Federal Research Grants

The University of California, one of the leading research universities in the United States, used about $201 million in federal grant money to pay graduate student researchers during the last three years. GAO found that the compensation paid to graduate student researchers for services charged to federal research grants sometimes exceeded the costs allowed under Office of Management Budget (OMB) Circular No. A-21, which sets forth principles for determining costs applicable to grants and contracts with schools. Although all graduate student researchers receive basically the same salary for work done on federal research grants, foreign students receive a proportionately larger share of fee and tuition payments charged to the grants because they pay a higher nonresident student tuition. In view of a pending court case and the fact that the Department of Health and Human Services and the National Institutes of Health pay no attention to the taxability issue when determining whether tuition remission is allowable under a grant, GAO does not address whether the tuition remission provided to graduate student researchers or whether the university's treatment of the tuition remission for tax purposes is consistent with OMB Circular No. A-21.

GAO noted that: (1) GSRs receive a salary and tuition or fee remission from the University of California as compensation for their work on federally sponsored research projects; (2) according to the university, its practice of charging the salary and remissions against federally funded research grants complies with OMB Circular A-21; (3) however, based on GAO's review of the compensation paid to GSRs for services charged to federal research grants, GAO found that these payments sometimes exceeded the allowable costs that could be charged to such grants; (4) GAO compared the compensation paid to individual GSRs assigned to federally sponsored research projects against: (a) the National Institutes of Health (NIH) guideline that establishes an award level of $23,000 per GSR; and (b) the salary of a first-level postdoctoral researcher at the university performing comparable work at an equivalent level of effort; (5) of the $201 million charged by the university to federally sponsored research during school years 1995-1996 through 1997-1998, $4.4 million was charged in excess of the NIH maximum award in what GAO believes to have been unreasonable compensation; (6) the university also charged federally sponsored grants approximately $19.3 million for GSR compensation that exceeded the salary of a first-level postdoctoral researcher during the same period; (7) although all GSRs receive substantially the same salary for work performed on federal research grants, foreign students receive a proportionally larger share of fee and tuition payments charged to the grants because they pay a higher nonresident student tuition; (8) although the university treats GSRs' salary and tuition or fee remission as compensation for purposes of the OMB Circular, traditionally it has treated only the salaries as part of the GSRs' gross income for federal income taxes; (9) the Internal Revenue Service informed GAO that, as a general principle, reasonable tuition remission provided as a result of an employer-employee relationship can properly be considered a fringe benefit and excludable from the employee's gross income for tax purposes; and (10) when audits are conducted in response to specific requests for awarding agencies other than NIH, HHS determines only whether line-item amounts exceed the amounts approved by the awarding agencies.