October 3, 2003

Dr. Michael J. Holland

Office of Science & Technology Policy (OSTP)

1650 Pennsylvania Avenue NW

Washington DC 20502

mholland@ostp.eop.gov

Dear Dr. Holland,

I am pleased to provide responses to the National Science & Technology
Council (NSTC) Subcommittee request for data and examples, as published
in the August 6, 2003 Federal Register.

The collaboration between federal agencies and universities has led to
significant scientific achievements. However, both the federal
government and universities face current economic challenges, which may
now be placing this relationship under some stress. The stream of new
federal regulations increases the costs of compliance with no
commensurate increase in funding. Universities seek to comply fully, but
are encountering dwindling resources to meet the costs of compliance.

## 

## "Inconsistency of policies and practices among Federal agencies"

1)  [Effort Certification and Inconsistent Application]{.underline}

Federal agencies are inconsistent in applying Office of Management &
Budget (OMB) Circular standards within A-21, *Cost Principles for
Educational Institutions*. This increases unnecessary administrative
burdens and compliance costs for universities.

As an example, the United States Department of Agriculture (USDA)
recently promulgated regulations advising that A-21 effort guidelines
did not apply to its Food Stamp Nutrition programs. Rather, universities
must maintain a [daily]{.underline} time reporting system for this
project in addition to any effort certification system already in place.

Our local principal investigator indicated this duplicate and more
onerous effort system would involve approximately 800 staff members,
since this project encompasses staff in virtually each county in the
state. Obviously, this administrative burden diverts valuable time from
researchers, who will now have less of their attention available for
research.

The OSTP/NSTC subcommittee can greatly assist the research enterprise by
working with federal agencies to ensure consistent application of
federal regulations (i.e., A-21). \[Also see comment under "Regulatory
Requirements" below.\]

2)  [Inconsistent Reimbursement of Facilities & Administrative (F&A)
    Costs]{.underline}

Federal agencies are inconsistent in their F&A rates used on sponsored
agreements. Universities must negotiate government-wide rates under OMB
Circular A-21 guidelines; however, some agencies do not use these rates,
which leads to an under recovery of legitimate costs incurred by
institutions.

For example, USDA reimburses its research grants with a 19% rate, and
the National Institutes of Health (NIH) permits only an 8% rate for its
training grants. By comparison, most universities have
federally-negotiated rates in the 45-50% range.

These lower F&A rates are well below most universities'
federally-negotiated Administrative component which is capped at 26%
(but may be lower in some instances). These lower F&A reimbursement
levels permit no funding of very expensive facilities costs such as
building depreciation, utilities and so forth.

OSTP/NSTC can ensure equity by working with federal agencies to ensure
consistent application of federally negotiated F&A rates or, at a
minimum, more reasonable reimbursement levels.

3)  [Inconsistency of Policies and Practices among Federal
    Agencies]{.underline}

OMB circular A-110 is based on principles that provide a reasonable
approach to managing research sponsored through federal grants at
universities. These principles have not been uniformly implemented by
the federal sponsoring agencies. In fact, over the last two decades the
regulations have grown to be quite inconsistent among the federal
agencies. Institutions now must deal with a minimum of three (3) levels
of source information when administering federal grants. They are: the
OMB A-110 basic principles (which are inconsistently applied from one
federal agency to another); agencies' terms and conditions (which are
inconsistently applied) and limited and inconsistent use of the expanded
authorities by federal agencies.

COGR has put together a matrix, which reflects each federal agencies
implementation of A-110. The matrix reflects the wide diversity in
agency implementation:

-   language that is verbatim from A-110

-   agencies that require approval for one-time extensions,

-   approvals for rebudgeting of funds,

-   agencies that require annual equipment inventory *versus* biennial
    equipment inventories as required by A-110.

Currently, for universities participating in the Federal Demonstration
Partnership (FDP), inconsistencies exist between FDP member research
funding agencies. The FDP standard terms and conditions implement the
expanded authorities contained in OMB A-110 , however, some agencies'
specific requirements vary in their implementation of these prior
approvals. For example Office of Naval Research will acknowledge the FDP
terms and conditions, but will then state that prior written approval is
required for the first no-cost extension request. NIH training grants
(T32) vary from institute to institute on whether or not they are issued
with FDP terms. The National Heart, Lung and Blood Institute has decided
to use the National Research Service Award training grant specific terms
and conditions versus the FDP terms and conditions.

As a result of these inconsistencies, researchers and their staff spend
valuable time searching through various source documents before locating
answers to their administrative questions.

## "Regulatory Requirements"

1)  [Overall simplification of Effort Certification Business
    Model]{.underline}

The current requirements in A-21 can be simplified to improve the
efficiency and cost effectiveness of the research enterprise, while
still retaining a proper level of accountability.

The current system creates administrative burdens and costs for
universities while diverting reseachers\' time from doing research.

For example, at the University of Minnesota we recently did a Cost of
Effort Compliance study, which showed that our cost of compliance is \$2
million per year (including researchers' time to complete the
statements).

OSTP/NSTC can improve research efficiency by working with the current
FDP project to change A-21 and implement the proposed annual Payroll
Verification system, which would still provide adequate accountability.

This would have favorable impacts to:

-   Reduce unnecessary administrative burdens and costs of compliance,

-   Retain a proper level of control to ensure that salary and wages
    charged to federal grants and contracts are commensurate with the
    time/effort/activity devoted to research activity

-   Increase the time available for researchers to do research.

##  "Research Infrastructure"

1)  [Simplification of Federal Regulations over Facilities
    costs]{.underline}

Current federal regulations (i.e., A-21) impose many unnecessary
administrative burdens upon universities to substantiate facilities
costs (building depreciation, utilities, external bond interest) within
F&A rate proposals. As an adverse consequence, universities incur
massive administrative costs or must outsource these tasks to even more
expensive external consultants in order to document facilities costs.

Examples within A-21 standards include:

-   Documentation for "Excessive Cash Flow" analyses to substantiate
    interest claimed within F&A proposals

-   Laborious space surveys for rooms utilized mainly to house research
    activities

-   Inconsistent application of new building cost projections included
    in F&A rate proposals

The "cash flow" analysis requires a laborious annual tracking of costs
and is based upon financial theory. Also, most universities do not
utilize the bonding instruments (i.e., "balloon" financing) that this
analysis is designed to detect.

For space survey expenses, one university was forced to expend \$250,000
with external consultants during its recent F&A proposal development
process. Another institution estimated the necessity for a like amount
via approximately 1,100 hours in billable external consultant hours.

In terms of new building cost projections, we were advised during our
most recent F&A rate negotiations with federal auditors in our region
that such factors were not acceptable. We subsequently learned that
another university in another region was able to increase its F&A rate
based on new building cost projections.

OSTP/NSTC can ensure that universities have the proper incentives and
F&A reimbursement to construct major new research buildings. The
subcommittee may want to participate in the current FDP "Facilities"
project. This proposes to change A-21 and implement simplified space
survey procedures as well as eliminate unnecessary administrative
burdens.

2)  [OMB Suspension of A-21 Utility Cost Adjustment]{.underline}

OMB has unilaterally suspended work to extend the Utility Cost
Adjustment (UCA) for currently ineligible educational institutions. This
A-21 provision properly allows a 1.3 percentage points increment to
negotiated F&A research rates.

The UCA is intended to compensate universities for the significantly
higher energy costs incurred in conducting sponsored agreements. For
example, the utility expenses incurred in university facilities housing
research grants is many times the costs for instruction rooms or
administrative offices.

It should be noted that this UCA provision became effective on July 1,
1998 (within A-21). Originally, 66 universities were permitted the UCA
increment since their prior energy studies proved that research rooms
incurred such heavy energy consumption. Given these data, the federal
government promised to extend the UCA to all institutions by July 1,
2002.

As an adverse consequence, the currently ineligible universities face an
underrecovery of utility costs incurred during their performance of work
on federal sponsored agreements. This embodies another shifting of costs
to educational institutions. The underrecovery means that institutions
must divert funds from the construction of necessary and costly
state-of-the-art research facilities.

There are many studies that fully demonstrate the necessity of the UCA:

-   Our local study showed that research rooms consume \$9.35 in utility
    costs per square feet of space versus \$3.67 for
    instructional/administrative rooms

-   During August 2002, the Council on Governmental Relations (COGR)
    issued correspondence to OMB fully demonstrating similar results at
    Princeton, Iowa and schools in the California system

-   Also, the NIH director issued a 2001 report detailing the
    insufficiency of biomedical research facilities

OSTP/NSTC can ensure that universities receive proper F&A reimbursement
by working with OMB to implement a fair and equitable UCA application.
In turn, this will assist universities in developing the facilities
infrastructure needed to adequately perform work funded by sponsors.

3)  [Limit on Administrative Cost Reimbursement]{.underline}

A crucial current issue is the "cap" imposed upon the administrative
component of the F&A cost rate. The October 1991 revision to A-21
mandated that administrative costs charged to sponsored agreements must
be limited to only a 26% level (within the total F&A rate).

As an adverse consequence, this has yielded yet another shifting of
costs for compliance to universities in the face of a stream of new
federal regulations. This underrecovery of administrative infrastructure
costs is straining institutional resources available to ensure
compliance.

Many studies provide examples in this area:

-   The 2000 Rand report documented an overall underrecovery between
    \$700 million to \$1.5 billion annually

-   Many F&A rate studies demonstrate that most universities calculate
    the administrative component to be well in excess of the 26% cap,
    even when these calculations are performed under the stringent A-21
    costing guidelines

-   Locally, our last F&A proposal showed 32% as our calculated
    administrative component

-   The "cap" is not included in OMB Circulars governing non-profit
    organization (A-122); state governments (A-87) or for-profit
    (federal acquisition regulations-FAR) organizations receiving
    sponsored funding.

OSTP/NSTC can ensure that universities receive equitable reimbursement
for the administrative infrastructure by working with OMB to augment the
current "26% cap". In turn, institutions would then have more resources
to better ensure compliance with federal regulations.

"*[Electronic Research Administration]{.underline}*"

While the federal government has aggressively promoted electronic means
to simplify the grant administration process, the slowness of the
agencies in agreeing on a common interface has increased costs at
institutions. Institutions like the University of Minnesota have
invested in information technology to improve our ability to comply with
federal regulations. However, inconsistencies from agency to agency have
created a situation in which universities will be required to develop
systems for each agency at great cost.

OSTP/NSTC can help here by influencing agencies to adopt a common
approach to electronic research administration, and to work closely with
FDP in accomplishing our common goals.

In summary, the research community and the University of Minnesota
believe that many of the changes proposed in the comments above will
improve the overall national research enterprise by making it more
efficient and by streamlining business processes that will benefit the
federal government and its higher education institutional partners.
There are many excellent ideas that have been put forward by the
research community that, if adopted, will lead to positive change. The
University of Minnesota appreciates the opportunity to express its views
and trusts that they will be received in the positive manner in which
they were intended.

Sincerely,

David W. Hamilton, Ph.D.

Interim Vice President for Research