Finding The Way To Confidence, Accountability

There is clearly a problem with the process by which universities recover their indirect costs of research. Congressional hearings, media reports, and discussion by university scientists and administrators all reflect a widespread loss of confidence in the present process, and that loss of confidence is in itself a significant problem. Universities must regain public confidence that the expenditure of public funds is handled in a fair and prudent fashion. The fact that there are problems in the indirect costs system does not come as a complete surprise to university presidents, administrators, and principal investigators. In 1987 the Association of American Universities appointed an Ad Hoc Committee on Indirect Costs, chaired by Cornelius Pings, provost of the University of Southern California in Los Angeles. The Pings Committee was charged with studying indirect costs and recommending ways to simplify the system and to reduce variations in the rate. It is hard to argue with the overall success of the partnership in basic research between the federal government and the research universities. Federal sponsorship of research has grown from insignificant levels in the period immediately following World War II to the present situation, in which most U.S. basic research is conducted at colleges and universities. The access to the enthusiasm and fresh ideas of graduate and even undergraduate students permits a research atmosphere unmatched anywhere in the world. The growth of this amalgam of research and instruction, largely financed by the federal government, is possible only because the government has agreed to pay its fair share of the "indirect costs" of maintaining a research laboratory in a university environment; that is, infrastructure costs, maintenance and personnel, and the costs of other services provided by the institution. When externally sponsored research was a small portion of institutional activity, it was possible to charge only the marginal costs of research. But now, when research occupies an equal role with instruction in a university's activities, it is neither fair nor even feasible to treat research as a marginal function. If research is not a marginal activity, then the infrastructure costs of research should not be calculated marginally, but rather on an average basis. The recognition of this fact years ago was crucial in the development of our research enterprise to its present strength. The determination of the average costs of support activities is not trivial, of course. The inextricable linking of research and instruction creates complications that are not present in the commercial sector. After identifying overhead costs for administration and space and the like, it is necessary to determine what fraction of these costs are attributable to research, and what fraction to instruction or other parts of the university mission. This allocation process is responsible for much of the complexity of the indirect costs rules and process. The Office of Management and Budget's Circular A-21 prescribes a preferred method of making this allocation for each separate type of cost, but permits the negotiation of alternative methods if they can be shown to be more reasonable. These alternative methods reflect the diversity of U.S. education institutions and their research efforts. It is to accommodate this diversity that the A-21 principles have permitted options in the identification and allocation of costs, and even flexibility in specifying which costs are direct and which are indirect. This, in turn, has led to differing rates of reimbursement. Part of this spread is natural, attributable to differences in climate, size of physical plant, utility costs, etc. Part of it, however, reflects differences in incentives for institutions to recover all their infrastructure expenditures. When funding levels are high, the differences in indirect costs reimbursements disturb few observers; but as funding levels drop, principal investigators, as well as project officers and review teams, become more concerned. The complexity of the indirect costs formulation hampers or precludes an understanding of differences between university rates. The solution is straightforward: The process must be simplified and the rates made more uniform. How can this best be accomplished? A common suggestion is capping--either restricting the rate allowed for a particular component, or restricting the total rate. An institution would still have to justify that it is entitled to the capped amount, or whatever lower amount it proposes. But this solution is unsatisfactory. Capping can, by brute force, narrow the spread in rates. But it does nothing to simplify the process, since calculations must still be made, and negotiation of rates will still occur. University A can still charge a rate different from University B. In addition, if any cap is applied to the total rate, it will discourage institutions from making necessary investments to restore an aging infra- structure. The same objection may be raised against the most radical of proposals, a single, uniform national rate. The Pings Committee recognized these difficulties, as well as the different incentives needed to regulate space-related costs and administrative costs. It led to the first of the committee's recommendations: that the present rate be split into two separate rates, one for space-related costs and one for administrative costs. A related alternative to the single rate, a fixed allowance for the administrative component of the total rate, does have considerable advantages. It would accomplish the desired reduction of the differences in rates together with a simplification of the process. It does not discourage facility investment. In fact, it has some precedent. In 1986 the Office of Management and Budget (OMB) adopted a standard allowance of 3.6 percent for the category of faculty effort in administration. There is a problem connected with any fixed allowance, however. While it is possible to establish the allowance at a level that is expenditure-neutral for the federal government, some institutions will see their indirect costs rates increase or decrease. The disruption that this can cause both to individual projects and to institutional budgets constitutes the main objection to this alternative. Such an outcome, in the long range, is inevitable under any scheme if rates are to become more uniform. The key question is the time scale on which changes are made. A variant of the single administrative allowance was proposed by the Pings Committee. This alternative replaces the allowance by an administrative threshold, with the following provisions: An institution whose indirect costs administrative component was historically above the threshold could adopt the threshold without documentation or negotiation. An institution with a historic rate below the threshold could adopt that three-year historic average, again without documentation or negotiation. Institutions could still, at their option, document and negotiate whatever rate is appropriate. The assumption is that a number of institutions would opt for the threshold or their three-year average (if the institution currently falls below the threshold) rather than incur the expense and trouble of documentation, and the possible acrimony of the negotiation process. In this way some narrowing of the variation in the administrative components might be achieved. This proposal was first made at a time when there was little controversy about indirect costs, before the recent revelations of difficulties in the calculation and verification process at various institutions. It was accepted in principle both by government representatives and by universities. In fact, considerable discussions and data assembling have occurred in the process of implementing the various recommendations in the report. A joint government-university task force on implementation has been engaged in discussions for over a year. In the words of an OMB representative, "Events have overtaken these discussions." It may well be that the modest proposals of the Pings Committee report are not drastic enough in the present situation. These are serious times, and the credibility of both universities and negotiating agencies is at stake. However, the Pings Committee concept of the threshold rate could well be regarded as a first step toward a long-term adoption of a single allowance for administrative costs. Such a strategy would have the advantage of providing the necessary gradual transition toward a new system. Two apparently inescapable conclusions emerge. First, the status quo, with its complicated rules and broad flexibility is no longer defensible. The second is that a uniform rate or a system of caps is not a desirable alternative. The adoption of a threshold system, as a way of phasing in an administrative allowance, is a viable approach. It is time to make a change. The challenge, as always, is to change in the proper direction. Marvin Ebel is the associate dean of the graduate school at the University of Wisconsin, Madison.

Finding The Way To Confidence, Accountability

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