Report of the Treasurer: For the Year Ended December 31, 2023 (2024)

III. Financial Condition

Audit Committee

June 17, 2024

Dr. Marcia McNutt

President

National Academy of Sciences

Dear Dr. McNutt:

In accordance with paragraph 11 of section II of the Bylaws of the National Academy of Sciences, the firm of Grant Thornton LLP was retained by the Audit Committee on behalf of the Council to conduct an audit of the accounts of the Treasurer for the year ended December 31, 2023, and to report to the Audit Committee.

The independent accountants have completed their audit and submitted their report. In accordance with paragraph 13 of section II of the Bylaws, the Audit Committee has reviewed the report and recommends to the Council that it be accepted and that the opinion of the independent accountants be published with the report of the Treasurer.

Respectfully submitted,

Audit Committee

Claude R. Canizares, Chair
Caroline S. Harwood
Claire L. Parkinson
Sean C. Solomon
William W. Stead

GRANT THORNTON LLP

445 Broad Hollow Road, Suite 300
Melville, NY 11747

D +1 631 249 6001

F +1 631 249 6144

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Audit Committee of the

National Academy of Sciences:

Opinion

We have audited the financial statements of the National Academy of Sciences (“NAS”), which comprise the statements of financial position as of December 31, 2023 and 2022, and the related statements of activities and cash flows for the years then ended, and the related notes to the financial statements.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of NAS as of December 31, 2023 and 2022, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for opinion

We conducted our audits of the financial statements in accordance with auditing standards generally accepted in the United States of America (US GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of NAS and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of management for the financial statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about NAS’ ability to continue as a going concern for one year after the date the financial statements are issued.

GT.COM

Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and each of its member firms are separate legal entities and are not a worldwide partnership.

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 13, 2024

NATIONAL ACADEMY OF SCIENCES

Statements of Financial Position

As of December 31, 2023 and 2022
(in thousands)

The accompanying notes are an integral part of these financial statements.

NATIONAL ACADEMY OF SCIENCES

Statements of Activities

For the years ended December 31, 2023 and 2022
(in thousands)

The accompanying notes are an integral part of these financial statements.

NATIONAL ACADEMY OF SCIENCES

Statements of Cash Flows

For the years ended December 31, 2023 and 2022
(in thousands)

The accompanying notes are an integral part of these financial statements.

NATIONAL ACADEMY OF SCIENCES

Notes to the Financial Statements

December 31, 2023 and 2022

NOTE 1 - ORGANIZATION

National Academy of Sciences

The National Academy of Sciences (“NAS”) was formed under a charter that was passed as an Act of Incorporation by the United States Congress and signed into law on March 3, 1863. NAS operates as a private membership organization of distinguished scholars engaged in scientific or engineering research, dedicated to the furtherance of science and its use for the general welfare.

National Research Council

Most of the activities undertaken by NAS are carried out through the divisions and boards of the National Research Council (“NRC”). The NRC draws on a wide cross section of the nation’s leading scientists and engineers for advisory services to government agencies and Congress. To respond effectively to both the disciplinary concerns of the research community and the complex interdisciplinary problems facing American society, NRC performs its studies and workshops through the following major divisions:

• Behavioral and Social Sciences and Education;
• Earth and Life Studies;
• Engineering and Physical Sciences;
• Gulf Research Program;
• Health and Medicine;
• Policy and Global Affairs; and
• Transportation Research Board.

NRC activities are under the control of the NAS governance structure and, therefore, are included in the NAS financial statements.

National Academy of Medicine

The Institute of Medicine (“IOM”), which was established in 1970, was reconstituted as the National Academy of Medicine (“NAM”) effective June 1, 2015. NAM is a separate membership organization within NAS, and issues position statements on policy issues related to health and medicine, cooperates with the major scientific and professional societies in the field, identifies qualified individuals to serve on study groups in other organizational units, and disseminates information to the public and the relevant professions. The financial activities and results of NAM are included in the NAS financial statements.

National Academy of Engineering

The National Academy of Engineering (“NAE”) was established in 1964 under the charter of NAS as a related parallel organization, autonomous in its governance, administration, and the selection of its members. NAE shares with NAS the responsibility for advising the federal government on scientific issues. The NAE conducts independent program activities and activities through the NRC. The results of both of these activities are included in the NAS financial statements.

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:

Net assets without donor restrictions: net assets that are not subject to donor-imposed stipulations.

Net assets with donor restrictions: net assets subject to donor-imposed stipulations that will be met by actions of NAS and/or the passage of time (Note 8). In addition, net assets with donor restrictions also include net assets whereby the respective donors have stipulated that the principal contributed be invested and maintained in perpetuity (Note 9). Income earned from these investments is available for expenditure according to restrictions, if any, imposed by donors.

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, 2023 and 2022, NAS had charitable gift annuity assets of approximately $6.4 million and $5.5 million, respectively, which is included in other assets in the accompanying statements of financial position. At December 31, 2023 and 2022, $5.7 million and $4.7 million, respectively, of these assets were classified as Level 1 and $0.7 million and $0.8 million, respectively, were classified as Level 2 in the fair value hierarchy (as described in Note 3). NAS has recorded a liability of approximately $3.3 million at both December 31, 2023 and 2022, 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. The U.S. Department of Transportation accounted for 40% and 41% of NAS’ total government contracts and grants revenue during the years ended December 31, 2023 and 2022, respectively.

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 13% and 18% were considered exchange transactions for the years ended December 31, 2023 and 2022, respectively. Of the total private contracts and grants, approximately 21% and 17% were considered exchange transactions for the years ended December 31, 2023 and 2022, respectively.

Contracts and grants are generally invoiced monthly for recoverable costs incurred in the preceding month. Contracts receivable consisted of $29.5 million of billed receivables and $48.9 million of unbilled receivables, as of December 31, 2023, respectively. Contracts receivable consisted of $19.3 million of billed receivables and $31.1 million of unbilled receivables, as of December 31, 2022, 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, 2023 and 2022, NAS was owed $11.6 million and $12.5 million, respectively, on these exchange contracts and grants. As of December 31, 2021, NAS was owed $14.1 million on receivables related to revenue from exchange contracts and grants.

Allowances for credit losses are recorded for exchange contracts and grants based upon management’s judgment and analysis using relevant available information, from internal and external sources, relating to past events, historical credit loss, current conditions, and reasonable and supportable forecasts. At December 31, 2023 and 2022, NAS had an allowance for credit losses for exchange contracts and grants of $0.5 million and $0.8 million, respectively, which is reported net of contracts receivable in the accompanying statements of financial position. For contracts and grants treated as contributions, allowances are recorded for estimated uncollectible amounts based upon management’s judgment and analysis of the creditworthiness of the sponsoring organization, past collection experience, and other relevant factors. At December 31, 2023 and 2022, respectively, NAS has an allowance for estimated uncollectible contracts and grants treated as contributions of $1.0 million and $1.5 million, respectively, which is reported net of contracts receivable in the accompanying statements of financial position.

For contracts and grants treated as contributions, NAS had $342.4 million and $276.7 million in unrecognized conditional contributions as of December 31, 2023 and 2022, 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 receivables 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 $3.2 million and $1.7 million in unrecognized conditional contributions as of December 31, 2023 and 2022, 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

Functional Allocation of Expenses

NAS’ primary program services include providing consensus advice, convening experts, managing, and administering research and analysis activities, promoting the scientific enterprise, and providing oversight of boards and committees. 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.

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

The following table presents NAS’ fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2022 (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 $13.2 million and $12.6 million as of December 31, 2023 and 2022, 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, 2023 and 2022 (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 5% of this asset class is not redeemable and distributions are received through liquidation of the underlying assets of the funds.

^(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 two years. Approximately 10% of this asset class is in liquidation.

^(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 three to ten years. For two funds in this category, the timing of liquidation has not been communicated. Approximately 3% of this asset class is in liquidation.

^(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 eight 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, 2023 and 2022 is comprised of the following (in thousands):

Depreciation and amortization expense was $5.7 million and $5.8 million for the years ended December 31, 2023 and 2022, respectively.

During the year ended December 31, 2023, NAS sold property located in Woods Hole, Massachusetts for approximately $12.7 million. NAS recognized a gain on sale of approximately $12.5 million which is included as a component of other income in the accompanying statement of activities for the year ended December 31, 2023.

NOTE 6 - LINES OF CREDIT

NAS maintains an available line of credit from Wells Fargo, which bears interest at the Secured Overnight Financing Rate (“SOFR”) plus 0.55% (5.93% and 4.85% as of December 31, 2023 and 2022, respectively) and expires on September 30, 2024. The available line of credit was $30 million on January 1, 2022 and decreased to $20 million on April 1, 2022. The available line of credit increased to $30 million on January 1, 2023 and decreased back to $20 million on April 1, 2023. The available line of credit increased to $30 million on September 29, 2023 where it will remain until the expiration on September 30, 2024.

NAS also maintains an available $20 million line of credit with TD Bank, N.A., which expires on October 31, 2025. This line of credit bears interest at SOFR plus 0.63% (6.01% and 4.93% as of December 31, 2023 and 2022, respectively).

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

As of December 31, 2023 and 2022, 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, 2023 and 2022 totaled approximately $376,000 and $85,000, 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, 2023 and 2022 (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 $50 million of available lines of credit (as further discussed in Note 6). In addition, NAS has $52 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, 2023 and 2022 (in thousands):

Net assets were released from donor-imposed restrictions in satisfaction of the following purposes during the years ended December 31, 2023 and 2022 (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 138 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 net assets for the years ended December 31, 2023 and 2022 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, 2023, there were no endowment funds with a fair value below the original value of the gift. At December 31, 2022, there were three endowment funds with a fair value below the original value of the gift. These funds had an original gift value of $900,000 and a fair value of $861,000, resulting in a deficiency of $39,000. These deficiencies were primarily the result of unfavorable market fluctuations that occurred shortly after the investment of new contributions. 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, 2023 and 2022 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 $20.1 million and $25.7 million as of December 31, 2023 and 2022, 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, 2023 and 2022 totaled $6.3 million and $3.2 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 0.11% plus 67% of the SOFR daily reset compounded in arrears, 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 $312,000 and $2.2 million for the years ended December 31, 2023 and 2022, 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 $771,000 and $1.1 million as of December 31, 2023 and 2022, 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, 2023 and 2022 amounted to $15.2 million and $13.9 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

NAS has a 457(b) plan (“457(b) Plan”) 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 $3.3 million and $2.5 million as of December 31, 2023 and 2022, 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, 2023, $2,948,000, $68,000 and $234,000 were valued at Level 1, Level 2, and Level 3 of the fair value hierarchy, respectively. As of December 31, 2022, $2,331,000, $43,000 and $80,000 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 funded status of the Plan 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, 2023 and 2022 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, 2023 and 2022 (in thousands):

During the year ended December 31, 2023, NAS recognized an actuarial loss of $696,000 primarily due to the 22 basis point decrease in the discount rate used to measure the Plan benefit obligation at December 31, 2023 as compared to December 31, 2022, updates to the trend rates, and the passage of time, offset by updates to claims costs and retiree contribution rates. During the year ended December 31, 2022, NAS recognized an actuarial gain of $15.2 million primarily due to the 241 basis point increase in the discount rate used to measure the Plan benefit obligation at December 31, 2022 as compared to December 31, 2021, offset by updates to the trend rates and passage of time.

The assumptions used to determine net periodic benefit cost for the years ended December 31, 2023 and 2022 are as follows:

The assumptions used to calculate the accumulated postretirement benefit obligation as of December 31, 2023 and 2022 are as follows:

The trend rate for growth in healthcare costs was assumed to decline gradually beginning in 2024 to 4.00% by the year 2049.

NAS postretirement benefit plan asset allocations at December 31, 2023 and 2022, 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, 2023 (in thousands):

The following table presents the fair value hierarchy for the postretirement benefit plan assets at December 31, 2022 (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 2024, as there is an actuarially determined net periodic credit for 2024 of approximately $366,000.

The following benefit payments, which reflect future services, are expected to be paid in future years as follows, as of December 31, 2023 (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 $6.6 million and $3.9 million in 2023 and 2022, respectively, on behalf of NAEF. NAS disbursed $7.3 million and $4.2 million to NAEF from these collected amounts in 2023 and 2022, 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 2023 and 2022 for Beckman Center operations totaled approximately $641,000 and $883,000, 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 the recognition of 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, 2023 and 2022, the right-of-use asset and lease liability are as follows (in thousands):

During the years ended December 31, 2023 and 2022, 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, 2023 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, 2021. 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.

NOTE 16 - SUBSEQUENT EVENTS

NAS evaluated its December 31, 2023 financial statements for subsequent events through June 13, 2024, 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

Nancy C. Andrews, Home Secretary

John G. Hildebrand, International Secretary

William H. Press, Treasurer

INVESTMENT COMMITTEE

William H. Press, Chair

Bonnie Berger

Ashvin Chhabra

David L. Donoho

Eve J. Higginbotham

Marcia McNutt

Jose A. Scheinkman

BUDGET AND INTERNAL AFFAIRS COMMITTEE

William H. Press, Chair

John C. Boothroyd

Diane E. Griffin

Andrea J. Liu

Kenneth A. Ribet

Gene E. Robinson

Michael S. Witherell

AUDIT COMMITTEE

Claude R. Canizares, Chair

Caroline S. Harwood

Claire L. Parkinson

Sean C. Solomon

William W. Stead

FINANCIAL MANAGEMENT STAFF

Ebun Johnson, Chief Financial Officer

Laura Douglas, Controller