    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                    EXAMINING THE OVERHEAD COST OF RESEARCH

    =======================================================================

                                 JOINT HEARING

                                   BEFORE THE

                   SUBCOMMITTEE ON RESEARCH AND TECHNOLOGY &
                           SUBCOMMITTEE ON OVERSIGHT

                  COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  May 24, 2017

                                   __________

                               Serial No. 115-15

                                   __________

     Printed for the use of the Committee on Science, Space, and Technology

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

           Available via the World Wide Web: http://science.house.gov

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                  COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY

                       HON. LAMAR S. SMITH, Texas, Chair
    FRANK D. LUCAS, Oklahoma             EDDIE BERNICE JOHNSON, Texas
    DANA ROHRABACHER, California         ZOE LOFGREN, California
    MO BROOKS, Alabama                   DANIEL LIPINSKI, Illinois
    RANDY HULTGREN, Illinois             SUZANNE BONAMICI, Oregon
    BILL POSEY, Florida                  ALAN GRAYSON, Florida
    THOMAS MASSIE, Kentucky              AMI BERA, California
    JIM BRIDENSTINE, Oklahoma            ELIZABETH H. ESTY, Connecticut
    RANDY K. WEBER, Texas                MARC A. VEASEY, Texas
    STEPHEN KNIGHT, California           DONALD S. BEYER, JR., Virginia
    BRIAN BABIN, Texas                   JACKY ROSEN, Nevada
    BARBARA COMSTOCK, Virginia           JERRY MCNERNEY, California
    GARY PALMER, Alabama                 ED PERLMUTTER, Colorado
    BARRY LOUDERMILK, Georgia            PAUL TONKO, New York
    RALPH LEE ABRAHAM, Louisiana         BILL FOSTER, Illinois
    DRAIN LaHOOD, Illinois               MARK TAKANO, California
    DANIEL WEBSTER, Florida              COLLEEN HANABUSA, Hawaii
    JIM BANKS, Indiana                   CHARLIE CRIST, Florida
    ANDY BIGGS, Arizona
    ROGER W. MARSHALL, Kansas
    NEAL P. DUNN, Florida
    CLAY HIGGINS, Louisiana
                                     ------

                    Subcommittee on Research and Technology

                     HON. BARBARA COMSTOCK, Virginia, Chair
    FRANK D. LUCAS, Oklahoma             DANIEL LIPINSKI, Illinois
    RANDY HULTGREN, Illinois             ELIZABETH H. ESTY, Connecticut
    STEPHEN KNIGHT, California           JACKY ROSEN, Nevada
    DARIN LaHOOD, Illinois               SUZANNE BONAMICI, Oregon
    RALPH LEE ABRAHAM, Louisiana         AMI BERA, California
    DANIEL WEBSTER, Florida              DONALD S. BEYER, JR., Virginia
    JIM BANKS, Indiana                   EDDIE BERNICE JOHNSON, Texas
    ROGER W. MARSHALL, Kansas
    LAMAR S. SMITH, Texas
                                     ------

                           Subcommittee on Oversight

                       HON. DRAIN LaHOOD, Illinois, Chair
    BILL POSEY, Florida                  DONALD S. BEYER, Jr., Virginia,
    THOMAS MASSIE, Kentucky                  Ranking Member
    GARY PALMER, Alabama                 JERRY MCNERNEY, California
    ROGER W. MARSHALL, Kansas            ED PERLMUTTER, Colorado
    CLAY HIGGINS, Louisiana              EDDIE BERNICE JOHNSON, Texas
    LAMAR S. SMITH, Texas

                                C O N T E N T S

                                  May 24, 2017

                                                                       Page
    Witness List.....................................................     2

    Hearing Charter..................................................     3

                               Opening Statements

    Statement by Representative Barbara Comstock, Chairwoman,
      Subcommittee on Research and Technology, Committee on Science,
      Space, and Technology, U.S. House of Representatives...........     4
        Written Statement............................................     6

    Statement by Representative Daniel Lipinski, Ranking Member,
      Subcommittee on Research and Technology, Committee on Science,
      Space, and Technology, U.S. House of Representatives...........     8
        Written Statement............................................    10

    Statement by Representative Darin LaHood, Chairman, Subcommittee
      on Oversight, Committee on Science, Space, and Technology, U.S.
      House of Representatives.......................................    13
        Written Statement............................................    15

    Statement by Representative Donald S. Beyer, Jr., Ranking Member,
      Subcommittee on Oversight, Committee on Science, Space, and
      Technology, U.S. House of Representatives......................    17
        Written Statement............................................    19

    Statement by Representative Lamar S. Smith, Chairman, Committee
      on Science, Space, and Technology, U.S. House of
      Representatives................................................    21
        Written Statement............................................    23

                                   Witnesses:

    Mr. Dale Bell, Division Director, Institution and Award Support,
      National Science Foundation
        Oral Statement...............................................    26
        Written Statement............................................    28

    Mr. John Neumann, Director, Natural Resources and Environment,
      U.S. Government Accountability Office
        Oral Statement...............................................    35
        Written Statement............................................    37

    Mr. James Luther, Associate Vice President of Finance &
      Compliance Officer, Duke University; Chairman of the Board,
      Council on Governmental Relations
        Oral Statement...............................................    51
        Written Statement............................................    54

    Dr. Richard Vedder, Distinguished Professor of Economics
      Emeritus, Ohio University, Department of Economics; Director,
      Center for College Affordability and Productivity
        Oral Statement...............................................    61
        Written Statement............................................    63

    Discussion.......................................................    67

                 Appendix I: Answers to Post-Hearing Questions

    Mr. Dale Bell, Division Director, Institution and Award Support,
      National Science Foundation....................................    84

    Mr. James Luther, Associate Vice President of Finance &
      Compliance Officer, Duke University; Chairman of the Board,
      Council on Governmental Relations..............................    87

                Appendix II: Additional Material for the Record

    Letters submitted by Barbara Comstock, Chairwoman, Subcommittee
      on Research and Technology, Committee on Science, Space, and
      Technology, U.S. House of Representatives......................    96

    Statement submitted by Representative Eddie Bernice Johnson,
      Ranking Member, Committee on Science, Space, and Technology,
      U.S. House of Representatives..................................   102

                    EXAMINING THE OVERHEAD COST OF RESEARCH

                                  ----------

                            WEDNESDAY, MAY 24, 2017

                      House of Representatives,
            Subcommittee on Research and Technology and
                              Subcommittee on Oversight
                   Committee on Science, Space, and Technology,
                                                       Washington, D.C.

        The Subcommittees met, pursuant to call, at 10:05 a.m., in
    Room 2318 of the Rayburn House Office Building, Hon. Barbara
    Comstock [Chairwoman of the Subcommittee on Research and
    Technology] presiding.

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        Chairwoman Comstock. The Committee on Science, Space and
    Technology will come to order.
        Without objection, the Chair is authorized to declare
    recesses of the Committee at any time.
        Good morning, and welcome to today's hearing titled
    ``Examining the Overhead Cost of Research.'' I now recognize
    myself for five minutes for an opening statement.
        The purpose of today's hearing is to examine the overhead
    costs of research, including how the National Science
    Foundation and other federal agencies negotiate and monitor
    these costs, how these funds are used, and to hear
    recommendations for improving efficiency and transparency.
        Last year, this Subcommittee held a hearing on Academic
    Research Regulatory Relief, which looked at recommendations for
    streamlining federal regulations on academic research.
        It has been a pleasure working with Ranking Member Lipinski
    on this Committee to cut the red tape, and I look forward to
    continuing that bipartisan cooperation.
        Through legislation such as the American Innovation and
    Competitiveness Act, as well as the 21st Century Cures Act,
    both of which were signed into law in the past six months, we
    were able to listen to recommendations from universities and
    students to implement better practices designed to address
    inefficiencies and increase transparency. I was proud to
    sponsor the Research and Development Efficiency Act, which was
    included in the American Innovation and Competiveness Act.
        As we move forward with reforming regulations, it is
    important to look at whether or not there are opportunities to
    streamline overhead costs as well, so that more money can go
    directly into this important research.
        Last year, the National Science Foundation spent $1.3
    billion on overhead or indirect costs--nearly 20 percent of the
    research budget. The National Institute of Health spends $6.3
    billion on indirect costs--27 percent of the $24 billion
    extramural research budget. In a time of tough budgets, when
    only one out of five research grant proposals are funded, which
    we all know is too little, we must look at whether or not those
    overhead funds are being spent efficiently because we want to
    make sure more of those projects can be funded.
        There is no question that there are legitimate and
    necessary overhead costs for conducting the best research in
    the world.
        Since World War II, the federal government, Universities,
    and nonprofit research institutions have worked in partnership
    to conduct research in our nation's interest. This partnership
    has served our nation well, spurring innovation to new heights.
    Universities and nonprofits provide laboratory space, pay the
    electric bills, buy equipment, and conduct accounting for
    federally funded research, while the federal government shares
    the cost by reimbursing certain expenses.
        However, over time that system has become more complex and
    in some cases more expensive, as we will hear from our
    witnesses today. Adding to that complexity is that since the
    1960s, every institution negotiates its own indirect cost rate
    directly with the federal government. Today, indirect cost
    rates for universities and institutions vary widely from less
    than one percent to over 60 percent. It raises a question of
    whether or not we have inadvertently created a system of have
    and have nots, where wealthy institutions benefit the most.
        Last year, Dr. Angel Cabrera, President of George Mason
    University--a University that serves many in my district--
    testified before the Subcommittee on the struggles of leading
    one of the fastest growing research institutions in the
    country, trying to break into the top tier while keeping
    tuition and fees low. I have a letter I am submitting for the
    hearing record from George Mason's Vice President for Research,
    Deborah Crawford, on how GMU uses overhead costs. I appreciate
    George Mason's input, and their commitment to transparency and
    keeping education costs low.
        One of my priorities as Chair of the Research and
    Technology Subcommittee is to make sure we are always
    maximizing the taxpayers' important investment in basic and
    fundamental research. It is important we give taxpayers
    confidence in how that investment is spent, so that we can
    continue to sustain and grow research funding. Ultimately,
    research is about creating good jobs and a secure future, a
    common goal I know we all share.
        And with that, I look forward to hearing the testimonies of
    our guests.
        [The prepared statement of Chairwoman Comstock follows:]

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       Chairwoman Comstock. I now recognize the Ranking Member of
    the Research and Technology Subcommittee, Mr. Lipinski, for his
    opening statement.
        Mr. Lipinski. Thank you, Chairwoman Comstock and Chairman
    LaHood, for calling this hearing. This is an important
    oversight topic, and I thank our panelists for being here to
    share their perspectives.
        There's always been some discussion within the research
    community about federal reimbursement for costs incurred by
    organizations that conduct research funded by the federal
    government, that is, work essentially done on behalf of the
    government. While most agree that direct costs for this
    research should be fully reimbursed by the federal government,
    opinions diverge when considering the extent of reimbursement
    for indirect costs, or overhead.
        Overhead costs incurred by universities provide the
    services that make cutting-edge research possible, such as
    electricity, chemical and radiation safety, libraries and
    research facilities, financial accounting, data storage and
    internet access, and many others. Indirect costs also include
    the support necessary to comply with the high administrative
    burden that comes with federal research funding. As the
    Chairwoman mentioned, I've worked with her on this Committee to
    reduce some of this administrative burden, and there is more
    bipartisan work that we should do in easing this burden.
        The bottom line is that indirect cost reimbursement is
    essential to American universities' capacity to execute their
    research as well as train the next generation of scientists and
    engineers that our country needs. NSF is not the cognizant
    agency for indirect cost negotiations for universities.
    However, universities account for approximately 90 percent of
    the total amount budgeted by NSF for indirect costs each year.
    We may address NSF's role in setting rates for nonprofits and
    small businesses, but the bulk of this debate centers around
    major research universities.
        There are many strictly enforced controls and regulations
    on reimbursement for indirect costs. One such control is that
    indirect cost reimbursements are based on modified total direct
    costs rather than total direct costs, excluding expenses such
    as graduate student tuition and equipment purchases, which are
    not expected to require extensive facilities or administrative
    support. As a result, indirect cost reimbursement rates as a
    percentage of total direct costs are much lower than the more
    commonly stated negotiated rates. According to Nature magazine,
    the average negotiated rate is 53 percent, but the average
    reimbursed rate is only 34 percent. I think it's important that
    we're all on the same page about exactly what these rates mean,
    and that we don't let large numbers mislead us.
        Some have expressed concern that administrative
    inefficiencies and conflicts of interest have led to rising
    indirect costs. The evidence does not seem to bear this out.
    Based on Mr. Neumann's testimony, GAO has not found that to be
    the case for NSF. GAO has expressed concern about possible
    rising rates at NIH, but NIH disputes GAO's analysis.
        Some of our top universities believe that the government is
    not paying them a fair amount for the research they conduct.
    It's my understanding that for every federal dollar a
    university is awarded for research, the university contributes
    30 to 40 cents of its institutional funds to make that research
    possible. At the University of Illinois, in fiscal year 2016,
    only 76 percent of actual indirect costs incurred on NSF grants
    were reimbursed, meaning that the university contributed $9.1
    million of its own funds to close the indirect cost gap for its
    NSF grants alone.
        Annual university subsidies amounting to hundreds of
    millions of dollars nationwide clearly demonstrate a
    willingness on behalf of research universities to contribute
    their own resources to the research conducted at their
    institutions. Sometimes, these subsidies even support the
    research infrastructure that NSF, as part of its mission, aims
    to provide. For example, the University of Illinois is home to
    the Extreme Science and Engineering Discovery Environment, an
    NSF-funded user facility that supports other universities,
    research facilities, and NSF-funded projects around the country
    and the world. As with all NSF-funded projects at the U of I,
    the facility's overhead costs are partially subsidized by the
    university, representing a contribution by the university to
    the national research infrastructure.
        Universities undoubtedly benefit from hosting prestigious
    research programs that enable them to recruit preeminent
    scientists and top students and spin off local companies and
    jobs. Yet it is hard for me to understand the argument by some
    that universities are making a profit. All of the evidence I
    have seen suggests otherwise.
        Furthermore, federally funded research is a public good. I
    consider it a win-win that it also benefits local economies.
        These are good debates to have and critical questions to
    address when talking about the health of the partnership
    between the federal government and research universities. I
    think we can all agree that we want this partnership to succeed
    at producing research that remains the envy of the world for
    many years to come.
        Thank you, again, to our witnesses for being here. I look
    forward to your testimony and a fruitful discussion on this
    important issue.
        I yield back the balance of my time.
        [The prepared statement of Mr. Lipinski follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairwoman Comstock. Thank you, Mr. Lipinski, and I now
    recognize the Chairman of the Oversight Subcommittee, Mr.
    LaHood, for an opening statement.
        Chairman. LaHood. Thank you, Chairwoman Comstock and
    Ranking Member Lipinski. Good morning and welcome to today's
    hearing: ``Examining the Overhead Cost of Research.'' I would
    like to welcome today's witnesses to our hearing and thank each
    of you for your attendance today.
        The purpose of today's hearing is to examine opportunities
    to stimulate innovative research at universities and nonprofit
    research institutions, while assessing measures to reduce
    overhead costs of conducting research.
        As part of our hearing today, we want to foster a
    discussion regarding whether we are directing precious taxpayer
    resources toward research in the most efficient and effective
    manner. Part of our discussion today will include learning more
    about how the National Science Foundation, charged with
    administering federal grant funds for countless research
    institutions, negotiates indirect costs rates, as well as the
    share of indirect costs in cumulative grant funding.
        We will hear from GAO today about a new study, finding that
    the growth of indirect costs at NSF has exceeded the growth of
    direct research costs and recommending improvements for better
    cost controls. As part of its study, GAO found that from 2000
    to 2016, indirect costs represented 16 to 24 percent of NSF's
    total grant funds. In total, GAO found that for fiscal year
    2016, NSF awards included about $1.3 billion for indirect
    costs, representing approximately 22 percent of the total $5.8
    billion in grant awards for fiscal year 2016.
        Further, during its analysis of NSF's fiscal year 2016
    grant awards, GAO found that 90 percent of NSF's awards
    included indirect costs. GAO also discovered that the
    proportion of indirect costs ranged from less than one percent
    of the grant award to 59 percent of the grant award, in some
    cases.
        GAO analyzed the types of awardees that budget for indirect
    costs, including federal, industry, small business, and
    universities, identifying universities as having some of the
    highest indirect cost rates.
        As part of its review, GAO identified potential areas for
    improved oversight of awardees' use of indirect grants,
    including reporting information about indirect costs when
    awardees request reimbursement, enhancing NSF's online approach
    to award payments to include collecting information on indirect
    costs, and consistently following NSF's own guidance for
    tracking and setting indirect cost rates.
        In light of GAO's study, we want to ensure we are doing our
    due diligence to further innovative research initiatives, while
    ensuring taxpayer dollars are expended in the most efficient
    way possible by directly furthering research.
        As many in this room know, encouraging innovative research,
    like that conducted at universities and nonprofit institutions
    across this nation, is vital to the long-term success of our
    economy and our nation.
        Close to my own district, I have seen this work firsthand
    at truly outstanding research institutions, like the University
    of Illinois-Urbana and Western Illinois University in Macomb.
    My district is also located close to the National Center for
    Supercomputing Applications located on the campus of the
    University of Illinois, which houses the Blue Waters
    supercomputer. This is one of the most powerful computers in
    the world, and it is capable of algorithms that can help inform
    a broad range of research, ranging from tax and budget-based
    research to cybersecurity. Western Illinois University, along
    with other research institutions, use the Blue Waters
    supercomputer to conduct innovative research that helps empower
    scientists and researchers across the world by informing novel
    research initiatives.
        During my time in Congress, I have made it my priority to
    help support these endeavors. In fact, last Congress, I
    sponsored the Networking and Information Technology Research
    and Development Modernization Act (NITRD), which was designed
    to help bolster policies for research related to high-end
    computing, cybersecurity, and high capacity systems software.
    This legislation aims to reduce bureaucracy and red tape that
    so often hampers innovative research initiatives, while
    ensuring that taxpayer dollars are spent effectively. It is my
    goal that the NITRD legislation, which was passed by the House
    of Representatives last Congress, as well as similar pieces of
    legislation, will be a core part of the 115th Congress's agenda
    and assist universities and research institutions in pursuing
    much-needed and potentially revolutionary new research.
        As we are conducting this groundbreaking research, we
    must--we cannot forget whose money we are spending. We must all
    strive to be good stewards of taxpayer dollars.
        I hope that today's hearing will help us examine some of
    the issues that may be hampering innovative research, such as
    rising overhead costs. Universities and nonprofit research
    institutions are at the forefront of innovative inquiries and
    studies that often result in lasting implications to help
    better our society technologically. Understanding that research
    is essential to furthering U.S. innovation as we in Congress
    must learn how we can increase effectiveness of taxpayer
    dollars used to fund research.
        I know each of the witnesses here today will help encourage
    a fruitful and engaging discussion and provide insight on ways
    we can improve the efficiency of university research by
    examining overhead costs.
        I thank each of the witnesses for their testimony today and
    look forward to an informative discussion. Thank you.
        [The prepared statement of Mr. LaHood follows:]

     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairwoman Comstock. Thank you, Mr. LaHood.
        And I now recognize the Ranking Member of the Oversight
    Committee, Mr. Beyer, for his opening statement.
        Mr. Beyer. Thank you, Chairwoman Comstock, and thank you,
    Chairman LaHood, for having this hearing today.
        I generally agree with the questions raised by Ranking
    Member Lipinski about overhead costs on federally funded
    research but I also want to emphasize the importance of the
    National Science Foundation and our other science agencies in
    spurring innovation, economic growth, and technological
    advancements in multiple arenas.
        I'm a small business owner, and I understand that indirect
    costs--overhead--are still costs that have to be covered and
    funded. I cannot run my automobile dealerships without
    electricity for light, heat, the tools, without accountants to
    manage our budgets, without IT gurus to maintain the computers
    that manage every aspect of our inventory and sales processes,
    and without the mortgages on our buildings. These kinds of
    overhead costs are just as necessary to run a science lab as
    they are to operate an automobile dealership.
        Of course, we must always strive to improve the management
    of federal research grants, and of course, we must search for
    effective and efficient methods to spend and to oversee these
    funds. But should we drastically cut federal funds to science
    agencies that lead to innovative technological discoveries, as
    the Trump Administration has proposed? Absolutely not. These
    would be foolhardy decisions that would jeopardize our economic
    competitiveness and our ability to develop important national
    security technologies and make vital medical and other
    scientific advancements.
        So I'm deeply concerned about efforts by this
    Administration, the budget we saw yesterday, to drastically
    reduce scientific funding to the National Institutes of Health,
    the Department of Energy, the Environmental Protection Agency,
    the National Oceanic Atmospheric Administration, the National
    Science Foundation, and many others. This shortsighted
    abandonment of our investment in science can only harm our
    economy, our health, our world leadership, and our ability to
    innovate in the middle and long term.
        The National Science Foundation plays the fundamental,
    foundational role in funding scientific research in the United
    States: sine qua non. The NSF builds our scientific knowledge,
    improves our security, expands our economy, and helps us
    compete. Each year they award more than $7 billion in
    approximately 12,000 new grant awards to nearly 2,000
    institutions. The National Science Foundation accounts for
    nearly one-quarter of all federal research funding for basic
    science conducted by America's colleges and universities.
        Look, I don't think any Member of Congress is opposed to
    exploring reasonable and responsible opportunities to ensure
    that our federal funds are spent as efficiently and effectively
    as possible. Improvements in financial management are always
    possible and should be pursued but let's be fully aware of the
    unintended consequences of our actions. Let's be certain any
    changes we make keep the best scientists doing the most
    important work for the National Science Foundation. Let's make
    sure we're not initiating a race to the bottom, with prizes to
    the lowest bidder doing the least valuable research.
        I look forward to hearing the testimony of our witnesses,
    and I trust we'll have a constructive dialogue about the
    important role of the federal government in funding science.
        Thanks, Madam Chair. I yield back.
        [The prepared statement of Mr. Beyer follows:]

     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairwoman Comstock. Thank you, and I would point out that
    the Administration's budget proposal, like every other
    President's, is just a proposal, and Congress gets to decide on
    that, and this Committee has had a very strong record of
    supporting science and research.
        So I now recognize Chairman Smith for his statement.
        Chairman Smith. Thank you, Madam Chair.
        Congress allocates more than $6 billion per year of
    taxpayers' money to the National Science Foundation to support
    scientific research and education at universities and
    nonprofits. This investment contributes to American innovation,
    economic competitiveness and national security.
        Congress also authorizes the NSF and other federal science
    agencies to reimburse universities and nonprofit research
    institutions for the overhead expenses they incur for federally
    supported research projects. These are called indirect costs.
    Indirect costs are allowed in order to pay for such expenses as
    light and water bills for university laboratories, security
    services, and compliance with federal regulations.
        However, indirect costs have expanded and expanded again.
    One point three billion dollars of National Science
    Foundation's current annual research budget is now consumed by
    indirect cost payments to universities and research
    institutions. That is almost one-quarter of National Science
    Foundation's research budget. One point three billion dollars
    would pay for 2,000 more scientific research projects in
    critical areas like physics, biology, computer science and
    engineering. Science and innovation in these fields will
    improve our future economic and national security.
        Universities and non-profits should certainly be reimbursed
    for reasonable costs of sponsoring federal-funded research.
    However, as we will hear today from the GAO, ongoing indirect
    costs consume a larger and larger share of funds for scientific
    research, and many universities are pressing to raise indirect
    costs even higher. In fact, some indirect costs rates have now
    reached 50 percent of the grant and higher.
        There is no question that there are legitimate costs
    associated with carrying out the best research in the world.
    The question is, are taxpayers paying for these costs in an
    efficient and transparent manner, or are we unnecessarily
    subsidizing excess, bureaucracy and waste? Or is the National
    Science Foundation becoming just another source of revenue?
        I recently met with a university president who described
    having to spend $1 million to build a new lab in order to
    recruit a high-profile scientist from another institution. Why
    should taxpayers foot the bill for this scenario?
        Another ongoing investigation of a researcher, who received
    millions in NSF grants over the years, revealed that he used
    indirect funding to pay his salary as president of the
    nonprofit institution as well as administrative salaries for
    his family members. Why was this allowed to happen, and how
    does National Science Foundation monitor the use of indirect
    funds?
        Our challenge is to ensure America remains first in the
    global marketplace of ideas and products, without misusing
    taxpayer dollars. We must conduct research efficiently and
    responsibly so that taxpayers know they are getting good value
    for their investment in our nation's scientific research and
    innovation effort.
        Madam Chair, I look forward to hearing from our panel of
    witnesses today about how indirect cost rates are negotiated
    and monitored, how the funding is used, and how we can better
    control overhead costs, including possible caps or other
    limitations.
        I'll yield back.
        [The prepared statement of Chairman Smith follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairwoman Comstock. I now recognize briefly Mr. Perlmutter
    for an introduction.
        Mr. Perlmutter. Thanks, Madam Chairwoman, and I appreciate
    the moment of personal privilege.
        The Chairwoman was bragging a little bit about George
    Mason. My friends, Mr. LaHood and Lipinski, were bragging about
    the University of Illinois.
        Chairman Smith. Here it comes.
        Mr. Perlmutter. Well, I actually get to brag about the
    University of Colorado. There are five budding scientists from
    the university here today in physiology, molecular, cellular
    and developmental biology, neuroscience, public health, and
    environmental biology. So if the students from the University
    of Colorado CU Boulder, would you please stand so everybody can
    see you?
        So my university takes these subjects very seriously, and
    I'd just like to thank you all for being here and listening to
    this, what is kind of a dry subject but very important to
    universities and how they receive their grants.
        So thank you for being scientists, thank you for coming to
    the Congress of the United States and listening to the Science
    Committee.
        And with that, I'd yield back to the Chairwoman.
        Chairwoman Comstock. Thank you, and I appreciate the
    students. Welcome, and nice to see so many young women
    scientists here. So thank you.
        I'll now introduce our witnesses. Our first witness today
    is Mr. Dale Bell, Division Director for Institution and Award
    Support at the National Science Foundation. In this position,
    Mr. Bell provides oversight across NSF's financial assistance
    awards through NSF policy and business systems requirements as
    well as cost analysis and awardee monitoring. Prior to NSF, Mr.
    Bell worked across the federal sector as a consultant for
    program execution management and strategic planning. He has a
    bachelor's degree in political science from the Johns Hopkins
    University and a master's degree from Georgetown University
    School of Business.
        Our second today is Mr. John Neumann, Director of Natural
    Resources and Environment at the U.S. Government Accountability
    Office. With over 25 years of experience, he leads auditing
    efforts in the science and technology area including the
    management and oversight of federal research and development
    programs, protection of intellectual property, and federal
    efforts to support innovation. He graduated cum laude with a
    Bachelor of Arts degree in political science from the State
    University of New York at Stony Brook and holds a master's of
    business administration from American University. Mr. Neumann
    also earned a juris doctorate from Georgetown University.
        Our third witness today is Mr. James Luther, Associate Vice
    President of Finance and Compliance at Duke University. He also
    serves as Chairman of the Board of the Council on Governmental
    Relations. Mr. Luther's responsibilities include post-award
    areas in asset management oversight for the University and
    School of Medicine, negotiation of Duke's indirect cost and
    fringe benefit rates, and all aspects of Duke's research
    costing compliance program. He earned his bachelor's of science
    in engineering from the United States Naval Academy and a
    master of arts from Duke.
        Our fourth witness today is Dr. Richard Vedder,
    Distinguished Professor of Economics Emeritus at Ohio
    University, in Athens, Ohio. Dr. Vedder has been an economist
    with the Joint Economic Committee of Congress, a Fellow of the
    George W. Bush Institute, and an Adjunct Scholar at the
    American Enterprise Institute. He also directs the Center for
    College Affordability and Productivity. Dr. Vetter has written
    over 100 scholarly papers published in academic journals and
    books on the U.S. economy and public policy including the book
    Going Broke by Degree: Why College Costs Too Much. He received
    his Ph.D. in economics from the University of Illinois.
        I now recognize Mr. Bell for five minutes to present his
    testimony.

                      TESTIMONY OF MR. DALE BELL,

                           DIVISION DIRECTOR,

                     INSTITUTION AND AWARD SUPPORT,

                      NATIONAL SCIENCE FOUNDATION

        Mr. Bell. Chairman Smith, Chairman Comstock, Ranking Member
    Lipinski, Chairman LaHood, Ranking Member Beyer, and
    distinguished members of the Research and Technology and
    Oversight Committees. My name is Dale Bell, and I serve as the
    Division Director for the Division of Institution and Award
    Support at the National Science Foundation. I appreciate the
    opportunity to testify before you this morning, and I'd like to
    say that this is a sexy topic for me, so thank you for the
    opportunity.
        Since its establishment in 1950, the mission of NSF has
    been to promote the progress of science, to advance the
    national health, prosperity and welfare, and to secure the
    national defense. To do so, NSF awards grants and cooperative
    agreements with an eye toward advancing the scientific frontier
    to approximately 2,000 organizations consisting of colleges,
    universities, K-12 school systems, businesses, science
    associations, and other research organizations.
        The federally sponsored research enterprise is a
    partnership between the federal government and the institutions
    performing the research. Both are committed to achieving
    mutually beneficial outcomes and both agree to share in the
    cost of enterprise that enables this research.
        NSF reimburses awardees for direct costs such as salaries,
    equipment and travel that can be attributed to a specific
    project. NSF also funds indirect costs. Some call these
    overhead or facilities administration. These are costs which
    are not readily identifiable with a specific research project
    but are still necessary for the general operation to carry out
    the research. Examples of indirect costs may include laboratory
    occupancy costs, hazardous chemical and biological agent
    management, libraries, IT systems, data transmission and
    storage, radiation safety, insurance, administrative services,
    and compliance with government regulations including
    institutional review boards for human subject research. Note
    that only resources used for research are counted, and the
    federal government partially reimburses awardees for these
    expenses through the use of an indirect cost rate.
        The amount of indirect costs budgeted to NSF awards has
    remained stable. Recent NSF analysis of data developed in the
    course of the GAO audit shows that annual funding for indirect
    costs across NSF's entire portfolio of awards averaged about 20
    percent of the total amount awarded over the last 17 years.
        NSF does not negotiate indirect cost rates for colleges and
    universities, which make up about 91 percent of NSF's awardees.
    Per the Office of Management and Budget's Uniform Guidance,
    indirect cost rate negotiation cognizance for all colleges and
    universities is assigned to the Department of Health and Human
    Services or the Department of Defense's Office of Naval
    Research.
        NSF is the cognizant agency for negotiating indirect cost
    rates for about 100 of its over 2,000 awardee organizations, or
    about five percent. To put this in perspective, of the
    approximately 45,000 awards in NSF's active portfolio, over 98
    percent were made to organizations that negotiate indirect cost
    rate agreements with other federal agencies.
        Organizations for which NSF is the cognizant agency largely
    consistent of nonprofits such as independent research
    institutions, laboratories, museums, professional scientific
    societies, and foundations.
        Accountability over indirect cost starts with the rate
    negotiation process. OMB Uniform Guidance sets requirements to
    be applied by all federal agencies. All entities for which has
    NSF has rate cognizance as required to regularly submit
    indirect cost rate proposals for review.
        Calculating an indirect cost rate is an involved process.
    The negotiation process begins with submission of indirect cost
    rate proposals and supporting documentation. A rate negotiator,
    an expert in cost analysis, reconciles the proposal with the
    organization's audited financial statements and other financial
    information and ensures that costs have been allocated in
    accordance with the Uniform Guidance.
        NSF exercises various forms of oversight over the
    application of the indirect cost rate. This includes single
    audits, incurred cost audits and other post-award monitoring
    efforts. In addition, NSF monitors the use of indirect costs
    through transaction testing as required under its
    implementation of the Improper Payments Act.
        Excellence in stewardship is an NSF strategic goal. The
    agency welcomes the oversight provided by this Committee and
    the GAO.
        NSF has already strengthened its internal procedures
    related to the indirect cost rate negotiation process as a
    result of the GAO engagement, and we remain a fully engaged
    partner in ensuring accountability for taxpayer investments in
    the federal research enterprise.
        This concludes my oral testimony. More detail on the points
    I briefly highlighted today can be found in my written
    statement. I would be pleased to answer any questions you may
    have. Thank you.
        [The prepared statement of Mr. Bell follows:]

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        Chairwoman Comstock. Thank you.
        And we now recognize Mr. Neumann.

                TESTIMONY OF MR. JOHN NEUMANN, DIRECTOR,

                   NATURAL RESOURCES AND ENVIRONMENT,

                 U.S. GOVERNMENT ACCOUNTABILITY OFFICE

        Mr. Neumann. Thank you. Chairwoman Comstock, Chairman
    LaHood, Chairman Smith, Ranking Members Lipinski and Beyer, and
    members of the Subcommittee, thank you for the opportunity to
    be here today to discuss our ongoing work on the National
    Science Foundation's oversight of indirect costs on awards for
    scientific research and education.
        NSF funds billions of dollars in awards each year to
    universities, elementary school systems, science associations,
    and other research organizations. For most awards, NSF
    reimburses awardees for both direct and indirect costs
    incurred. Direct costs such as salaries and equipment are those
    that can be attributed to a specific research project. Indirect
    costs are those that cover the genera operation of an awardee's
    organization such as the cost of operating and maintaining
    facilities or the salaries and expenses for general
    administration.
        Today I'd like to provide some preliminary observations
    from our ongoing work that is focused on two areas: first, what
    is known about indirect costs of NSF awards over time, and
    secondly, the extent to which NSF has implemented guidance for
    setting indirect cost rates for the organizations it's
    responsible for.
        Our first preliminary observation is that indirect costs on
    an NSF award range from 16 to 24 percent of the total amounts
    the agency awarded each year from 2000 to 2016. NSF has
    provided some explanation for the variation in indirect costs
    from year to year, and we are continuing to evaluate those
    factors.
        Another observation related to this variation is that the
    average indirect costs also varied across types of awardees
    which included universities, small businesses, industry and
    others. Specifically, we observed that in fiscal year 2016,
    university awardees had the highest average indirect costs,
    about 27 percent, while industry had lower average indirect
    costs of 14 percent, and we're continuing to evaluate the
    reasons for that as well.
        I should also note that our preliminary analysis of
    indirect costs is based on NSF budget data because NSF doesn't
    require awardees to report information about actual indirect
    costs separately from direct costs when requesting
    reimbursement for work done on a specific award.
        In our review of NSF's guidance for setting indirect cost
    rates for the organizations it's responsible for, we also had
    several observation including that NSF staff did not
    consistently implement the guidance and the guidance itself did
    not include certain details. For example, in 2008, NSF created
    a database for tracking its active indirect cost rate proposals
    in response to recommendations made by the NSF Inspector
    General in a prior audit. However, NSF staff haven't
    consistently updated the data in its tracking system to reflect
    the current status of its indirect cost rate proposals.
        Also, we observed that NSF guidance does not describe
    specific steps for supervisor review of the indirect cost rate
    proposals to ensure that only allowable and reasonable indirect
    costs have been proposed for NSF awards.
        Lastly, we observed that NSF's guidance has not been
    updated to reflect changes from OMB's Uniform Guidance for
    Federal Awards, which became effective at the end of 2014.
        In closing, I would note that we're continuing our ongoing
    work to examine NSF's data on indirect costs over time and its
    implementation of its guidance for setting indirect cost rates.
    As you know, NSF awards billions of dollars to organizations
    each year and it's essential that NSF ensures efficient and
    effective use of the federal science funding through its
    oversight of indirect costs.
        This concludes my prepared remarks. I'm happy to respond to
    any questions you may have.
        [The prepared statement of Mr. Neumann follows:]

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        Chairwoman Comstock. Thank you.
        And I now recognize Mr. Luther for five minutes.

                     TESTIMONY OF MR. JAMES LUTHER,

                      ASSOCIATE VICE PRESIDENT OF

                   FINANCE & COMPLIANCE OFFICER, DUKE

                   UNIVERSITY; CHAIRMAN OF THE BOARD,

                   COUNCIL ON GOVERNMENTAL RELATIONS

        Mr. Luther. Good morning, Subcommittee Chairwoman Comstock,
    Ranking Member Lipinski, Subcommittee Chairman LaHood, Ranking
    Member Beyer, and members of the Research and Technology and
    Oversight Committees. My name is Jim Luther. The perspective I
    represent today is both as a compliance officer and finance
    individual at Duke University as well as the Board Chair for
    the Council of Government Relations, which is a group of about
    190 of the nation's major research universities, medical
    centers and research institutes.
        I'll start by expressing my appreciation for this
    opportunity to discuss the federal university research
    partnership and how universities are reimbursed for the cost of
    conducting federally funded research. Academic institutions
    have been working in partnership with the federal government
    for decades to advance national security, health and
    prosperity. This partnership allows for significant cost
    efficiency in the use of federal funds where the government is
    unbound from maintaining its own facilities and personnel, and
    it has yielded tremendous results.
        United States leads the world in scientific innovation,
    which has led to significant economic benefits, job growth, and
    advances in healthcare and defense that benefit all Americans.
        The federal government contributes over 50 percent of
    funding for academic research. These funds include direct costs
    of personnel, supplies and equipment as well as facilities and
    administrative costs that represent critical infrastructure
    that supports the research. F&A costs cannot be viewed
    separately from direct costs. Together they represent the total
    cost of performing research.
        If direct costs are thought of as the gas for the research
    engine, F&A reimbursements represent the oil. The research
    engine requires both.
        My remaining comments are summarized in four points. Number
    one, there is a longstanding, time-tested commitment to the
    partnership. Number two, the effectiveness of the partnership
    is demonstrated by the cures that have impacted human health,
    improvements in defense, infrastructure, engineering, biology,
    social science, and other areas. Number three, the current
    system recognizes cost and infrastructure differences. Some
    research is more expensive than others because of geography
    but, more important, the type of research. And finally and most
    importantly, the current system recognizes that F&A is a real
    cost of doing research.
        Research institutions provide the physical infrastructure
    where research is conducted. This includes construction and
    maintenance of specialized facilities and labs, which support
    diverse research such as the study of serious and potentially
    lethal agents, advanced robotics, and critical vaccines. F&A
    costs also provide key operations infrastructure such as
    utilities, high-speed data processing, human and animal
    research review boards, radiation and chemical safety, and
    other compliance activities required when accepting federal
    funds. It is as basic as turning on the lights and as complex
    as supporting the disposal of biohazardous materials like
    anthrax.
        F&A costs are tightly regulated and audited by the
    government to ensure that the government only funds that
    portion of F&A costs that are attributable to the federally
    funded research. F&A costs on federal awards have remained
    relatively constant for the past two decades. At NIH,
    approximately 28 percent of all expenditures are attributable
    to F&A.
        Universities are committed partners in our nation's
    research enterprise, committing more than 24 percent of their
    own funds towards higher education research and development--
    $17.7 billion in fiscal year 2015.
        It is important to note that federal funding does not fully
    cover F&A costs apportioned to federal studies. That is due in
    part to a cap on administrative costs put in place for research
    universities in 1991 but also due to the significant increase
    in federal requirements that necessitate additional
    infrastructure and staff. A recent National Academies report
    noted that the federal government promulgated on average 5.8
    new or changed regulations and policies per year over the past
    decade, a 400 percent increase over the 1990s. As nearly all
    universities are over the administrative cap of 26 percent, all
    new costs associated with complying with these regulations are
    borne by the university. That represents about $4.8 billion
    related to unreimbursed F&A costs.
        With respect to research space, Duke's experience is that a
    moderate-sized research building increases our institutional
    cost by approximately $10 million per year, even after the
    recovery of F&A. This is due to faculty start-up costs, ongoing
    faculty and research support, subsidized animal operations, and
    components of the building which are not designated as
    research.
        In closing, I would emphasize three points. The
    longstanding commitment to the partnership works, and it's been
    time-tested for many decades but is being jeopardized by
    declines in state funding, increasing regulations, and reduced
    F&A reimbursements. Number two, the current system recognizes
    costs and infrastructure differences that some research is more
    expensive, and for good reason. Different geographic regions
    and types of research can cause significant differences in
    costs. The costs related to support policy research is vastly
    different than F&A costs related to biocontainment,
    translational cell therapy, and so forth. And finally and most
    importantly, it recognizes that F&A cost is a real cost and
    doing research without it, plain and simple, we could not turn
    on the lights.
        I would suggest that the effectiveness of this hearing
    would be reduced if we were sitting on the Capitol steps and
    didn't have lights, didn't have air conditioning, chairs,
    legislative aides, and AV equipment. That is analogous to the
    F&A support needed for university research.
        Any reduction in federal funding including funding for
    research infrastructure will result in less research, slower
    scientific progress, fewer medical treatments, fewer jobs, and
    likely fewer universities conducting research, and
    undergraduates and graduate students educated in the research
    setting.
        Thank you.
        [The prepared statement of Mr. Luther follows:]

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        Chairwoman Comstock. Thank you.
        I recognize Dr. Vedder for five minutes.

                    TESTIMONY OF DR. RICHARD VEDDER,

             DISTINGUISHED PROFESSOR OF ECONOMICS EMERITUS,

                            OHIO UNIVERSITY,

                        DEPARTMENT OF ECONOMICS;

                      DIRECTOR, CENTER FOR COLLEGE

                     AFFORDABILITY AND PRODUCTIVITY

        Dr. Vedder. Chairs Comstock and LaHood, Dr. Lipinski, Mr.
    Beyer, Members of the Committee, the policy of the federal
    government regarding overhead or indirect cost reimbursement to
    universities holding research grants is seriously flawed.
        Two highly regarded economists from Stanford and
    Northwestern Universities concluded talking about overhead
    costs, and I quote them, ``The existing system for reimbursing
    those costs creates unnecessary distortions in the operations
    of universities and has very high transactions cost. Instead,
    both universities and the federal government would be better
    off if the existing indirect cost reimbursement system were
    replaced by a system of fixed reimbursement rates that were not
    related to a university's actual indirect costs.''
        Suppose the NIH or NSF makes a million-dollar grant to a
    Harvard researcher. The immediate increase in indirect costs to
    Harvard for buildings, administration, electricity and the like
    as a consequence of that grant is probably at most a few
    thousand dollars. But however, Harvard will get several hundred
    thousand dollars in overhead funds, therefore, making a large
    short-term financial gain. At many schools including my own,
    researchers getting federal grants receive a kickback of some
    of the overhead money as an incentive to seek more grants.
    Schools would do not that unless they considered federal
    research grants to be at least somewhat financially lucrative.
        Now, to be sure, in the long run there are real legitimate
    long-term indirect costs yet I think the current system
    incentivizes universities to pad their bureaucracies and have
    excessively fancy buildings. As one academic put it, ``The more
    you spend, the more you get.'' Where's the incentive to have
    linoleum floors instead of marble?
        A fairly considerable amount of resources is also devoted
    to justifying and verifying overhead costs. Non-governmental
    organizations making grants to universities typically allow far
    lower amounts of indirect costs. What are the policies
    regarding state government financial research? Again, today's
    GAO testimony suggests that the overhead provision is smaller.
    I calculate from figure 2 of the GAO report today that the
    average NSA university overhead provision in 2016 was about 37
    percent of the amount granted for direct research costs, 27
    percent of the total, 37 percent for research.
        There are two good approaches to replacing the current
    system. The first would be to adopt a uniform national
    reimbursement rate. This was unsuccessfully proposed in the
    Obama Administration. This approach could save resources by
    ending negotiations and verifications and audits surrounding
    unique individual rates on various campuses. If a university--
    if a uniform federal rate of, say, 20 percent were adopted, you
    would be able to maintain the amount of money going directly
    for research within a ten percent NSF funding reduction if that
    were to happen. I'm not advocating that, by the way, but I said
    you would be able to do so.
        Although over time--and I would predict universities would
    still vigorously apply for grants although over time they would
    reduce their bureaucracies, hold fewer grant-writing workshops
    and like--more bang for the buck.
        Under a second approach, the decision as to who would
    receive research grants would be partly determined by project
    price--a novel notion. Suppose NSF or NIH grants are made on a
    point system, 100 points being the maximum? Have 75 points be
    determined as now by the scientific merit of the proposal. Have
    the remaining 25 points be determined by the amount of overhead
    universities request. With the more points gained, the lower
    the overhead request. A school asking for 50 percent overhead
    for a grant might only get one point on the indirect cost
    portion of the grant application while one asking for only 20
    percent might get 22 points. Greedy universities--a concept
    some don't believe exist but I've been at them for 52 years,
    and I know. Greedy universities with extraordinary indirect
    cost requests would likely get fewer grants while frugal
    universities willing to accept modest overhead provision would
    gain some advantage.
        It is possible to get more actual research activity per
    dollar of total funding by paring our support for indirect cost
    provisions in funded grants.
        Thank you, Madam Chairman.
        [The prepared statement of Mr. Vedder follows:]

     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairwoman Comstock. And I now recognize myself for five
    minutes for questions.
        Given the wide range that we have there, could you explain
    to us, like for example, Harvard University has--what, they're
    up in the 60s or so for their rate of--is that correct? And
    so--and Harvard University probably has one of the largest
    endorsements in the country. Would that be correct? You all
    agree? Okay.
        So what I'm looking at some place like George Mason--and I
    understand a lot of the universities don't want to have caps
    here. What I'm trying to look at is how when we have a
    university with a huge endorsement, probably one of the largest
    in the country, has one of the highest rates, how can we, you
    know, provide for fairness, particularly for the new and up-
    and-coming universities? Do we want to have more diversity in
    terms of ability to get the research out there? I think, Dr.
    Vedder, you provided some different ideas on that.
        And then also, and this is sort of for all of you to
    address maybe in a general idea, but when you look at--I'm
    thinking at George Mason, I know the Gates Foundation is
    funding some of the research that we have going on, I believe
    in Lyme disease. The state also funds it. I'm not sure what
    their rate is that they allow, and then we have some federal
    government money going in there. How does that work when the
    Gates Foundation does cap their administrative costs at ten
    percent. How does this all work out when you have those
    different rates, and how can we as the federal government maybe
    get a better bang for the buck and getting the money going
    directly to research among the different situations and
    different universities?
        Mr. Luther. Could I respond to that question?
        Chairwoman Comstock. Yes, Mr. Luther.
        Mr. Luther. Thank you. So I think there were three
    questions, one about the endowment, one about why do rates
    vary, and one about foundations. So the endowment piece, I'm
    not an expert on endowment, but there's certain restrictions
    about how you can use the funds for endowment.
        But if I could address the other two because I think
    they're kind of at the heart of the issue as we look at this,
    and I would suggest that rates vary significantly as we all
    have discussed for two primary reasons. One, because of
    geography, what region they're in. If you have the exact same
    research building in San Francisco or New York City or in the
    middle of America, that exact same research, the cost of that,
    the cost of construction, utilities and everything else are
    going to be vastly different.
        But the second point I think is more important there, and
    that is, it's all about the type of research. Within Duke, if
    we looked at individual grants, we have research being done on
    public policy, and the F&A related to that individual grant is
    a computer, the lights and so forth. If we look at a school of
    medicine, they have biocontainment facilities, they have
    specialized HVAC, they have warm rooms and cool rooms, they
    have purified water, they have the ability to filter the water
    for the experiments in a certain way. They have IT
    infrastructure. I mean, it truly is all about the research, the
    type of research being done, and I would suggest--again, within
    Duke, we might see one grant where the effective rate is low,
    we might see another grant where it's really 100 percent or
    more. That averages out across the institution in this process.
        And then with regard to foundations, I think there's a
    couple of things to look at. We have a fair amount of
    foundation money. A fair amount of that is from the Gates
    Foundation. But the way we cost is vastly different from a
    foundation to the federal government. First of all,
    foundations--and it's on the Gates Foundation website, for
    example--they will routinely pay certain things that the
    federal government will not pay. They pay it directly--project
    management costs, facilities costs, lots of different things
    that the federal government would not pay.
        The second thing is that foundations generally apply their
    F&A rate to total direct costs. There was some discussion
    before about modified total direct costs. The federal
    government does not pay overhead to Duke University on capital
    equipment, patient care, sub awards, lots of different
    categories. Oftentimes a foundation does.
        And then continuing, many of the foundation funding relates
    to off-campus work so comparing the Gates Foundation to Harvard
    at 60, it's more appropriate to compare to the off-campus rate,
    which is normally around 25, 26, 27 percent.
        And then lastly, I would say, you know, foundations, at
    least our experience at Duke, are oftentimes incremental
    funding. We have again a fair amount of Gates Foundation
    funding that is providing funding related to development of an
    AIDS vaccine. NIAID is providing the bulk of that funding. The
    Gates Foundation is providing critical funding to support that.
        Chairwoman Comstock. Dr. Vedder, did you want to----
        Dr. Vedder. As Mr. Luther mentioned, there were several
    components to your question. One point you made with regards to
    endorsements, and it is--I think you're raising a fairly
    legitimate question, and also about the overall issue of sort
    of inequality in the funding.
        I did do a little statistical regression equation looking
    at the published NSF overhead rates as of two or three years
    ago for about 100 different schools, and I compared that with
    other indicators of the eliteness of the school including their
    endorsement money per student, and it was interesting. The
    richer schools were getting the higher percentage rates.
        Now, it is true, as Mr. Luther says, that there are special
    circumstances in some situations that might lead to some
    legitimacy in the differences of cost, but my university, a
    little school in Appalachia with a modest endowment, has an
    overhead rate of about 50 percent. In 2013, Harvard had 69
    percent. And it is literally true if you walk into a building
    in Cambridge, Massachusetts, the floors are marble. I mean,
    they're nicer buildings. I mean, what the hell? I've been
    teaching at universities 52 years, and I've taught at all the
    universities mentioned here. I have two degrees from Illinois.
    I have one degree--I get a lot of money from George Mason, from
    the University of Colorado. I've been at all these schools, and
    believe it or not, there are differences in the appearances.
        So I think it would be wise to ask the GAO to extend their
    studies further. What does Britain do? Take another country.
    What does Canada do? Why are the--why would McGill University
    or the University of Toronto be much different than American
    University? What to the Canadians do? I don't know. It'd be
    interesting to know.
        To me, a large part of the costs are this back-and-forth
    negotiations. Why not just set a flat rate and say be done with
    it?
        Chairwoman Comstock. And save the money on the audits.
        Dr. Vedder. Yeah, yeah, yeah. And by the way, I don't know
    want my remarks to be construed as saying I am against
    scientific funding. It's a question of how do we divide the pie
    between the researchers and between the administrative costs.
        Chairwoman Comstock. Thank you, and I've gone over my time,
    so I now recognize Mr. Lipinski for five minutes.
        Mr. Lipinski. Thank you.
        In my previous life, I was an assistant professor and I did
    get my Ph.D. from Duke. I have been to Ohio University though I
    have visited there.
        But my background, and what I hear from my colleagues, what
    I hear in this Committee has--the reason why I was so active in
    working to reduce the regulatory burden and worked to get the
    Interagency Working Group on research and regulation
    established in the American Innovation and Competitiveness Act
    last year.
        I want to ask Mr. Bell, what are some of the--what role do
    you see this interagency working group having in helping to
    reduce the regulatory burden?
        Mr. Bell. What I'd like to do is talk a little bit about
    the Uniform Guidance, which is a policy document that oversees
    the indirect cost rate negotiation, and that was born of
    interagency working groups looking at administrative burden and
    trying to strike that fine balance between oversight and
    stewardship with, as we've talked about, freeing up funding to
    focus more on direct costs. So I believe that there is great
    opportunity. Administrative burden and interagency
    collaboration, I think, really need to be viewed within the
    context of where did the burden come from, where did the cost
    of compliance come from. So you could come up with a lot of
    great ideas, which is what I believe that the current reform
    efforts are associated around. The question is how do you then
    undo those from a government-wide level. So I believe that they
    will be great sources of information for administrative burden.
        And then the real effort will be, how do you then unpack
    that? Is it coming from legislation, is it coming from
    individual regulation? The Uniform Guidance I believe did an
    admirable effort in trying to strike that balance between
    stewardship and between owning the partnership in the sense
    that our awardees are responsible to make sure that they're
    doing the best that they can with the funds that they receive.
        Mr. Lipinski. Thank you.
        I want to move on to ask Mr. Luther, Dr. Vedder claims that
    universities make a profit on indirect cost reimbursements from
    the federal government. It's my understanding that due to
    eroding support from state appropriations, public universities
    are contributing an increasing amount of their own
    institutional funds to cover the costs of conducting research.
    What is your response to the assertion that universities are
    making a profit on indirect cost reimbursements?
        Mr. Luther. That's a great question. At Duke, we contribute
    about $30 to $35 million of administrative costs. We're about
    six points over the cap. Now, one might argue that that's
    administrative bloat. I can assure you that's absolutely not.
    That is directly related to two things: adding administrative
    infrastructure to support the faculty. Right now there's
    multiple studies that suggest that faculty spend about 42
    percent of their funded time doing administrative and
    compliance activities. Our job as administrators is to do the
    types of things that let them do the research and we do the
    administration.
        The other thing we've been doing as we've discussed in
    September, eight months ago, from the perspective of new
    compliance requirements, new compliance requirements are coming
    out at the rate of about six or so a year, new regulations.
    When that happens, we spend money on technology, on business
    processes and people to manage it. But there is absolutely no
    incentive for us to hire additional administrators because we
    pay for every penny of it.
        From the building perspective, we lose money. We don't get
    anywhere close to recovering the cost of a building regardless
    of the type of research, and in support of this testimony
    today, when we submitted our indirect cost proposal to Health
    and Human Services for negotiation, I looked in a handful of
    buildings, and the example I'm about to explain is
    representative. A 10-year-old building, the costs for
    depreciation and O&M operations and maintenance--is in the
    range of $9 million. We recover somewhere in the neighborhood
    of $2-1/2 million. We subsidize the research mission in that
    building $7 million.
        So I do agree that some of our buildings have marble
    floors, but that's not what drives up the cost. What drives up
    the cost is that to support that research, you have to purchase
    a $2 million DNA sequencer in the lab to support that. A piece
    of that is in the indirect cost rate. You have to put in
    special HVAC and all the other things that we've talked about
    to manage that research. It is not--I would suggest it's not
    the marble when you walk in the lobby. It is everything else
    that goes to conducting that top-notch research.
        Mr. Lipinski. Well, I have to say I didn't--none of
    political science buildings had marble floors, so that's all I
    know.
        My time is up. I yield back.
        Chairwoman Comstock. I now recognize Mr. LaHood.
        Chairman LaHood. Thank you, Chairwoman Comstock.
        Mr. Bell, I was going to ask you a question here. I
    referenced earlier in my statement about National Science
    Foundation Office of Inspector General had released several, I
    guess, routine audits regarding several universities and
    research institutions and their use of indirect costs to cover
    travel expenses. As a result of one of those audit reports, the
    OIG is pursuing an ongoing investigation into the misuse of
    federal grant dollars for travel unrelated to the purpose of
    the grant, which was awarded to cover the development of a
    research institute. The OIG has questioned over $36,000 in
    travel expenses including over $12,000 covered by indirect
    costs.
        Mr. Bell, because this case was egregious enough to warrant
    an ongoing investigation by the OIG, what measures does NSF
    take to track indirect costs and ensure that federal funds go
    toward direct research expenses and not other things?
        Mr. Bell. Thank you for the question. So in terms of
    tracking costs both direct and indirect, there are a number of
    activities that NSF uses. One of them is one that you have
    pointed out, which is the oversight and analysis done by our
    Office of Inspector General. That is one way in which we ensure
    that the policies and procedures are in place--OIG audits.
        Another mechanism that we use is something called single
    audit. Any organization that expends over $750,000 of federal
    funds is required to conduct an audit, and that audit looks at
    internal controls, looks at financial statements, and that
    information is then summarized in the audit and then uploaded
    to a federal audit clearinghouse, and the idea here is that we
    don't want just any one agency getting access to this
    information. Cognizant agencies for audits are responsible for
    taking those single audits and reviewing them and resolving
    those audits to ensure these organizations are meeting the
    expectations outlined in the Uniform Guidance.
        The third thing that we do is, we have advanced monitoring
    programs, both where we do some transaction testing on site to
    ensure that internal controls are in place, and we do
    transaction testing at a baseline level where we randomly check
    various transactions, track them back to how those costs were
    reimbursed, how they were spent, both from a direct and an
    indirect basis.
        Chairman. LaHood. And I guess following up on that, Mr.
    Bell, have you found that those mechanisms that are currently
    in place have had a deterrent effect on any other type of
    egregious allegations and that it has worked well or is in need
    of review?
        Mr. Bell. So to begin with, we are in full compliance with
    the Uniform Guidance on oversight monitoring and indirect cost
    rate management, so that's our starting point. In terms of how
    we're doing, we believe that our advanced monitoring program
    and the other points with which we interact with awardees in
    fact does protect and serve the taxpayer. An example is we'll
    often during our advanced monitoring uncover things that don't
    seem right to us that could border on fraud. We forward those
    to the Office of Inspector General for investigation. We also
    work very closely with our Office of Inspector General during
    audit resolution. Resolution is the point at which the
    management takes that information and figures how best to move
    forward including things like the returning of funds or
    corrective action to support internal controls.
        Chairman. LaHood. And you're confident with the system
    that's in place now?
        Mr. Bell. I am. I am, and there is always room to get
    better. With over 2,000 awardees and 45,000 active awards,
    there's always an opportunity for us to improve, which is why
    we appreciate the oversight from this organization and from my
    colleague to the left at GAO.
        Chairman. LaHood. Thank you. Those are all my questions.
        Chairwoman Comstock. I now recognize Mr. Beyer.
        Mr. Beyer. Thank you, Chairman Comstock.
        Mr. Bell, in Dr. Vedder's presentation, he made an argument
    for uniform national reimbursement rate, and among other
    things, he said that the current system of negotiated rates
    favors the wealthier schools over other institutions, you know,
    HBCU schools or smaller state schools and the like. How do you
    respond to that, and why is that insight not correct?
        Mr. Bell. So my first response is that we are the cognizant
    agency for about five percent of the organizations that receive
    NSF funding, and 91 percent of those organizations are colleges
    and universities, for which the cognizant agency for them is
    HHS and ONR.
        Mr. Beyer. Let me jump beyond that. I realize that you
    aren't determining the rates because you're not the cognizant
    agency but you still have to administer those 22,000 grants,
    the $7 billion. So whoever makes the rate, they're negotiated
    now across all 100 percent.
        Mr. Bell. That's correct.
        Mr. Beyer. Does the negotiated rate actually help the
    Harvards and the Princetons and disadvantage the Virginia
    States and the Norfolk States?
        Mr. Bell. I wouldn't be able to give you specific
    information but perhaps I'll give you a general statement. A
    cap means that some organizations would have to--would under-
    recover indirect costs, and as we've described, indirect costs
    are real costs in support of executing research. So a cap could
    mean that organizations would not be able to recover. Some
    organizations are in a better position to absorb under-
    recovery. Those would be organizations who have access to other
    types of funds, which could include endowments, could include
    raising tuition, or other sources of funding. So organizations
    that are unable to absorb that under-recovery would not be able
    from an economic standpoint to actually participate in the
    research enterprise.
        Mr. Beyer. Okay. Thank you.
        Mr. Neumann, again, referring to Dr. Vedder's comments,
    number one, he pointed out that the research grants are so good
    for colleges and universities that they actually give kickbacks
    to the professors who get them and that they're incentivized to
    get more. He also suggested later that in arguing for uniform
    national reimbursement rate that if 30 percent were adopted,
    universities would complain bitterly but still apply for grants
    as vigorously as ever.
        From a Duke perspective, is that how you guys feel about
    the grants, kickbacks, and would you compete as vigorously as
    ever with a 30 percent cap?
        Mr. Luther. So two questions. With regard to the kickback,
    we do return some of the recovery back to the department and to
    the school but we do that because that's where the cost is, so
    20 years ago we didn't do that. We kept much of the indirect
    centrally and we paid rent centrally, we paid facilities
    centrally, and there was no incentive for the schools to manage
    their space effectively. When the revenue follows the cost, the
    incentive is completely different. So if they have vacant
    space, that space that they don't pay for, they don't get any
    indirects related to that, and it's managed centrally so that
    it can be used more effectively.
        So the kickbacks, I would say the first point on that is,
    the indirect costs are reimbursement for costs that we already
    incurred. The fact that the revenue comes in and we do
    something else with it I would suggest is completely
    irrelevant. But secondly, as I just stated, the reason we
    return that back to the faculty member, back to the department
    is to incent responsible behavior and because, as I mentioned,
    Duke contributes somewhere in the neighborhood of $125 million
    a year to the research mission sending that back to the
    department so that they can buy computers, which are difficult
    to purchase on grants, so that they can fund post-docs and
    graduate students, which aren't always funded on grants. That's
    why we do that type of thing. And I'm sorry, I forgot the
    second question.
        Mr. Beyer. If there were a 30 percent cap, would you pursue
    the grants as vigorously as before?
        Mr. Luther. What troubles me about that is, I don't know
    what the long-term impact on that is, but you wouldn't have the
    breadth of the research institutions you do now. We fund that
    $125 million a year of the research mission that the federal
    government doesn't fund with philanthropy and with clinical
    margins and other things. I don't know how other institutions
    would do that with pressures on tuition, with smaller
    endowments and so forth. Right now the way the research works
    now is the research is solely focused on the institution that
    submits the best proposal from a scientific standpoint, from a
    peer-review standpoint gets the award, and sometimes we absorb
    more indirect costs than others but that's how the system
    works. It's not about funding. It's not about the indirect
    costs.
        Mr. Beyer. Thank you. Mr. Chair, I yield back.
        Chairman. LaHood. [Presiding] Thank you. I now yield five
    minutes to Mr. Palmer.
        Mr. Palmer. Thank you, Mr. Chairman.
        Mr. Neumann, why do university awardees receive the highest
    averaged budgeted indirect costs? I think it's 27 percent in
    2016 compared to other awardees?
        Mr. Neumann. Well, we're still evaluating the reasons for
    that but NSF has told us, you know, some of the things that
    they believe goes into that, and a lot of it is just the nature
    of the research being done, the facilities that are needed for
    that research, and I think the important thing is, we're
    looking at the data at a high level, and to really understand
    what that data means, you need to go down to almost an award-
    by-award level so you're comparing apples to apples, you know,
    university to university to see what you're paying for the same
    type of research, and so I think that's the level of analysis
    you would need to understand some of the reasons for the
    universities being higher.
        Mr. Palmer. We're talking about an average so that means
    it's pretty uniform, routine that it is higher. I think it
    raises some concerns about the budgeted indirect costs.
        Let me ask you this. For an organization to be reimbursed
    for indirect costs, it must have a negotiated indirect cost
    rate agreement with the federal agency. How can this process be
    improved at NSF?
        Mr. Neumann. Sure. I think what we're seeing is that there
    should--we'd like to see consistency in applying the guidance
    for the rate-setting process, make sure that there is
    supervisory review, and that the guidance is clear. I think
    that's going to be really important to ensuring that you have,
    you know, effective processes for managing indirect cost rates,
    having, you know, the data being helpful in identifying where
    the indirect costs might be growing if they are having that
    guidance and ensuring that staff are implementing it correctly.
        Mr. Palmer. Your agency, the GAO, released two reports on
    NIH and indirect costs. Were you findings for NSF similar to
    those previous findings or were there any significant
    differences?
        Mr. Neumann. On the rate-setting process, we had similar
    findings in the NIH report where we saw some--there could be
    some improvements in the internal control for the rate-setting
    process including supervisory review and having clear guidance,
    particularly for changes that came out of the Uniform Guidance
    in 2014.
        Mr. Palmer. Well, GAO cited some deficiencies in oversight
    of grants, indirect cost claims by agency watchdogs. Are we
    seeing adequate amount of scrutiny on these grants, on the
    indirect cost claims?
        Mr. Neumann. Well, the NSF IG has continued to monitor that
    and has done a number of audits over the years and continues to
    do that, and we understand NSF has some things in place that
    they do to monitor the expenditures, but we did note in our
    statement that NSF doesn't have complete data on expenditures
    of indirect costs. It's more done at the planned award budget
    level. So NIH, for example, does have that data on indirect
    cost expenditures that may be useful if you were trying to
    monitor any improper use of indirect costs.
        Mr. Palmer. Well, Mr. Dodero and I have had several
    conversations about the problem of improper payments and how do
    we stop that. Let me ask you this. What are the penalties for
    organizations that have found to have charged inappropriate
    indirect costs? Are they penalties sufficient to ward off bad
    actors? And by the way, just for the rest of the Committee's
    information, the improper payments last year were $133.7
    billion. That's money we had to borrow since we're in a
    deficit, so I'd like to know if there's anything that we can do
    at any level of the federal government, and particularly right
    here, since that's the topic of this hearing, to ward that off?
        Mr. Neumann. I think there's some similar themes in terms
    of this case as well, and that would be just having the data,
    analyzing that data to know where there might be anomalies and
    then being consistent in implementing the guidance for the
    indirect cost rate process and having the ability to review
    that information when expenditures come in.
        Mr. Palmer. I appreciate your answers. I thank the
    witnesses for being here today. Mr. Chairman, I yield back.
        Chairman. LaHood. Thank you. I yield five minutes to Mr.
    McNerney.
        Mr. McNerney. Well, I thank the Chairman and I thank the
    Committee for having this hearing. My daughter's a research
    scientist, and this is an area that's very dear to her.
        Mr. Neumann, Chairman Smith in his opening statement
    claimed that indirect costs are increasing over time. Do you
    agree with that assessment?
        Mr. Neumann. We noted variation in the indirect costs over
    the 17-year period we looked at from 16 to 24 percent, and
    there was increase from 2010 to 2016 if you look at just those
    years. What we haven't looked at yet is what is the reason for
    that, what's behind that data. Are we looking at increases in
    the amounts of cost for the same types of awards or is it just
    the mix of research that goes into each year that's different
    from year to year and so there would be different types of
    indirect costs included in there.
        Mr. McNerney. Thank you.
        Mr. Luther, you indicated that federal funding does not
    cover the indirect costs at the universities. What is your
    understanding of why universities are unable to recover their
    costs?
        Mr. Luther. Could I address the previous question just for
    one moment?
        Mr. McNerney. Sure. Absolutely.
        Mr. Luther. What we've seen and I think it's actually
    federal data is that at least as far as NIH, one funder, that
    the rate of 27, 28 percent has been consistent for decades. So
    the funding has gone up, F&A has gone up, regulations have gone
    up, but as a percentage of the direct funding, it's been
    relatively stable.
        Mr. McNerney. Okay. Thank you.
        Mr. Luther. With regard to why we can't recover, I think
    there's a number of things. One is the administrative cap that
    was put into place in 1991 caps all administrative costs at 26
    percent. That number has not been indexed up. It's been 26
    percent for 27 years. And as I've mentioned, the regulatory
    requirements have changed significantly, and so the compliance
    requirements have changed significantly. And again, we absorb
    every incremental dollar of administrative or compliance
    activities from the A part of the F&A.
        With regard to the facilities, again, I would suggest that
    the cost of research is increasing significantly based on the
    type of research we're doing. So again, as the federal budget
    tightens sometimes, Duke University, many universities, public,
    private, big and small make decisions to purchase equipment to
    do things different--to build buildings, to renovate existing
    space to meet the new type of research that's coming down the
    pike. It's expensive, and we don't recover all those costs.
    That's known going in, but from the standpoint of what does it
    mean to have a state-of-the-art building that supports, whether
    it's a Nobel prize winner or a researcher, there's
    undergraduate students, graduate students that interact through
    those labs, the ecosystem, the value of that across the entire
    ecosystem is significant, and so we know going into those
    decisions that we build buildings for that broader base.
        Mr. McNerney. Well, Mr. Vedder described a vicious cycle in
    which indirect costs go to justifying indirect costs. Could you
    respond to that?
        Mr. Luther. Well, so I would suggest the competitive
    cycle's really critical. The hit rate on grants has dropped
    significantly so there are a lot of proposals that are being
    submitted. But as far as institutions that there's incentive to
    spend administrative dollars or F dollars, the facility costs,
    we pay every incremental dollar for administration, and again,
    for every research dollar that comes in the door, we pay 30 to
    40 cents on the dollar. So we're not making money on the
    research endeavor whatsoever.
        Mr. McNerney. The National Laboratories don't seem to be
    represented here this morning. Can anyone speak to the--or can
    anyone quantify any difference in overhead at the national labs
    as opposed to the universities? I guess that you would be you,
    Mr. Neumann. You're shuffling through papers.
        Mr. Neumann. So we did have a category in figure 2 of our
    statement for federal and that included the National
    Laboratories. It was eight percent. But again, we're still
    evaluating, you know, what the differences mean. This is just
    high-level data that lays out what the actual percentages were
    for the one fiscal year, so we'd want to do a little more
    evaluation to understand what's behind that number.
        Mr. McNerney. So you wouldn't have an explanation for that
    difference?
        Mr. Neumann. No, but we can get back to you with a response
    for the record.
        Mr. McNerney. I would appreciate that.
        Mr. Luther, what--well, I'm out of time so I'll just yield
    back.
        Chairwoman Comstock. I now recognize Mr. Hultgren for five
    minutes.
        Mr. Hultgren. Thank you, Chairwoman Comstock. Thank you all
    for being here. This is an important conversation for us to
    continue to have and I'm really grateful. It's so important for
    us as we go back talking with our constituents to make sure
    that we are getting the best bang for taxpayer dollars in
    research and committed to making sure that the resources
    continue to be there.
        I've been a staunch advocate in our role as federal
    government in basic scientific research funding and the
    research that really can't be done by the private sector, the
    stuff that we have to be doing, and recognizing often
    unintended results decades after initial results that again the
    private sector just can't put a plan together to do that, but
    that's the kind of work we see every day in our great research
    and in our labs.
        I'm also looking for ways in which we can do this in the
    most efficient manner as I know all of us are. The compliance
    costs and regulatory burdens for universities I believe is too
    high, and with the passage of the American Innovation and
    Competitiveness Act, I hope these processes we'll put in place
    will be able to tackle that problem.
        At the end of the day, I'd rather have more taxpayer money
    going to research than new lawyers or compliance officers. Many
    of us would share that.
        This hearing has been focused on facilities and
    administrative costs, or F&A, where we could have greater
    transparency and potential savings. I've heard from a number of
    my universities that they actually spend more on F&A than are
    reimbursed by the government, most showing a reimbursement rate
    of about 75 percent.
        I am wondering, and I'd kind of throw this out to all of
    you, regulatory compliance contributes to the cost of F&A. What
    actions could the federal government take to reduce this
    regulatory burden and help ensure that researchers' time is
    spent productively? I'll throw it out to any of you if you have
    a thought or two. Mr. Neumann?
        Mr. Neumann. Yes. Last year, we issued a report regarding
    the federal research requirements for universities in
    particular, and we identified a number of opportunities for
    streamlining some of the requirements. Even though we have the
    Uniform Guidance that OMB put out, agencies still have some
    flexibility in implementing those guidance, and--that guidance,
    and we found agencies did do so differently and so that created
    some additional workload for the universities that we met with.
        Mr. Hultgren. Mr. Luther?
        Mr. Luther. The only thing that I would add to that is, you
    know, as we collectively look at this, whether it's COGR or AAU
    or the Federal Demonstration Partnership, which is a
    combination of universities and federal representatives that
    work together on these things, you know, I think our greatest
    concern is that much of this burden falls on the individual
    faculty members, so they're the individuals that should be in
    the lab getting the work done and instead they're doing
    compliance and administrative responsibilities. So we take that
    very seriously.
        The other part is just the sheer cost of that, and I think
    over the past six months and certainly longer than that, there
    is a growing list of recommendations. Again, from my COGR role,
    we have a number of lists that we would suggest opportunities
    for reducing burden, and this isn't suggesting that the
    regulations all in all are bad around human subject management
    but it's suggesting that there's betters ways to do it with
    less burden. And so I think there's lots of opportunity to
    address those types of things, and again, I think in the GAO
    report and the National Academies report from a year or so ago,
    there were great recommendations along those lines.
        Mr. Hultgren. Mr. Luther, maybe you can drive in a little
    bit deeper on that. In your testimony, you talked about the
    regulatory burdens for carrying out federal research. As we cut
    to those regulatory burdens on academic research, isn't there
    an opportunity to also bring down administrative costs as well?
        Mr. Luther. Yes, I think there is, absolutely. You know,
    but again, to state that, reducing the regulatory burden is a
    great idea. That's not necessarily going to have any impact on
    the F&A costs because, again, we're many points over the
    administrative cap, right? So reducing that burden reduces the
    ability to direct those funds towards programmatic missions,
    academic, research and other missions so absolutely, that's
    what we should be focusing on.
        Mr. Hultgren. Mr. Neumann, with the seconds I have left,
    for an organization to be reimbursed for indirect costs, it
    must have negotiated an indirect cost rate agreement with its
    cognizant federal agency. How can this process be improved by
    NSF?
        Mr. Neumann. As I noted previously in my statement, we are
    seeing some opportunities for the NSF guidance to be
    implemented consistently as well as opportunity to provide more
    details to the NSF staff so they can be consistently
    implementing the guidance particular when it comes to
    supervisory review and then applying the uniform guidance
    changes that came up in 2014.
        Mr. Hultgren. Thank you. My time is expired so I yield back
    the balance of my time. Thank you, Chairwoman.
        Chairwoman Comstock. I now recognize Dr. Marshall.
        Mr. Marshall. Thank you, Chairwoman.
        My first question, I think Mr. Bell or Mr. Neumann can
    answer it. Let's suppose the top biosecurity research center in
    the country, Kansas State University, has ten different studies
    they're doing. When you negotiate an indirect expense rate with
    them, cost, do you do it per study or does the university just
    get one negotiated for the year?
        Mr. Bell. So because it's a college or university, it is
    negotiated either by HHS or ONR. It is done at an
    organizational level, not an award-by-award level.
        Mr. Marshall. And at the end of each year you go through
    the finances and you reconcile that, so to speak?
        Mr. Bell. It depends on the type of rate that is
    negotiated. I believe HHS and ONR typically use four-year
    predetermined rates, that is, they look at the stability of the
    organization and whether or not the ratio fluctuates over time
    and then they establish a predetermined rate. Now, that
    predetermined rate means that you only negotiate it once so
    you're reducing administrative cost. However, you can
    potentially under-recover with no recourse or you could
    potentially over-recover. And you're exactly right that the
    basis of these negotiations are audited financial statements or
    other financial information.
        The other thing is that cognizant agencies have the
    flexibility for creating a rate structure to most equitably
    distribute costs. So one study may have a different indirect
    cost rate if it in fact is using a totally separate set of
    infrastructure, and this is why I think this topic is ``sexy''
    because there is a lot of complexity. It's an easy concept: how
    do we share these indirect costs appropriately? The hard part
    is, well, what's the best way to do it, and currently, Uniform
    Guidance really provides the way that at least we're doing it
    all the same way across the government.
        Mr. Marshall. Okay. Mr. Luther, this one's for you. As I
    understand it, foundations and philanthropic organizations
    account differently for research expenditures, allowing some
    costs to be included as direct research expenditures at the
    federal government does not allow. Can you talk a little bit
    about apples and oranges in the way we're comparing foundations
    will pay for F&A costs versus the other entities?
        Mr. Luther. Certainly. So you're exactly right. The
    foundations will often pay for the things the federal
    government won't, number one, and number two, when they apply
    that rate, it generally applies to all costs. There's no
    modified total direct cost. And so the recovery mechanisms and
    the costing mechanisms are truly different. And as I mentioned
    briefly, many times foundations fund research that's considered
    off campus so truly the rate that is compared to many
    foundations should be to like a Duke University's off-campus
    rate, which is 26 percent, as opposed to our full rate because
    of the type of research that's being conducted.
        Mr. Marshall. Okay. I'm going to stick with you, Mr.
    Luther. My universities obviously are very concerned about this
    and are helping to educate me. Is it also your understanding
    that the current OMB rules strictly prohibit federal
    reimbursements that will subsidize research sponsored by
    foundations when they don't pay for full cost for research
    including the required F&A costs?
        Mr. Luther. That's correct. So we just submitted our
    indirect cost proposal to Health and Human Services three
    months ago, and in that proposal, the way we developed the cost
    allocation, the sexy aspect of the cost allocation is to make
    sure that the federal government does not subsidize one penny
    of foundations, industry or anything else. It's just the
    structure defined by the Uniform Guidance doesn't allow that to
    happen.
        Mr. Marshall. My last question. Why is there a difference
    in the rate non-federal research sponsors pay for these
    facilities' administrative costs?
        Mr. Luther. So again, many of these foundations have a
    different mission and a different relationship to universities.
    As we talked about in the very beginning, this partnership was
    about the federal government going back 50 years sharing in the
    development of the infrastructure. The Gates Foundation is
    paying for incredibly important research at Duke University,
    and it's partnering with Duke and NIAID around creating an AIDS
    vaccine, but it's funding some of the incremental and critical
    costs that allow that research to continue, especially when
    there's been federal funding gaps.
        Mr. Marshall. I'm going to squeeze in one question. I think
    it's back to Mr. Neumann and Mr. Bell.
        Mr. Luther says there's geographical differences. Why would
    that matter? If electricity is cheaper at Fort Hayes State
    University or Kansas University than it is at North Carolina,
    why can't we use that to our advantage in saying that we can
    actually do more with less as long as our outcomes are good?
        Mr. Bell. So really, the issue there is that whether or not
    an idea, or the location of an idea, or whether a researcher
    comes up with an idea; it's the value of the idea and the
    potentially transformative nature of that idea, and that should
    not be a component of evaluating whether or not we should fund
    it. So if you have a full portfolio that you're reviewing based
    on the merit review criteria--that's intellectual merit and
    broader impact--those are the drivers on whether or not you try
    to fund something, not whether or not their indirect cost rate
    is high or low.
        Chairwoman Comstock. And actually I'd like to follow up.
        Dr. Vedder, you had talked about maybe taking in
    competitive factors and other things into account. So can you
    expound upon that a little bit on evaluating research proposals
    how if there weren't going to be a cap because that could have
    other issues with it, what kind of factors and how would they
    be utilized? And I'm thinking in the context of having a more
    diverse research pool but also sort of getting more bang for
    our buck and then maybe providing an incentive for some of the
    others that have high overhead cost to maybe finding their way
    to balancing it if that were a competitive factor?
        Dr. Vedder. Yeah. As I understand research grants now, when
    a group of scientists evaluates an NSF proposal, they view it
    strictly on its scientific merit--is this the best proposal--
    and they rank a series of proposals from best to worst, and
    they're putting primary emphasis on the quality of the
    research. But in the real world, we have resource constraints
    and dollars matter. You ought to know that here in Congress
    with all the budget talks and so forth.
        So what is wrong with the idea that after we've done the
    consideration of scientific merit on a proposal and that we
    make that the prime determinate of whether the award will be
    made that we couldn't give some secondary weight to how little
    money the university asks for the non-purely scientific
    dimensions of their research? Why shouldn't a university be
    able to bid as we bid in everything else in life, and if we are
    willing to do the work at a low cost in terms of the
    administrative side of things, why shouldn't that be given some
    favorable consideration in the evaluation of the grant? That
    was one of my research ideas.
        The other thing I pointed out, Chairman Comstock, was we
    spend an awful lot of time talking to researchers and auditing,
    investigating, checking, did you do this, did you do this, is
    this over the cap, is this under the cap. There's a lot of
    people, and I talk to researchers all the time and says there's
    too much of that, why don't you just put a--this is another
    approach. It's a different idea. And it's been introduced
    before. The Obama--it's a nonpartisan thing the Obama people--
    it was pushed in the Obama Administration. Why don't we just
    put a flat rate? We can argue whether the rate ought to be 20
    percent or 30 percent or what. Everyone will get that. The
    basic research grant will be approved, whatever, and then we'll
    add that on, and we won't spend as much time and resources as
    we do going through all this other stuff.
        So those are two alternatives approaches that I think at
    least ought to get some discussion. I'm not talking about the
    amount of money on scientific research here. I'm talking about
    the allocation of that money between alternative uses, and
    that's an altogether different issue, and so that's--I don't
    know if--that probably didn't answer your question.
        Chairwoman Comstock. No, that was----
        Dr. Vedder. But I'm a college professor with tenure and I
    answer any question I want.
        Chairwoman Comstock. Thank you. I appreciate it. Did anyone
    else have a comment on that? Mr. Bell?
        Mr. Bell. So Dr. Vedder does point out that merit review is
    a primary component of the NSF approach. We have panelists of
    experts that evaluate against the two criteria, intellect merit
    and broader impact. Our program officers then use merit review
    as a component of trying to decide what is the correct, or the
    best portfolio, so that may mean that it's not just merit
    review, it could be that there are two ideas that are both
    equally good but you may just need to fund one of them. So it's
    not whatever scored highest gets funded. There are experts,
    program officers who are responsible for managing that
    portfolio.
        Chairwoman Comstock. So you're suggesting that some of
    that's already being incorporated? So it would be like if a
    college got two exceptional students that are equal otherwise,
    they might look and say but this person has had a tougher time
    or, you know----
        Mr. Bell. That's exactly right.
        Chairwoman Comstock. --or fewer opportunities and so
    already factor some of that in now?
        Mr. Bell. Right. We have program officers bring their
    expert judgment to the table. It's not rack and stack, draw a
    line, you're done. It's do we have enough geographic diversity,
    do we have enough new awardees and established awardees. So
    there are other factors that play into the merit review
    process.
        Chairwoman Comstock. Thank you. And Mr. Lipinski, I'll
    recognize him for second round.
        Mr. Lipinski. Yes. Thank you, Chairwoman.
        I want to follow up. I understand--I appreciate the fact
    that Dr. Vedder has tenure and can say whatever he wants to
    say. I want to follow up on the proposal that Dr. Vedder had
    for scoring research proposals in part based on what they would
    cost. I understand sort of on the face of it it makes some
    sense. Now, NSF never did exactly that but in the past they did
    favor research proposals that came with higher cost-sharing
    commitments. In 2004, NSF ended voluntary cost-sharing except
    for unique programs such as the Industry-University Cooperative
    Research Centers.
        Program officers are always under pressure to stretch their
    budgets as far as possible, and when cost-sharing was used as
    leverage in negotiations, scientific merit and impact was too
    often downgraded as a factor in award decisions. That was the
    concern that NSF had and why they ended that. So I want to ask
    Mr. Luther what your thoughts are on the effect Dr. Vedder's
    proposal to score research proposals based on cost would have
    on research and researchers ta university?
        Mr. Luther. Thank you. A couple thoughts. My first thought
    is, I mean, I completely get the idea of factoring in cost. My
    concern is that would significantly reduce diversity. It's
    going to be universities that can cost-share the most that are
    going to win those awards, and that's--as a large private, that
    certainly benefits a university like Duke. I don't know that it
    benefits the broad research mission. And that would be my
    greatest concern, number one.
        Number two, you know, we often make decisions on cost, and
    I was talking to a faculty member several days ago about a
    grant that was trying to maximize how many genomic array tests
    it could do, and the individual had X amount of money. We went
    out to the lowest bidder, and when it was all said and done,
    the quality that came back wasn't sufficient, and we had to
    rerun all of those tests internally at Duke's expense to make
    sure that the data was valuable.
        That's my only concern about factoring in the cost too much
    is that would reduce diversity across institutions, and
    sometimes--and as economist you would probably agree, sometimes
    you get what you pay for, and my concern is that diversity and
    the best science should always be number one.
        Mr. Lipinski. The concern that I have is that you start a
    race to the bottom in some ways and that some universities will
    just start cutting that because they're looking--they don't
    have enough of a view of the long run and the long term. We
    certainly see, especially--I'd asked earlier about public
    universities. I know public universities are under a lot of
    pressure right now. Certainly the University of Illinois is.
    And I would sort of hate to see it be a situation where we need
    the money in the door right now so let's say our indirect costs
    are going to be lower, and in the long run then you're really--
    again, you're giving up. Your facilities are just going to
    suffer. Everything for the long term, in the long run is going
    to suffer for the immediate impact of maybe getting more
    research dollars in the door today. So that's also a concern
    that I have.
        I thank everyone very much for their testimony on this.
    It's certainly an important issue. We all want to stretch
    research dollars as much as we can, and I think we should
    continue this discussion, and as Chairwoman Comstock said,
    we've worked on reducing regulatory burden. I think on this
    Committee we have that role of helping with that, and I want to
    continue to make sure that we do that.
        So I yield back.
        Chairwoman Comstock. Thank you, and I thank the witnesses
    for their testimony and their insight today and the members for
    their questions. The record will remain open for two weeks for
    additional written comments and written questions from Members.
        And the hearing is now adjourned. Thank you.
        [Whereupon, at 11:45 a.m., the Subcommittees were
    adjourned.]

                                   Appendix I

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                       Answers to Post-Hearing Questions

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                                  Appendix II

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                       Additional Material for the Record

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