 62, but there is no mandatory age for retirement.

Deferred Compensation

During the year ended December 31, 2019, NAS implemented a 457(b) plan (“457(b) Plan”). The purpose of the 457(b) Plan is to provide deferred compensation to employees who meet or exceed a base compensation threshold that is set by NAS. NAS also holds investments as part of a prior and now frozen deferred compensation arrangement for certain employees. The fair value of investments held for the two plans totaled $2.3 million and $1.7 million as of December 31, 2021 and 2020, respectively, which is reported within other assets in the accompanying statements of financial position. The related obligation is included in accrued employee benefits in the accompanying statements of financial position. Deferred compensation investments are held in debt and equity mutual funds, as well as group investments issued by the plan custodian, which are valued using Level 1, Level 2, and Level 3 inputs (as further discussed in Note 3). As of December 31, 2021, $2,221,000, $26,000 and $54,000 were valued at Level 1, Level 2, and Level 3 of the fair value hierarchy, respectively. As of December 31, 2020, $1,621,000, $13,000, and $32,000 of these investments were valued at Level 1, Level 2, and Level 3, of the fair value hierarchy, respectively. The deferred compensation obligation to employees is equal to the fair value of the investments held.

Postretirement and Postemployment Benefits

NAS provides certain health and life insurance benefits for employees retired due to length of service. All benefit-eligible employees may become eligible for service retiree benefits if they reach age 60 while working for NAS and complete five years of service in a benefit-eligible status for medical and 10 years of service for life insurance benefits. In addition, certain health and life insurance benefits are provided for employees retired due to disability. A benefit-eligible employee may become eligible for disabled retiree benefits if deemed totally disabled under NAS’ long-term disability insurance or if they are eligible for disability benefits from the Social Security Administration. Life insurance benefits are provided based on coverage at date of disability and health insurance may be continued if the disabled retiree had participated in an NAS health insurance plan for five years at the date of disability. Insurance companies whose premiums are determined on an experience-rated basis provide life and health insurance benefits for retirees. Medicare supplement insurance is not experience rated. The retiree welfare benefit plan (the “Plan”) is contributory for health insurance purposes for employees who retired on or after January 1, 1992. Participant contributions for health insurance are based on a percentage of the monthly premium paid by NAS (from 25% to 100%). The participant contribution is also based on their date of retirement, length of service, and choice of health insurance carrier.

The accrued postretirement benefit obligation is reported within other assets in the accompanying statements of financial position.

Postretirement changes other than net periodic benefit cost are as follows (in thousands):

Items not yet recognized as a component of net periodic benefit cost at December 31, 2021 and 2020 are as follows (in thousands):

The following table presents the changes in benefit obligations, changes in plan assets, funded status, and the components of net periodic benefit cost for the years ended December 31, 2021 and 2020 (in thousands):

During the year ended December 31, 2021, NAS recognized an actuarial gain of $1.3 million primarily due to the 39 basis point increase in the discount rate used to measure the Plan benefit obligation at December 31, 2021 as compared to December 31, 2020 offset by updates to the claims costs, retiree contribution rates, and mortality assumptions. During the year ended December 31, 2020, NAS recognized an actuarial loss of $1.2 million primarily due in the 85 basis point decrease in the discount rate used to measure the Plan benefit obligation at December 31, 2020 as compared to December 31, 2019 offset by updates to the claims costs, trend rates, and mortality assumptions.

The assumptions used to determine net periodic benefit cost for the years ended December 31, 2021 and 2020 are as follows:

The assumptions used to calculate the accumulated postretirement benefit obligation as of December 31, 2021 and 2020 are as follows:

The trend rate for growth in healthcare costs was assumed to decline gradually beginning in 2021 to 4.0% by the year 2046.

NAS postretirement benefit plan asset allocations at December 31, 2021 and 2020, by asset class, are as follows:

The investment objective of the plan is to produce a rate of return over the long-term that will provide for fund growth, protect against the effect of inflation, and provide for some stability in different market environments. The fund is diversified between fixed income and equity investments. With this diversification and investment in broader market funds, there is reasonable assurance that no single security or class of securities will have a disproportionate impact on plan assets. Plan assets are invested with a long-term growth with reduced volatility strategy.

The overall long-term rate of return was developed by estimating the long-term real rate of return for the plan’s asset mix, while taking into account the effects of inflation. This estimate was developed by evaluating the history of investments with similar asset allocations.

The following table presents the fair value hierarchy for the postretirement benefit plan assets at December 31, 2021 (in thousands):

The following table presents the fair value hierarchy for the postretirement benefit plan assets at December 31, 2020 (in thousands):

The methods and assumptions used to estimate the fair value of each class of financial instrument are further discussed in Note 3.

NAS does not expect to contribute to the Plan for 2022, as there is an actuarially determined net periodic credit for 2022 of approximately $405,000.

The following benefit payments, which reflect future services, are expected to be paid in future years as follows, as of December 31, 2021 (in thousands):

NOTE 14 - RELATED-PARTY TRANSACTIONS

National Academy of Engineering Fund

The National Academy of Engineering Fund (“NAEF”) is a separately incorporated tax-exempt organization established by NAE to raise funds to support its goals. The financial activities and results of NAEF are not included in the NAS financial statements.

NAS performs certain activities in connection with fundraising by NAEF. NAS collected a total of $4.9 million and $3.9 million in 2021 and 2020, respectively, on behalf of NAEF. NAS disbursed $4.5 million and $3.7 million to NAEF from these collected amounts in 2021 and 2020, respectively. Amounts collected but not yet remitted to NAEF are included in other current liabilities in the accompanying statements of financial position.

TNAC

TNAC was separately incorporated in 1986 as a tax-exempt corporation for the purpose of constructing and maintaining a study and conference facility. This facility, the Arnold and Mabel Beckman Center, located in Irvine, California, operates to expand and support the general activities of NAS, NRC, NAM, and NAE. The financial position and results of TNAC are not consolidated in the NAS financial statements. NAS manages the operations of the Beckman Center. The amounts transferred from TNAC to NAS in 2021 and 2020 for Beckman Center operations totaled $750,000 and $625,000, respectively.

NOTE 15 - COMMITMENTS AND CONTINGENCIES

Leases

NAS assesses contracts at inception to determine whether an arrangement is or includes a lease, which conveys NAS’ right to control the use of an identified asset for a period of time in exchange for consideration. NAS is committed to one noncancelable operating lease for space, for which a right-of-use asset and a lease liability are recorded on the accompanying statements of financial position. The lease expires on March 31, 2026 and contains no renewal or termination options, or any restrictions or covenants. The lease contains no variable lease payments or residual value guarantees. The amount recognized as a right-of-use asset is included in other assets in the accompanying statements of financial position, while the related lease liability is included in other current liabilities and other long-term liabilities.

NAS has elected the practical expedient to forgo applying the recognition requirements in ASC 842 to short-term leases. NAS has one short-term lease for copiers and related support and is recognizing the payments on a straight-line basis over the lease term.

As of December 31, 2021 and 2020, the right-of-use asset and lease liability are as follows (in thousands):

During the years ended December 31, 2021 and 2020, NAS had the following cash and non-cash activities associated with leases (in thousands):

The maturity of the lease liability under NAS’ operating lease as of December 31, 2021 is as follows (in thousands):

The amount of the right-of-use asset and lease liability were determined using a risk-free rate of 2.59%, based on the daily treasury yield on a seven-year note, which most closely approximated the remaining term of the lease at the date that the right-of-use asset and lease liability were recorded.

Contingencies

NAS receives a portion of its revenues directly or indirectly from federal government grants and contracts, all of which are subject to audit by the Defense Contract Audit Agency, which has completed its examinations through December 31, 2020. A contingency exists relating to unexamined periods and final settlements of examined periods to refund any amounts received in excess of allowable costs. Management is of the opinion that no material liability will result from such audits.

In the normal course of business, NAS may from time to time be subject to various claims and lawsuits. Certain lawsuits may be covered, in full or in part, by external insurance coverage. In the opinion of management, there are no lawsuits outstanding that would have a material adverse effect on the financial statements of NAS.

The COVID-19 pandemic continues to have a broad impact on commerce and financial markets around the world. The extent to which COVID-19 may impact NAS’ future financial position, changes in net assets, and cash flows is uncertain. The accompanying financial statements include no adjustments relating to the effects of this pandemic. NAS has and will continue to make every effort to mitigate the current and future financial impacts of COVID-19.

NOTE 16 - SUBSEQUENT EVENTS

NAS evaluated its December 31, 2021 financial statements for subsequent events through June 14, 2022, the date the financial statements were issued. NAS is not aware of any subsequent events which would require recognition or disclosure in the accompanying financial statements.

OFFICERS

Marcia McNutt, President

Diane E. Griffin, Vice President

Susan Wessler, Home Secretary

John Hildebrand, International Secretary

William H. Press, Treasurer

INVESTMENT COMMITTEE

William H. Press, Chair

Ashvin Chhabra

Robert W. Conn

David L. Donoho

Robert F. Engle

Eve J. Higginbotham

Marcia McNutt

Jose A. Scheinkman

James H. Simons

BUDGET AND INTERNAL AFFAIRS COMMITTEE

William H. Press, Chair

Nancy C. Andrews

John C. Boothroyd

Diane E. Griffin

Richard E. Lenski

Kenneth A. Ribet

Sean C. Solomon

AUDIT COMMITTEE

Claude R. Canizares, Chair

Ingrid Daubechies

Jeremiah P. Ostriker

Claire L. Parkinson

William W. Stead

FINANCIAL MANAGEMENT STAFF

Didi Salmon, Chief Financial Officer

Laura Douglas, Controller

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