made a number of recommendations that the Smithsonian 

 plans to implement in the near future. These recommenda- 

 tions include hiring key business staff, including a chief 

 operating officer; strengthening the planning and financial 

 analysis function; clarifying conflicting goals; improving 

 management information systems; focusing more on cus- 

 tomers and competitors; and making strategic investments in 

 the businesses. More detailed recommendations for each ac- 

 tivity are being developed. 



The Smithsonian must also increase the support it receives 

 from private contributions. The Institution hired Robert 

 Hanle, previously the vice-president and director of develop- 

 ment at the University of Minnesota, as executive director for 

 development to lead this important initiative. He has begun 

 working closely with the Secretary to develop a capital cam- 

 paign for the Institution that will focus on raising funds for 

 construction and endowment. 



The Smithsonian's interest in corporate fund raising was 

 the topic of discussion at the Smithsonian Council. After 

 various subcommittees researched specific topics, they 

 presented a series of workshops and presentations, focused on 

 how to develop win/win partnerships with corporations. Cor- 

 porate representatives, Council members, and Smithsonian 

 tepresentatives described how both the Smithsonian and the 

 corporations can meet their respective goals and objectives 

 through creative partnerships without in any way diminish- 

 ing those of the other. 



Even with enhanced income levels, some new initiatives 

 will likely require external financing. Consequently, where a 

 strong case can be made that an investment will generate an 

 adequate return, the Smithsonian is open to considering debt 

 financing. One example of this is the Discovery Center 

 project at the National Museum of Natural History. The Dis- 

 covery Center will include 3-D large-screen theater, a new res- 

 taurant, programmatic space, and an expanded museum shop, 

 which is already open. After a careful analysis of the new in- 

 come to be generated from the business activities included, 

 the Smithsonian issued tax-exempt bonds to finance construc- 

 tion of the facility. The bonds were issued in January 1998. 

 The Institution received triple A ratings from Standard & 

 Poor's and Moody's for this financing. 



The financial challenges facing the Smithsonian have 

 served as a catalyst for new and innovative approaches to 

 funding and delivering Smithsonian programs. These new 

 approaches will help ensure chat the Smithsonian remains a 

 vital and vibrant asset for the American people in the next 

 millennium. 



Fiscal Year ippy Results 



Revenues received ty the Institution in fiscal year 1997 from 

 all sources totaled $728.8 million. Revenue from federal ap- 

 propriations accounted for $383.5 million, and non- 

 appropriated trust funds provided an additional $345.3 

 million. When adjusted to remove auxiliary activity expenses 



of $183.4 million, net revenues totaled $545.4 million. The 

 chart on the preceding page reflects revenues by source and 

 broad purpose of use. 



Operations 



Federal operating revenue of $313.5 million provided the core 

 funding for ongoing programs of the Institution. The fiscal 

 year 1997 operating appropriation of $318.5 million repre- 

 sented an inctease of $7.3 million from the fiscal year 1996 

 level. Increases to cover certain uncontrollable costs included 

 $5.0 million to cover the cost of the January 1997 pay raise, 

 $2.0 million for additional utility costs, and $1.0 million for 

 increases in rental costs. In addition, the following program 

 increases were provided: $.7 million to fund initial operation 

 of the Smithsonian Astrophysical Observatory submillimeter 

 telescope array, $.6 million for voice and data systems for the 

 National Museum of Natural History's East Court project, 

 and S.2 million for the Mississippi Delta program at the 1997 

 Festival of American Folklife. 



General trust revenue was $261.7 million. Most income 

 categories were generally consistent with last year. There was 

 a drop in revenue related to 150th anniversary activities as 

 they wound down. Auxiliary activity revenue was up ap- 

 proximately 5 percent from 1996 levels. The magazines had an 

 outstanding year, with net revenues up 34 percent. 

 Smithsonian Press/Smithsonian Productions continued to 

 operate at a loss. However, the level of the loss decreased by 

 68 percent. The Institution continues to evaluate this situa- 

 tion and develop strategies for eliminating this loss. 



Revenue from donor/sponsor designated funds totalled 

 $27.0 million. The Institution continues to intensify its fund- 

 raising activities and focus on new strategies. Major gifts and 

 grants received in fiscal year 1997 included $2.9 million from 

 the U.S. Postal Service for operations of the Naitonal Postal 

 Museum, $.9 million from the Andrew W. Mellon Founda- 

 tion to support tropical ecosystem studies at the Smithsonian 

 Tropical Research Institute, and $.6 million from the Lilly En- 

 dowment Inc. for an exhibition at the Anacosda Museum. 

 The Smithsonian is especially grateful to its many friends in 

 the private sector whose genorsity contributed vitally to its 

 work. The names of major donors are listed in the Benefactors 

 section of this annual report. 



In fiscal year 1997, the Institution recorded $56.7 million 

 in income from contracts and grants from government agen- 

 cies, an increase of $.8 million over fiscal year 1996. Support 

 from government agencies constitutes an important source of 

 research monies for the Institution while also benefiting the 

 granting agencies by providing access to Smithsonian exper- 

 tise and resources. As in prior years, the majority of these 

 funds were provided by the National Aeronautics and Space 

 Administration for research programs at the Smithsonian 

 Astrophysical Observatory. Other awards included $.8 million 

 from the National Science Foundation for the National 

 Science Resources Center at the Smithsonian to develop 

 science and technology concepts for middle schools, $.6 mil- 



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