A federal proposal would reduce research funding to the University of Michigan and other universities by slashing reimbursements for facilities and administrative costs (F&A, also called indirect costs or overhead), forcing universities to cut jobs and shift research portfolios, jeopardizing our research mission.

The White House proposal would impose a 10 percent cap on F&A cost reimbursements to the university’s National Institutes of Health grants. Currently, F&A costs are established in partnership with the federal government using long-existing guidelines that ensure accountability of all parties. The proposed cap on NIH reimbursements would result in about $92 million in lost funding to U-M.

Universities and the federal government have a long-standing and successful partnership that grew out of World War II. For decades, the federal government and America’s universities have been co-investors in prosperity, competitiveness and global leadership. The public derives outstanding value from the investment of its tax dollars in the NIH. The NIH budget represents just 0.16% of GDP or 0.8% of the federal budget.

Email to U-M faculty from university leaders (7/10/17)

Letter from President Schlissel to Secretary Tom Price and OMB Director Mick Mulvaney (6/15/17)

When the NIH awards a grant to a university, the total cost includes two components:

• Direct costs fund expenses that can be attributed to individual projects. Examples include salary support for research staff and students, benefits, supplies, equipment, travel, and publication costs.
• F&A costs support crucial infrastructure, facilities and administrative investments and are essential for the conduct of the funded research. F&A costs cannot be assigned to a single project because they are items like laboratory space, heat, lights, IT infrastructure, library collections, grant accounting, purchasing, journal subscriptions (electronic and print), animal care facilities, hazardous waste disposal, security, insurance, and the support staff required to ensure compliance with a complex array of federal and state regulations.

The White House proposal would impose a 10 percent cap on F&A cost reimbursements to the university’s NIH grants.

There is often a misconception that F&A costs do not directly support research. Characterizing F&A costs as “indirect” is imprecise. These vital funds are used to partially reimburse universities for investments that are essential to the support of quality research. The actual costs are much higher.

How U-M’s F&A reimbursements are set

In negotiating F&A reimbursement rates with the U.S. Department of Health and Human Services, U-M includes only those resources actually used to support the conduct of NIH funded research.

F&A costs are audited, and they are classified this way because they are difficult to attribute to one specific project (e.g. How much water did that experiment use?). They are based on an average of specified expenditures from all NIH funded projects at an institution and set in accordance with current federal guidelines. These are real, and audited, expenses incurred by the institution in doing NIH-related research.

There is no margin to F&A charges. In fact, institutions receive less in F&A reimbursement than they actually spend on F&A costs to support research. Universities assume the risk of these investments and must demonstrate that costs are eligible for reimbursement.

U-M’s current four-year F&A negotiated rate agreement enacted in 2016 for NIH grants is 55 percent for fiscal years 2017-18 and 56 percent for fiscal years 2019-20, representing a significant decrease relative to the university’s actual cost rate, which would be nearly 61 percent. Each percentage point associated with the on-campus organized research rate represents approximately $4 million in annual indirect cost recovery for the university.

U-M uses the same rigorous process when negotiating all F&A rates with our federal partners.

Independent analyses have demonstrated repeatedly that the federal government only partially reimburses universities for these expenses, many of which have been invested prior to the awarding of the grant. These are costs that the university would not incur if it were not a research-intensive institution. Federal data show that colleges and universities pay for more than 24 percent of total academic R&D funding from their own funds.

Non-federally supported research

Another question we are often asked is why we accept funding from foundations that do not pay the federal F&A rate? There are several explanations. For some foundations, what would normally be considered an F&A expense may be charged as a direct cost since foundations are not required to use federal rules. In other instances, university funds are used to cover these costs. Total research support from U.S. foundations at U-M last year was $26.3 million, or 1.8 percent of our research volume, so given the relatively smaller share of funding, we work to absorb unfunded costs to enable Michigan faculty to pursue these research opportunities. We would also note that U-M’s industry partners often reimburse F&A costs at or above the federal rate, as private sector partners often recognize the true cost of research.

Consequences of the proposal

If enacted, the White House proposal will threaten the University of Michigan’s ability to maintain what is now the second largest research portfolio amongst all universities in the United States.

If these reimbursements were to suddenly cease from the federal government, a partnership that formed the basis of a decades-long national commitment to research would be destroyed.

We would have no easy alternatives. It is not feasible to increase tuition or to use restricted purpose endowment funds to cover these costs. Almost every aspect of how our university supports research would be seriously limited.

Here are some of the consequences we have identified that apply to all research universities:

Americans will lose jobs in all 50 states

Most of the effect of the F&A cap will be on personnel. Universities lack resources to backfill lost federal support resulting in:

• Layoffs of human resources, accounting, purchasing, stockroom, delivery persons, janitors, maintenance personnel (electricians, plumbers, etc), security personnel, compliance monitors, etc.
• Subsequent layoffs among research faculty, lab staff, postdoctoral staff.
• Diminished size of PhD programs in affected areas.
• NIH dollars support jobs in all 50 states and cuts of this magnitude will have a measurable national effect.

America will lose its status as the world leader in fundamental research

The research portfolio of universities (and private research institutes) will be reconsidered. Priorities will be shifted to less-expensive research, rather than focusing on the most important problems or promising opportunities. Faculty imagination will be dampened and national and societal priorities will suffer.

The health and well-being of Americans will suffer

Universities will be less able to develop new medicines, medical devices, and treatments for diseases ranging from birth defects to Alzheimer’s. We will be more at risk in the next great pandemic (think AIDS, Ebola, SARS, Zika). Promising research in cancer treatments will go unsupported.

American infrastructure and competitiveness will suffer

Some buildings may be closed and others will accumulate deferred maintenance. Existing bonding repayment schedules and formulas will be threatened. American dominance is already slowly shrinking, as China’s skyrocketing investment in science over the last two decades begins to pay off. Chinese biomedical research teams now rank fourth in the world for total number of new discoveries published in six top-tier journals, and the country spent three-quarters what the U.S. spent on research and development during 2015

America’s future scientific leadership and economic competitiveness will be placed in doubt for generations to come

Cuts will destroy the pipeline of future innovations and discourage our most promising faculty members from pursuing research careers. Previous administrations of both parties have recognized the importance of long-term investments in the partnership between the NIH and research universities. President Ronald Reagan in 1988 called federal support of research “an indispensable investment in America’s future.” The next major new global industry (think biotechnology or semiconductors) will not arise in the United States and we will be put in the position of global follower rather than leader.