A conflict over capital- NC Lawmakers take look at overhead portions of university grant money

N.C. State University wanted to recruit a rising star in fungal genomics from Clemson University three years ago and knew he wouldn’t come cheap. But where would the
money come from?

By:
Dan Kane
Raleigh News and Observer
Raleigh, NC
http://www.newsobserver.com

It made sense, university officials figured, to use some of its governmental funds intended to support the indirect costs of research such as utilities, administration and
debt service on labs.

So NCSU invested $1 million to outfit a lab and to hire assistants for Ralph Dean. Since then, NCSU says, Dean has generated ten times that amount in federal and
private grants, much of it to find ways to prevent a common fungal disease from destroying one of the world’s most prevalent food sources — rice. "If it wasn’t for that
money, I wouldn’t be here," Dean said. "And if I hadn’t been here, we wouldn’t have attracted more than $10 million in grants in the last two years, and that’s the bottom
line."

Dean is one of the researchers university leaders tout as they fight now to protect the $120 million in overhead receipts that UNC schools receive annually with research
grants, mostly from the federal government.

Some state House members, desperate for new revenues to help plug a $1.5 billion budget deficit, say part or all of that money should go back to the state. They say
that the state is subsidizing some of these indirect expenses and that, in some cases, UNC schools use overhead receipts for expenses unrelated to research.

"I’m in favor of taking all of it," said Rep. Mickey Michaux, a Durham Democrat who sits on the Education Appropriations Subcommittee. "But I’m willing to listen to
reason on it. I’m flexible."

The state’s two major public research universities have the most to lose as House members set their sights on the money. UNC-Chapel Hill receives about 70 percent of
the overhead receipts, while NCSU collects about 20 percent.

University leaders say that taking even a piece of the research money would disrupt an economic engine that pays for itself many times over, providing hundreds of
university jobs across the state and at spinoff companies that license university research. "It would cripple what is arguably one of the greatest success stories in the
history of the state," UNC-Chapel Hill Chancellor James Moeser said last week.

But Moeser and other university officials acknowledge that there are some instances in which they are collecting overhead receipt money for things the state pays for. So
far, no one has provided detailed figures on this overlap.

And in some cases, the universities have used the money for expenses unrelated to research.

Winston-Salem State University used nearly $76,000 of overhead receipts to finance its search for a new chancellor last year. WSSU officials said they had little choice
because state funds cannot be used for chancellor searches.

NCSU, which wants to build a $65 million hotel, conference center and golf course at Centennial Campus, has said that, if necessary, it would cover any hotel operating
losses by drawing on non-state revenue sources — including overhead receipts.

George Worsley, vice chancellor for finance and business, said that to satisfy potential bondholders, the university needed to pledge overhead receipts and other
unrestricted income such as donations and athletic revenues. But Chancellor Marye Anne Fox said the university would look to other revenues to cover any hotel project
losses.

Some overhead receipt funds support research-related capital projects. NCSU earmarks $2 million annually toward debt service on six Centennial Campus research
buildings.

UNC-CH has set aside $80 million in overhead receipt money, or the equivalent of what it received from federal and other sources this fiscal year. Moeser said the money
is mostly dedicated to help pay for seven major research buildings that are planned or under construction.

To pay for current research-related expenses that would have been covered by these funds, Moeser said, the university is tapping gifts, endowments and other non-state
sources.

So far, the universities have persuaded Gov. Mike Easley and the state Senate to leave the overhead receipt money alone in their proposed budgets. But as the budget
debate shifts to the House this week, many representatives have set out to get at least a piece of it.

"You could make a very viable argument for the loose ends of those overhead receipts," said Rep. Alex Warner, a Hope Mills Democrat who sits on the House Education
Appropriations Subcommittee. "We could put them to a practical use in the state budget."

Until a few years ago, the state kept a portion of the overhead receipts to reimburse its investment in UNC research. But in 1998, the General Assembly let the
universities keep the money and spend it as they saw fit.

Since then, the General Assembly has sought a better accounting of how the universities spend the money. Last year, legislators told UNC administrators to begin
providing annual reports on overhead receipts.

The first 10-page report, published in March, provided a programmatic breakdown but did not answer a key question many legislators have: How much overlap is there
between state appropriations and overhead receipts?

"I don’t know if any of us really knows that for sure," Warner said.

How they work

Overhead receipts work like this: When a professor wins a $1 million grant, most of that money is earmarked for the direct costs of research. That can include the
salaries of the professor and assistants, lab equipment and so forth.

But what about the administrator who oversees research operations for the university? Or the library that provides research materials? Or the police officer who patrols the
research building? Or the building itself?

The federal government recognizes that these are indirect research costs that should be reimbursed as well, through overhead receipts.

Figuring out how much universities should receive for these indirect costs isn’t easy. Every few years, UNC-CH and NCSU submit hundreds of pages of documents to the
U.S. Department of Health and Human Services to set an indirect cost reimbursement rate for every federal grant. NCSU has negotiated a 46.5 percent cost rate, while
UNC-CH’s is 45.5 percent.

In theory, those reimbursement rates should mean that if, say, NCSU wins an EPA grant for $1 million, $465,000 would go toward indirect costs. But officials at both
universities say federal agencies sometimes seek reductions or cost-sharing agreements that drive that reimbursement down. State and private grants come with lower
reimbursement rates or none at all.

As a result, UNC-CH and NCSU officials say their actual reimbursement for indirect costs is more in the range of 30 percent, which means they must find other funds to
cover some expenses. A Rand Corp. study in July 2000 found the same problem hitting all universities. Its authors warned that further reductions in reimbursements
might cause a slowdown in research investment.

But while the universities may not be getting the full reimbursements they seek, they are seeing an explosion in grant money. UNC-CH’s funding from the National
Institutes of Health, the largest provider of federal grants, has grown from $100 million in 1996 to $237 million last year.

UNC-CH now ranks 12th among all universities in NIH funding, and its recent designation by the U.S. Centers for Disease Control and Prevention as one of three national
centers for genomics and public health research will likely steer more federal and private research dollars its way.

Combined research grants across the UNC system, mostly from the federal government, increased last year by nearly $100 million to $768 million.

"We grew the equivalent of a Wake Forest University in the UNC system in one year," said Russ Lea, UNC vice president for research. "And you know what? We’re going
to do it next year, and we’re probably going to do it a year after that."

Part of that growth resulted from the federal government and private sectors’ increasing investment in university research — the NIH budget has nearly doubled over the
past four years. But university leaders also say having complete control of overhead receipt money enables them to make the best investments that will attract more
grants.

Some House Democratic leaders agree. Majority Leader Philip Baddour of Goldsboro and Speaker Pro Tem Joe Hackney of Chapel Hill say the universities have earned
their overhead receipt money and are spending it in ways that grow the state’s economy. Therefore, the universities should keep it, even if a portion of those indirect
research costs are borne by the state.

"If you take it, you are basically discouraging that activity," Baddour said. "So the whole idea of taking back what you are paying for really misses the big picture."