Johns Hopkins Gazette: January 30, 1995

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
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

Q:   Why would the 50 percent overall cap cost Hopkins so much
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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