Facilities and Administrative Cost Recovery: Past, Present and Future

1. Facilities and Administrative Cost Recovery: Past, Present and Future Coalition for Academic Scientific Computation October 13, 2017 Jeffrey Silber, Cornell University

2. Topics • What is F&A • Key moments in F&A History • Recent, but pre-2017, issues with F&A • Cloud Computing • Software Capitalization • Where we are today • Proposed budget for DHHS • Response • Where are we going and what is at risk?

3. Key Moments in F&A • 13th Century: Luca Pacioli is credited with the origins of cost accounting • 19th Century: Alexander Hamilton Church developed methods of cost allocation (and Charles Babbage contributed too) • 1904: Cost Accounting was being taught at Penn and NYU • 1940s-50s: ONR and DHEW begin paying for F&A • 1958: OMB Circular A-21 first issued. NIH F&A fixed at 15% • 1963: NIH F&A raised to 20% • 1966: F&A caps removed • 1979: F&A base moved to Modified Total Direct Cost (MTDC) • 1993: Administrative Cap imposed at 26% • 2014: Uniform Guidance issued • 2017: Administration proposed reducing F&A to 10% of total direct cost, to reduce costs and make it comparable to that awarded by foundations

4. What’s New Under the Uniform Guidance • 200.414 • Redirects F&A methodology, previously in “G Section” of A-21 to an appendix based on entity type. Higher Ed is Appendix III. • Authorizes a 10% of MTDC de minimis rate • Authorizes one-time rate extensions of up to 4 years for each negotiation cycle. • Appendix III to Part 200—Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Institutions of Higher Education (IHEs) • Section 4.c authorizes utility cost adjustment of up to 1.3 points and describes computation

5. What else is new • CAS information • http://psc.gov/docs/default-source/fact-sheets/indirect-cost.pdf?sfvrsn=4 • Staffing shortages • Software capitalization • New CAS review guide • https://rates.psc.gov/fms/dca/Updated%202017%20CU%20Best%20Practices%20Manual.pdf • DOJ settlement regarding use of Off-Campus Rate • https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-95-million-settlement-columbia-university-improperly • https://www.justice.gov/usao-sdny/file/875196/download

6. More New • Direct charging Single IRB • https://grants.nih.gov/grants/guide/notice-files/NOT-OD-16-109.html • Council on Governmental Relations (COGR) F&A survey • http://www.cogr.edu/cogr-2017-fa-survey-results

7. Cloud Computing • Discussion occurred a few years ago, involving the National Science Board (NSB), federal Office of Science and Technology Policy (OSTP), COGR, and others pertaining to the inclusion of cloud computing services in the F&A base (MTDC). • At issue is that the acquisition of a computer would be a capital expense, not in MTDC nor subjected to F&A recovery, so why are the fees to use a computer in MTDC. • Having cloud computing services in MTDC serves as a disincentive to researchers using what may be a cost effective approach. • Not having it in MTDC would be inconsistent with other services • There was no conclusion but the issue may be revisited.

8. Software Capitalization • Institutions have an equipment capitalization threshold of $5,000 or less, as required by 2 CFR 200.33 • Equipment is defined as “tangible personal property (including information technology systems)” • Equipment is an MTDC exclusion and no F&A is charged on the purchase of equipment • Institutions typically have a much higher threshold for capitalizing software in accordance with GAAP. This may range from $100K to $1M • Last year, when reviewing a Cost Accounting Disclosure Statement for an institution, DHHS questioned this higher capitalization threshold for software • A recent Uniform Guidance FAQ, along with further clarification from OMB stated that only software purchased with hardware is subject to the $5,000 threshold.

9. The Future • Suggestion that F&A reductions can be used to reduce federal expenses • https://www.nytimes.com/2017/04/03/us/politics/trump-medical-research-funding-nih.html?_r=0“About 30 percent of the grant money that goes out is used for indirect expenses, which, as you know, means that that money goes for something other than the research that’s being done” - Former DHHS Secretary Tom Price • Higher Ed and others, through various associations, pushed back hard on cuts to proposed direct and F&A cuts. Over 100 associations joined in this. This was a significant effort in response to a significant threat • http://www.cogr.edu/sites/default/files/8.21.17%20Community%20Letter%20on%20NIH%20FA%20Support-2.pdf • Congress noticed and, for FY18, we appear to be safe • https://www.nytimes.com/2017/09/11/us/politics/national-institutes-of-health-budget-trump.html?smid=pl-share

10. What would a 10% NIH F&A cap cost? • FY2016 NIH awards totaled $23.3B • F&A represented 27.5% of this total (which has remained constant at less than 28% for over a decade) • If this were reduced to 10%, and the total awarded remained the same, the $6.4B in F&A recovery would be reduced by approximately two-thirds to $2.3B. • At Cornell we modelled that this cut would cost us $51M per year across the university • If other agencies followed in the same path we would be looking at over $100M per year

11. Part of the Problem • How well do people (other than us cost accountants) understand F&A? • Faculty frequently grumble about F&A being a tax, and not supporting their activities. Sometimes this has gone to the Hill (remember DoD cap) • Often people get the math wrong … • The university takes 60% of my award for F&A. • Actually a 60% F&A rate means that on a $100,000 award no more than 37.5% of the award goes to F&A. Modifiers – items on which F&A is not charged such as equipment, tuition, and most of the subcontract cost – further reduce that percentage. • Executive and Legislative branches look for places to cut budgets • Foundations and States tend to pay very little F&A • So, what is F&A?

13. F&A Methodology • Every activity must pay its fair share • Costs are allocated as prescribed by the government in Appendix III of the UG • Four cost objectives: instruction, research, other sponsored activities, other institutional activities • Nine indirect areas • Administrative: general, departmental, student services, sponsored • Capped at 26% • Facilities: building and equipment depreciation, operation and maintenance, interest, libraries

14. Where are we going • We must be vigilant. Any limitation imposed is unlikely to be a temporary thing. Our lesson from history • Virtually every university is above the 26% administrative cap. • The cap was imposed in 1993 in response to an incorrect perception from a highly-publicized incident that there was significant waste at universities. • Twenty-four years later the cap remains. • We appear to be safe for FY18 • However, it is unlikely that the threat will go away • Education and advocacy are essential • Our faculty need to be on board

15. COGR Resources on F&A • F&A Primer • F&A Talking Points • COGR One Pager on F&A • Frequently Asked Questions • Cost of Research Infographic • ​Comparing Foundations to Federal Research Support

16. What is at risk? How would we replace F&A recovery? From a COGR FAQ: • Universities have a limited number of funding sources. The primary funding sources for research universities to fulfill their educational missions of teaching, research, and service are: tuition, research grants, cooperative agreements and contracts, philanthropy, endowment income, and state appropriations. • A reduction of federal F&A payments would result in one or more of the following: • The inability of universities to accept research awards from, and conduct research on behalf of, federal agencies; • The deterioration of research facilities as the financial risk to build new facilities or maintain existing ones becomes too great to invest institutional funds; • The inability to sustain required support staff and infrastructure required to comply with government regulations; this could threaten the health and safety of patients, researchers and students; • A reduction in the pipeline of trained scientists and engineers in the workforce due to reduced research training opportunities at universities. • An increase in tuition rates, an action which universities would not want to take.

17. Questions? Contact: Jeffrey Silber Cornell University silber@cornell.edu