strucuon activities included $5,234 million fot minor construction 

 and planning for future capital projects 



Endowment (Tables 5, 6. and 7) 



The Institution has a large number of endowment and quasi-endow- 

 ment funds. For investment purposes, these funds are pooled into a 

 consolidated portfolio, and the investment policy is focused on the 

 total return (i.e., dividends, interest, and realized and unrealized 

 capital gains) on the portfolio. Each year, the market value of the 

 portfolio increases by new gifts, net transfers, and the total return on 

 the portfolio. It is reduced by the annual payout for current expendi- 

 tures, fees, and expenses. Each fund within the consolidated endow- 

 ment purchases shares similar to an investor in a mutual fund. The 

 value of each share increases as the market value of the consolidated 

 portfolio (net of new gifts and transfers) increases and. annually, it re- 

 ceives the applicable payout per share for current expenditures. 



The Investment Policy Committee of the Smithsonian's Board of 

 Regents oversees the development of the investment policy and the 

 annual payout for the consolidated endowment. The overall objective 

 of the endowment is to maintain its real purchasing power (net of 

 new gifts and transfers). Current policy calls for an average payout of 

 4.5 percent of the average market value over the prior 5 years. To 

 achieve the endowment objectives, the investment policy targets a 

 real return of 5 percent. 



During fiscal 1992, the market value of the consolidated endow- 

 ment increased to $34 3.6 million, a $29.8 million gam. Following 

 past practice to increase the endowment for the future. $3.1 million 

 in revenue generated from auxiliary enterprises was transferred to the 

 unrestricted endowment. The total rerurn was 10.3 percent, the pay- 

 out was 4.2 percent of the five-year average market value, and fees 

 were 0.4 percent of average market value of the portfolio. With infla- 

 tion running at an annual rate of 2.4 percent, the real purchasing 

 power of the endowment increased by 3.8 percent. At fiscal year-end, 

 the portfolio of the Institution reflected 36 percent in bonds. 7 per- 

 cent in cash and cash equivalents, and 57 percent in equities. 



• an external review, arranged by the Private Sector Council, of the 

 management and organization of Smithsonian finance and admin- 

 istration by executives from the Eastman Kodak Company, the 

 Gillette Company, the Lockheed Corporation, and the American 

 Express Company; 



• the development of a new accounts payable /purchase order sys- 

 tem — to be completed by the end of fiscal 1993; 



• the development of a more highly coordinated fund-raising pro- 

 gram plan; 



■ collateralization of Smithsonian funds on deposit with major banks 

 through the Federal Reserve Bank; 



• the establishment of a Smithsonian-wide disaster preparedness 

 plan, the acquisition of a fully equipped disaster response trailer, 

 and completion or initiation of disaster preparedness plans at 22 

 separate Smithsonian facilities; 



• initiation of a study to examine the planning and construction of 

 exhibitions and recommend opportunities for cost savings — to be 

 completed in fiscal 1993. 



The Institution's financial statements are audited annually by an in- 

 dependent public accounting firm. Along with the audit report, 

 management also receives a report from the auditors with suggested 

 operational improvements, which management acts upon as appro- 

 priate Coopers & Lybrand's unqualified report for fiscal 1992 is re- 

 printed on the following pages. The Smithsonian's internal audit 

 staff, part of the Office of the Inspector General, assists the outside 

 auditors and regularly audits the Institution's various programs, activ- 

 ities, and internal control systems. The Defense Contract Audit 

 Agency audits grants and contracts received from federal agencies, in- 

 cluding the allowability and allocabilitv of indirect cost charges. 



The Audit and Review Commirree of the Board of Regents met 

 three times during the fiscal year pursuant to its fiduciary responsi- 

 bilities and the bylaws of the Board of Regents. The committee re- 

 viewed the results of the 1991 audit of financial statements and the 

 1992 audit plan, received reports from the inspector general, and con- 

 ducted inquiries on a variety of topics directed at safeguarding the 

 Institution's various assets. 



Financial Management 



In 1990. to assure effective financial management, the Smithsonian 

 established the position of assistant secretary for finance and adminis- 

 tration and later designated that position as chief financial officer of 

 the Institution. The chief financial officer has responsibilities for safe- 

 guarding all of the Institution's assets and oversees all financial offices 

 to assure integrated financial planning and proper coordination of all 

 financial management functions. 



Although not required to comply with the Federal Chief Financial 

 Officers Act of 1990, the Smithsonian has elected to comply volun- 

 tarily with the spirit and intent of its objectives for sound financial 

 management and internal controls. The Smithsonian is, in fact, well 

 ahead of most federal agencies in implementing the principal require- 

 ments of the act. In addition, the Institution's finance offices are tak- 

 ing part in an effort to continuously improve the quality of their 

 products and services and the cost -effectiveness of their business pro- 

 cesses through total quality management (TQM). A program to train 

 all financial staff is under way and implementation of the program is 

 proceeding. 



Specific financial management improvement initiatives undertaken 

 or completed in fiscal 1992 include 



Related Organizations 



The National Gallery of An, the John F. Kennedy Center for the Per- 

 forming Arts, and the Woodrow Wilson International Center for 

 Scholars were established by Congress within the Institution. Each or- 

 ganization is administered by its own board of trustees and reports in- 

 dependently on its financial status. The Smithsonian provides the 

 Wilson Center with certain fiscal, administrative, and support ser- 

 vices, as well as office space, on a reimbursement basis. 



Administrative services are provided by the Institution on a con- 

 tract basis for Reading is Fundamental. Inc. The Friends of the Na- 

 tional Zoo (FONZ), an independent nonprofit organization, operates 

 under a concessions contract; proceeds accrue to the Zoo. 



n8 



