[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



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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:]
    
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    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:]
    
    
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    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:]
    
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    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:]
    
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    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:]
    
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    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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