Appendix U

1/24/17

SENATE COMMITTEE ON RESEARCH

Report on the Penn State Facilities and Administration Rate

(Informational)

THE CHARGE

The Senate charged the Committee on Research with creating an information report benchmarking Penn State’s overhead rate (currently 57%) with peer institutions.

Questions to be addressed include:

  • At what point do these overhead costs become a limiting factor on research productivity and our competitiveness to secure grant funding?
  • Are there ways these overhead costs could be reduced, especially for young investigators?

BENCHMARKING

For FY 2017, facilities and administration (F&A) rates on federally funded grants across the Big 10 Academic Alliance (according to agreements posted on university websites) are as follows:

Big 10 SchoolPercentageEffective
Illinois58.6%expires on 6/30/19
Penn State57.2%expires on 6/30/17
Northwestern56.5%becomes 58% on 7/1/17
Indiana56%becomes 57.5% for 7/1/17-19
Michigan55%becomes 56% for 7/1/18-20
MSU55%expires 6/30/19
Rutgers55%2015 rate; presumably still in effect
Purdue55%expires 6/30/17
Maryland54%increases to 54.5% in FY 2018
Ohio State54%expired 6/30/16; presumably still in effect
Nebraska53.5%expires on 6/30/18
Wisconsin53%expires 6/30/17
Minnesota52%becomes 54% in FY 2018 and 54% in FY 2019
Iowa51%expired 6/30/16

According to the University of Cincinnati, in FY 2015 the average F&A rate among all research universities was around 53%, with private universities averaging about 7% higher and public universities around 3% lower than the average.  FY 2017 rates for selected private universities who rank in the top 20 nationally in research expenditures are as follows:  MIT 54.7%, Stanford 57%, Duke 59%, and Johns Hopkins 63%.

DEFINITIONS

As at every university, sponsored research projects conducted at Penn State have both “direct” and “indirect” costs.  “Direct costs” are those that can specifically and easily be identified with a particular project or activity and are allowable under the guidelines of the sponsoring organization.  “Indirect costs” (also known as “overhead” or “facilities and administration costs” [F&A]) are those incurred for common or joint objectives, or that cannot be specifically and easily identified with a particular sponsored project.  Such costs include building and equipment depreciation and use allowance; general administration; departmental administration; interest; operation and maintenance expenses; library expenses; and student administration and services expenses.  An example of an administrative cost might be a portion of the salary for a payroll clerk who processes biweekly and monthly payroll for an employee being paid from a grant, since a portion of that clerk’s time is indirectly benefiting the grant.  Most federal agencies and other sponsoring agencies pay the university for indirect costs in addition to the direct costs of a grant or contract award.

Indirect cost recovery is not income, but rather a reflection of the real cost of using the University’s facilities and administrative support that cannot be claimed as direct costs.  By collecting F&A from sponsors, Penn State recovers those costs.  Under guidelines established by the Office of Management and Budget (OMB), the federal government has established what costs may be charged as direct costs, and what is allowable as indirect costs.  (The guidelines are contained in 2 CFR 200, Appendix III.)

It is important to note that under these guidelines administrative costs are capped at 26%.  According to the OVPR this is several percentage points lower than actual administrative costs, particularly in light of increasing costs for compliance and reporting mandated by federal regulations.  As a result, Penn State and most (if not all) research university under-recover in the area of administrative costs.

THE F&A RATE SETTING PROCESS

F&A rates on federally funded grants and contracts are set for each university by a designated “cognizant agency.”  The cognizant agency is the entity that provides the largest share of federal dollars toward a given university’s sponsored research.  That agency represents all others in establishing the university’s F&A rate.  Although the National Institutes of Health serves in this role for many of our peer institutions, for Penn State the cognizant agency is the Office of Naval Research (ONR).  (Among our Big 10 peers, Illinois is under the purview of ONR.)  Penn State provides data and recommendations based on those data, which ONR considers in setting the rate.  Although rate setting is often described as a “negotiation,” it is ONR that establishes the rate.

THE RECENT SIGNIFICANT F&A RATE INCREASE AT PENN STATE

In 2016, Penn State experienced a substantial F&A rate increase from 51.9% to 57.2%, causing concern among faculty and staff engaged in funded research.  This significant jump was caused by a change in 2011 in the implementation of policy at ONR to address over or under recovery.  Prior to that time, ONR established a series of pre-determined rates for Penn State that were in place for three-year periods, after which data were re-examined and a new set of rates were established for the next three-year period.  Since these rates were based on estimates of future activity, over recovery was absorbed by the federal government and under recovery by the university.  In 2012, ONR shifted to a “fixed with carry forward” approach for Penn State.  This means that a rate is set annually for the upcoming year and, once determined, any over- or under-recovery is incorporated and carried forward into the following year’s rate.  In 2014, ONR questioned Penn State’s projection for a flat/shrinking “base” and increasing facility costs and held the rates at 49.5%, in spite of objections.  The agency was then slow to determine the 2015 rate, establishing at first a “provisional” rate of 50.7% and then finally fixing it in June 2015 at 51.9%.  At that time, our rate was the second lowest in the Big 10 Academic Alliance.  In late August 2015, ONR established a provisional rate of 57.2% for FY 2016, making it the second highest among our Big 10 peers.  This rate includes a substantial carry forward from under-recovery that would not have been necessary had ONR accepted Penn State’s 2014 projections.

DISTRIBUTION OF F&A RECOVERY AT PENN STATE

Of the F&A dollars received by Penn State, 12% are allocated to colleges based on who is involved with a sponsored project as measured by the assignment of credit submitted by the primary investigator(s).  (That allocation percentage has been in place for some time, and it is unknown how closely it corresponds to actual costs at the college level.)  This allocation is known as “Research Incentive Funds” (RIF).  Each college follows its own procedure for keeping some RIF funds cover centralized costs and distributing some funds to units, who in turn have their own policies for keeping some funds at the unit level and distributing some to investigators engaged in sponsored research.  The University Planning Committee undertakes a periodic report detailing how each college handles RIF funds.

Another part of RIF is the 1.5% allocation to the OVPR, which uses these funds for interdisciplinary initiatives.*  The remaining 86.5% of F&A dollars recovered are kept centrally to defray indirect costs incurred by the university-wide research enterprise.  At present, the university provides no public information regarding the breakdown of how these funds are spent.

*Note: The university-wide interdisciplinary institutes that report to the OVPR [Huck, MRI, ICS, IEE, and SSRI] do not receive budget allocations from F&A recovery, but rather are supported by general funds.

IS THE CURRENT PENN STATE RATE AN IMPEDIMENT TO RESEARCH?

The short answer is, “No.”  While on the high end for top-tier public research universities, the current Penn State F&A rate is in line with that of peer institutions.  As noted above, university administrators state that the current rate creates a situation in which the university under-recovers indirect costs incurred by the university’s research enterprise.

It is important to acknowledge that any increase in the F&A rate proportionally reduces direct costs that can be budgeted into capped funding opportunities.  At the same time, a higher F&A rate equates to an increase in the funds available to cover indirect costs, creating and supporting services and infrastructure that serves investigators.

Faculty who have served on review panels acknowledge that funding won or lost on the quality of the proposal, not on the F&A rate.

RECOMMENDATION: GREATER TRANSPARENCY

At present, the OVPR has a “PSU F&A FAQ” available on its website (research.psu.edu/sites/default/files/FA%20FAQ%20%282016-11-22%29.pdf).  Additional information is contained in Penn State Policy RA-30: “Facilities and Administrative (F&A) Costs” (guru.psu.edu/policies/RA30.html).

Although these are important and necessary resources aimed at the research community—and grants administrators in particular—the Committee on Research urges the OVPR to consider additional communication tools that would help broadly disseminate information to the Penn State community with the aim of dispelling misperceptions about F&A, including how the rate is set and how that money is used.  Making such resources available, and updating them regularly, would alleviate the current necessity of explaining these issues on an annual basis to the University Senate and others.

The model that the committee recommends is one based on the University of Minnesota’s “Facilities & Administrative Costs: What Faculty and Staff Need to Know,” (ospa.umn.edu/forms/rates/documents/FA_Brochure_2016.pdf) and (ospa.umn.edu/forms/documents/F&A_factsheet.pdf).  The Minnesota document includes a detailed breakdown of actual and negotiated F&A costs.  The Penn State OVPR and Office of the Controller have agreed to take a similar approach, and work is well underway on creating a similar document with the Committee’s input.

The Committee urges the OVPR to make public its process for spending the 1.5% of F&A returns allocated for interdisciplinary initiatives, as well as an annual list of initiatives supported in this manner.

In a similar vein, the Committee urges colleges and departments to communicate detailed information to faculty and staff regarding the allocation of RIF funds.  Moreover, we urge colleges and departments to examine their current practices and to consider ways that the “incentive” in RIF can be best actualized in light of their respective research cultures and budgetary climates.

LOOKING AHEAD

Although the Committee concluded that the current F&A rate is not a significant impediment to research productivity, it did discuss other possible impediments.  One issue that emerged as an item of potential future study was graduate tuition as a significant cost in relation to funded research.  The Committee would be happy to examine this issue, should the Senate wish it do so.

SENATE COMMITTEE ON RESEARCH

  • Ali Borhan
  • Yohchia Frank Chen
  • Alison Franklin
  • Andrew Geller
  • Michael Hickner
  • Kathleen Hodgdon
  • Janet Hughes
  • Andrey Krasilnikov
  • Derek Kreager
  • Todd LaJeunesse
  • Joshua Lambert
  • George Moldovan
  • Sudarshan Nelatury
  • Rogerio Neves, Vice Chair
  • Kevin Reuning
  • Andrew Schulz, Chair
  • Alok Sinha
  • Mort Webster