A year into the federal stimulus, state economies continue to stagnate or sink. Large industrial states like California and Michigan are in particularly bad shape, and if recovery fails in such places, it will damage the economy of the entire country. It is particularly unfortunate, therefore, that the federal research stimulus is not only putting too little money into public universities, but is putting it there in a way that makes the problems of those institutions worse.
Higher education split $100-billion in stimulus support with elementary and secondary education in the final American Recovery and Reinvestment Act legislation. About half of that was given to the states to distribute with considerable latitude, and the final impact on universities was modest. In most cases, the federal stimulus funds did no more than keep cuts from being even worse.
The act also provided $21.5-billion of one-time money for research, about half of which is being spent at universities. So far so good, and last year the federal government spent more than $50-billion to support university research. That support came in the form of direct costs—the budgets proposed by university investigators—and “indirect” costs—the expensive facilities, general services, and administration upon which research depends. It is with the indirect costs that the stimulus’s negative impact on universities begins.
Those indirect costs, called “facilities and administration,” or “F&A,” are fees calculated as a percentage of the amounts directly budgeted for research, less some adjustments. For universities, they usually are 45 percent to 65 percent of direct costs—meaning that for every dollar spent on direct costs, the government spends an additional 45 to 65 cents for research infrastructure.
Each university negotiates its indirect-cost rate with a designated federal agency on a multiyear cycle. A typical negotiation involves the university’s compiling extensive financial data to demonstrate that it is incurring costs of, say, 62 percent of the modified total direct costs of federal research, and the federal agency granting the university an F&A rate of, say, 58 percent. In the vast majority of the specific instances we have seen, there’s been a shortfall between the university’s reported indirect costs and those provided by federal grants.
How substantial is that shortfall? In a recent year, Harvard University said that indirect costs ran about 73 cents for every dollar of direct costs, but it actually recovered 67 cents, using a rate set by the National Institutes of Health. That means that Harvard had to supply 6 cents of its own money for every dollar it received. Analogous figures at other institutions were: the Massachusetts Institute of Technology, 69.2 vs. 65 cents; the Johns Hopkins University, 67.7 cents vs. 63.1 cents; and the University of Washington, 64.4 vs. 56 cents. And, in an extreme case for an NIH grantee, the University of California at Davis’s numbers were 71.2 cents vs. 52 cents—or almost 20 cents on the dollar.
What does that mean in terms of actual losses? If an “average” campus has $200-million in research, and the gap between actual and recovered costs is “only” 5 percent on a 50-percent negotiated indirect-cost rate, that campus needs to find nearly $7-million a year of its own money to cover the costs of conducting the extramural research that it is legally obligated to perform ($73.3-million at 55 percent, not the $66.7-million it receives).
Federal indirect-cost rates are the best-case scenario. Most nongovernmental sponsors pay lower rates. One institution has estimated that its own contribution to research costs across all types of sponsored projects, above what it collects in indirect-cost return, is not 5 percent, but 25 percent. In that case, our hypothetical campus would have to come up with $33-million of its own money to support $200-million in research grants.
Yet the sources for money to make up research shortfalls are few. Private universities can use endowment and tuition income. Public universities depend on state support and tuition. From the mid-1950s through the mid-1970s, when baby-boom public universities and Sputnik-inspired research were growing by leaps and bounds, state governments understood that they were expected to cover some research costs—particularly involving the construction and maintenance of facilities—because most of the immediate benefits of the research were local.
Once those booms ended, wealthy private institutions were still able to use their continuous tuition increases and endowment gains to set a breakneck pace for research investment. During the same period, however, state universities saw their public support reduced. The University of California lost 35 percent of its per-student, inflation-adjusted income between 1990 and 2007, and an additional 20 percent in the last year and a half.
If extramural sponsors do not pay the full costs of research, where can public universities turn? The only remaining source of funds is tuition, which must continuously rise to help close the gap in research support. Thus, although it may seem like a technical issue, inadequate indirect-cost recovery is now endangering the core public mission of affordable undergraduate access.
Students and parents might agree to subsidize research on the grounds that it improves undergraduate education, but they have not been asked, nor been told that they already do. Researchers rightly chafe at the inadequacy of the indirect-cost monies returned to them and don’t want to be put in competition with students, yet they have been.
How can we untangle at least that part of the political and financial snarl that involves research support? Only the federal government is in a financial position to help stabilize higher-education finances or to reinvest in research infrastructure. Thus our recommendations focus on federal agencies:
Government agencies should suspend for at least two years any “matching requirements.” The U.S. Department of Energy, for instance, is supporting a three-year grant at Arizona State University to increase the efficiency of photovoltaic solar cells. The agency provides almost $896,000 but requires a “cost share” of more than $240,000—or about 80 percent of the indirect-cost money that the university receives for the grant. Unless the university has obtained a private outside source providing the cost-sharing money, the cost share is likely to come in the form of an internal allocation of indirect-cost funds. That requires the university to draw more money away from instruction, raise tuition, or dip into its endowment. The stimulus should reverse that trend and make research programs sustainable and self-sufficient.
Remaining stimulus funds should be set aside to support upgrades in research infrastructure. Universities receiving at least $20-million in extramural federal grants as of July 1, 2009, should receive a supplement of 10 percent of their total federal awards to be used as research infrastructure and development funds. Those funds would not go into the existing indirect-cost pools, where they are likely to disappear—used to resolve immediate budget problems, retain key faculty members, and meet other status-quo needs. Rather, they would be set aside to be spent on projects that develop research infrastructure with clear and specific public outcomes.
For example, infrastructure money could provide support for innovation and entrepreneurship, technology-based economic development, and industry training in advanced research techniques. Such areas are of vital importance to realizing public benefits from research and are chronically undersupported in federal grant proposals and university budgets alike. Universities would be accountable for the use of such infrastructure funds; they would have to report publicly how they have used the money and their progress toward the completion of projects, just as they are required to do for research.
All federal agencies should increase indirect-cost rates by at least 10 points for two years. That across-the-board increase would avoid complicated recalculations and renegotiations. It would close most, if not all, gaps between the full costs of conducting research and what sponsors now cover. And it could be done immediately. There is no point in extending the number of projects that an agency supports if each award incrementally hurts the universities involved.
The federal government should lift the veil of secrecy surrounding indirect-cost rates and recovery. Few areas of university budgeting are less transparent, more confusing, or create more ill will and mutual suspicion. The general belief in all departments that their activities are subsidizing ungrateful others has been worsened by a combination of opacity and repeated cuts. The federal government should publish the stated indirect costs of all universities, the rate it actually provides, and explain the differences. Federal agencies should also publish overhead rates for their large number of industry contractors, whose rates are generally much higher than those of universities—and again explain the differences. Universities should be able to decline awards that they literally can no longer afford, and they need public data to justify those decisions.
Without such changes, the federal stimulus of university research will deepen the very public-university budget crises that it seeks to reduce. The stimulus, as it is, will also increase the unwanted tension among the university’s different missions of teaching, research, and public service. Without the changes that we suggest, public universities will be forced to continue to rob Peter to pay Paul, drawing funds away from instruction and public service and pulling money from the broader economy in the form of substantially higher tuition paid by millions of middle- and lower-income families.
These changes are relatively simple and will go a long way toward making the stimulus a productive effort with positive outcomes. Federal stimulus programs should support higher education and put more money to work in the economy. They should not create incentives to reduce instructional outlays and create more debt burden for the people in this country who are seeking educational opportunity.
