Looking at the Realities of Indirect Cost Recovery (Part Two)

I discussed in the last UT Matters how indirect costs recovery revenues (a.k.a., “F&A” costs) are part of the real price of “doing business” – in this case, the business of doing sponsored research. I said that we must do everything we can to recover all the costs of a sponsored project to the university, if the research enterprise is to continue thriving and growing. However, I ended by saying that the UT Health Science Center, like most every institution, loses money when it comes to a fair and full costing of all research activities.

In the best of circumstances, the F&A cost component merely reimburses the institution for a portion of the “real” indirect cost of a specific research project. Universities have long argued that existing overhead reimbursement rates for all federal research grants end up costing each institution millions of dollars annually.

The university also subsidizes many sponsored projects for which the F&A cost rates seem to be arbitrarily restricted by the sponsor – or, the university is pressed into the dicey practice of “waiving” indirects, which we occasionally do.

Another reason that the reimbursed F&A costs all too frequently do not fully cover the actual F&A costs of research is inflation over time. F&A cost payments are determined after a university identifies and documents its costs for all university activities in a recent year (referred to as the ”base” year). In practice, the indirect cost reimbursement is only distributed once it is earned, or after the sponsored funds are spent.

A number of “environmental” factors are at work here, most of which result in downward pressure on this funding stream that is, for us, vital to our research infrastructure.

The National Institutes of Health (NIH) experienced annual budget growth in every year between 1970 and 2005. Since then, financing by Congress of the NIH has been flat (i.e., the actual NIH budget is dropping in real purchasing power). Without growth, the total number of funded research project grants will likely continue to decline, as will the inflation-adjusted size of the average grant award.

Researchers also have been experiencing a national trend of shifting the cost burden of “overhead” (i.e., indirect costs) increasingly to the recipient institutions and, in effect, forcing the transfer of these costs to other institutional revenue sources. One way of doing this is to make arbitrary cuts in previously negotiated and audited F&A costs, which most research institutions see as unjustified and unfair.

Bills in Congress are seeking to cap indirect costs on basic-research grants and contracts financed by the Department of Defense at 35 percent. Such cap reductions would be a major blow to universities, because they would unreasonably shift to them a larger share of support costs – like administrative expenses, laboratory space, utility bills, etc.

Furthermore, because of the 26 percent cap on administrative costs imposed by OMB Circular A-21, universities now absorb 100 percent of the costs of new regulatory and compliance requirements mandated by the federal government since 1991. These include new costs from such areas as auditing standards and rules, export controls, the Student and Exchange Visitor Information System (SEVIS), HIPAA, human subjects protection, conflict of interest reviews, research animal care, hazardous materials administration and disposal, and occupational health and safety standards.

According to the Association of American Universities (AAU) and others, more than 90 percent of all research institutions and universities spend more on administration and regulatory compliance than is reimbursed under a 26-percent cap. Studies suggest that the actual administrative rate at most universities is closer to 30 percent.

University budgets already struggle with grant awards that are capped for direct costs (and treat indirects as an add-on) and awards where a cap is applied to the total award amount (such as the $36-million Clinical and Translational Science Award, or CTSA, which also requires a $2 million per year “match” from the recipient institution).

Imposing new artificial, arbitrary caps would further worsen the problem of under-recovery.

Universities, after all, have only a limited number of revenue streams (i.e., educational revenues, clinical income, philanthropy) from which to cover the costs associated with conducting research sponsored by the federal government.

Already, universities are the second-largest funding source for academic research after the federal government. In fact, universities themselves provide more support for university research than states, industry, and private foundations combined. The Council on Governmental Relations (COGR) estimated that the subsidy that research institutions provide for federally funded research may soon exceed $3 billion per year, nationwide.

Unrecovered or under-recovered indirect costs are additional expenses for the UT Health Science Center. They are paid for out of the operating budget of the schools and departments, out of state appropriations, and out of operating funds managed for the university as a whole. The positive and negative impacts of indirect cost recovery revenue, once earned, are worth a closer look.

(More in the next UT Matters …)

Kevin