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why do universities salivate over money-losing grants?

Happy new year. Guess what my New Year’s resolution is. To that end, a few quick thoughts on universities and the grant economy to dip a toe back in the water.

We all know that American universities (well, not only American universities) are increasingly hungry for grants. When state funding stagnates, and tuition revenues are limited by politics or discounting, universities look to their faculty to bring in money through grants. Although this may be a zero-sum game across universities (assuming total funding is fixed), it is unsurprising that administrations would intensify grant-seeking when faced with tight budgets.

Of course, it’s only unsurprising if grants actually make money for the university. But a variety of observers, from the critical to the self-interested, have argued that the indirect costs that many grants bring in – the part that pays not for the direct cost of research, but for overhead expenses like keeping the network running, the library open, and the heat and electricity on – don’t actually cover the full expense of conducting research.

Instead, they suggest that every grant the university brings in costs it another 9% or so in unreimbursed overhead. In addition, about 12% of total research spending consists of universities spending their own money on research. While some of this goes to support work unlikely to receive external funding (e.g. research in the humanities), I think it’s safe to assume that most of it is related to the search for external grants – it’s seed funding for projects with the potential for external funding, or bridge funding for lab faculty between grants. (These numbers come from the Council on Government Relations, a lobbying organization of research universities.)

If that’s the case, it means that when faculty bring in grants, even federal grants that come with an extra 50% or so to pay for overhead costs, it costs the university money. Money that could be spent on instruction, or facility maintenance, or even on research itself. So how can we make sense of the fact that universities are intensifying their search for grants, even as the numbers suggest that grants cost universities more they gain them?

I can think of at least three reasons this might be the case:

1.  The numbers are wrong.

It is notoriously difficult to estimate the “real” indirect costs of research. How much of the library should your grant pay for? How much of the heat, if it’s basically supporting a grad student who would be sitting in the same shared office with or without the grant? There are conventions here, but they are just that – conventions. And maybe universities have a better sense of the “real” costs, which might be lower than standard accounting would suggest. COGR has an interest in making research look expensive, so government is generous about covering indirect costs. And critics of the university (with whom I sympathize) have a different interest in highlighting the costs of research, since they see a heavy grants focus as coming at the cost of education and of the humanities and social sciences. (See e.g. this recent piece by Chris Newfield, which inspired the line of thought behind this post.)

Certainly the numbers are squishy, and the evidence that grant-seeking costs universities more than it gains them isn’t airtight. But I haven’t seen anyone make a strong case that universities are actually making money from indirect costs. So I’m skeptical that these numbers are out-and-out wrong, although open to better evidence.

2. It’s basically political and/or symbolic, not financial.

A second possibility is that the additional dollars aren’t really the point. The point is that universities exist in a status economy in which having a large research enterprise is integral to many forms of success, from attracting desirable faculty and students, to appearing in a positive light to politicians (more relevant for public than private universities), to attracting donations from those who want to give to an institution that is among the “best”. Or, in a slight variation, maybe the perceived political benefits of having a large grant apparatus – of being on the cutting edge of science, of being seen as economically valuable – is seen as outweighing any extra costs. After all, what’s an extra 10% per grant if it makes the difference between the state increasing or cutting your appropriations over the next decade? (Again, most relevant for publics.)

These dynamics are real, but they don’t explain the intensification of the search for grants in response to tight budgets, except insofar as tight budgets also intensify the status competition. But it really seems to me that administrators see grants as a direct financial solution, not an indirect one. So I think that symbolic politics is a piece of the puzzle, but not the only one.

3.  Not all dollars are created equal.

Different dollars have different values to different people. Academic scientists often like industry grants because they tend to be more flexible than government money. Administrators, on the other hand, don’t, since such grants typically don’t cover overhead expenses.

Perhaps something related is going on with the broader search for grants. Maybe, even if grants really do cost more than they bring in for universities, administrators don’t perceive the revenues and the expenses in parallel ways. After all, those indirect costs provide identifiable extra dollars the university wouldn’t have seen otherwise. But the “excess” expenses are sort of invisible. The university is going to pay for the heat and the library either way; even if you know the research infrastructure has to be supported, you might assume that the marginal overhead cost of an additional grant doesn’t make that much difference. (Maybe you’d even be right.) And people might not see some costs – like university seed funding for potentially fundable research – as an expense of grant-seeking, even if that’s why they exist.

I think this is probably a big part of the explanation. The extra revenues of grants are visible and salient; the extra costs are hidden and easy to discount. So, rightly or wrongly, administrators turn to grant-seeking in tight times despite the fact that it actually costs universities money.

There are some other possibilities I’m not considering here. For example, maybe this is about the interests of different specific groups within the organization – e.g. about competitions among deans, or between upper administration and trustees. But I think #2 and #3 capture a lot of what’s going on.

So, if you think this dynamic (the intensification of grant-seeking) is kind of dysfunctional, what do you do? Well, pointing out how much research really costs the university – loudly and repeatedly – is probably a good idea. Make those “extra” costs as visible and salient as the revenues. (Though it would be SO NICE if the numbers were better.)

But don’t discount #2 – even if any extra costs of grants are made clear, universities aren’t going to give up the search for them. Because while the money grants bring in matters, they also have value as status capital, and that outweighs any unreimbursed costs they incur. Grants may not quite cover those pesky infrastructure costs. But the legitimacy they collectively confer is, quite literally, priceless.

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Written by epopp

January 4, 2016 at 1:54 pm

10 Responses

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  1. […] 2016, folks.  As the new year unfolds and people consider their new year’s resolutions, I’d like to thank three of our 2015 guest bloggers Caroline W. Lee, Ellen Berrey, and Victor […]

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  2. As usual, nice post, epopp. According to resource dependency theorists (see Managing With Power), the power that comes with managing your own pot of money is appealing to certain administrators. Also, pulling in X dollars in grants is also an easily reported, quantifiable number to share with alums and other audiences, particularly grant-givers who want a “sure” bet.

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    katherinekchen

    January 4, 2016 at 5:48 pm

  3. A nice post to get rumination started in the New Year! Merci beaucoup! My comments reflect my experiences at three R1 universities who are also members of the Association of American Universities (the AAU that is cited in the COGR report).

    The incidence of costs and benefits from external grants is complex and NEVER transparent in what passes for university funds accounting. The overhead costs of engineering, physical science, natural science, and agricultural science grants are often greater than the 50% +/- F&S rates that are added above the requested direct costs. (Try maintaining a research farm or a nuclear reactor…) Often this means that social science grants cross-subsidize the other sciences in the research function. This shows up often as the “startup package” for a biochemist or physicist, which may include $500,000 to $1,500,000 for lab equipment, technicians, and other promises. So universities salivate over any grant monies that permit the poaching of scientists from competitors, as they can use F&S to pay the startup packages.

    There are also other taxes paid from grant monies that contribute to overhead costs. These include tuition remission charges, or whatever euphemism your institution uses to describe a tax on graduate student salaries that ostensibly pays for graduate education. At my institution, this is about $9000 per year, regardless of the student salary or the real costs of that education. As well, if one pays a month’s salary from a grant to an existing employee, benefits are charged to the grant even though they are usually already paid in the base hard-money budget. These things count as direct costs, not overhead. In fact, the F&S rate may be piled on top of these other taxes.

    There are important symbolic values for AAU members. Membership (initial and continuing) requires meeting expectations of the organization for dollar values of external grants, as well as other metrics. The University of Nebraska was disinvited a few years ago for failing to maintain this metric. Now they are the only member of the Big 10 that is not an AAU member. One might ascribe a stigma to being booted out of the club.

    So the universities that have paid my salary over the years have made grant-getting an important part of performance expectations, often with highly visible incentives. What is becoming more obvious to me is the focus of the university is on getting and using the overhead and taxes; it shows up in all documents exhorting faculty to act as “research entrepreneurs”. Meanwhile, what we care about are the direct costs in the budget that pay research assistants, buy data, and travel, and invest in (modest) equipment and supplies. The institution’s cut get larger each year and mine gets smaller. So they keep salivating.

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    Randy

    January 4, 2016 at 7:24 pm

  4. @Randy — I often wonder if better accounting standards might make a big (positive) difference for higher ed debates — or at least make them more substantive. Because you’re right, not only it is never transparent, it also varies greatly from institution to institution. I don’t know enough about the nitty gritty of higher ed accounting to have a really informed opinion, but in addition to the points you mention, the big university-provided subsidy of faculty time (to teach a 2/2 load or less) is never accounted for in any of this. And of course there is also the whole argument that the social sciences teach a disproportionate share of students without getting credit for it. These debates are always going to be political, but it would be nice if they could be based on standard numbers, at least.

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    epopp

    January 4, 2016 at 10:20 pm

  5. Following on the last point in epopp’s reply, there is certainly a lack of recognition – surely on the public’s part, but also within the university – that a (virtually) tuition-only department like English may in fact be substantially more lucrative than a grant-getting department like Chemistry. Along with the likely possibility that the grant enterprise is not making much (or is even in the red) once all the supporting infrastructure is considered, the differences in faculty salaries and teaching loads favor English, and English probably also has a bunch of low-paid adjuncts teaching vast numbers of freshman composition students. (Chemistry will have some service-type courses too, but not to the same extent.)

    Of course the particulars will vary by institution, and no doubt one can identify exceptions, or less popular humanities departments for which this won’t always be true. Still, I shake my head when – as happens at my place – I hear physical science faculty grouse about the humanities and social science departments being a financial drain on them. Even with their splashy grants, it’s more likely that the overall subsidy flows in the opposite direction.

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    visitor

    January 4, 2016 at 11:20 pm

  6. I’ll echo what Visitor said. I was on a relevant budget committee some years ago. On my campus, the rhetoric is that research “pays the bills” but there was no cost accounting that could document that and as I learned about the issue it seemed to me that it was at least as likely that teaching “pays the bills” for research. I believe it is definitely true at high-tuition private schools that undergraduate tuition subsidizes graduate education and faculty research. The situation at lower-tuition public schools is harder to assess. Due to an adverse political climate, including a state legislature with a proven track record of seizing any “surplus” it finds in the university budget, budgeting on my campus is purposely obscurantist, making any objective cost accounting even more impossible. Regarding graduate tuition, if you stop and actually think about it, you may realize that graduate training DOES have a cost, which is the faculty time spent on it. On a per capita basis, the cost to an institution of training a graduate student is far greater than the cost of educating an undergraduate.

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    olderwoman

    January 4, 2016 at 11:39 pm

  7. What we are looking at here is an example of belief undeterred by evidence (even suggestive evidence). Everyone “knows” that external grants “make money” and few would believe any contrary evidence, however strong.

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    Ronnie

    January 5, 2016 at 12:00 am

  8. The points made above about the subsidization of STEM by humanities and the social sciences are spot-on, particularly when institutions do a (relatively) thorough job of full-costing. Twice I have observed moments where the VPs have discovered to their embarrassment that the tuition revenues that come in to the humanities and social sciences, less the costs of delivering coursework and associated educational experiences, create huge revenue surpluses that are available to buy down deficits in STEM education and research. This occurred most recently when our university declared a strategic hiring plan to attract “rainmakers” in biochemistry, genomics, and health sciences. Alas, rudimentary net present value calculations show that it takes about 25 years to pay pack the hiring costs and startup investments for a rainmaker from the increased revenues from her/his lab (grant F&S, overhead for contracts, inventions and patents)… if they live that long. In the meanwhile, the costs of hiring and subsidizing their teaching and research deficits are borne by departments of philosophy, English, history, economics, sociology, anthropology, and (surprisingly!) business administration.

    I’d like to hear from Fabio about whether Indiana still does responsibility-based management. At one time, they championed the idea of building a full-cost accounting system and using it to guide internal budgets and hiring. Still the case?

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    Randy

    January 5, 2016 at 1:38 am

  9. So Newfield lays out more of the cross-subsidization argument — which he has made as strongly as anyone — in this recent piece: https://profession.commons.mla.org/2015/12/16/the-humanities-as-service-departments-facing-the-budget-logic/. But it’s still necessarily based on very piecemeal data. Here’s a good (older) critical response by Stanley Fish: http://opinionator.blogs.nytimes.com/2010/10/18/crisis-of-the-humanities-ii/. Fish’s money quote:

    “My first reaction to this is to say (with Hemingway), “Isn’t it pretty to think so?”, and my second reaction is to report to you the conversations I have had in the past week with deans, provosts and presidents at four large public universities situated in different parts of the country. The picture they paint is complex and has something of the aspect of a kaleidoscope. There are so many variables that a nice clean account of the matter will always be an oversimplification.”

    Compounding this is the fact that university budgets are necessarily, and (as OW points out) sometimes intentionally, obscure. Newfield’s piece spends some time on my own institution, which closed humanities departments during the financial crisis. He writes that “even after a Freedom of Information Law request, the university was disclosing only the state share of the budget, leaving 63% of the total budget in the dark.” Assuming this is accurate, it is astonishing to me that a state institution could legally be so vague about its financial activities.

    But yeah, ultimately I suspect that there are multiple honest stories that could be told about who subsidizes whom in the research university. Even if you have legitimate numbers, they are open to different reasonable interpretations. Politically, it makes sense (as a non-natural scientist) to push the cross-subsidization argument. But as a social scientist, I just wish we had better information about what really happens.

    Last point. I vaguely recall Andy Perrin making an eloquent case for honest university accounting (in a blog post? a comment?) that I can’t seem to find. If anyone remembers that, I’d love to see a link.

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    epopp

    January 5, 2016 at 3:14 am

  10. Some observations:

    1) The federal government has the highest overhead rate, but it is their policy to only cover costs and not provide a profit. So nearly by definition, it is impossible for extramural funding to produce an average profit for an institution, and the best case scenario is that research on a break-even basis.

    2) The university administration diverts overhead to other uses and frequently does not cover genuine indirect costs incurred by the principal investigator. Since the individual scientist is squeezed and sees inadequate overhead coming back to cover costs at the lab level, he/she erroneously concludes the university must be making a profit off of his/her effort.

    3) Politicians don’t want to hear about extramural research being a net cost to the university just like they don’t want to hear that it is much more expensive to educate students in engineering than in the humanities — it puts a damper on the rah-rah-STEM parade. They want more STEM research and more STEM students, but they don’t want to pay for it.

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    Joel Norris

    January 5, 2016 at 10:26 pm


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