Restructure federal grants to universities

An easy and quick win for Department of Government Efficiency (DOGE)

The Department of Government Efficiency (DOGE) aims to maximize value for taxpayers by improving efficiency and eliminating wasteful government spending. In fiscal year 2023, the total budget was about $6.1 trillion with a budget deficit of $1.7 trillion. Of the total $6.1 trillion, Social Security accounts for about 22% of the total budget, national defense about 18%, medicare about 14%. Large gains can be realized by dissecting these big areas, but there will also be strong political resistance to anything that gives the appearance of cutting social security, medicare, or defense spending. There is plenty of fat to be cut from much smaller budget items. Making these smaller cuts across multiple areas can result in substantial gains while also being less controversial and facing less resistance.

Federal funding of Research and Development (R&D) offers a prime example of how targeted changes can immediately save tens of billions of dollars without any ill-effect on innovation.

Approximately 3.1% of the U.S. Government’s annual budget—$210 billion for R&D in FY 2024—of $6.7 trillion total for the 2024 fiscal year—is spent on research and development (R&D). Of that amount, roughly half goes to universities and colleges through funding from the National Science Foundation (NSF), National Institutes of Health (NIH), and other agencies. While research funding is important for driving excellence in innovation and science, it is a little known secret that a big chunk of the funding sent to universities does not go toward research at all.

The dirty secret of “indirect costs”

Of the roughly $100 billion funding received by universities in 2024, approximately one-third ($34 billion) will go to so-called “indirect costs”. Indirect costs, also known as Facilities and Administrative (F&A) costs, are meant for overhead expenses such as utilities, maintenance, and administrative support needed for research.

When a university receives a federal research grant, the funds are categorized into two main components:

1. Direct Costs: These are expenses directly tied to the research, such as salaries, equipment, lab supplies, and travel.

2. Indirect Costs (F&A Costs): These cover infrastructure and administrative support, including utilities, building maintenance, and grant administration. Indirect costs are calculated as a percentage of the direct costs incurred.

For example, consider a $1,000,000 research grant with an average F&A rate of 52% (though rates vary by institution, often ranging from 40% to 60%):

• A $50,000 direct research expense (e.g., lab supplies or salaries) would result in an additional $26,000 ($50,000 × 52%) allocated to indirect costs.

• This means the university receives a total of $76,000 for every $50,000 spent on actual research.

As F&A funds are only paid when direct costs are incurred, the indirect cost allocation incentivizes universities to maximize direct expenditures. Universities have little motivation to minimize expenses or improve efficiency because their indirect revenue grows with higher direct spending.

Although indirect costs are paid out as a fixed fraction of direct costs, universities enjoy significant economies of scale in administering grants: their indirect costs do not scale dollar-for-dollar with direct costs. Yet the amount received in indirect costs scales with total expenditure: on average, universities receive $0.52 in indirect costs for every $1.00 spent on research. Therefore, in order to receive more in indirect costs, universities are incentivized to spend (i.e., waste) taxpayer money regardless of whether it is needed for research. This perverse incentive can be eliminated immediately, without any ill-effect on research progress or innovation, by implementing an annual institutional F&A cap that aligns with the actual costs realized by each institution.

For example, Johns Hopkins received nearly $3.4 billion in federal research funding in FY 2022, of which an estimated $1.2 billion was allocated to indirect costs. It is safe to assume that Johns Hopkins’s actual costs are much lower. The same is true at every major university in the country. So where does the rest of the money go?

On paper, these indirect costs go toward necessary expenses for conducting research, but in reality they go into the pockets of the university administration, via the Office of Sponsored Research Programs (OSRP) or some similar Department. While these offices do perform some necessary functions for grant administration, it is safe to assume that they do not require billions of dollars per year to operate. Instead, the excess funds for indirect costs are used to grow the administration and to subsidize (often woke, ideologically-motivated) programs that don’t otherwise generate revenue for the university.

These indirect costs represent tens of billions of taxpayer dollars that could otherwise be returned to the federal budget or used for additional research, rather than subsidizing university inefficiencies and ideological programs.

Indirect costs are not the only area of inefficiency in federal research funding. Direct costs themselves often reflect wasteful spending in the form of exorbitant travel to exotic conference locations and inflated tuition costs for trainees.

Professional societies frequently hold conferences in exotic locations under the guise of research collaboration. For instance, the TIES Environmetrics conferences, whose focus is on climate change, have been held in Naples, Italy, Margarita Island, Venezuela, Santiago, Chile, and Anchorage, Alaska. Not exactly the place you would hold a conference if you cared about your carbon footprint, but why let saving the world get in the way of a taxpayer-funded vacation?

A significant portion of research grants goes toward training, which often includes tuition for graduate students. While training is certainly important, these tuition rates often are artificially inflated and the funding is used to instead pay for "research credits" and independent studies which entails nothing additional to the work that students are already doing on the funded project. In other words, these are another way for universities to claw money from federal grants.

As the above analysis suggests, DOGE can make immediate savings of $50-$100 billion per year simply by cutting back on unnecessary inflated expenses in the form of indirect research costs. By setting a fixed cap for indirect costs that aligns with the actual costs incurred, these costs could be reduced from more than a billion dollars per year to a few million dollars per year, per institution, resulting in huge savings with no detriment to research output. Additional courses of action should be to scrutinize inflated tuition costs and prohibit taxpayer-funded conferences in lavish locations.

If this level of gain can be realized just by investigating one very specific, narrow aspect of the federal budget, there is undoubtedly trillions of dollars additional that can be saved by performing similar analysis of every other aspect in the budget.