Thursday, April 15, 2010

Big grants...not the solution to our budget woes

A key component of the U's strategic positioning initiative has been to expand parts of the University that can compete for large federal grants. As Bill Gleason has noted on his blogs, these grants often end up costing the U money since they do not fully cover start-up and overhead costs. A 2007 Science article noted that "the bulk of scientists' salaries and overhead costs are not set up to support faculty members long-term." As grants become more competitive (due to declining federal funding and more pressure on faculty to apply for grants), we need to ask some pointed questions.

First, can we afford to continue plowing resources into parts of the U that live off grants? (E.g., is it wise to build that $200m biomed facility, which will include 40 new faculty lines? See As Joe Konstan, member of the Senate Finance and Planning Committee told the Daily: "“I came away feeling a big chunk of the solution isn’t going to be deciding we can do things a bit more efficiently here or there, but deciding there are substantial chunks [of the University] that, as much as we can do them well, we just can’t afford to do.” (

Second, how is the financing gap for these grants being filled?

Third, how will these facts about big grants shape discussions about how to restructure the U? A common myth is that the humanities are the ones being subsidized by universities, but in fact many humanities and social science programs more than cover their expenditures with the tuition revenue that they generate. (See

At last there is some honest talk starting about this matter. VP Mulcahy met recently with the Senate Research Committee. Select portions of the minutes are appended below.


Dr. Mulcahy recalled that about 18 months ago the President appointed a working group to address financing the future of the University; the group issued a report that was subject to considerable discussion. One question the report asked is whether there are revenue streams that might be enhanced. One suggestion was to increase the volume of sponsored research and thereby collect additional indirect-cost funds. Many, however, recognized the fallacy in that suggestion: The University does not recover the full cost of research, so increasing the volume of sponsored research would mean greater cost and that the University would have to increase its subsidization of research. Many do not understand F&A costs, so he had a session with the President's executive team to introduce the idea that the University should introduce changes in its policies and practices.

The federal role is one part of dealing with F&A costs, Dr. Mulcahy said, but what is done at the University is another part that affects what the institution receives in F&A income. For one thing, the University has a practice of sometimes voluntarily waiving F&A income it could receive. This issue fits with the larger question of sustainability of the research enterprise because the challenges to sustainability are tied to the revenues available to put systems in place, provide infrastructure, matching funds, equipment, and so on. F&A income is a big piece of the revenue used to support research, so to the extent units decide to waive F&A charges, it adds to the challenge of sustaining the research enterprise.

F&A costs (indirect costs, overhead) are real costs incurred while conducting research. They are related to administrative management, providing facilities, and "costs that are incurred for common or joint objectives and, therefore, cannot be identified readily and specifically with a particular sponsored project." F&A costs are costs that some sponsors will reimburse based on a calculated average rate developed and negotiated in accordance with OMB Circular A-21. The cost-recovery mechanism is not, Dr. Mulcahy emphasized, a "tax" on grants or investigators. The University is not "taxing" the federal government or the PI; this is a cost-recovery mechanism.

The reason this is so important is that in the University's budget model, all costs to operate administrative units are distributed to colleges, as are all tuition and most F&A revenues and state funding. F&A funds are one way colleges pay for services provided by the University, and make up an important revenue stream.

The calculation of the F&A rate is different from the actual F&A costs. Dr. Mulcahy explained the formula used, which results in a calculation of a 62% indirect-cost rate for the University of Minnesota. One would think that this would mean the federal government would provide 62 cents in addition to each research dollar provided, but it does not.

The actual rate negotiated with the federal government is 51%. The reason it is lower than the 62% is because there is a federal cap of 26% on administrative F&A costs. The federal government agrees that the University has demonstrated legitimate administrative costs of 32.57%, but it will only pay 26%. It also agrees that the University has legitimate other indirect costs that total 30.31%, but it has only agreed to pay 25%. The University can justify the 62%, but the federal government gives it 11 cents less than that for each research dollar. The administrative cap of 26% has been in place since 1991, ever since there was a scandal involving a yacht at Stanford...since 1991 with respect to paperwork and regulation required by the federal government, one realizes it has gone through the roof—but there have been no additional F&A funds from the federal government to respond to these mandates. The difference between the 32.57% and the 26% costs the University about $7 million per year.

If the full F&A rate of 51% were applied to all appropriate sponsored research costs, the University would receive $145 million per year. The EFFECTIVE rate, however, is 37%, because the University only received $104 million in 2009. It is not that the federal government is not paying the full rate (which some agencies do not), but that other funding organizations do not, either. The average rate from the federal government is only 42.6% because some federal agencies do not pay 51%. The clinical-trials rate is 26%, as is the off-campus F&A rate. Many sponsors limit F&A to less than 51%, including collectives, the State of Minnesota, commodities groups, research foundations, etc. One can see the point of view of foundations (e.g., American Cancer Society, American Diabetes Association): they want their money to go to research for a cure, not for administrative costs. But that leaves the University paying those indirect costs. In some cases, sponsors may cap total costs, direct and indirect, and make no distinction between them. That makes proposal with lower F&A costs more competitive.

One big reason the University does not receive 51%, however, is that it sometimes voluntarily waives F&A costs that are allowable and that the sponsor is willing to pay.

Effective F&A rates vary by college.

CBS 42.6%
CEHD 38.5
CFANS 17.0
CLA 41.3
HHH 29.3
IT 39.5
Med School 37.8
Pub Health 36.2
Vet Med 28.6
UMD 28.3

The number of waiver requests increased considerably starting in 2003. In 2008, increasing awareness about waivers led to a decline in 2009. But the increase from 2003 (about 18) to 2008 (about 190) is a cause for concern.

The deans maintain that there are legitimate reasons for granting waivers, Dr. Mulcahy said, and he agrees. There are good reasons, peculiar to each circumstance, so it would be unwise to adopt a general policy prohibiting waivers. Some of those reasons include seed grants that may attract larger grants, hardship for a new PI, awards that include equipment or building funds, community-relations or library projects, student-services projects, when a department is committed to undertake the research regardless of external funding (so any money is better than none), small cost, junior or incoming faculty member, etc. But the University of Minnesota is more generous with F&A waivers than other top research universities.

Dr. Mulcahy noted again that the University has a total unrecovered cost of research of about $75 million (the difference between the full rate of 62%, or $179 million, and the effective rate of 37%, or $104 million). $34 million of that $75 million is difference between the full (62%, $179 million) and the negotiated rate (51%, $145 million). The other $41 million is the difference between the negotiated rate ($145 million) and the effective rate ($104 million). The key point is that someone paid that $75 million. The $34 million is, in essence, the cost of doing business—the University is not going to recover the difference between the full/actual rate of 62% and the negotiated rate of 51%. But of the $41 million difference between the negotiated and effective rates, perhaps half is recoverable. Not all of it, Dr. Mulcahy said, because some sources will not or cannot pay the negotiated rate, but with more stringent University rules, it should perhaps be able to recover $20 million.

So the institutional "cost" per dollar of research is about 25 cents for every unrecovered F&A dollar.

Dr. Mulcahy next identified myths about F&A cost recovery; all of the following statements are false, he said.

-- F&A cost recovery from increased research represents a financial strategy to resolve the University's financial challenges.
-- The University recovers the negotiated F&A rate on all direct costs.
-- F&A waivers are approved as exceptional circumstances though a controlled process.
-- Conducting more research doesn't cost more since we already have the resources. (He said he hears this all the time, but it does cost more to do more.)
-- There is nothing the University can or need do to recover more of the legitimate costs of conducting research. (The fiscal times demand that everything possible be done to control costs.)

There are few ways to infuse more money into research, Dr. Mulcahy said, and two of them are to increase F&A recovery and to increase money from the commercialization of technology.

Another myth, Professor Cleary said, is F&A money generated in one unit helps to cover the costs of projects in another unit. That is a myth to this extent, Dr. Mulcahy said: Even if the unit recovered the negotiated rate, it would not cover all the costs of doing research. It is only possible to cover costs related to research, not to other parts of the University, so one cannot say that NO dollars ever went to another unit, because the funds are all pooled.

Professor Bearinger said there is a conundrum in that, while the intent and hope is that research funding to the University will double or more in the future, so too would the deficit resulting from unrecovered costs of administering research grants. If funding doubled, the current $41 million "deficit" would become an $82 million deficit. The question is, then, what is the message to faculty, particularly to new faculty? One hears that "researchers are costing the University money," but that is not the message that should be sent. There is a need to think about talking points with particularly consideration to incentives for new PIs. If one considers the 62% actual costs and the 51% negotiated rate, Professor Anderson said, some of the costs are offset by benefits—which must be real or the University would not pay the costs. There are benefits in standing, in ranking, etc.; the research is buying something the University is willing to pay for.

Dr. Mulcahy said that the University has three missions and it does not recover the full cost of any of them. It will not stop providing education. In doubling the research volume, it must be disciplined about accepting lower F&A rates. At one extreme is not allowing any variation from the rates; at the other is allowing great variation. The University has tended toward the latter end and needs to achieve a better balance.

1 comment:

  1. My (shorter) take on this:

    We are not going to grow out of the financial mess at the University of Minnesota by increasing Federal Grants.

    Dirty Little Secret Finally Acknowledged
    Research Funding From Outside Federal Grants
    Requires Additional Subsidy

    I've been harping on this point for, literally, years.

    For a little more, please see:

    Sad, indeed, that Dr. Mulcahy had to explain this to the President's executive team. That they did not know this already is part of the reason we are in the current mess.

    Leadership matters. Let's not make the same mistake twice.