I exaggerate a bit.  When the press covers for-profit diploma mills or exploding student debt, it is smart and skeptical.    When they cover college funding or ed-tech, it gets gullible and naive. 

Take a recent entry from the New York Times: Bringing Tech Culture to the Staid College Quad.  First of all, what non-hibernating person thinks the college quad is staid?  A major Atlantic Monthly analysis of "The Dark Power of Fraternities" showed being on the quad endangers your health.  In staid Santa Barbara this year, some of my students were date-raped, stalked, framed by the local cops, and killed in a drive-by shooting.  The college quad sees protests about racism, abortion, foreign policy, police violence, and administrative misconduct.  The quad does teaching and research that is generally over the horizon of the average newsroom.  Staid is a patronizing and ridiculous word for today’s universities, which are fully immersed in their surrounding societies, while having also to stay ahead of them.

If the outdated stereotype is one problem with college coverage, falling for sales pitches is another.   Journalists seem now to believe that professional educators are a selfish special interest, while corporate marketers are impartial observers who offer the true picture.

The Staid Quad article is about the high cost of college textbooks.

In a report last year, the Government Accountability Office said the price of new textbooks rose 82 percent from 2002 to 2012, only slightly less than the 89 percent rise in tuition and fees, and far higher than the 28 percent rise in overall consumer prices.

Very bad. Textbook prices are outrageous. Who gets to explain the problem? Dan Rosensweig, the chief executive of Chegg, an education services company. “Learning has been an inefficient market,” he says. This fits with the stereotype that teaching is inefficient and teachers like it that way, so they are just fine with overpriced texts. Chegg.com’s comparative shopping service is apparently the answer – improving price information will make textbooks a more efficient market and thereby lower prices.

Actually, no.  Students aren’t price gouged by universities or their generally sad, post-book “bookstores” that sell big gulp water bottles and school sweatshirts. Students aren’t price gouged by faculty, who have zero control over text pricing.  Students are price gouged by publishing monopolies, who set prices on a captive audience.  Academic publishers are gradually strangling university libraries to get 20-36% profit margins on scientific journals, where investigators review for free but pay to publish.  The same goes for textbooks.  You can't write a good article on excessive textbook prices unless you can say "exploitative economics of academic publishing," but that's what this ed-tech article does. Textbook prices have risen because for-profit educational services make as much money as they possibly can off students, and seek market positions that protect this pricing power. Sure enough, Chegg charges for tutoring and job placement services that universities currently provide their students for free. And yet we are supposed to think that Chegg-style for-profit services will cure cost problems that their sector has produced.

There have been free services at the public college near you, but not such good free services anymore, since the public colleges that serve the lower- and middle-income, socially-un-networked students who really need job placement have been subject to year after year, decade after decade of budget cuts.  These public colleges now spend in many cases ten to fifteen cents on the dollar Harvard spends on its students.  The California Community College system, with its wealth of first-generation and low-income students, has 2000 students per advisor.  So why don’t the CC's have more advisors.  Because they don't have the money. Why don't they have they money?  Now we're getting to the right question.

They don't have money because state politicians keep cutting their budgets.  This pushes us one more step.  Why these constant cuts to the state share of higher ed?  Well, there are strong competitors that weren't around 50 years ago, like Medicaid and the world's most overactive prison system.

But there is also the tax avoidance culture of the corporate America to which “educational services” companies belong. Think Apple, tax avoidance champion on 35% profit margins (important revelations here and here). Think Google, who furnished the engineer who started Udacity, the company dedicated to driving market inefficiencies out of teaching by replacing teachers with screens—until that turned out not actually to work.  Think the whole iEconomy, engaged in continuous tax arbitrage and thus social disinvesting around the world. Think effective corporate tax rates at 12.1%, 1/3rd the nominal rate, 1/3rd the rate you and I pay. Think Bechtel, UC's partner in national lab management, "one of the country’s largest engineering firms, [re]organized as [an] S-corporation to avoid corporate income taxes."  Think the growing gap between corporate profits and corporate tax returns, on the federal level, which is not so different from trends in the states, where corporate taxes are down to 5% of revenues (California).
Whether or not the products of the private alternatives to public universities actually work, the cuts continue, conveniently for Chegg et al., who can charge for services that used to be free in the public universities that tax arbitrage continues to destroy.

Should journalists have to talk tax code every time they praise ed tech? No. Should they ask whether the educational solutions of corporate marketers aren’t in fact the problem? Absolutely yes.

And what I am as a professor doing about the high price of textbooks. What I have always done: Order old editions that have lots of used copies around. Put copies on reserve in the library. Give desk copies away. Scan and post documents on protected websites. And of course overuse my departmental xerox machine--which we'll have money to replace around 2023.

As you may know, there have been rumors of a significant rise in the co-payments that UC's health insurance plans require as part of coverage of "specialty drugs" that are often needed by the most endangered members of the workforce (people suffering from cancers, MS, HIV, liver ailments etc). In the aftermath of Union pressure and employee mobilization, Vice President Dwaine Duckett has announced that there will not be changes to the ways that "specialty drugs" will be treated by the different health care plans.

It is difficult to tell whether this was, in fact, a serious possibility that was pushed back by union activism or simply something floated in the course of discussions.  But it is a reminder that next year's UC health insurance options are in the process of being finalized and it is important for faculty and staff to keep their eyes open or contact their local HR offices about possible changes.

It is now a year since the debacle that was the roll-out and implementation of UC Care.  Although UCOP liked to emphasize the moderation of employee premium costs, it soon became clear that the shift to UC Care also shifted some costs onto employees for certain procedures, and that there was concern about new fees and reduced availability of physicians.  In fact, it was the example of UC Care that helped trigger the worry about the co-pays on specialty drugs. You may recall from analysis we posted last fall that one of the effects of UC Care was to raise the costs of specialty drugs dramatically.  In some cases individuals had to pay co-payments of up to 30% of the cost of drugs (although there were monthly and annual limits).  It is also the case that many employees doctors were no longer included in Tier 1 (thereby raising costs that way as well).

On top of this cost shifting there was the larger question of the reduced coverage offered to employees at non-medical center campuses.  The ultimate example of this, of course, was UCSB.  The only major hospital in the area Cottage Hospital refused Tier 1 coverage because of what UC was offering in payment. The only major clinic was pressured into a Tier 1 contract, but only for  one year.  It is unclear what, if any, Tier 1 coverage will be offered to UCSB this year.

Finally, people need to be aware that retiree health care for out of state retirees has been modified dramatically.  Since health care for employees looks like overhead to UCOP, further cuts are in the offing.

We have a number of old posts that you can check to refresh your memories of last year's UC Care roll-out and other changes.  Open enrollment is in two months so now is the time to raise issues or concerns with your local HR offices.

Employee Benefits Posts and Links

Remaking Posts:
Health Care Troubles and a Simple Solution (October 9, 2013)
The Plot Thickens on UC Care in Santa Barbara (October 10, 2013)
Some Further Questions About UC Care (October 12, 2013)
More on UC Care (October 15, 2013)
UCR Faculty Association Letter on UC Care in Riverside (November 17, 2013)
UCSB Health Care Update: The REst of Tier 1 is Yet to Come (November 23, 2013)
Obamacare and UC Care (December 9, 2013)
Union Logic of the Insurance Changes: the Case of Retiree Health Care (December 15, 2013)
UC Care Stories (March 14, 2014)
Further Troubles with UC Care (April 10, 2014)

As you probably know, at the beginning of August University of Illinois Chancellor Phyllis Wise decided to rescind an offer of a tenured position to Steven Salaita formerly of Virginia Tech.   Professor Salaita had been chosen by the American Indian Studies Program last October after, as far as I can tell, passing through all of the appropriate Academic vetting processes at U of I. The offer was, as all job offers are at U of I, conditional on approval by the Board of Trustees.  For some reason, the Illinois Board does not meet to make final approval until September, after most new faculty have started their jobs.  In the interim, under conditions that remain clouded in mystery, Chancellor Wise apparently became convinced that Professor Salaita's tweets on the Israeli-Palestine conflict made him unqualified to join the faculty and she chose not to submit his name to the Board of Trustees.

Chancellor Wise's latest statement on her decision can be found here.

There have already been responses to her statement.  I list three below:

John K. Wise has posted at the Academe Blog.

Peter Kirstein has a comment here.

Timothy Burke has a commentary here.

Whatever one's views on the Israeli-Palestinian conflict or the BDS movement (which are the underlying points of political controversy here) Chancellor Wise's statement only highlights the dangers facing academic freedom from administrative intervention into faculty judgment about the appropriate scholar to fill a position. Chancellor Wise insists that her decision "was not influenced in any way by [Professor Salaita's] positions on the conflict in the Middle East nor his criticism of Israel."  This claim is then followed not by any discussion about why Professor Salaita's offer should be withdrawn but by generalized commentary about showing respect in the classroom for people holding alternative positions and for alternative positions themselves. Her statement is so vague that, as John Wilson points out (linked above) it could apply to a biology professor who was disrespectful of creationism.  Or, I would add, if you were to take a different political position, should an administration be able to prevent an appointment of an anti-abortion tweeter because some of his or her teaching might upset pro-choice students?

What appears to be at stake here is criticism of Professor Salaita's tweets.  I have already commented in the Los Angeles Review of Books on the threats to academic freedom posed by administrations and Boards seeking to control people's statements as citizens on social media.  But this case sharpens the point.  As the blog Mondoweiss points out, Professor Salaita has a long teaching record which shows no evidence of the dangers that Chancellor Wise claims to fear, i.e. whatever one's opinion on his tweets there is no evidence that students feel unwelcome in expressing their thoughts or alternative views.   And if there is no connection between tweeting and his interaction with students in his classrooms then there is no relevance to the tweets.

The Board's defense of the Chancellor's decision displays an even more disturbing confusion. The Board insists that "we" (I think they intend the University but it could just be the Board) "must constantly reinforce our expectation of a university community that values civility as much as scholarship."  They apparently believe that this entails discourse that will not make students or others feel uncomfortable.  Now it is certainly right that colleges and universities ensure that professor's don't demean or abuse their students--and there are plenty of mechanisms to do that.  But to insist on some undefined standard of "civility" in debate and to claim that it is as important as scholarship is, frankly, absurd.  Part of a student's higher education is becoming uncomfortable as your accepted ideas are challenged, defended, and rethought.  The level of confusion here is enough to justify asking the Board to stay out of these decisions.

There are other deeper issues that need to be raised.  As far as I have been able to determine Professor Salaita's appointment went, as I said above, through all the normal academic channels.  But there is no evidence that, when Chancellor Wise developed concerns, she returned the file to the appropriate faculty organs to ask for clarification or extra materials.  Nor, apparently, was there any attempt to communicate with Professor Salaita.  In other words, what we have here is an administrative override of a considered faculty judgment based on unproven concerns that there might be some relationship between social media and the classroom.  Given that, it seems unreasonable for Chancellor Wise to insist that the decision was not politically motivated.

Nor is the claim, forwarded by some, that since Salaita was not already a member of the U of I faculty there is no academic freedom issue anything more than a red herring.  If academic freedom is to mean anything it must be a system.  For it to work nationally and internationally scholars cannot be worried that if they say or publish something a board or an administrator at a position they seek will block their appointment.  It is incumbent on faculty and on colleges and universities to honor academic freedom not only of their own members but of scholars at other institutions.

Finally, although administrators have the authority to set priorities and determine how faculty lines are distributed, the decision about the individual scholar chosen is primarily a faculty one and should not be imposed or denied by upper administrations separate from the faculty review process.  At the University of Illinois under its present Chair Christopher Kennedy the Board already intervened in two previous cases of individual faculty positions.  (See here and here)  Indeed, Chancellor Wise indicated that she did not forward Professor Salaita's appointment to the Board in part because she doubted it would be approved.  It is quite possible that she has been charged with doing their work for them.

Although this case is, of course, singular it reveals a more general pattern.  Boards and upper administration are pressing against the autonomy of the actual scholarly and curricular life of universities and colleges--something for decades has been organized and overseen by faculty.  The American Council of Trustees and Alumni (ACTA) has recently insisted that Boards take an even greater role in university and college affairs and that shared governance "cannot and must not be an excuse for board inaction."  Instead they insist that

trustees must have the last word when it comes to guarding the central values of American higher education--academic excellence and academic freedom.  The preservation of academic freedom, freedom of expression, and the integrity of scholarship and teaching rightly falls under their purview.  While the occasions should be rare, they must be prepared to intervene when internal constituencies are unable or unwilling to institute urgently needed reforms.

I want to be clear here.  Despite the calls for academic freedom and expression, the central theme of the ACTA statement is that trustees are the only group that can view the institution and its relation with society whole. Therefore, more than narrow faculty or even preoccupied administrators, they must control the relationship between the university or college and the wider world.  Central to this relationship is reputation, only this is defined by ACTA as public acceptance rather than academic autonomy.  ACTA wants to professionalize Board service so as to limit the professional claims of faculty over their own areas.  Indeed, since faculty are so focused on their professional responsibilities, ACTA suggests, they are unable to see the big picture.  It is this logic that justifies the Board of Trustees at Illinois to support the Chancellor in overriding all of the normal faculty review processes.

The approach advocated by ACTA and enacted in the Salaita case threatens to undermine the academic autonomy that faculty have struggled for since the early twentieth-century. If faculty lose their autonomy, the autonomy of colleges and universities will be lost as well.

All those who want to prevent higher education from becoming even more of a sphere of reputational fear and institutional timidity need to push back against this vision as forcefully as they can.

This week has seen the thin veneer of amateurism removed from the image of the NCAA. Two separate decisions--one by the Association and one by a Federal Judge should make it clear that the NCAA is big business, that it depends on profiting off of its athletes while denying them fair recompense, and that its business model is fraught with legal and ethical problems.  It will take some time to see the effects of these decisions but some quick responses are offered below.

1) Yesterday Judge Claudia Wilken released a judgment in the legal case brought by Edward O'Bannon and others against the NCAA.  O'Bannon and his fellow plaintiffs argued that the NCAA acted unfairly by profiting from the use of their images and names without allowing them to share in the profits.  The NCAA argued in part that they prevented athletes from sharing in their profits because it was important for college athletics to remain "amateur" and that paying the athletes directly would undermine that image.  The Judge rejected that position and ruled that, in fact, the whole notion of "amateur" had changed over time and that there was no legitimate legal reason to prevent the athletes from gaining compensation for the NCAA's licensing of the athletes images.  You can read the entire decision here but the salient point is that the Judge insisted that athletes at Division 1 football and basketball programs should be allowed to share the profits, that their shares could be placed in trust during their time in school, and that the amount placed in the funds could be capped at no less that $5000 annually. One expert estimated that if NCAA Division 1 schools did cap at the minimum the amount would could be up to $300 Million dollars over a 4 year span.

2) The second important event was the decision by the NCAA to grant to the power sports conferences greater autonomy over their own actions and greater authority within the Association.  The power sports conferences had threatened to break away from the NCAA and in response the Association apparently agreed to stop pretending that it was a single entity and to allow those campuses with oversized athletic programs with oversized power to separate themselves from the athletic hoi polloi.  The decision opens the way for the richer conferences to offer more scholarships and larger scholarships.  They will also, after Judge Wilken's decision be in a better position to create the trusts to allow athletes their small piece of the licensing pie.  Although one can expect to see coaches salaries going up a lot more than the monies offered to athletes. Amateur athletics is big business after all.

Of course waiting in the wings of all of this ongoing question of whether student-athletes are employees and have the right to unionize.  That issue--raised by Northwestern football players--is a long way from being settled.  Perhaps, though, it might lead not only to fairer compensation for the athletes but also to coaches remember that student-athletes are supposed to be students and not setting up practice requirements in such a way that they have to regularly miss class.  What can I say...hope springs eternal.

Higher ed policy is suffering through a long siege  of intellectual gridlock.  The default result is what I've been calling permausterity, a chronic funding shortage for public colleges that now rests on a chronic lack of confidence in the job they're doing.  This has become a vicious cycle that feeds itself.  

Making matters worse, faculty responses are fragmented, when faculty respond at all.  Some of the most eloquent voices are increasingly disenchanted: William Deresiewicz got so much pushback for his recent piece, "Don't Send your Kid to the Ivy League," in part because he seemed to be saying that even our premier universities are turning America's most successful students into mercenary sheep.

(1) Why Can't College be Cheaper?

Dr. Deresiewicz's piece upset many supporters of the college ideal (e.g., Jim Sleeper), and one reason is that it seemed to lend credibility to this year's leading higher ed question: "is college worth it?" If Yale sucks too, why not give up on rebuilding funding and learning and get on with the inevitable consolidation of higher ed into two dozen university-corporations along the lines of the media industries and IT? The Apollo Group could provide the management, Coursera the online platform, Pearson VUE the assessment, and Harvard-MIT-Stanford the quality control.  Three percent of the college population could still go to prestige-brand research universities and liberal arts colleges, which is about the percentage that goes to them now.  Everyone else would, in this scenario, get converted over 10-15 years to varying combinations of blended learning and online-only. In spite of the MOOC ebb that began last summer, tech-based disruption and downsizing remain at the top of the national higher ed agenda.   

There are good disruptions that should be implemented, bottom-up, in universities, and also obvious reasons not to turn universities into digital learning corporations.  One of these reasons has to do with how people actually learn (as opposed to how they receive and replicate information packets). Some of the growth in student services is a market-driven "amenities race," but much of the growth comes from new structural support for better learning. Fixing the country's educational levels is going to require more and not less money for student services, more and not less funding for active learning, and more and not less payroll to hire permanent faculty.  Adjunct Nation has new allies in Congress, which will also support a deeper discussion of educational quality. We need post-contingent education (see, for example, Jennifer Ruth's recent posts (here and here).

Another large cost is research.  The country expects the vast majority of its basic research to come from universities.  And yet few policymakers and general voters understand who pays for research and how much it costs.  The traditional funders have been the federal and state governments, but states have been reneging on their side of the deal for years, leaving the feds in the lurch.  At the same time, the feds have been partners in this decline, having never explained to state policymakers, much less to voters, that they did not fund the full cost of research.  Admitting that research loses money has been taboo, since it conflicts with Washington's demand that science lead directly to economic growth.  States have cut funding in part because they didn't know they were in effect also cutting economically strategic STEM research.

But in the last few years things have been looking up.  Washington D.C. agencies are finally going public with their concern that we don't know how to pay the full costs of university research after all.

(2) Research Shortfalls are Real

In 2012, the National Science Board published Diminishing Funding and Rising Expectations: Trends and Challenges for Research Universities, and in the same year the National Research Council of the National Academies released Research Universities and the Future of America. Both criticized the states' wholesale retreat from public funding.  Both reports noted that universities are increasingly on the hook to pay for research from their own internal funds--even when the research has an outside sponsor. Institutional funds are now the "second largest source of funding for academic R&D, accounting for $11.2 billion of the $54.9 billion of academic spending on S&E [Science &Engineering] R&D in 2009" (NSB p 16).  The NRC report stated that "The institutional contribution to research has been growing faster than federal funding," which, they added, diverts money from necessities like instruction and maintenance (NRC p 125).

Then, this past June, the Council on Governmental Relations, a leading research university lobby, chimed in with the same message and more graphic detail.  Under the title, "Finances of Research Universities," its report offers a good primer on the differences between private and public university funding and then gets into some of the gory details of research costs.  If one of your summer resolutions is to tone up your skill with calculating F&A overhead on MTDC, then this is the report for you.

The big takeaways are that universities' internal funds are the fastest-growing source of research funding, and that universities' share is large.  The total university contribution has grown again since the NSB and NRC reports, from $11.2 billion to $13.7 billion per year.

Over the period from 1976 to 2012, the share of R&D expenditures assumed by colleges and universities has grown faster than any other category. Institutional Funds accounted for 21.6% of all R&D expenditures in 2012 (adjusting out the ARRA effect) as compared to 12.0% of all R&D expenditures in 1976—a growth factor of +80%.

COGR provides a number of interesting tables, using in many cases data from the NSF's Higher Education Research and Development Survery, or HERD). Here is one:

Reseach and Development (R&D) Expenditures by Funding Source as a Percentage of All R&D Expenditures

State support for R&D is a third of what it was pre-Sputnik (1956) (although unadjusted totals continued to grow).  Federal support, though much more stable, is now heading back down towards its pre-Sputnik share. Over the same period, universities have doubled the size of their piece of research funding. Their share has doubled since the 1970s, in spite of excellent growth rates of federal research funding--or actually, because of this federal growth.  In 2011, a useful article in Nature pointed out a further problem, which can be seen in one of its figures: 

Public universities do twice the dollar amount of research that privates do, and yet spend twice the share of their own funds in subsidizing it (24% vs 12%).   Hence the title question, how can public research universities afford to do the research society does in fact want?

Back to the COGR report, which concludes with some bureaucratic fighting words:

The university subsidy is a legitimate issue and one that use be addressed honestly and constructively by all stakeholders.  [Forcing] universities to fund real, unreimbursed costs through non-federal revenue sources [makes them] potentially reduce investments in core missions and infrastructure. Ultimately, this impairs a university's ability to strategically plan and invest in its future research enterprise. (23)

In other words, concealing true research costs hurts the overall university while also hurting research.

I'm happy that a high-level organization is now explicitly saying that unrecovered research costs "are a financial burden with severe implications for the future productivity of research universities" (19).  This is progress.

(3) How Much of the Research Shortfalls are Recoverable?

There's a big wrinkle we now need to consider.  What kind of research costs are universities covering through their Institutional Funds? 

Universities need to support extramural research with outlays for facilities and administration (F&A), whose reimbursements have been capped at 26% since 1991, though only for universities. They also need to build and renew overall infrastructure and pay for research that isn't supported by outside sponsors (which includes nearly all research in the arts, humanities and qualitative social sciences).  They must help start new labs, sometimes build new buildings for them, seed new projects that may attract outside funding at some future date, and provide bridge funding for faculty who are in-between grants but have labs to run and grad students to train.  A combination of these and other activities accounts for the $13.7 billion that universities spent of their own money on research in fiscal year 2012 (out of a total of nearly $66 billion).  (The NSF breaks down costs by university in this table.)

The NSF tries to figure out how much money goes to various research categories through the HERD survey mentioned above.  The COGR report cites its findings as follows:

Of the $13.7 billion, 56% ($7.7 billion) was in the form of direct funding for faculty or student research projects, 9% ($1.3 billion) was devoted to cost sharing, and almost 34% ($4.6 billion) represented unrecovered indirect costs. (2012 HERD Survey)

In other words, somewhat over half of university research expenditures supports the research of their own faculty and students. A third goes to cover costs incurred by sponsored research that are not covered by the sponsors. Another tenth goes to cost sharing, which always involves sponsored projects. Summing up these figures, we might conclude that 44% of Institutional Funds subsidize extramural sponsors, while 56% cover internal research projects.  All of these costs are within the normal scope of research university activity--and, to get pious for a second, form part of its obligation to society.

But is this breakdown correct? The COGR report suggests it is by singling out the $4.6 billion as the main subsidy burden universities bear. It equates, in the report's terms, "to a staggering multi-million dollar obligation per university," and raises a "widespread concern as to the sustainability of the significant investments made by research universities" (19). COGR thus implies that only about one-third of universities' research outlays could be recovered by fixing reimbursement policy.

Other documents tell different tales.  The COGR report itself offers a case study (Chart 13, p 20) of a "Private Research University, Southeast."  This university spent $505 million on research but received $390 million in revenues, which required it to chip in $115 million of its own money.  So nearly 23% of this university's total research costs came from Institutional Funds.  The line-item breakdown of expenses lists University-Funded Research at $33 million, or  a bit over 28% of the Institutional Fund contribution.  This is half of the average for "direct funding for faculty or student research projects" in the HERD survey.  (It is also only 6.5% of this university's total R&D expenditure.)

To take a further case: when the University of California's Commission on the Future tried to get a handle on the university's costs, they summarized research losses like this:

In recent years, the University has received over $3.5 billion per year in extramurally-sponsored research grants, of which over $780 million per year is designated for indirect costs such as facilities support and research administration.  But the actual indirect costs of extramurally-funded research are estimated to be $1.5 billion. (page 111)

UC was thus losing $720 million a year on a research gross of $3.5 billion. This meant that 20.6% of its R&D expenditures came from internal funds, which is very close to the national average.  But this statement suggests that sponsored research caused the entire shortfall.

So we have three stories about the extent to which research universities must spend more money than the public understands in order to cover costs on behalf of research sponsors. 

1.  A third (or at most 44%) of Institutional Funds go to subsidizing costs of sponsored research, costs that the private sector would likely insist be paid in full.  About 56% goes to non-sponsored or "internal" research for faculty and students.
2. Something like a quarter of Institutional Funds go to non-sponsored research.  That leaves three-quarters supporting extramurally sponsored research. 
3. More or less all Institutional Funds go to filling in these shortfalls in sponsored research funding.

Which story is correct? I think the best answer at the moment is all of them, depending on the university. Wealthy private universities may well be close to (1), spending most of their internal funds on their own faculty's non-sponsored projects.   Less wealthy privates and some major public research universities may be close to (2). Both of these stories are about major research losses of somewhat different sizes.

The extreme case of (3), in which nearly all Institutional Funds subsidize sponsored research, may be right for the case for which it was developed, the University of California.

To check whether this could possibly be true, I offer some seat-of-the-pants numbers for one campus, UCLA.  It has formally recorded Institutional Funds expenditures from at least two sources, its Academic Senate Committee on Research, and the Office of the President's Research Grants Program Office (RGPO). The former, in the pre-cut year of 2007-08, dispensed about $2 million in travel and research support.  The latter, over a three-year period 2010-13, spent $44 million per year (  Annual Report page 25).  (I apologize for mixing years but here I'm just going for scale).  I'll assume that UCLA got about one-fifth of RGPO system resources based on its large size.  That means the campus spent $11 million of Institutional Funds through formal channels on faculty and student research projects in a period when it was grossing around $1 billion a year in extramural research funding.  In other words, UCLA spent 1.1% of its Institutional Funds on designated faculty research. 

(UPDATE 04/15: Having looked again at the RGPO awards for the relevant period, I think UCLA's share may be half of my estimate here. It's hard to say because they do not publish dollar amounts.  In addition, newer COR reports are online. Award totals are the same in 2013-14 as in 2007-08, my baseline here. The 1996-97 COR award $1.9 million, which is about $2.84 million in 2013-14 dollars: UCLA's COR now awards about half the amount it did 20 years ago.  "Half" seems to be the theme today: RGPO has awarded about half the number of multi-campus grants in this cycle compared to the last.)

This is obviously not the whole picture of internal research funding, but we don't have public information on the use of discretionary funds retained at various administrative levels--but also no reason to think a large percentage of this unknown figure goes to non-sponsored faculty research.  Throw in the fact that Committee on Research funds go to some extent to top up extramural grants. You can then see why the UC Commission report rounded up to the claim that essentially 100% of Institutional Funds go to paying for unreimbursed indirect costs of extramural research.

The implication of all of these stories, especially 2 and 3, is that public universities can pay for research, but, as we go forward, only if federal, state, and private funders stop asking them to subsidize a large chunk of indirect research costs.

(4) A Few Steps Towards Improvement

Regardless of which story is correct for a given university, they all point towards the following list of to-do's.

A. University administrations should say openly and often that research loses money. It must be publicly supported because it loses money.  The more fundamental the research, the greater its long-term social potential, the more likely it is to lose money for years if not decades. The Internet provides an easy example of this point. 

B. Point out that effectively freezing public funding to hundreds of research universities is undermining the country's research ecosystem.  Converting higher ed to online, in whole or in part, will wreck that ecosystem.

C. Act on these NSB, NRC, and COGR calls "to cover the full costs of research projects and other activities they procure from research universities in a consistent and transparent manner" (NRC Recommendation 6, p 122).  (It is already official University of California policy to charge sponsors enough to "cover all expenses, direct and indirect" (APM-020 Revised Regulation No. 4, II. 3)  Set up a multi-year plan for fixing at least the one-third of the problem that all agree is attributable to sponsors' underpaying of indirect research costs.

D. Sort through Stories 1-3 above. Get clean numbers, campus by campus, for "indirect indirect" costs--all the set-up costs that support extramural research rather than research that is ineligible for extramural funding. This will mean distinguishing clearly that research which, for historical and institutional reasons, depends wholly on Institutional Funds. It will also mean campus admins publishing those numbers to their communities, so that they can be understood and discussed.

E. Identify and quantify the needs of the large, complicated sphere of this (mostly) qualitative and/or truly experimental research that cannot receive external sponsorship. Explain why its ineligibility to receive external sponsorship follows from the historical shape of Western scientific, military, and industrial development rather than from a lack of merit or social value.  (This needs to be done for a society that doesn't generally understand market failure, spillover effects, or noncommercial social value.) Then make sure that this research has equal or superior claim to Institutional Funds.

Universities need finally to get ahead of the curve on research costs. If they don't, the "unbundling" pressures will only increase.