Gazette Q&A Hopkins to Educate Lawmakers on Perils of Indirect Cost Cap By Steve Libowitz Indirect cost reimbursements, which represent payments to universities for certain administrative and capital expenses related to federally sponsored research grants, have been under assault since alleged abuses emerged at Stanford University several years ago. To close perceived loopholes in the IDC system, the Office of Management and Budget last year implemented a 26 percent cap on administrative costs and put in motion a series of related actions. The 104th Congress is expected to hold hearings on the feasibility of an additional cap of 50 percent on all capital allocations. This proposal, which could save the federal government an estimated $250 to $300 million per year, would cost Hopkins approximately $26 million annually. Gazette editor Steve Libowitz recently spoke with senior vice president for administration Eugene Sunshine about this issue, the problems with a cap and how Hopkins is joining other major research universities to explain its implications and offer alternatives to Congress. Q: How much of an effect will the new Republican majority in Congress have regarding indirect cost recovery? A: The indirect costs reimbursement issue is not a Republican vs. Democratic issue. It's a sign of the times in the sense that everyone is searching for expenditure reductions, to fund tax cuts, pay for new program initiatives that somebody has on their plate or pay for deficit reduction. There's sort of a feeding frenzy now, a lot of which is certainly meritorious and certainly long overdue. Research universities don't want to be portrayed as anti-deficit reduction or anti-federal expenditure reduction, because we're not. The question is, in the case of indirect cost reimbursment, how do we achieve federal expenditure reduction without ruining the system, without being unfair to universities that have properly invested in the past, without casting a very cold chill over the prospect of institutions like Hopkins making additional research investments in facilities? That's really the question. Universities have to be prepared, like all other aspects of society right now, to do more with less and to sustain reductions. It's our responsibility now as a public citzen. I really believe that. The question is, how? Some legislators are trying to get savings out of indirect costs associated with federally sponsored research. We would argue very, very strongly that the way to do that is not with any kind of overall cap on reimbursement levels and not through any kind of overall percentage reduction of reimbursement rates. Both ways are very unfair and have very negative effects on an institution's willingness to invest in the future. Rather, we've worked hard with the Association of American Universities and federal representatives in the administration to develop an alternative. The savings from which, when combined with savings achieved in recent years by virtue of the 26 percent administrative cap already in place, will roughly equal the savings that the Congress projects would come from a 50 percent cap on capital allocations, about $250 to $300 million a year nationally. Q: What alternative are you proposing? A: What we've been working on is a benchmarking system that pertains to capital facilities. Basically, the benchmarking system says that the administration, working with the universities, will establish, for example, square footage allowances for each type of research. And so, for example, if the determined amount of square footage that's appropriate for a certain discipline of engineering research is a thousand square feet per researcher, and you build 1,200 square feet for that researcher, the government is not going to reimburse the costs associated with that extra 200 square feet. Q: Will it be difficult to come to some consensus among a wide range of institutions? A: Sure, it won't be easy. It's going to require quite a bit of give-and-take between the administration and the universities. It's certainly not ideal, from the point of view of the workload associated with developing it and other perspectives as well. It probably will cost us money, too, in the long run. On the other hand, it's a much more reasonable approach to squeezing additional savings out of overhead costs than arbitrary hatchet jobs, like a 50 percent overall cap. The problem with a cap is that the administrative costs of indirect cost recovery have already been capped. When you apply an overall cap at this point what you're really doing is capping the capital facilities component of indirect costs. What that does is specifically punish universities and colleges that have made the investments in capital facilities according to federal rules and programs and have every expectation of receiving reimbursements for fixed obligations--like for the bonds we have sold to finance the construction of buildings. If you arbitrarily cap the capital facilities reimbursement, what you've really done is say, we are going to shoot your horse in midstream. How you get to the other side of the stream is now your problem. For example, how you pay your fixed costs, notwithstanding past agreements, is your worry. Not only does that cast you into an extremely precarious financial situation right off the bat, but it surely casts a chill on your willingness to put additional capital money into expanding your research. If the federal government is no longer going to be a player, where is the money going to come from? Not from tuition, obviously. Q: Is the government morally obligated to support university-based research and to pay for the management and housing of these projects? A: It is a public policy issue whether the current system of reimbursing universities for capital facilities is continued with regard to future construction. It is a moral, or business, obligation to pay for commitments made under the existing ground rules. Understand that for many years, the national government has held that federally sponsored basic research is in the national interest, and universities have been a prime deliverer of that research. Universities have been responsive to federal policy. If the federal government does not want to be as directly involved in research, or required facilities, that's a decision that can be made for the future. But you can't have a policy that encourages and calls for the conduct of federal research by universities and then abandon them along the way. Q: Has this benchmark-ing system gained widespread acceptance by other research universities? A: It's hard to talk about a general consensus, because the administration's plan is still in development and is, therefore, not yet fully understood. Moreover, everyone will eventually have their own ideas. The financial situation of each university and how it paid for its facilities will sometimes drive them to different perceptions of the problem and to different solutions. Q: What else does the benchmarking proposal offer the government? A: Benchmarking really covers a multitude of areas, like operation and maintenance. The thing to keep in mind is the number we're looking for to be equivalent to the cap is only $250 to $300 million a year, and half of that was achieved by the 26 percent administrative cap. Therefore, we only need about $125 to $150 million annually to be squeezed out of the system in order to equal the savings imposed by an arbitrary cap. We're not thrilled, by any stretch, with the notion of adding additional layers of complexity to the rate negotiation process, but it is a far more fair and equitable system than what some are talking about now. The layers would be required, in all likelihood, to administer a benchmarking system. Q: Why is the cap idea so popular, seemingly in all sorts of market-driven businesses? A: I think it's because caps are easy to explain, easy to understand and their effects are easy to quantify. And when you are trying to save a lot of money in a short period of time, and you have a lot of people who weren't there for the discussions of policy implications about why things were done the way they were done, caps are a solution. With the indirect costs issue, I suspect some people are still angry about the alleged abuses that appeared in the media three or four years ago. That anger helps make a very misguided idea more attractive. Q: What is Hopkins' strategy for stemming this tide? A: We're doing what we do best: educating people. Along with the AAU and many of its members, we're talking to public policy- makers and those who influence policy-makers about these issues. This dialogue is nothing new, but, there is now more urgency to our efforts because resolving this issue is so important to Hopkins. Q: Why would the 50 percent overall cap cost Hopkins so much money? A: Simply because Hopkins has invested very heavily in research facilities in the last five to 10 years, and we do a large amount of federally sponsored research. Q: What is the timetable for the introduction of legislation that would cap indirect cost recovery? A: That's hard to know right now. It could surface in many forms in many subcommittees. So we must remain vigilant, and continuously talk to as many people as we can. We believe we have a very compelling message, and we are willing to take our share of the financial hurt necessitated by expenditure reduction. We are leaving no stone unturned in our efforts to educate policy-makers about the ramifications of this. Q: How confident are you that your efforts will get the intended response on the Hill? A: We feel we certainly have every opportunity to be successful, since we're getting into the process early. It's a matter of process, strategy and communication. We're trying to influence the outcome.
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