Hyde Park, Chicago on June 25, 2017   

It’s great when you’re President of the United States and are unlawfully taking apart the national system for funding STEM research, and then some big universities step in and cut their non-STEM units instead.

 

Case in point: in July, UChicago’s Division of Arts and Humanities announced plans for a reorganization that would cut its number of departments in half, among other things.  The announcement came “just three months after UChicago Arts and the Humanities Division rebranded as a consolidated division.” In mid-August, the Division’s dean, Deborah Nelson, announced a reduction of PhD admissions for some departments and a full “pause” in others.  A week later, Nelson announced that the pause in PhD admissions would cover the entire Division, with a couple of exceptions. 

UC Irvine on May 8, 2018   

As Trump’s blunderbuss shoots the bottom out of the research boat, how will UC Irvine, the system’s middle case, stay afloat?

This is actually a national question. Trump has done a classic “heighten the contradictions” of the political economy of the US research university. 

 

This political economy has always been unstable, and three decades of reductions in per-student state funding have kept the boat rocking back and forth. Now the Trump Administration has blown holes in most sources of federal research funding. Meanwhile, state funding is mainly flat or down, and will be under renewed pressure as the provisions of Trump’s tax cut bill come into effect.

 

Colleges are taking on water, and this is to say nothing of the deeper crisis of social mission and public support, embodied in editorials like “It’s a Bad Time to Be a Graduate.”

 

The US university sector now has a choice: it can face its structural crisis, in particular the crisis of its research funding system, or force campuses to dig even deeper to subsidize it. 

 

In a recent post, I discussed the evidence that the senior management of the University of Minnesota is choosing the second path. I presume that this is the default choice across the country. That’s not good, because this path means, at best, austerity and, more likely, major cuts to instruction and to non-sponsored research, which is most research in law, arts, humanities, and the qualitative social sciences. 

 

Couple this with what Peter Byrne calls “AI hypnosis,” which can be used as an excuse for further instructional cuts, and the cognitive gains of completing college face gradual evaporation. Or so goes one default path.

 

Like the University of Minnesota, UC Irvine offers an important case study. Its administration  has been proactive. The Division of Finance wrote an informative “Budget and Financial Overview: Fiscal Year 2024-25 (FY25).”  The Budget Office has a new “Budget Model and All Funds Multi-Year Planning” mechanism.  This is coupled with a “Financial Stability Plan” that is responding to a campus structural deficit that they have presented publicly. So far, so good.

 

I’m going to tell the story of the UCI Budget Overview. I’ll then have to dispute its overall portrait of the campus economy—of who loses money and who doesn’t.

 

**

 

UC Irvine is a $6.7 billion university operation. (It was 56^th in the US in R&D expenditures in 2022-23, so is more typical of the body of research universities than giants like UCSD or UCLA.) Half of that income comes from UCI Health, the medical center which has recently acquired four more hospitals and does a massive revenue business—nearly $3.5 billion in 2024-25 (FY 25).  

 

In the Overview, medical business is booming, and the Overview claims that “funds flow from the health enterprise to the campus, contributing significantly to academic and support functions across the main campus, including the UCI School of Medicine” (p 7). 

 

The non-medical operation is split 3:2 between “non-core” and “core” operations.  Non-core funds include auxiliary units (like housing and parking) as well as research contract and grant expenditures (C&G).  Research is of course fully academic and core to the educational mission in spite of being put in non-core.  Research funds depend on academic faculty submitting successful research proposals to funding agencies with the full involvement of staff, postdocs, graduate students, and lecturers who also cover the teaching that grant-writers aren’t doing.  Faculty apply to federal agencies like NSF, and also get lesser funding from state, corporate, and foundation sources.

 

Figure 1

 

The UCI Overview presents this 4/5^th of UC Irvine as robust and profitable. It presents the “core” as not so much.   

 

Note that in Figure 1, all the entities, even the medical center, are trying to help the core’s Schools by sending money, apparently with nothing being generated by the Schools.  The Schools are charted like a sinkhole—Schools aren’t givers but takers

 

The core is inseparable from the campus and teaching students. Although the “core missions” are “teaching, research, and public service,” nearly all of UCI core revenues are tied to instruction.  This means both state funding and the many kinds of student tuition that UC campuses now charge. Some grant-based indirect cost recovery (ICR) is here as well, some investment earnings, etc.  But the core’s salaries for tenure-track faculty, lecturers, Graduate Student Employees (GSEs), and staff are tied to revenues from instruction. 

 

UCI defines the problem of the core in simple terms.  Core revenues go up 1-4% a year (Chart 3.2).  Core expenses go up 5-8% a year (Chart 3.3).  Costs rising at twice the rate of income has led to a projected $70 million deficit in 2026-27, or 5% of the core budget. 

 

The only good revenue news for the core is ICR, which gets special praise.  More on this in a bit.   

 

So, UCI defines its budget problem as the core’s expenses, and the Financial Stability Plan as the solution. It’s a model, but at heart is a plan for cuts, of familiar kinds. The UCI core will proceed by “not filling vacant faculty and staff positions, increasing revenue where possible, reducing programs and services where possible, leveraging existing non-core resources, and reducing other operating costs.”  The idea is to reduce instructional staff and services—that is to reduce instruction itself. (The only hint of growth again comes from “non-core resources.”)

 

In the UCI Overview story, all losses are occurring in the academic core, founded on instruction.  It assigns no losses to the non-core or to UCI Health. Therefore, all the cuts might logically come from the core as well.  

 

**

 

The UCI core does lose money, particularly on teaching California resident students, because the state has long underfunded the University very badly, refusing to compensate for quasi-frozen residential tuition, among other things.

 

But, contrary to the Overview story, the rest of the university loses money as well.   Even massive clinical revenues and other auxiliary activities barely cover costs in specific units. (And UCI seems to have negative “uncommitted reserves” (Figure 4)).

 

First, there’s UCI’s Medical Center, subject to audited systemwide Financial Reports.  In the most recent Report, for 2023-24, UCI Health’s Income from Operations was negative $28.6 million  (p. 60). Its Change in Net Position is negative $230.8 million (p. 60). Its Transfers to University is negative $91.9 million, meaning the campus sent it about $92 million that year (p 62).  

 

Caveats: these numbers fluctuate from year to year, there are others one could report, they require interpretation (cash flows from Med Center to UC campus are likely repayments / recharges for activities not specified in financial reports), med center accounting is very complicated, and I am not an expert in it.  

 

That said, the Budget Overview is not justified in presenting UCI Health as a general financial donor to the core and its Schools.  The arrows in Figure 1 are at best misleading when they show the Schools getting surplus funds from UCI Health, while generating none of their own.

 

This is an especially dangerous claim at this point in time, as the 1/3^rd of UCI Health that comes from Medicare and Medicaid reimbursement will be subject to further reductions when Trump’s health care cuts become fully effective after the 2026 midterm elections.

 

Next, there’s the “non core,” with its very large research expenditures. The Overview story is that non-core runs in the black and that ICR is a special boon.

 

Of the core fund sources outlined here, one source that has kept pace or exceeded inflation has been indirect cost recovery (ICR) from grants and contracts, which grew 15% each year for the past two years. This accomplishment reflects years of intentional investments in faculty, infrastructure, pre- and post-award administration, and incentive programs that have resulted in clear progress toward the strategic goal of increasing the impact of UCI research. The resulting growth in indirect cost recovery resources helps to cover existing costs for administration, maintenance, utilities, and other research-related costs that cannot be charged directly to grants. Continued growth at a steady pace is essential to achieving a sustainable financial model for the campus.

 

This is mostly crazy talk.  It’s obviously right about the rate of ICR increase, but the ICR growth rate is a function of UCI faculty’s increased grant acceptance rate, not an independent revenue stream. And those grants have costs that ICR is supposed to cover--rather than supply free cash flow to the campus.

 

Which gets us to the next point. ICR is also not a positive revenue stream on top of the allegedly positive net revenue of Contracts and Grants. 

 

 I’ll focus on this in a bit, but note in passing a third problem. That is the Overview’s suggestion that ICR comes from the administration’s capital investments rather than from the labor of the faculty, staff and students who write the grants (5-10 proposals for every success) and who then do the research. They are not mentioned here.  This is not petty carping about wording: academic accounting misrepresents academic reality in large part because of its abstraction from universities’ core academic work.  “Continued growth” in research activity is labor first, with secondary capital support that in fact, at all UC campuses, Irvine included, struggles to be adequate. 

 

**

 

Back to ICR.  The idea that ICR is a positive revenue stream is one of the most destructive myths in university political economy. 

 

ICR is the supplement to direct research costs that are covered more in less in full by an extramural grant. However, in the U.S. and the U.K., ICR does not cover the full indirect costs associated with running a research grant at a university. Not ever.

 

Many or most of these indirect costs fit under “Facilities and Administration” that many grants need and share.  (The American Association of Universities has a short primer). The Trump cuts to ICR from 56.5% at UCI’s campus down to 15% are still tied up in court, but will be devastating if they go through. The reason is not only because they cover real expenses, as has been stressed in this crisis period, but because they aren’t enough even at 60% or 75% to cover a university’s costs in laboratory research.

 

Here are two ways of depicting the universal ICR shortfall at universities.  The first comes from the UK’s Office of Students’ Transparent Approach to Costing (TRAC) database. TRAC tries to account for the “full economic cost” of all university activities. Here’s the picture from the 2023-24 TRAC Report.

 

Figure 2

UK universities lose money on teaching home students (dark blue bar) whose fees are quasi-capped (much like California resident student tuition).  They lose even more money conducting research (mint green).  Each year, the gap between full recovery and actual recovery of real research costs gets bigger, as do their losses. 

 

The TRAC report spells out the problem: 

The full economic cost recovery rate showed a deterioration to 66.0 per cent compared with 68.5 per cent of full economic costs for 2022-23, and notably lower than in 2010-11 when the recovery rate for research peaked at 77.8 per cent. The median rate for full economic cost recovery was 58.1 per cent for the UK sector.

 

The typical UK university loses nearly £400,000 for every £1 million of research it conducts. This is double what it lost a dozen years earlier. If sponsors paid the full cost of UK university research, the fiscal crisis of the UK university would go away.

 

The second ICR figure comes from the AAU primer, and brings us back to the U.S.

 

Figure 3

This figure expresses an implied loss on sponsored research: it is expressed by the share of research expenditures that come out of the university’s own pocket. In the AAU’s prose, 

Federal data show that colleges and universities pay for 25 percent of total academic R&D expenditures from their own funds. This university contribution amounted to $27.7 billion in FY23, including $6.8 billion in unreimbursed F&A costs. These institutional commitments to academic R&D significantly exceed the combined total of all other non-federal sources of support for academic R&D: state and local government (5 percent), industry [businesses] (6 percent), and foundation [other non-profit organizations] (6 percent) support in FY23. (emphasis added)

 

AAU objects to the myth of research funding as a net positive revenue stream and stresses how much universities are out of pocket. What does that mean for UCI’s “non-core’s” Contracts & Grants allegedly running in the black, even making money on ICR?  

It means this happens only because UCI spent $132,261,000 of its own money on research (FY23 Table 22, Rank 56, the most recent federal data).  In other words, 21.7% of its overall R&D expenditures that year ($609.6 million) came from its institutional funds.

 

Caveat: a small percentage of these institutional funds went non-STEM fields (an NSF accounting category) perhaps as direct internal research funding.  

 

Figure 4

 

 

 

But it’s a very modest non-STEM number ($8.2 million for the humanities, for example, and $36.8 million for all non-STEM fields (Table 58, rank 60); some share of it goes to subsidize (much smaller) losses on non-STEM research. (More analysis on these issues can be found at Liner Note 13, “Humanities Decline in Darkness” or, for detail, Stage 2 of The Great Mistake).  

 

So about one-fifth of UCI C&G funds take the form of internal subventions of extramurally sponsored research.

 

**

For the record, I am zealously pro-research and think there should be much more of it, not less. But the sector has long needed to stop bullshitting itself and pay for it fully and honestly, now more than ever--without pushing costs on universities who then have to sacrifice instruction or research in politically weaker disciplines like history and feminist studies. 

 

(This is not a new issue with Trump: for ye historians, here’s a call for full research costing on this blog—in July 2009, or Gerald Barnett and I kicking off the 2010s with a Chronicle piece on the same subject, or me trying to use UCSD losing three core members of its Center for Theoretical Biological Physics to Rice University as a teachable moment in 2011, or trying to use UCLA losing a neuroimaging lab to USC as a teachable moment in 2013, etc..)

 

The reason it’s even more urgent now is that the Trumpian war on the knowledge system is slated to cause universities to lose much more money on research than ever before. Their administrations will be looking to free up resources everywhere, very much including the large payrolls tied to the instructional core.  

 

Given the damage this will cause, they are likely to set it up as UC Irvine has done: say research is profitable for the university while instruction runs at a loss that must now, in trying times, be staunched.  UCI finance, having obscured the $100+ million it spends to subsidize research (leaving aside UCI Health), plans to cut its Schools of Humanities and of Arts and then keep the reductions to about 4% next year with subventions in the $2.8-$2.9 million range.  

 

I’ll discuss this issue in Part 2 of this piece.  But we should go into it with the understanding that “subventions” are the lifeblood of higher education. They can be made very large when education needs or wants them large, as with basic research in the STEM disciplines.  

 

The political economy of universities rests on the socialization of costs. It’s just a matter of whose costs and whether we admit them or cover them up. 

 

UC Santa Barbara on February 11, 2014

The necessary long-term strategy has been nicely outlined by Eric Reinhart and Craig Spencer at the Boston Review. The public is more likely to support research funding that has direct and visible public benefits, like affordable treatments, rather than today’s funding that serves as an input to Big Pharma mega-profits and maximized care rationing for patients. They are completely right to say, “The path forward cannot be simply to defend the pre-Trump status quo; we must go far beyond it.”

 

The same also goes for the short-term strategy. The courts have stayed the NIH cut of indirect costs to a flat rate of 15%.  It’s good that universities are explaining what indirect costs are and that they are real costs. The Editor-in-Chief of the Science journals, Holden Thorp, wrote a strong editorial (“A Direct Hit”) saying how these costs work and suggesting that “these cuts should be a rallying cry for higher education to come together to make the case for the American system of research and teaching.” 

 

That case, however, will have to include direct public benefits of research that cut through the monopoly profit system—Reinhart and Spencer’s point—while also explaining the necessary public funding contribution to the initial research. People don’t know why the funding should be public rather than corporate and also how much money is required. 

 

There’s now been some progress on the public funding issue.  Universities and their organizations are starting to contest the core Republican narrative about research grants. That narrative is that grants make big money for the rich universities that have them. The conclusion is that lowering the research profits at universities won’t hurt them and will increase fairness and efficiency for the taxpayer.

 

The narrative is nonsense but university managers have never properly taken it on.  They aren’t comfortable with the reality they must disclose, which is that universities lose money on sponsored research, and plenty of it.  Big science is a big loser for universities.  If you were running universities as a business you’d get rid of sponsored research. In other words, you’d do what most businesses have done.  But universities aren’t businesses, though their leaders haven’t wanted to stress this point to a misinformed public.

 

I’ve stressed at length in many places—most recently in Liner Note 15 and Inside Higher Ed – that this has been both a data and a strategic disaster. No doubt university managers have worried than disclosed research losses would encourage voters to cut research in a (neoliberal) culture in which pecuniary gain is the measure of all things.  It’s a rational fear, but a bad policy. The result has been decades of miseducating people, politicians, business executives, and their own campus scientists, leading to general confusion about how expensive research actually is and why it depends on public funding and not just on Nvidia, Microsoft, and OpenAI.

 

The truth was always out there, but buried in obscurity. The Council on Governmental Relations (COGR), an association of research universities, has long published an annual report called “Finances of Research Universities.”  There they would regularly observe that much of a given university’s research expenditures comes from the university’s own “institutional funds.”  

 

For example, in 2008, COGR wrote, “According to the 2006 NSF Survey, Institutional Funds account for 19.0% of all R&D expenditures, compared to 12.0% of all R&D expenditures in 1976” (author’s files).  The real story of federal funding is that the share of total costs pushed onto universities has doubled to around 25% over the past fifty years.  

 

COGR is now getting more company.  Duke University officials have disclosed a potential loss to their NIH indirect cost recovery of $194 million, which is nearly the same as their NSF “institutional funds” disclosure (Table 22).  (Such reports encourage me to stick with my higher calculation of losses (I ran UCSFs), in contrast to than those from The New York Times’  national data base of institutional losses that relies on calculating indirect costs on every single NIH grant in 50 states.  I commend their heroic effort of public education on this key infrastructural issue even if I think they’ve come in rather low.  Dan Mitchell compiled their lower figures for UC campuses.)

 

In the past, universities have taken the hit rather than make a public issue out of it, and now in the current emergency they are now backed into a corner.  But the truth is slowly groping towards the fore. 

 

Another example: if a nerd like me reads the declarations in the lawsuit that led to the temporary stay on the NIH cuts, one can read the following from a Brown University official: 

Importantly, if NIH’s indirect cost rate is reduced to 15%, Brown cannot simply make up for the resulting gap in funding through alternative means. Brown’s full cost of research is already significantly more than what is covered by sponsored direct costs and indirect cost recovery. In the 2022 fiscal year, for example, Brown’s full cost of research was estimated at $315 million, which was $66 million more than sponsored direct costs and indirect cost recovery. Brown made approximately $37 million in additional investments, including through research incentive programs, cost-sharing, and other programs. And Brown took on $28 million in “unrecovered” indirect costs.

 

Great.  It’s paragraph 23 of one of many declarations and it goes on to say something confusing that I don’t quote here.  But it’s a lot better than nothing.

 

Meanwhile, COGR has moved into getting the word out with video animations.  The result is very good, and I encourage everyone to watch it if you need to refresh yourself on the basics. Here are two key moments.

 

Figure 1.

 

“Wrong” means the idea that Congress covers all research costs. “F & A” means “Facilities and Administration,” which have been capped at 26% for decades, regardless of actual costs. The key figure is the big number universities hand over.

 

Figure 2

 

Emptying the piggy bank is right.

 

It should go without saying that money-losing STEM research is not subsidizing the arts, humanities, and social science fields who mostly don’t have extramural funds in the first place. But apparently it doesn’t, so I’ll do a separate post on this later.

 

We can see this as too little too late, or as better late than never.  My heart says the former, since I’ve known this for 25 years, going back to a time when the country had a good chance of fixing the problem were it to have admitted its existence. But my head goes with better late than never—we now need to mad dog this issue and that means universities everywhere coming clean. 

 

Here we get to the next huge issue: the (public) university piggy bank didn’t have money in it.   Their money comes mainly from student tuition and state funding. Neither of these sources are large enough, and have been for quite a while.

 

I just watched the most recent University of California Board of Regents budget presentation (January 2025, Board, Finance and Capital Strategies Committee, 1’58” to 2’04”, discussion to 2’14”). it’s a good example of what I’m talking about. 

 

Knowing perfectly well that Trump was trouble, California Governor Gavin Newsom cut public higher ed anyway.  Here’s a UC Office of the President (UCOP) slide that sums up the breaching of the latest “Compact” that was supposed to assure reliable funding.

 

Figure 3.

 

This is some pretty dumb futzing around with the University by a state with a $230 billion budget. Newsom also insists that UC must take additional resident undergraduates even as he declines to pay anything for them.  The state has done this off and on for years.  There’s always room for more sacks of turnips on the turnip truck. 

 

The UCOP presenters noted that UC campuses have structural deficits, and the state is assuring they will increase.

 

Figure 4.

 

 

Even if the state funds what it says it will, UC has a half-billion-dollar deficit in 2025-26. And that’s before the NIH cuts were announced.

 

This confirms what campuses already know in the form of hiring freezes, grad admissions suspensions, course overcrowding, and systemic shortfalls in professional resources.  

 

And it also means that UC is not able to backfill the federal cuts with state money, not for one month, to say nothing of covering the coming cuts across the entire Trump administration.

 

The original federal research deal---1950s, 1960s—was that states would fund some of the research done at their universities because they got direct and indirect benefits.  State residents got jobs and paid state taxes, and also got skilled graduates and new knowledge. The past 30-40 years of flat or falling state funding (depending on the state) destroyed that tacit cost sharing.  

 

UC’s budget VP through most of the period 1985-2010, a shrewd and likeable guy named Larry Hershman, had decided that state legislators didn’t know what research was and had no reason to care.  So he never brought it up when lobbying for funds—it was always undergraduate education.

 

Throughout the 2000s, those of us on the Academic Senate’s Planning and Budget Committee (UCPB) literally begged Hershman on a monthly basis that he had to teach them about research. All of us classroom teachers face “don’t know and have no reason to care” in Day 1 in every course we have ever taught—it’s the proverbial “teachable moment.” Hershman always said it was hopeless and wouldn’t (and didn’t).  This meant that the state funding and student tuition cross-subsidy of research has remained the invisible part of the funding iceberg that sleeps beneath the surface. 

 

So now no one in state government seems to be in a position to understand the damage their permanent austerity budgets have done to UC teaching and research.  The Legislative Analyst Office’s new comment is a good example. Stop pretending you’re going to increase UC funding, they say to the legislature, and just don’t increase it.

 

The UC Board of Regents don’t understand either.  Their budget presentation lasted a total of 6 minutes.  The only real questions came from graduate student regent Josiah Beharry and another young person I couldn’t identify. Beharry pointed out that the university needs to rethink the compact with the governor if it’s “hurting us rather than helping us right now.” No comment from UCOP.  The other regents sat in total silence.  

 

16 minutes after the presentation began, Regent and committee chair Michael Cohen, formerly Gov Jerry Brown’s budget director, closed the session.  Cohen noted that the Board may need to look at campus budget problems more than it has in the past, but don’t forget the state has a deficit. So UC needs to focus on “long term ways to reduce our costs.”  In other words, Cohen is offering the University more cuts!  

 

The lack of engagement with decades-old campus budget problems is Board malpractice.  The refusal to deal with resulting quality problems is completely irresponsible. This is a frozen governance crisis, and UC finances won’t improve at all until faculty, staff, and students can find a way to overcome it.

 

The lowest estimate of UC’s losses to NIH cuts adds $427 million, bringing 2025-26’s shortfall to about $1 billion.  However, UCLA’s CFO told a town hall that $1 billion is the potential loss from various Trump threats just for that campus.   

 

So what is the real estimated problem? Official figures would be nice. In the meantime, here are mine.  

 

UC campuses spent $4.6 billion in federal research funds in FY2023. If we average indirect cost recovery rates at various campuses at 58% (UCSF’s NIH rate is 64%), UC campuses received something like $1.69 billion of that in the form of indirect costs [x=(4.6b/1.58)0.58].  One can easily come up with a scenario in which UC’s 2025-26 budget deficit is $2 billion.

 

Just to focus the mind, this comes on top of an existing shortfall in which campuses in FY2023 also spent $1.9 billion of their own “institutional funds” to support federally-funded research. (This and the previous paragraph are calculated from Table 22).  That has been covered with (inadequate) state funds and student tuition in the main. 

 

This all sounds crazy because it is. This is how the US funded research has been before Trump came along.  It’s not a normal we want to restore, and disclosing it is the only way to get to something better.

 

The regents can’t really see how bad the long term state trend is from Figures 3 and 4, which is what they get in meetings. UCOP sometimes has longitudinal charts in the Budget for Current Operations, but they need to be part of the live meetings where UC people and journalists sometimes attend. 

 

Here’s  the updated version of the state general fund trend (for background see The Essential Charts).

 

Figure 5. 

 

 The blue line is a benchmark, tracking growth in state per-capita income.  This measures the strength of the economy as it exists in people's pockets.  It goes up 4-5 percent a year most of the time.  If a state wanted to fund an agency in an average way, it would make that agency's revenues rise at the same rate as per-capita income. In such a case, the legislature isn't treating it as essential or special, but just letting UC or CSU or public health or transportation grow with the state.

 

The yellow line takes the per-capita income benchmark and corrects it for actual UC student growth.

 

The purple line is the California state budget (right-hand scale).  State government--health, corrections, transportation, K-12 education, etc.--has grown at around the same rate as personal income.

 

The red line tracks the state's actual general fund allocation to UC. 

 

None of this is corrected for inflation.

 

The chart shows that UCOP and the Board of Regents have failed over many years to keep UC’s state resources on par with state growth.  Regent Cohen is completely wrong to look for still more reductions.  The University has the opposite problem--lagging pretty much everything  associated with state government throughout the 21st century.  And this substandard funding when California is supposed to be a world-leading knowledge society.

Now,  when state funding is needed to fill in for some likely federal cuts, Cohen and the rest of the Board of Regents have left UC unprepared.

 

UC is certainly not alone in this.  Across the country, universities are enduring a “phony war” period like Christmastime 1914: World War I on research funding has started, mass firings are happening, agency leads are capitulating to the Trump administration, staff are furious and demoralized, review panels and grants have been blocked, and confusion has settled over the national pride and joy that is STEM research.  

 

While the cuts are still suspended, universities need to launch a massive campaign to explain public good research and its sources in public funding.  I’d like to think UC people could help show the way.

Bosphorous from Boğaziçi University on February 5, 2010

I've written two dozen posts on this blog about indirect cost recovery (ICR), going back at least to 2009. But this is my first when the topic has made national news, unfortunately as part of Trump's total war on professional knowledge (that series started here). 

ICR seems like a boring, technical budget subject.  In reality, it is a major source of the long-running budget crises of public research universities. Misinformation about ICR has also confused everyone about the university's public benefits.  

These paired problems--concealed shortfalls and midirection--didn't cause the ICR cuts being implemented by Trump's man at NIH,  one Matthew J. Memoli, M.D. But they are the basis of Memoli's rationale. 

Trump's people will sustain these cuts unless academics can create an honest counter-narrative that inspires wider opposition.   I'll sketch a counter-narrative towards the end of this post. 

The sudden policy change is that the NIH is to cap indirect cost recovery at 15% of the direct costs of a grant. This will apply to all grants to all institutions, regardless of the existing negotiated rate for each.  Memoli's Notice has a narrative that is wrong but internally coherent and plausible.

It starts with three claims about the $9 billion of the overall $35 billion budget that goes to indirect costs: 

• Indirect cost allocations are in zero-sum competition with direct costs, therefore reducing the total amount of direct research.
• Indirect costs are "difficult for NIH to oversee" because they aren't entirely entailed by a specific grant.
• "Private foundations" cap overhead changes at 10-15% of direct costs and all but a handful of universities accept those grants.

Memoli offers a solution:  

• Define a "market rate" for indirect costs as that allowed by private foundations (Gates, Chan-Zuckerberg, some others). He then claims that 
• this foundation-set market rate is equal to the share of indirect costs that are valid. The foundations' rate "discovers"  real indirect costs rather than inflated or wishful costs that universities skim to pad out bloated administrations. (Many scientists share this latter view: see UCSF's Vinay Prasad's points 3 & 4.)
• On this analytical basis, currently-wasted indirect costs will be reallocated to useful direct costs, thus increasing rather than decreasing scientific research. 

There's a logic here that needs to be confronted.  How are we doing so far? 

The current strategy is to focus on outcomes rather than on the logic of the claims or the underlying budgetary reality of STEM research in the United States.  This continues a longtime, standard response to cuts (these are by no means the first)--to call the new ICR rate cap an attack on US scientific leadership and on public benefits to U.S. taxpayers (childhood cancer treatments that will save lives, etc.).  Most current coverage feature these arguments  (Science, NYTimes, WaPo, APLU). 

For example, one scientist wrote, "The NIH cap on indirect costs will kneecap biomedical research in the US." "It will mean shuttering labs across the country, layoffs in red and blue states, & derailing lifesaving research on everything from cancer to opioid addiction," wrote Sen. Patty Murray.  The University of Washington biologist Carl Bergstrom put together a good BlueSky thread: 

This is all good stuff.  The next step is to file lawsuits claiming illegality and seek a court injunction.  

And yet these claims don't refute the NIH logic. Nor do they get at the hidden budget reality of academic science. 

 

On the logic: NIH-Memoli's first two points as stated above misdescribe indirect costs. They aren't in competition with direct costs because direct and indirect costs pay for different categories of research ingredients.   

Direct costs apply to the individual grant: chemicals, graduate student labor, waste disposal, that are only consumed by that particular grant.

Indirect costs support "infrastructure" used by everybody in a department, discipline, division, school, or university.  Infrastructure is the library that spends tens of thousands of dollars a year to subscribe to just one important journal that is consulted by hundreds or thousands of members of that campus community annually. Infrastructure is the accounting staff that writes budgets for dozens and dozens of grant applications from across a department or schools. Infrastructure is the building, new or old, that houses multiple laboratories: if it's new, the campus is still paying it off; if it's old, the campus is spending lots of money keeping it running.  These things are the tip of the iceberg of the indirect costs of contemporary STEM research.

In response to the NIH's social media announcement of its indirect costs rate cut, Bertha Madras has a good starter list of what indirects involve. 

Good list! Then there are people who track all these materials, reorder them, run the daily accounting and payroll, etc etc.--honestly people who aren't directly involved in STEM research have a very hard time grasping its size and complexity, and therefore its cost.  (Memoli is a NIH lab director and surely knows this.) 

As part of refuting the first claim--that NIH can just not pay for this and therefore pay for more research--the black box of research needs to be opened up, Bertha Madras-style, and properly narrated as a collaborative (and exciting) activity.

This matter of human activity gets us to the second NIH-Memoli claim, which involves toting up the processes, structures, systems, and people that make up research infrastructure and adding up their costs.  The alleged problem is that it is "difficult to oversee."  

Very true, but difficult things can and often must be done, and that is what happens with indirect costs. Every university every year compiles indirect costs as a condition of receiving research grants.  Specialized staff (more indirect costs!)  use a large amount of accounting data to sum up these costs, and use expensive information technology to do this to the correct standard. (They do routinely the very thing Elon Musk and DOGE claim to be bringing for the first time to the federal government, which is advanced IT applied to complex systems.) University staff then negotiate with federal agencies for a rate that addresses their particular university's actual indirect costs.  These rates are set for a time, then renegotiated at regular intervals to reflect changing costs or infrastructural needs.  

The fact that this process is "difficult" doesn't mean that there's anything wrong with it. This claim shouldn't stand--unless and until NIH identifies flaws would need to be identified. As stated, the NIH- Memoli claim that overhead cuts will increase science is easily falsifiable.  (And we can say this while still advocating for reducing overhead costs, including ever-rising compliance costs imposed by federal research agencies. But we would do this by reducing the mandated costs, not the cap.)

The third statement --that private foundations allow only 10-15% rates of indirect cost recovery--doesn't mean anything in itself.  Perhaps Gates et al. have the definitive analysis of true indirect costs that they have yet to share with humanity. Perhaps Gates et al. believe that the federal taxpayer should fund the university infrastructure that they are entitled to use at a massive discount. Perhaps Gates et al. use their wealth and prestige to leverage a better deal for themselves at the expense of the university just because they can.  Which of these interpretations is correct?  NIH-Memoli assume the first but don't actually show that the private foundation rate is the true rate.  (In reality, the second explanation is the best.)

However, the cuts to 15% depend entirely on the private status of these foundations insuring that 15% is the true and valid ICR rate. Since they don't and  it isn't, the solution of 15% isn't right either (the second set of bullets above).  

This kind of critique is worth doing, and it can be expanded. The NIH view reflects right-wing public-choice economics that treat teachers, scientists et al. as simple gain maximizers producing private not public goods. This means that their negotiations with federal agencies will reflect their self-interest, while in contrast the "market rate" is objectively valid. (See Nancy McLean's book on James Buchanan, etc.) However, critique is only half the story.

The other half is the budget reality of large losses on sponsored research, all incurred as a public service to knowledge and society. 

Take that NIH image above. It makes no logical sense to put the endowments of three very untypical universities next to their ICR rates: they aren't connected. It makes political narrative sense, however: the narrative is that fat-cat universities are making a profit on research at regular taxpayers' expense, and getting even fatter. 

The only way to deal with this very effective, very entrenched Republican story is to come clean on the losses that universities incur.  The reality is that existing rates of ICR recovery do not cover actual indirect costs, but require subsidy from the university that performs the research.  ICR is not icing on the budget cake that universities can do without. ICR buys only portion of the indirect costs cake, and the rest is purchased by each university's own "institutional funds."  

For example, here are the top 16 recipients of NIH funds (under HHS- Heath and Human Services). The second largest is UC San Francisco, winning $795.6 million in grants in 2023. (The Higher Education Research and Development (HERD) Survey tables for FY 2023 are here.)

UCSF's negotiated indirect cost recovery rate is 64%. This means that it has shown HHS and other agencies detailed evidence that it has real indirect costs in something like this amount (more on "something like" in a minute).  It means that HHS et al. have accepted that UCSF evidence of their real indirect costs as valid.

If the total of UCSF's HHS $795.6 million is received with a 64% ICR rate, this means that every $1.64 of grant fund has $0.64 in indirect funds and one dollar in direct.  The math-- x=(795.6/1.64)0.64 -- estimates that UCSF receives about $310 million of its HHS funds in the from of ICR.

Now, the new NIH directive cuts UCSF from 64% to 15%. That's a reduction of about 77%. Reduce $310 million by that proportion and you have UCSF keeping $71.3 million of its ICR, or losing $238 million in one fell swoop. 

There's no mechanism in the directive for shifting that into the direct costings of UCSF grants, so let's assume a full loss of $238 million.  That's over 10% of UCSF's research budget.

In Memoli's narrative, this $238 million is the Reaganite's "waste, fraud, and abuse." The remaining $71 million is legitimate overheads as measured (wrongly) by what Gates et al have managed to force universities to accept in exchange for the funding of their researchers's direct costs.  (To repeat, this is quasi-free riding on the federal government by private foundations, not a measure of real vs. fake indirect costs. We do need to make this critique.)

But the actual situation is even worse than this.  It's not that UCSF now will lose $238 million on their NIH research.  In reality, even at (allegedly fat-cat) 64% ICR rates, they were already losing tons of money. Here's another table from the HERD survey.

There's UCSF in the No. 2 national position again, a major research powerhouse.  It spends over $2 billion a year on research.  However, moving across the columns from left to right, you see federal government, state and local government, and then this category "Institution Funds." As with most of these big research universities, this is a huge number.  UCSF reports to the NSF that it spends over $500 million a year of its own internal funds on research.  

The reason? Extramurally sponsored research, almost all in science and engineering, loses massive amounts of money even at current recovery rates, day after day, year in year out. This is not because anyone is doing anything wrong.  It is because the infrastructure of contemporary science is very expensive. 

Here's where we need to build a full counter-narrative to the existing one. The existing one, shared by university administrations and Trumpers alike, posits the fiction that universities break even on research.  UCSF states, "The University requires full F&A cost recovery."  This is actually a regulative ideal that has never been achieved.  

The reality is this:

For every million dollars in research expenditures at UCSF, the university spends $250,000 of its own money. That adds up to half a billion dollars of its own funding spend to support its $2 billion in research.  That money comes from the state, from tuition, from clinical revenues, and some, less than you'd think, from private donors and corporate sponsors.  If NIH's cuts go through, UCSF's internal losses on research--the money it has to make up--suddenly jump from an already-high $505 million to $743 million in the current year.  This is a complete disaster for the UCSF budget. It will massively hit research, students, the campuses's state employees, everything.

The current strategy of chronicling the damage from cuts is good: the best MSM coverage so far is Kaleem & Watanabe.  But it isn't enough. We also need the critique of NIH and this true story of the already existing negative research budget reality.  I'm pleased to see the American Association of Universities, a group of high-end research universities, stating plainly that "colleges and universities pay for 25 percent of total academic R&D expenditures from their own funds. This university contribution amounted to $27.7 billion in FY23, including $6.8 billion in unreimbursed F&A costs." All university administrations need to shift to this kind of candor.

Unless the new NIH cuts are put in the context of continuous and severe losses on university research, the public, politicians, journalists, et al. cannot possibly understand the severity of the new crisis.  And it will get lost in the blizzard of a thousand Trump-created crises, one of which is affecting pretty much every single person in the country.

Finally, our full counter-narrative needs a third element: showing that systemic fiscal losses on research are in fact good, marvelous, a true public service. A loss on a public good is not a bad and embarrassing fact.  Research is supposed to lose money: the university loses money on science so that society gets a long-term gain from it.  Science has negative return on investment for the university that conducts it, so that there is a massively positive ROI for society, of both the monetary and non-monetary kind. Add up the eduction, the discoveries, the health, social, political and cultural benefits: the university courts its own endless fiscal precarity so that society benefits.

We should also remind everyone that the only people who make money on science are in business. And even there ROI can take years or decades. Commercial R&D, with a focus on product development and sales, also runs losses.  Think of "AI": Microsoft alone is spending $80 billion on it in 2025, on top of $50 billion in 2024, with no obviously strong revenues yet in sight.  This is a huge amount of risky investment, --it compares to $60 billion for federal 2023 R&D expenditures on all topics in all disciplines.  I'm an AI skeptic, but appreciate Microsoft's reminder that new knowledge means taking losses and plenty of them.

These up-front losses generate much greater future value of non-monetary as well as monetary kinds. We can remind people of these abundant future benefits as we insist that they confront the size of these research losses (here, here, here, here Stage 2). Look at Penn, Madison, Ann Arbor, Harvard, Pitt in Table 22 above. The sector spent nearly $28 billion of its own money generously subsidizing sponsors' research, including subsidizing the federal government itself. 

There's much more to say about the long-term social compact behind this--how the actual "private sector" gets 100% ICR or significantly more, how state cuts have screwed up the university's lower rate, how student tuition now subsidizes more of STEM research than is fair, how research losses have been a denied driver of tuition increases. There's more to say about the long-term decline of public universities as research centers that, when properly funded, allow knowledge creation to be distributed widely in the society. (See this 2011 post on UCSD losing a major research team to Rice University, when one of the departing scientists broke the silence on the role of public cuts in his departure.)

But my point here is that opening the books on large everyday research loses, especially biomedical losses of the kind NIH creates, is the only way that journalists, politicians, and the wider public will see through Memoli's Trumpian lie about these "no problem" ICR "efficiencies." It's also the only way to move towards the full cost recovery that universities deserve and that research needs. 

UPDATE FEBRUARY 11: (Washington Post)

'Judge Angel Kelley, in federal district court in Massachusetts, ordered the National Institutes of Health not to implement a funding change the agency had announced Friday night, which would dramatically reduce funding to universities and other research organizations for indirect costs related to research.

'Twenty-two Democratic attorneys general sued the Trump administration, the Department of Health and Human Services, and the National Institutes of Health on Monday, charging that the action is in violation of the Administrative Procedure Act.

'In their complaint, the attorneys general said the impact would be immediate and result in layoffs, suspension of clinical trials, disruption of research and laboratory closures. It sought the temporary restraining order only in the 22 states that brought the action, Andrea Joy Campbell, the attorney general of Massachusetts, said in a news conference Monday. The cuts affect everyone in the country, but only Democratic attorneys general stepped up, she said.

'Later Monday, three higher-education associations representing colleges and universities nationally — the Association of American Universities, the Association of Public and Land-grant Universities, and the American Council on Education — also sued in federal district court in Massachusetts.'