purchasing shares in a manner similar to shares purchased by 

 an investor in a mutual fund. 



The Investment Policy Committee of the Smithsonian's 

 Board of Regents establishes investment policy and recom- 

 mends the annual payout of the consolidated endowment. 

 The Smithsonian's policies for managing the endowment are 

 designed to achieve two objectives: I) to provide a stable, 

 growing stream of payouts for current expenditures and 2) to 

 protect the value of the endowment against inflation and 

 maintain its purchasing power. Current policy calls for an 

 average payout of 4.5% of the average market value over the 

 prior five years. With this payout policy, to achieve the 

 endowment's objectives, the investment policy targets a real 

 rate of return of 5% . 



In order to improve the performance of the endowment, a 

 specialist fixed income manager was added and an equity 

 manager was terminated. During the year, the equity ex- 

 posure of the portfolio was reduced from 76% to 71%, the 

 fixed income exposure increased from 21% to 28%, and the 

 cash equivalent exposure was reduced from 3% to 1% bnng- 

 ing the asset allocation more in line with the investment 

 policy goals for the portfolio. 



The Institution adopted the provisions of SFAS No. 124, 

 Accounting for Investments held by Not-for-Profit Organiza- 

 tions, at the beginning of fiscal year 1996. In accordance with 

 this standard, the Institution's investments are reported at fair 

 value based on quoted market prices. 



The market value of the endowment increased from $434.6 

 million to $482.5 million during fiscal year 1996. New gifts 

 and internal transfers totalled $6.5 million while the payout 

 was $16.6 million and fees were $1.2 million. 



The total return on the consolidated portfolio was 13.6%. 

 At year end, the Institution's portfolio was invested 71% in 

 equities, 28% in bonds, and 1% in cash equivalents. The 

 portfolio had 28% in foreign stocks and bonds and 72% in 

 U.S. securities. 



Construction and Plant Funds 



In fiscal year 1996 the federal construction revenue was $43.8 

 million. The actual federal appropriations for construction 

 amounted to $64.9 million. Net funds provided in fiscal year 

 1996 included $34.0 million for general repair, restoration, 

 and code compliance projects throughout the Institution. Al- 

 though this amount has increased over the prior year, it is still 

 less than the $50 million per year estimated to keep up with 

 the rate of deterioration in the physical plant. Net funds ear- 

 marked for new construction, alterations, and modifications 

 totalled S31 million. Included in this amount is $15 million 

 for the Mall facility for the National Museum of the 

 American Indian; S3. 2 million for renovations, repairs, and 

 master plan projects at the National Zoological Park; $8.7 

 million for the East Court Project at the National Museum of 

 Natural History; Si million for planning and design of the 



National Air & Space Museum Dulles Center; and $3 million 

 for minor construction and planning. 



Nonappropriated trust construction activity, also termed 

 plant funds, totalled $8.5 million. Approximately $6.3 mil- 

 lion was for the construction of facilities for the National 

 Museum of the American Indian, $1.6 million for renovation 

 of the Cooper-Hewitt, National Design Museum, and $200 

 thousand for the reinstallation of the Gem Hall at the Nation- 

 al Museum of Natural History. 



Implementation of SFAS 116, iij and 124 



On October I, 1995, the Smithsonian Institution adopted the 

 provisions of Statements of Financial Accounting Standards 

 No. 116 (SFAS 116), Accounting for Contributions Received 

 and Conttibutions Made, No. 117 (SFAS 117), Financial State- 

 ments of Not-for-Profit Organizations, No. 124 (SFAS 124), 

 Accounting for Certain Investments Held by Not-for-Profit 

 Organizations. These new accounting standards requited 

 several significant changes in the accounting and reporting of 

 financial activity and position by the Smithsonian, and make 

 comparisons with financial tesults from prior years difficult. 

 Consequently, only fiscal year 1996 results are presented in the 

 audited financial statements that follow. 



SFAS 116 requires not-for-profit organizations to record 

 revenue from pledges made by donors to conttibute funds to 

 the Institution (referred to as "unconditional promises to 

 give") in the year the pledge is made. Formerly, revenue from 

 pledges was deferred and not recorded until the funds pledged 

 had been received by the Institution. Pledges received in fis- 

 cal year 1996 were recorded by this new method, and a 

 cumulative adjustment fot the impact of this change on prior 

 years also was recorded. The cumulative adjustment increased 

 net assets by $21.8 million. 



SFAS 116 also required a change in how the Smithsonian 

 accounts for its federal appropriations. Under the new stand- 

 ards, the federal appropriations are accounted for as exchange 

 transactions, which means the revenue is earned as expendi- 

 tures are incurred. Formerly, the entire appropriation was 

 tecogmzed as revenue in the year received. Unexpended ap- 

 propriations are now recorded as a liability, when formerly 

 they were recorded as fund balances. A cumulative adjust- 

 ment was made to reflect the impact on prior years of this 

 change, which reduced net assets and increased liabilities by 

 $162.3 million. 



Certain types of funding received by the Smithsonian have 

 previously been reported as restricted funds, meaning that the 

 funds could only be used for specific purposes or had other 

 restrictions on them that limited their availability for the 

 general purposes of the Institution. These sources included 

 restricted gifts from donors, research projects sponsored by 

 grants or contracts from foundations, other donors or the 

 government, and earnings on endowment funds where the 

 donor of the endowment placed testnctions on the use of 

 those earnings. Restricted revenues and the expenses incurred 



$13 



