Fend off US bid to cut overhead payments
WASHINGTON — Harvard, MIT, and a coalition of other powerhouse research institutions have thwarted a reform proposal by the Obama administration to slash the amount of government research money each school receives for overhead costs.
The result is that about $10 billion a year, roughly a quarter of the nation’s university research budget, will continue to be channeled into such things as administrative salaries and building depreciation instead of directly into scientific studies.
Critics say the system lacks accountability, unfairly rewards the biggest schools, and is an ineffective use of taxpayer research dollars in an era of fiscal austerity.
Harvard, for example, gets 69 percent in extra funding, among the highest in the nation and well above the national average of 52 percent.
“Harvard is taking the government to the cleaners,” said Richard Vedder, director of the Washington-based Center for College Affordability and an economics professor at Ohio University, a public college that receives overhead compensation at the rate of 48.5 percent.
“The amount of taxpayer money that goes to support these private schools is immense, and of course, Boston is at the epicenter of this. The federal government should not be in the business of subsidizing building construction or administrative aggrandizement.”
All research institutions get additional money tacked on to federal science and medical grants to help pay for general overhead. But federal rules allow institutions to deposit those payments into their general budgets, with no requirement they be used to directly support scientific endeavors.
The Obama administration sought to change the system last year, saying it was considering a flat rate, at an unspecified level, for all institutions. But after successful lobbying by large universities to protect their bigger share of the pie, the administration abandoned the effort.
Instead, it now suggests institutions should be given a pathway to lock in their existing, higher reimbursement rates for up to four years.
Harvard and other university officials argue that the overhead rates they have negotiated with government agencies reflect real costs to the university, and do not come close to covering the actual amounts that universities spend on building maintenance, staff, and energy costs in pursuit of groundbreaking research.
“Capping rates basically means you’re not going to reflect the actual cost of the research,” said Kevin Casey, an associate vice president who oversees Harvard’s government relations in Washington. “If the government had to create its own facilities, hire the researchers, staff and train students, it would be a more costly venture than to purchase research where it is now.”
Officials from the Office of Management and Budget would not speak on the record about the ongoing rule-making process, or the failure of the overhaul attempt.
“It was shot down big-time,” said a Health and Human Services official who is not authorized to speak to the media. “Universities were too powerful. In a nutshell, the lobbyists killed it.”
Demands for a fairer system have been issued for years, the inequities cited in numerous reports. Vedder and other critics contend the varying overhead reimbursement rates contribute to a widening gap between rich and poor schools. And smaller, less prestigious schools around the country are tired of being shortchanged, particularly when the prime beneficiaries are extremely wealthy schools like Harvard, which has a $30.7 billion endowment.
Bin Guo, a cancer researcher at North Dakota State University who wrote to the government in support of an overhaul, said he supports a flat rate set between 40 and 50 percent. North Dakota State receives a 44.5 percent overhead rate.
“This will eliminate the waste of federal funds at many large institutions that spend the indirect cost on nonresearch-related programs,” Guo said. “If the NIH can save this extra money, they can support more research grants.”
Harvard received $656 million last year in federal research funding, and about $175 million of that was overhead compensation. Harvard maintains that its rate is high because the type of research that is done there requires high-tech facilities and equipment, in addition to being located in a region with high labor and construction costs.
At Boston University, the overhead rate is 63.7 percent, compared with 56 percent at MIT, 53.5 percent at Tufts University, and 55.5 percent at Northeastern.
Overhead rates are calculated based on a complex formula that takes into account an institution’s historical costs for construction, maintenance, utilities, and administration.
The steady stream of unrestricted federal subsidies has lead to an competition with colleges scrambling to build state-of-the-art labs, which only serves to bump overhead rates even higher, critics say.
“The fallacy of this formula is that the more you spend, the more you get. Where’s the incentive to have linoleum floors instead of marble?” said Wick Sloane, an English teacher at Bunker Hill Community College who coauthored a 2006 paper for The Center for College Affordability & Productivity that advocated for open debate on the rates.
Competition is fierce. A cottage industry of consultants, accountants, and attorneys has exploded to help schools maximize the amount of money that can be squeezed from the federal government. Some smaller institutions lacking the resources to fully engage in the tedious negotiations favor a flat rate.
A complete picture of the varied rates and competitive environment is difficult to capture. A government database of universities’ negotiated rates is shielded from the public for “proprietary” reasons, even though most schools post their rates on their websites.
Even the Washington-based Council on Governmental Relations, which represents about 200 research universities in their dealings with federal regulations related to research funding, has stopped publishing the rates in their annual survey, deeming the information too sensitive.
“Our only concern is whether the research funding agencies and the federal government pays its fair share,” said David Kennedy, director of costing policy and studies at the Council on Governmental Relations.
The White House did not specify a number for a flat rate, but some proponents suggested 50 percent, near the national average, as a cap. A cap at that level would cost Harvard about $47 million a year in lost government payments.
The Health and Human Services official said another option being considered was lowering every school’s reimbursement by 3 percentage points, or paying schools 95 percent of their current negotiated rates.
“The flat rate was a nonstarter. It was all about saving the government money, and it wasn’t about helping the universities,” said Tobin Smith, vice president for policy at the Association of American Universities, which spent $108,000 lobbying on an array of government issues last year. The exclusive 113-year-old organization represents 60 of the nation’s leading research universities, including Harvard, MIT, Brandeis, and Boston University.
Dozens of universities, including MIT, submitted letters voicing their opposition to a flat rate.
Universities and the federal government became partners in research after World War II. MIT was one of the biggest beneficiaries. The National Institutes of Health initially set the overhead reimbursement rate at 8 percent and it eventually rose to 20 percent for all universities. In 1965, Congress permitted schools to directly negotiate their rates with the federal government, setting ballooning rates on their course.
Overhead cost rates came under congressional scrutiny in 1992, when federal auditors discovered that dozens of universities, including Harvard and MIT, had inappropriately billed the government for items unrelated to research such as sports tickets, parties, even a university yacht. The universities ended up reimbursing the government a portion of those costs. The rules about how such rates are calculated were subsequently tightened, and some universities’ rates, which once soared into the 90 percent range, were lowered.
“Overhead rates dropped all across the country,” said Bruce Chafin, a former congressional investigator who investigated the inappropriate billing, “and we’re still getting the same research.’’
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