House Science Committee Delves into Research Overhead Costs

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Publication date: 
6 June 2017
Number: 
74

In late May, the House Science Committee held a hearing to explore federal policies for funding the costs of research overhead, focusing on the National Science Foundation. The subject has come to the fore in the wake of the Trump administration’s proposal to cap overhead reimbursement on National Institutes of Health grants.

On May 24, the Research & Technology and Oversight subcommittees of the House Science Committee held a joint hearing to examine the use of federal grants to fund the overhead costs of research, also known as indirect costs. In an opening statement, Committee Chair Lamar Smith (R-TX) argued the skeptic’s perspective:

Ongoing indirect costs consume a larger and larger share of funds for scientific research and many universities are pressing to raise indirect costs even higher. … There is no question that there are legitimate costs associated with carrying out the best research in the world. The question is, are the taxpayers paying for these costs in an efficient and transparent manner, or are we unnecessarily subsidizing excess, bureaucracy, and waste?

On the whole, though, committee members from both parties appeared more interested in gathering information from the hearing’s witness panel than in championing any particular conclusions.

Witnesses offer differing perspectives on overhead

At the hearing, only one witness condemned current overhead funding policies. Richard Vedder, a retired economics professor and director of the Center for College Affordability and Productivity, argued that universities charge excessive rates and funnel the funds into padded bureaucracies, lavish facilities, and “kickbacks” to research groups. He also claimed that overhead funding exacerbates the division between wealthy and cash-strapped institutions. He advocated a capped reimbursement rate and preferential treatment for grant applicants offering a lower rate.

Two other witnesses testified that levels of federal funding for overhead are appropriate. William Bell, the director of the National Science Foundation’s Division of Institution and Award Support, cited studies concluding that universities lose more money than they recoup through federal grant funding. In his written testimony, he pointed out, “If the government does not pay for all costs associated with federally funded research, other entities will have to bear them, in effect subsidizing the federal government.”

James Luther, Duke University’s associate vice president of finance and chairman of the board for the Council on Governmental Relations, a research university association, concurred that universities supplement grant funding of overhead costs with their own resources. He further argued that the burden of reducing overhead payments would fall most heavily on the institutions least able to bear it financially.

The final witness, John Neumann of the Government Accountability Office, reported that GAO has not yet completed an ongoing study of indirect costs funded by NSF. He noted that indirect costs have varied over time between 16 and 24 percent of total award costs, and, in his written testimony, added that expenditures do appear to have “generally increased” as a percentage of expenditure on grants since 2010. However, he was not prepared to point to specific causes for the recent upward trend.

overhead-gao-trends.jpg

A GAO chart showing trends in the amounts and percentages of award funding that NSF expends on indirect costs.

A GAO chart showing trends in the amounts and percentages of award funding that NSF expends on indirect costs. Click to enlarge.

(Image credit – GAO)

Public domain

Nuances of overhead administration explored

The committee members present for the hearing were engaged with what can be a dry subject, asking a range of questions about why overhead is administered in the way that it is and about the advantages and disadvantages of possible alternatives.

In her opening statement, Research & Technology Subcommittee Chair Barbara Comstock (R-VA) linked the overhead issue to the committee’s work on easing the burden of research regulations, remarking, “As we move forward with reforming regulations, it is important to look at whether or not there are specific opportunities to streamline overhead costs as well, so that more money can go directly into research.” The subcommittee’s ranking member, Dan Lipinski (D-IL), has also been active in research regulation reform and expressed an interest in addressing the administrative burden of grants as a component of indirect costs.

Luther testified that universities often run up against the cap that has been in place since 1991 that limits the amount they can recover for administrative costs to 26 percent of a grant’s direct costs. For this reason, he said, universities themselves must bear the burden of compliance with new regulations, which he reported arrive “at the rate of about six or so a year.”

Several committee members asked about differences in the overhead rates funded by the federal government versus those funded by states and philanthropic foundations as well as those funded through grants in other countries. They also asked about differences between the rates applied to grants to universities versus those applied to nonprofit organizations and such federally supported institutions as national labs.

overhead-gao-institution-type.jpg

A GAO chart showing differences in the average percentage of an award budgeted for indirect costs for different kinds of institutions receiving NSF grants.

A GAO chart showing differences in the average percentage of an award budgeted for indirect costs for different kinds of institutions receiving NSF grants. Note that rates for universities are negotiated through either the National Institutes of Health or the Office of Naval Research and that budgeted rates are often below negotiated rates due to certain costs that must be excluded. Click to enlarge.

(Image credit – GAO).

Public domain

Bell and Luther noted that institutions’ negotiated reimbursement rates vary based on the kinds of research they conduct, their geographic location, and differences in the rules governing what sorts of institutions may be reimbursed for what sorts of costs. Luther noted, for instance, that federal grants typically reimburse universities for indirect costs at a rate well below the negotiated rate because many indirect costs are not reimbursable on any given grant — a condition that would not apply with a federal contractor’s bid or to a philanthropic grant. He also noted that universities typically accept philanthropic grants, which tend to be smaller and come with their own restrictions, “in a very strategic and focused manner.”

Overhead a hot topic in wake of Trump budget

Overhead has recently become a widely discussed topic in science policy following the Trump administration’s proposal to cut the National Institutes of Health budget by 22 percent and to cap reimbursements for indirect costs on grants at 10 percent of their total budgeted cost.

In a written statement, the Science Committee’s ranking member, Eddie Bernice Johnson (D-TX), warned that the Trump administration could similarly try to cap indirect cost reimbursements to pay for funding cuts at NSF (which, unlike NIH, is under the committee’s jurisdiction). She remarked,

This administration is assuming they can cut indirect cost reimbursements without doing any harm to our nation’s great research universities or to U.S. leadership in science and technology. The evidence simply does not support that assumption.

She also noted that state support for public universities has declined, providing them with fewer resources with which to build up their research capabilities. She argued that reducing federal support for state universities’ overhead “would do immediate and lasting damage to the research programs at our nation’s great public institutions.”

During the hearing committee members from both parties expressed broad support for federal funding of overhead while acknowledging the need for efficiency and oversight. No committee member definitively advocated decreasing the amount the federal government expends on overhead or suggested specific changes in policy.

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