Changes To OMB Indirect-Costs Guidelines May Not Satisfy Budget-Cutting Lawmakers

University groups work with Clinton administration to rewrite indirect-costs rules but will the new Congress ask for more ? Poorly understood, much maligned, and yet central to the work of research, indirect costs are due for a partial, but welcome, revamping under changes expected to be published this week by the Office of Management and Budget (OMB), according to university administrators and association officials. Indirect costs represent that part of a federal research grant that reimburses the sponsoring institution for its contribution to a project, through support facilities and administrative overhead. To calculate rates for indirect costs--that portion of a federal research grant used to pay for facilities and administrative costs--university accountants sit down with their ledgers and representatives from one government agency, their so-called cognizant agency, to negotiate. Together, they arrive at a rate, unique to each school, that is then honored by all other federal agencies awarding grants to that university. Most institutions negotiate with the Department of Health and Human Services (HHS), but a number of the older schools work with the Office of Naval Research (ONR). Some confusion has, at times, stemmed from the fact that the resulting indirect-costs rate, which is expressed as a percentage, is not the same as the percentage of a grant that goes to pay for indirect costs. "If a university is awarded a $100,000 grant, and if the rate at that university is 50 percent, then about $67,000 goes to the direct costs and $33,000 goes to the indirect costs," explains Milton Goldberg, executive director of the Council on Governmental Relations (COGR) in Washington, D.C. "If you think about that a minute, $33,000 is 50 percent of $67,000--so only a third of the money goes for infrastructure, administration, compliance, and other indirect costs." When negotiating a university's indirect-costs rate, accountants and government auditors use actual past expenses at the university. "Schools have receipts, to put it simply, of what it cost to put a building up, how much their electric bill was, and how much their wage rates are," Goldberg says. "All of that is added up and divided by the number of square feet that are allocated to research. And from that they derive a cost. It's done after the fact and then projected forward." Regional differences in expenses are an important reason for the variance in indirect-costs rates among institutions around the United States, academic research administrators explain. "It costs more to heat and light a building in the Northeast than it does to heat and light a building in the Southwest," Goldberg observes. "Utility costs in the state of Washington are about three times lower than they are in southern California, for example. The cost of construction in the Northeast is higher than the cost of construction in the South." A growing portion of the indirect-costs rate derives from the need to comply with federal regulations of different kinds, university officials contend, a point they hope that Congress will bear in mind as it puts indirect costs under rigorous budget-cutting scrutiny. "You've got the welter of regulations, many of which are appropriate," says Herbert Pardes, vice president for health sciences and dean of the faculty of medicine at Columbia University College of Physicians and Surgeons. "You've got human-subjects regulations, you've got animal-care regulations, you've got drug-safety and environmental-health issues. Those issues all take staff, take reviews, take procedures, take revenues. Where are they going to come from?" Several years ago, the Office of Management and Budget instituted a 26 percent rate cap on the administrative component of indirect costs. The facilities component, however, is still negotiated at each school. Even with expenses rising, indirect-costs rates have remained relatively stable, university representatives maintain. "The indirect costs recovered by public and private institutions around the country have remained, as a fraction of total costs, flat for a decade or more at about 30 to 31 cents of every dollar returning to cover the costs of administration and facilities, or the total basket of indirect costs," says Jack Crowley, director of the Massachusetts Institute of Technology's Washington office. --F.H. The modifications, negotiated by representatives of the White House and national academic organizations, will save the government a relatively small amount of money over time, but will make the overall system more rational for the schools and palatable to the public, the university representatives say. However, the changes may not be enough to save indirect-costs recovery from various congressional budget-slashing measures being considered. Some of those plans, attached to some early versions of the Republican Contract with America, pose serious threats to the ability of top research universities to do science, many academic administrators contend. "The real issue involving research-support costs_the term that I prefer to use is what's going to happen in the budget cutting that's going to take place," says C. Peter Magrath, president of the National Association of State Universities and Land Grant Colleges (NASULGC), one of the groups involved in the negotiations. "And that's going to be dictated, not by the executive branch, but on [Capitol] Hill. We are a relatively small piece of the total budget-cutting numbers that are being kicked around in this town. That's where the real action's going to be in the next few months." Among anticipated modifications to OMB Circular A-21, the government publication that regulates indirect costs, are a strategy to peer-review building construction costs that climb above certain levels and a change to incorporate indirect costs categories directly into the research budget of a grant. The alterations were negotiated by representatives from OMB; the Office of Science and Technology Policy (OSTP); and a university group that included officials of the Association of American Universities (AAU) and NASULGC, both Washington-based, and others. In rough terms rates vary widely from institution to institution_about a third of every federal research grant goes to cover indirect costs. Partly because of recent highly publicized cases of alleged abuse of the system and the fact that overhead is an intangible concept to many, these reimbursements have few defenders. "Indirect costs are unpopular with university faculty, they're unpopular with the program people in the agencies, and they're unpopular with a great number of members of Congress," observes Milton Goldberg, executive director of the Council on Governmental Relations (COGR) in Washington, D.C. "And that creates a serious problem." "As a faculty member, I know the view that the faculty members would love to have all of that money to spend themselves on direct costs for their research," comments J. David Litster, vice president and dean for research at the Massachusetts Institute of Technology (MIT). "Of course, they also like to have lights in their laboratories, they like it to be warm in the winter and probably air- conditioned in the summer, and so on." Indirect costs also have been a target for lawmakers in almost every budgetary cycle since a scandal over alleged inappropriate charges at Stanford University erupted in 1990. Stanford and the government recently agreed to a settlement in the dispute, but the impact of high-profile hearings before the subcommittee on oversight and investigations of the House Committee on Energy and Commerce under former chairman Rep. John Dingell (D-Mich.) lingers. "There's no question the Stanford incident is a good part of the image held by some that this is just waste, fraud, and abuse," says AAU president Cornelius J. Pings, who spearheaded the talks with the executive branch. "And it's not. It's tightly audited costs, and no university is getting anything like its full reimbursement for its full costs that are audited." "It's still very easy to find people, both members and staff, in Congress for whom those memories are fresh," observes Jack Crowley, director of MIT's Washington office. He notes that, within months of the Stanford case and in direct response to it, changes to Circular A-21 were introduced identifying a long list of specific expenses as unallowable. Later, too, the administrative component of indirect costs was capped at 26 percent for all institutions, although the facilities component_the focus of the new agreements_is still negotiated at each school (see accompanying story). For Pings, a longtime indirect-costs policy veteran who will leave AAU if, as expected, he is elected to the presidency of the National Academy of Engineering later this year, the modifications to Circular A-21 may represent the bulk of his legacy at AAU. "Our endeavor on this last round," Pings states, "was to try to make some suggestions that would make this whole system a little more understandable, a little easier to explain_and maybe a little easier to defend, therefore." Beginning in mid-summer, the university representatives met several times with OMB and OSTP officials to discuss changes to the government's indirect-costs guidelines. According to COGR's Goldberg, the resulting agreement produced three significant new recommendations. "One was to have buildings peer-reviewed when they exceeded certain [cost] thresholds," he says. "Two was to recommend that the agencies deal in total project costs, rather than indirect costs and direct costs. And the third one had to do with how one deals with the costs of new buildings and capital improvements, the technique by which payments would be recovered." A result of the first recommendation would be that costs above certain as-yet-undetermined levels would not be charged to the government, and it is in this area that public savings might be realized. "Excessive building costs, probably determined by national schedules of what were sensible allocations for buildings, would not be put into the indirect-costs rate," Pings explains. "If a building was being put up that exceeded that, the university would have to ask for a review to get the rate. It might be a specialty building, in which case they could ask for a review and get the costs included. Otherwise, the university might have to absorb it." An aim of the second proposal_to describe indirect costs as the facilities and administrative components of total project costs_although little more than a change of name for indirect costs, is to help university research administrators make their strongest case to scientists, the public, and members of Congress. The ability to convincingly explain indirect costs as necessary to the research enterprise could be crucial at a time when Congress is looking for ways to cut the budget. "It's only an accounting necessity that makes them be separate the way they are," Goldberg says. "But there's no other good reason to separate indirect costs from direct costs, since you need them all. It's sort of like driving a car without wheels or tires. You can't go very far, whether it's a Cadillac, Mercedes, or a Ford, without having wheels and tires. And that's sort of what indirect costs are about. It's really difficult to do research if you don't have a laboratory in which to work." Litster uses the same basic image to explain the importance of indirect costs to academic research: "It's kind of like saying to a person, you can drive a car, but we're not going to let you put oil in it. You can put gas in it, but you can't put oil in it. You get into trouble that way fairly soon." "The second proposal is to change the language in the principal-investigator budgets to use words that are more descriptive of what's going on," Pings elaborates. "Indirect costs sound like something that's vague and not well- defined, and, of course, it is well-defined. We're just suggesting the agencies drop words like overhead and indirect costs." Other administrators agree that the widespread view in Congress, especially that indirect costs are somehow not integral to research support is one that must be corrected. "If I told you that the indirect-costs dollar backed up things like polio vaccine determination or fighting against drug-resistant tuberculosis or trying to solve the AIDS problem, then you understand it in a different way," says Herbert Pardes, vice president for health sciences and dean of the faculty of medicine at Columbia University College of Physicians and Surgeons. "Indirect costs are not really indirect costs, they're research costs." The third proposal concerns the way that building costs are recovered. Currently, universities can be reimbursed for research facilities on the basis of a 50-year use allowance, or they can negotiate a more accelerated depreciation schedule. "Everybody knows that a research building is technologically obsolete before 50 years," Goldberg observes. "And so the recommendation is that there be only one method for recovering those costs and that that method be depreciation." The Contract with America, a series of legislative initiatives proposed by the new Republican majority in Congress, does not speak specifically to indirect costs. But supporting papers circulating in Washington suggest that substantial cuts in this area are on what Pings calls a "hunt list." University officials are concerned about how this idea might play out during the current budgetary go- round and beyond. "When the Contract with America was circulated, even before the election," Pings recalls, "there was an attachment that suggested how money might be found. In at least one version of it, there was a line that suggested there was money to be found in reducing indirect costs on university research programs." According to that line, $1.62 billion could be saved over five years through reductions in the overhead rate on federally sponsored university research. "That's about 10 percent of the reimbursement coming to our campuses for that purpose," Pings says. "There are no details," Magrath comments. "But the backup for the Contract with America calls for reduction in research support to the tune of about $320 million [per year]. The danger is there. How that would be done, I don't have a clue." There are also fears that the Republican Congress might resurrect the idea raised in a previous year by Sen. Hank Brown (R-Colo.), a member of the Senate Committee on the Budget_of a percentage cap on indirect costs at, for example, 50 percent of total research costs. Presumably, such a figure would incorporate the current 26 percent cap on the administrative component of indirect costs, potentially limiting the facilities component to 24 percent. "The notion of putting indirect costs up for cuts is a very worrisome idea," says Pardes. "And the prospect of capping them at 50 percent, indiscriminately, could decimate some of the best research institutions in this country. We already have a cap on the administrative part of indirect costs, and all of our revenue streams are tightening up. The clinical revenue streams are being tightened by managed care rolling through, and the academic medical centers are uniquely vulnerable. If you pinch the clinical revenues and pinch, also, the research revenues, you might as well close up shop." "A cap would be a very bad idea," contends William H. Danforth, chancellor of Washington University at St. Louis. "We are building a new psychology building, and there will be a fair amount of biomedical research done in it. I expect we will recover some of those facility costs as part of indirect costs, and if I didn't believe that, we wouldn't make that investment. "You need a stable playing field, one that you can count on, to make an investment that you may be paying on for the next 20 or 30 years." "If Congress needs to get lower numbers, it would be more sensible for them to get the lower numbers simply by not investing as much in research," Litster points out. "But to only invest in part of the research and not the whole package is, in the long run, going to be a less-efficient investment," he adds. "This is really how the United States built its research university system, through the indirect costs. And I haven't run across too many people in the government who understand that."

Changes To OMB Indirect-Costs Guidelines May Not Satisfy Budget-Cutting Lawmakers

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