Why do many public universities obfuscate the costs of doing externally sponsored research?

The simple point of this blog is that public universities rely on undergraduate tuition and state dollars, often allocated based on some measure of student enrollment, to support the research operation, including externally supported grants. The universities I have worked in have never made that clear to their stakeholders.

University research has a complex funding model.   The thoughts in this essay are based on my 10 years a senior research officer in a soft money research institute and two AAU research universities. (perhaps some of my assumptions here are my misunderstandings or their basis may have changed- so if you know I am wrong, just let me know).  I think, in general, that universities have intentionally obfuscated the allocation of research costs other than in the universities with very clear and transparent RCM (Responsibility Centered Management) models. I have never worked in a school with an RCM model.

Public universities have three main sources of funding to run the university: State funds; Tuition; and Philanthropy/Endowments. Some universities, but few, get positive net revenue from successfully commercializing intellectual property

State funds in many places, including my last two institutions, are allocated based on some measure of student enrollment, generally focused on undergraduates. Tuition is marketed as specifically supporting the costs of education. Philanthropy/Endowments can be used for multiple purposes, depending on the donor. Many support research, but rarely the costs of having a research operation. Often, larger gifts, require the university to invest significant amount of its resources to meet the mission of the gift.  Land-grant universities receive some funding for their applied research mission through experiment stations, generally supporting mission-based research in Agriculture, but other disciplines, too..

External research grants bring in sizeable revenue specifically aimed at meeting deliverables related to a funded project. In general, 75-80% of the funds gained from external research grants support people. Support for people includes salary and benefits to support principal and co-principal investigators (usually in the summer, in non-medical areas,), graduate students stipend and tuition, post docs, research technicians, undergraduate researchers, etc. Direct costs on grants may indirectly support other university salaries through cost associated with using shared facilities or other research services that bill for service. Indirect costs from external grants support a number of people who have administrative or facilities roles related to research.

Higher Ed has made strong arguments that, since externally supported research pays people in the community, and those people spend their salaries in the economy, these two facts alone represent research as being a huge economic driver in the community, particularly when you add in the value of research that is commercialized and the creation of advanced facilities and a skilled workforce. These arguments are true. And, we know that the presence of large university research operations drove the development of innovation centers across the country- e.g., Boston, Research Triangle, San Diego, and Austin are great examples.

One question, which is not always answered in economic development reports, is whether those benefits, particularly of paying people, would be the same, better, or worse, if the same amount of federal money came into communities to support other initiatives.

Nonetheless, despite the positive news about research's impact on the economy, research institutions generally lose money on research- at least that is true without factoring indirect effects like increasing an institution's reputation, attracting philanthropic funds, etc..  How is that possible?

1. University research requires substantial indirect costs that are usually not included in state allocations or explicitly  included in tuition calculations. For example, receiving external funding through grants and contracts requires a great deal of administrative oversight to be compliant with contract and grant terms and federal accounting regulations. Furthermore, universities have growing compliance responsibilities in accounting regulations, but also in services like managing overseeing human subjects in research, the use of animals in research, research misconduct, bio and chemical safety, conflicts of interests , export control, etc..  Universities have to carefully document these costs.

2. Universities take on substantial costs for the operation and maintenance of research facilities. These include depreciation of research space, debt service for research space, utilities and renovation of research space, purchase of research equipment, etc.  Universities have to document that cost.

3. Most external funding for universities comes from federal sources.  Universities negotiate indirect costs with their cognizant federal agency that determines the rate at which universities can recover these costs. The administrative costs charged to a federal grant are capped at 26% of direct costs, even though administrative costs keep rising as new compliance rules are put in place. Depending on the university, the costs associated with facilities usually range from 20% to 40% of direct costs for public universities (toward the lower end of that range in universities that I have worked). 

4. When I attended an  AAU meeting about a decade ago, I asked the group of research officers if any of their universities had calculated their administrative costs for research at or below the 26% cap.  Not a single research officer raised their hand. At that time, all of the universities present at the meeting calculated research-related administrative costs to be 30-35% of direct costs.  This means that universities lose five to nine cents on every dollar of research. For a university with several hundred million dollars of sponsored research, that number is not trivial.

5. Federal agencies rarely accept the university's calculation of facilities costs. For example, when I was VPR at one institution, our calculation was reduced by four cents on the dollar by the cognizant agency.  So, adding the two together, a university starts out losing 10 cents or so on every dollar.

6. There are many sponsors that will not pay the full federally negotiated federal rate. For example, USDA grants are capped at around 22% (my guess is because of their history in supporting research operations in experiment stations).  Many foundations will not pay any indirect costs, or perhaps 10%.  Sometimes the university purposefully uses the indirect costs as a cost share when grants and contracts require a cost match. Some industry sponsors will actually pay the full rate (including costs that the federal government did not allow), but many try to negotiate lower indirect cost payments.

7.  The net result is that the effective rate of the reimbursement of indirect costs was around 15%-20% of direct costs in some institutions where I worked, even when the calculated rate accepted for federal grants was 50-55%

8. Taking into account that the federal negotiated rates already do not cover the full administrative or facilities costs (my estimate was a loss of ten cents on the dollar - that might be low), with an effective rate that is 30-40 cents on the dollar less than calculated rate means that universities lose about 40-50 cents on the dollar in paying for administrative and facilities costs of research.

9.  A cost that is rarely considered in the cost of research is faculty time.  Faculty in a research university (outside of a medical school) generally have a workload that is proportioned between research, teaching in service with all of their academic year time paid by the university.  Research workloads are usually assigned between 40-60% of a faculty member's time.  Some sponsors, e.g, the National Science Foundation, will not pay for the salary of university faculty during the academic year.  Other sponsors, such as NIH, will pay academic year salary.  In non-medical schools, the salary that a sponsor will pay a faculty member during the academic year is often used to "buy-out"  the teaching responsibilities of faculty members (not their research time), so does not reduce the amount a university is paying for their research time, and the saved funds have to be used to find someone else to teach courses.  If a university has 2,000 tenure-track faculty, with an average of 40% of their workload devoted to research, at an average salary/benefits of $100,000, it would be a cost of $80,000,00 dollars annually on top of loss of 50% on the dollar on externally supported research.

10. Furthermore, universities often allocate funds proportionate to the amount of facilities and administrative costs that are recovered to support research efforts of departments and principal investigators- drawing more funds away from supporting research administration and facilities.

11. So, a public institution with 2,000 tenure-track faculty and a $400,000,000 of annual direct costs of external research, not including how philanthropic and endowed funds are use to support research, or including net positive income from commercialization, would have the following high level calculation of cost.

Facilities and administrative costs based on negotiation with the federal government at 50% of direct costs would equal $200,000,000.

Assuming the effective indirect cost rate is 25% instead of 50% would mean that only $100,000,00 of facilities and administrative costs would be recovered. That would lead to a loss of  $100,000,000 (or you can think that the university has to pay $100,000,000 in unrestricted dollars to get $400,000,000 million in research dollars restricted to research). If you add the $0.10 per dollar that is lost by the negotiated F&A rate not recovering the full costs, another $40,000,000 would be added. Additionally, if one wants to include the costs of faculty research time, that would add another $80,000,000.  So, the costs of research to this hypothetical university  would be $220,000,000 annually

12. How does the university pay this $220,000,000?  First, state funds may include some portion of funds to support research, or may not. Again, in the universities where I was provost, there was no specific state allocation for research, but some public universities do get research directed funds from the State. Second, some of the costs of faculty time and facilities can be covered from philanthropic funds, but that has not been a huge amount where I have worked, except in one private university (but that university had no state funds). Usually philanthropic funds are additive and aren't aimed at base operations.  If technology commercialization efforts are successful, net positive revenue can help reduce the annual cost for research, but only a relatively small number of universities receive enough revenue from commercialization to pay base research costs.. 

So, in general, the a sizeable amount of funds to support research administration, research facilities, and faculty time allocated to research has to come from state funds, that were usually calculated based on enrollment, and from tuition dollars.  In two previous institutions, during the period between 2000-2010, the costs of education were paid 2/3 by state and 1/3 by students in 2000, but were completely reversed (students 2/3, state 1/3) in 2010. That is a national trend.

Thus, the elephant in the room that is rarely talked about is that research universities end up needing to fund the research operation through tuition (and research is one major driver of increases in tuition) and often do so by teaching large introductory classes with several hundred students, with low paid non tenure track faculty. Most of these courses are associated with general education requirements.

13. The costs of research are often built into student tuition revenue.  Some institutions  will argue that is a good thing (as does my friend who commented below) and is worth the extra costs- because getting undergraduates engaged in research improves the quality of education (it does!). And, that faculty engaged in research are better teachers (the data I have seen shows little evidence for that, but most of the best teachers I know are active researchers- as are the worst teachers I know).  Having been an advocate for undergraduate research and bringing research into the classroom, I can't really disagree.  And, research is critical to graduate programs- you can't have PhD programs without active research.  But, that isn't the point.  In the end, universities have a limited amount of money to meet the missions of student learning, research (including scholarship and creative activities) and community engagement.  How money is allocated to meet these mission should be clear, especially in public institutions, as should it be clear in every other function.

I am not trying to argue that research is not a benefit to students and to the community. It is!  But, it really bothers me that, in general, universities do not clearly explain how they budget for the costs of research, and how much they decided to charge all students for the benefit of being in a research university.  I have not been in a university that has made the way research infrastructure is funded transparent to students or faculty.

 At one university where I served as dean, the idea that undergraduates should pay for research was made very clear by dean of graduate/professional school.  I remember a conversation with a medical school dean who demanded at an executive team meeting that undergraduate tuition needed to be raised to provide more support research in the medical school. In discussing this with senior admin colleagues from other institutions, the reaction was "we all do that."

14.  I will admit that this causes a mathematical paradox for me.  If universities lose so much money ($220,000,000 in my hypothetical scenario of university with $400M for direct costs of sponsored research) in supporting an externally funded research program, why don't the biggest research universities go broke?  It is even more perplexing, because I would argue that public universities with the largest externally supported research programs, are probably the most financially stable of public institutions.  Some of that is the reputation that is built on a strong research enterprise that attract students and philanthropic dollars. Some of it is tuition revenue recovered from graduate programs related to research.  Some is related to the large size of many of those universities.  But, honestly, I am not sure.  Every time I play this out in my head, I tend to go down a path leading to a community college budget model. And, their budget models are not very stable.

15. Universities I am familiar with tend to obfuscate the cost of research when discussing the great research momentum to all of its stakeholders including students, faculty, staff, alumni, boards, donors, legislators and the community.. That may happen because the way research is funded is so complicated that very few people understand how research costs are calculated and funded, especially in universities with an incremental budget model. In my experience, budgets in incremental models include facilities and administration cost recovery as revenue, but do not allocate that revenue specifically to research expenses, and may not specifically identify the difference between indirect research costs vs the actual recovery of facilities and administrative costs, and how those costs are subsidized by other sources of revenue. Also, high level budges I am familiar with  include faculty salary as one large expense (or broken out between tenured/tenure track, and non-tenured faculty), and not broken out by teaching, research and service work efforts.  Many faculty even think that the facilities and administration charges on federal research grants is equivalent to a management fee or "profit", as opposed to reimbursing for carefully determined costs.  I can't tell you how many discussions I have been in as a faculty member 30 years ago and now, where faculty feel that F&A is the university making profit on their hard work and that more F&A recovery should be directed to them to support their research programs. As many of you know, a few years ago, some faculty went directly to their program officers in DoD conveying that universities need to return more recovered F&A to faculty. That led to serious conversations on the Hill of reducing F&A recovery to 10% in DoD grants, since the conclusion was that if universities are giving away recovered F&A to faculty, then they clearly don't need it to support the administrative and facilities cost of research.

I feel like integrity/honestly/transparency should be a core value of every university. So, when we celebrate great momentum in research funding, we should also discuss the costs that come along with that, and how the university pays them. Doing so says nothing about the value of research- in fact if a university decides to cover research costs on the order of $200,000,000 that is a significant statement that research is important.  It will be uncomfortable to openly talk about who pays for faculty research time and the deficit in facilities and administrative costs, but that doesn't mean it shouldn't be talked about.

On a final note, it is not as if at least some politicians don't know at some level the challenges in supporting a research university. A few years ago, former Governor of Utah, Michael Levitt, came to talk to the APLU provosts.  At some point in the conversation he said, paraphrased, "It is not a secret that universities pay for research through tuition credit hours accumulated by teaching large gen ed classes with low paid faculty members." This governor will also be one of the first to say the tremendous role that university research played in developing Salt Lake City as an innovation hub.  I wish everyone in the university understood the costs and benefits with data and then could effectively make arguments that are not anecdotal.

P.S. I agree with most of the points made in the first comment below.  My only addendum is that somebody has to pay for it- and to ask who should that be.  Research sponsors? State? Tuition in general? Fees on students who take advantage of research opportunities? Philanthropy? If it is tuition in general, shouldn't students know what in general they are paying for? I mean many of us with liberal politics (including me) might feel pretty guilty if some proportion of students are underwater in student debt because their tuition was raised in part to fund research activities in a medical school, while they experienced  increased class sizes because of faculty losses or hiring freezes.