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Defense Department pays, and we are on the better side of it. So our Department is able to negotiate better rates.

The difficulty I have always had is that it seems to be an odd way to do business, and there must be a better way in which we can do business. For that reason, there are some alternatives or approaches that could be considered, and I would be pleased to discuss them if you like.

WAYS OF MANAGING INDIRECT COSTS Senator HARKIN. You just left me hanging there. You said there must be better ways of doing business. What are the possible ways?

Mr. KUSSEROW. There are some options, I think, that are available. The problem is that, over the years as I have tried to work with these options, they have been kind of elusive when trying to affect them. As we have looked back over the years, 20, 30, or 40 years, maybe the number of research dollars has gone up. But if you look at the percentages of the total pot, you see that the same schools are still getting about the same percentage. So why do we not just block grant those schools and say, "OK, here is a block grant; you get this much in research dollars and you work out what you want for direct or indirect costs." That would be one possibility.

Another idea is this. There is a built-in tension in the research community, Mr. Chairman, between the business officers at the universities who are most interested in getting as much money as they can for indirect costs, and the principal investigators who are engaged in the research. But somehow we end up being the ones trying to decide how much money should go this way versus how much should go that way..

So one possibility might be to award money to the principal investigator. That is, in fact, the way it happens most of the time-you do not give money to the university, you give it to some researcher who has some standing, who has a methodology and approach to a particular problem that we think is worthwhile researching. But perhaps we could give the entire pot, 100 percent, to the principal investigator and say, "OK, here is your money, go find a place to do the research.” Then they could go to the university and fight it out with the business officers as to how much should be direct or indirect.

I kind of like that approach because it lets the people really fight for it. Say, “Here is the money, fight for it." Perhaps that might be a way to go. Of course, in each one of these areas, every time you come up with a good idea there are also problems on the other side.

Another approach, whether in totality or in part, is go back to the way it used to be. Up until the mid-1980's there was a provision in which we looked to the universities to cost share the research. In other words, we will put up some money for this research if they want to put up some money for it, and perhaps we can get them to contribute.

Somewhere along the line, though, that method was done away with. Maybe we might want to look back and see whether we want to reinstitute that, or even mandate it.

Senator HARKIN. Excuse me for interrupting. You said that was recently?

Mr. KUSSEROW. In 1984, 1985, sometime around then.

Senator HARKIN. So we had this cost share, and then it was dropped?

Mr. KUSSEROW. There were problems with it. But I think it is something where the issue could be revisited, and maybe we can see whether something like it might be reinstituted. Maybe we could file off some of the rough edges of the original idea.

INDIRECT COST CAPS Senator HARKIN. I just asked my staff to go back and get me information on it. If you have any

Mr. KUSSEROW. I would be pleased to work with your staff on that, Mr. Chairman.

Another thing might be if you were to look at the whole area of developing a cap for these indirect cost rates. That might be another option. · Senator HARKIN. Has there ever been a cap in the past?

Mr. KUSSEROW. Yes, there has been, but the cap was very high. It is a controversial issue. It would have to be done with some real foresight if you wanted to avoid problems. It would depend on what the purpose of the cap would be.

If you want to put a cap on to generate money-in other words, to save money for the taxpayers and bank it away—that is probably a lot more politically difficult to do than the alternative would be. That is, to take that money from the indirect costs that would be saved and recycle it as additional research grants.

For example, the average indirect cost rate, if you average all the public and private schools together, comes out to almost exactly 50 percent. If you were to limit indirect cost rates to 50 percent, you would generate $125 million in indirect cost savings. That is about equivalent to a little more than 1,000 new research grants.

Senator HARKIN. $125 million if you cap it at 50 percent? Mr. KUSSEROW. That is the median right now of all of these schools, both public and private. If you were to cap at 60 percent, which is the average of the private institutions and higher than the public schools, you would generate about $47 million. That would allow you to have an additional 400 research grants to be let out.

Senator HARKIN. You said that $125 million translated into how many?

Mr. KUSSEROW. The average grant comes out to about $113,000. That is just an average. With $ 125 million you could probably generate about 1,000 new grants if you wanted to use the savings for that purpose.

Senator HARKIN. You got my attention. Mr. KUSSEROW. As I mentioned, if you wanted to go to a higher level, the private schools have a higher average indirect cost rate than public schools. They are at about the 60th percentile. If you were to cap the rate at 60 percent of direct costs, that would generate about $47 million in savings, or enough money for about 400 new grants.

If you wanted to use the average for the public schools, it would be about 45 percent of direct costs. That would be about $183 or $184 million, which might be enough to generate another 1,500 research grants.

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Of course, if you want to get really Draconian, Mr. Chairman, you could go the way the Department of Agriculture has. Mr. Whitten on the House side got a provision passed which said that at agricultural schools, the indirect cost rate would be 14 percent.

If you put our cap at 14 percent, you would not be able to ever again set foot on any major university in the United States, but you would probably be able to generate an extra 5,000 new grants per year to the schools. I would think that the researchers might love you, but I am afraid that I would never try to speak before a university again.

The only thing I am suggesting is that there is wide latitude in this area. The difficulty you have is that, since we have never been able to figure out what the variables are that account for all the differences, we are not sure we would know what to do. If you come down too little, what you might do is invite everybody to go up to the cap and, therefore, lose. So unless you come down significantly, you probably would not be able to generate the full savings. So there are a lot of unknown factors in this whole thing; but again, they could be worked out.

Now I have given you four possible approaches. There is a fifth one. If the answer is that you want the Division of Cost Allocation to really hammer down harder on these universities, it is going to have to be supported by more audits. Right now we are funding only 35 audit years to support this activity.

Now if you have 35 audit years and are looking at 276 major schools, you can see that going in and looking at all those schools and engaging in audits is a physical impossibility. Some of these schools are gigantic. I could take my whole Boston staff and drop them into Harvard University and never see them again. These are very costly audits, but there is another option. We could increase the policing of these universities by having more auditors working with our Division of Cost Allocation and hammering down on a case-by-case basis.

INDIRECT COST CASE STUDIES Senator HARKIN. I understand. Let me ask you this. How about zeroing in? Let us take some parameters. How about looking at one or two that are on the high end of the spectrum, one that may be right in the middle, and one or two at the bottom end, and go in there

Mr. KUSSEROW. We are doing more than that, Mr. Chairman. We are going to a number of schools, and there is very close cooperation between the Assistant Secretary for Management and Budget's Division of Cost Allocation and the Office of Inspector General's Audit Services. We look for aberrations, try to target those schools, and try to understand what is going on with indirect costs.

Again, one of the difficulties we have is that every school has a different system and different problems, and it is difficult to come to grips with all of them.

I think that in all fairness I should tell you that we have a major undertaking going on where we are trying to get a better handle on this. Our Dallas office has been commissioned to develop a computerized system which can ingest the more than 2,000 audit reports we have done, as well as those done by the public accounting firms that universities are using. This system will take all of their financial statements, all the audits of the financial statements, all of our audits, all the work done by GAO, and all the work done by the Division of Cost Allocation, put them in the computer and do computer analyses and try, as you suggest, to identify factors and aberrations that would allow us to better target schools.

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Even with a system such as this, I will tell you that it is a very heavy investment to go beyond a university's books and records to try to determine whether they have fairly allocated costs or not. It really requires a major undertaking. It is not one of those things where you can just walk in the front door and say, "We want you to explain why you have charged so much for groundskeeping against the research grants at this school.” It goes far beyond that.

In fact, as you know, in the Stanford case it was a major battle. It seems that schools have plenty of money when it comes to hiring their own auditors to make their case. Believe me, if you want to see a lot of pin stripes, go into a school and challenge them on something. You will find more attorneys coming out of the woodwork than you could possibly imagine. There are major battles when you do it on a case-by-case basis.

A case-by-case basis is an option. But I mention it as the last one because I am hesitant to say, “Give me more research and I will go out there and engage in a holy war against these people."

I think the basic underlying problem is that this is not a good way to do business. There is something screwy when we give money to a researcher to do research and then we, the Federal Government, go to the same university that this researcher wants to go to and cut a separate deal with them.

Senator HARKIN. That may be the best option. I circled that here, in fact. We ought to really take a look at that.

Mr. KUSSEROW. I would be pleased, if you like, to work with your staff to give you more specifics on all these options. Senator HARKIN. I intend to pursue this diligently this year.

DIVERSITY OF INDIRECT COSTS Mr. Williams, did you have something? Mr. WILLIAMS. I want to make one comment. I agree with every

Mr. WILLIAMS, werow said. Mr. Chairman

Mr. KUSSEROW. I am sorry, Mr. Chairman, I forgot. I should have introduced my good shepherd.

Senator HARKIN. You do not have to. I know Mr. Williams.

Mr. WILLIAMS. The only other thing I would emphasize here is that one really has to recognize that in our public/private system there is a great diversity in terms of the kinds of facilities that we are doing business with, and the kinds of administrative systems that are operated within these universities. There is a great variety of costs for a variety for reasons.

Some universities are located in areas that are high cost areas, while others are located in areas where there are low wage rates. If you are located in the South, as opposed to the Northeast, you might have lower heating costs. Others have higher heating costs. So there are a lot of legitimate reasons why direct costs and indirect costs are different. This makes true comparison very difficult. There are also a variety of ways of operating within a university. To give you one simple example, secretarial assistance might be included as a direct cost because that individual works directly in a lab. In another university, a lab may rely on a secretarial pool which is available to a wide range of people, and that might be classified as an indirect cost. In that university, the indirect cost might be somewhat higher as a result.

I do not mean to say that there are not a lot of things that we should look at and explore. But one needs to recognize the diversity that is out there and the difficulty of comparison.

The only other thing I would mention, and this is what I think the Secretary emphasized the other day, is that in looking at this we ought to keep in perspective that we have a very important research enterprise out there. Biomedical research is a very important part of it. As we look at this, we do not want to take backward steps and endanger the great results we are getting from these universities. That is not to say we should not look at the cost, but we would not want to do things that endanger the overall results we are getting from this system.

INDIRECT COST GRANTS TO RESEARCHERS Senator HARKIN. Then how about the suggestion that we basically give the grants to the principal researcher, hold that principal researcher accountable for how those moneys are spent, and let that researcher go to the university or some other university or whoever that researcher feels that he or she can get the best support mechanism for the money that they have to conduct that research?

Mr. WILLIAMS. We would say it is an idea that one ought to look at. Again, though, I think the ability of a researcher to just pick up and move someplace else, although fine in theory, in practice is not so easy. If you have a large laboratory with lots of equipment, and have invested a lot of time and effort in recruiting staff, moving around from place to place is not always easy. One needs to look at the incentives that such a situation might create, as well as the possible benefits. I only say you should be cautious about what you do.

Mr. KUSSEROW. I think that Mr. Williams eloquently states some of the complexities of this issue. That is why, when you mentioned your being perplexed, I made the quip about your not being alone. Now we are beginning to see one of the reasons why.

There is something very intriguing in my mind, though. Maybe it is because I have been in Washington too long and I have developed a perversity. There is something very intriguing about the notion of taking some raw meat and throwing it on the floor between two tigers and telling them to fight over it.

Believe me, if you put out research money to a principal investigator and say, "Here it is, now you go negotiate with the university how much of it should be in support of the direct research effort and how much should be the indirect support from the university," I am not so sure that you would not see a lot of growling. At least the Government would not be part of it. It is very difficult to be 3,000 miles away from my alma mater and to try to figure

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