Discussion and Analysis of the Financial Statements

The National Science Foundation is committed to providing quality financial management to all our stakeholders. We honor that commitment by preparing annual financial statements in conformity with generally accepted accounting principles and then subjecting them to an independent audit to ensure their reliability and accuracy in assessing the performance of NSF. The results are an opinion on the fair presentation of those financial statements.

FY 1999 Financial Statement Audit
The Chief Financial Officer’s Act of 1990 (Public Law 101-576) requires that NSF prepare financial statements to be audited in accordance with Government Auditing Standards. The NSF Inspector General is statutorily responsible for the manner in which the audit of NSF’s financial statements is conducted. KPMG LLP, an independent certified public accounting firm, was selected by the NSF Inspector General to perform the audit of NSF’s FY 1999 financial statements.

NSF received an unqualified opinion stating that the principal financial statements were fairly stated in all material respects. The independent auditors did not report any material weaknesses in internal control or material noncompliance with law or regulations.

One reportable condition was repeated from last year’s audit related to the NSF U.S. Antarctic Program’s (USAP) Property, Plant and Equipment (PP&E). NSF, through its contractor, maintains research facilities in New Zealand and Antarctica; assets at these facilities account for over 95 percent of NSF’s total assets. This year’s audit determined that NSF’s USAP contractor had not implemented control policies and procedures to ensure that the year-end equipment records provided to NSF were complete. The auditors performed extensive interim testing prior to year-end at the contractor’s site and found equipment additions properly recorded in the contractors’ records. However, these equipment additions were not properly recorded at year-end, in either the contractor records or in the NSF general ledger. As a result of auditor-performed test work and recommendations, NSF adjusted contractor-held additions to accurately report activity in the financial statements. Because of this condition, the auditors feel NSF cannot routinely compile complete and accurate property information related to contractor-held equipment additions for financial reporting.

NSF management plans to engage the USAP contractor to increase their level of internal controls relative to the PP&E reporting provided to NSF for the annual financial statements. NSF management is requiring a supervisory level of review and concurrence with accounting information prepared by contractor staff to identify and correct any errors or improper reporting before information is submitted to NSF. The contractor will be asked to engage NSF on any questions or issues of property reporting as matter of professional responsibility. NSF feels this increased level of control will correct this finding.

Understanding the Financial Statements
The following provides a brief description of the nature of each required financial statement and its relevance to NSF. Some significant balances or conditions on each statement are noted to help clarify their link to NSF operations.

Balance Sheet: The Balance Sheet presents the combined amounts available for use by NSF (assets) against the amounts owed (liabilities) and amounts that comprise the difference (net position).

Three line items represent 99 percent of NSF’s assets. Fund Balances with Treasury is funding available in the Department of Treasury accounts from which NSF is authorized to makes expenditures and pay liabilities. Property, Plant and Equipment comprises capitalized property located at NSF Headquarters and NSF-owned property in New Zealand and Antarctica that support the United States Antarctic Program. Advances are funds advanced to NSF grantees and contractors as well as a few advances made to NSF employees for travel.

Accounts Payable and Advances from Others represent 96 percent of NSF’s liabilities. Advances from Others are amounts advanced to NSF from other federal entities for the administration of grants on their behalf. NSF maintains the expertise and automated systems for the administration of grants upon which other federal entities rely to assist in the administering of their grants. Accounts payable are liabilities to grantees for their unreimbursed expenses.

Statement of Net Cost: This statement presents the annual cost of operating NSF programs. The gross cost less any offsetting revenue for each NSF program is used to arrive at the net cost of specific program operations. Revenues are recognized from other federal agencies for grant administration work completed during the year.

To arrive at full costing, NSF must include certain benefit costs for NSF retirees that will be paid by the Office of Personnel Management (OPM) for future periods. Amounts remitted to OPM by and for covered NSF employees do not generally cover the actual costs of the benefits those employees will receive after their careers. NSF calculates the costs paid by OPM on behalf of NSF and reports those costs as part of the cost of NSF operations.

In FY 1999, 95.6 percent of all NSF costs incurred were directly related to the support of NSF research and education programs. A small portion of these direct costs is for travel and salaries paid from programmatic funds. Costs incurred for indirect general operation activities such as salaries, training, activities related to the advancement of NSF information systems technology, and Inspector General activities are about 4.1 percent of the total NSF cost. NSF’s commitment to administrative efficiency is evident in the relatively small portion of its total costs devoted to general operation activities.

Statement of Changes in Net Position: This statement presents those accounting items which caused the net position section of the balance sheet to change from the beginning to the end of the reporting period.

Almost 99 percent of all financing sources are comprised of NSF appropriated funds from Treasury accounts and donations received from private and foreign government sources used in the furtherance of the mission of the Foundation. The increase in unexpended appropriations is primarily due to an increase in unliquidated obligations from the prior fiscal year. Unliquidated obligations are obligations maintained by NSF for science and engineering awards for which expenses have not yet been recognized.

Statement of Budgetary Resources: This statement provides information on how budgetary resources were made available to NSF for the year and the status of those budgetary resources at year-end. The outlays reported in this statement reflect the actual cash disbursed for the year by Treasury for NSF obligations. The majority of obligations incurred by NSF are for science and engineering grants.

Statement of Financing: This statement provides a reconciliation between the resources available to NSF to finance operations and the net costs of operating NSF programs. Operating Costs that do not require direct financing sources include depreciation and the operating gain or losses recognized upon the disposition of NSF capital assets. Cost Capitalized on the balance sheet are additions to capital assets made during the fiscal year.

Stewardship Investments: Stewardship investments are NSF-funded investments that yield long-term benefits to the general public. NSF investments in research, education, and people yield quantifiable outputs shown in this statement as the number of awards made and the number of researchers and students supported in the pursuit of discoveries in science and engineering and in science and math education.

Budgetary Integrity: NSF Resources and How They Are Used
NSF is funded primarily through five Congressional appropriations that in FY 1999 totaled $3.7 billion. Other FY 1999 revenue resources included $102 million in reimbursable authority and appropriation transfers from other federal agencies and $37 million in donations to support NSF activities. Additional resources were also received from the Department of Justice under The American Competitiveness and Workforce Improvement Act, enacted in 1998, which provides for a temporary increase in access to skilled personnel from abroad under the H-1B visa program. In FY 1999, NSF received $26.6 million from H-1B visa fees, to support education activities and scholarships for low-income students in computer science, engineering, and mathematics.

As indicated in the Statement of Net Cost, the Foundation supports two primary lines of business, Research Activities and Education Activities. Research Activities are funded through the Research and Related Activities appropriation and the Major Research Equipment appropriation. Education activities are funded primarily through the Education and Human Resources appropriation, although given the integrative nature of research and education, NSF research activities often include an education and training component. Administrative support for the Foundation as a whole is provided by the Salaries and Expenses appropriation. The Office of Inspector General is funded under its own separate appropriation.

For FY 2000, Congress has provided total appropriations of $3.9 billion; it is estimated that NSF will also receive an additional $33 million from H1-B fees. Specific areas of emphasis for NSF investments in FY 2000 include information technology; biocomplexity in the environment; educating for the future; plant genome research; and Arctic research, education, and logistics. Projects supported through the Major Research Equipment appropriation include the Large Hadron Collider, the Millimeter Array, the Network for Earthquake Engineering Simulation, and polar aircraft upgrades. NSF efforts will also be directed toward science and engineering at historically black colleges and universities, and developing innovation partnerships to help institutions expand their research capacity and competitiveness.

Future Trends and Challenges
The manner by which NSF transacts business in the next century will continue to evolve to take advantage of the most recent developments in technology. By harnessing the powerful capabilities of the Internet, we can share information, conduct transactions and provide even better service by automating interactions with our diverse and growing customer base. Efforts are currently underway that will further enhance productivity and reduce costs for the Foundation, in both the near and long term.

Productivity through Automation: NSF continues to migrate existing mainframe applications to a client/server platform. NSF is replacing legacy mainframe administrative systems to improve ease of use for employees, increase productivity, and save time. To date, five systems are fully functional in the client/server architecture. Resource savings in these systems have already been apparent. Further, because client/server systems are so easy to use, the need for training has been reduced, resulting in savings in resource time and cost. NSF is currently developing client/server applications for our financial accounting awards management, procurement, and payroll systems.

Web-Based Grants Management: NSF continues to be a leader in business practices and research administration enterprises. NSF is utilizing the power of the Internet to facilitate the administration of grants for our customer organizations. Through the NSF-developed "FastLane" system, NSF grantees can conduct business-to-business commerce transactions over the Internet. These transactions include award searches, proposal preparation, proposal review and status reports, project reporting and post-award notifications, and requests. Customers can also conduct business transactions such as requesting award funds and submitting cash transaction reports using the FastLane system. There are over 2,000 registered grantee institutions using FastLane, and this number continues to grow. Approximately 90 percent of NSF grantees use FastLane to draw cash advances and report expenses. This business-to-business integration provides the model that will be used to expand the transaction of all NSF’s commerce using the World Wide Web.

Management through Cost Accounting: NSF will continue to integrate cost management and program performance with the implementation of the Government Performance and Results Act (GPRA). By integrating cost information with program, process and management performance measures, NSF can evaluate the cost of the services provided to an increasingly diverse customer base. With activity-driven cost information, management can receive immediate feedback to questions about performance improvement and the impact of changes on workload or technology. By making cost accounting an integral management tool, NSF can take better advantage of strengths and more quickly correct weaknesses to maximize the utilization of limited resources.

FinanceNet: FinanceNet (www.financenet.gov) is the Internet’s website for public financial management information. Established in 1994, FinanceNet is operated by NSF under the sponsorship of the U.S. Chief Financial Officers Council. The primary mission of FinanceNet is to serve as a vehicle and catalyst for continuous improvement and innovation, at all levels of government, in the accountability and stewardship of taxpayer resources by providing a central World Wide Web portal to the best practices, current trends and pending changes that affect the entire federal financial government community. FinanceNet has proven to be an important interactive information tool. In FY 1999, FinanceNet accesses increased 46 percent from the prior year to nearly 30 million hits while subscriptions to its Internet mailing list more than doubled to over 72,000.

FinanceNet continues to expand its role to provide more service to the federal financial community. FinanceNet is now the federal government-wide web source for assets sales, and in the future will be expanded to include a searchable database of disposal assets by class and category. A future phase of the project will include the development of an on-line auction website (e.gov) similar to several popular private sector on-line auction houses. FinanceNet also is being considered as a potential data clearinghouse for agencies to reconcile and report intergovernmental transaction information that is required by the U.S. Treasury to compile the annual Consolidated Government-wide Financial Statements.