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Enhancing the Ability of North Carolina’s Public Research Universities to Contribute to State Economic Development
March 4, 2004
A Study funded by
Table of contents
Executive Summary...... 3 Introduction...... 5 A. Project Objective...... 5 B. Economic Challenges at the Federal and State Level...... 5 C. Impact of a Stagnant Economy on Colleges and Universities...... 6 D. The Strategic Importance of Research to the State and to Universities...... 6 I. Research at North Carolina's Public Universities Has a Broad and Significant Economic Impact...... 8 A. The Flow of Funds Related to University Research...... 8 B. University Research is a Prominent and Stable Source of Employment for North Carolinians...... 9 C. Measuring the Annual Economic Impact of Public University Research on the State of North Carolina...... 9 D. University Research: A Birthplace and Magnet for Corporations and Intellectual Talent...... 10 E. Additional Long-Term Impacts of University Research Are Substantial...... 12 F. Measures of Technology Transfer Success Show Encouraging Signs of Growth...... 12 G. North Carolina’s Public Research Universities are Key to the Continuing Transition of the State Economy...... 14 II. Protecting the Vibrancy of Public University Research is Critical to the Growth of the North Carolina Economy...... 16 A. Funding for Public Research Universities...... 16 B. The Economics of Operating a Research University...... 17 C. The Importance of F&A Funding for Research Universities...... 18 D. National Competition for Research Funding is Intense and Growing...... 20 E. Infrastructure: A Critical Facet of A Robust Research Program...... 21 F. Efficient Processes Must Support Research Programs...... 22 III. State and University Policies Materially Impact Research Success at North Carolina's Public Institutions23 A. Human Resource Policy Can Hamper Research Productivity...... 23 1. North Carolina’s State Personnel System Limits the Ability of the State’s Public Research Universities to Attract and Retain Critical Resources...... 23 2. Inefficient University Processes Related to Human Resources Administration Delay Research Progress and Activity...... 26 B. Purchasing Regulations Interfere with Cost Reduction and Fast Delivery...... 26 1. Comparative Data Indicates a Competitive Disadvantage...... 27 2. State Regulations Impact Timing...... 28 3. Participation in Mandatory State-Term Contracts Costs Researchers Funding...... 28 C. Facilities Policies Challenge Research Facility Needs...... 28 1. State Regulations Limit Leasing Efficiency...... 29 2. State Regulations Lengthen Construction Timelines...... 29 D. Summary...... 30 IV. Key Policy Changes will Enhance the State of North Carolina’s Future Growth and Success...... 31 A. Recommendations...... 31 1. Maintain 100% F&A Retention...... 31 2. Review Internal Operations...... 31 3. Review Relationships with Duke University...... 32 4. Improve Institutional Accountability...... 32 5. Reduce SPA Restrictions...... 32 6. Modify State Purchasing Rules...... 32 7. Review Construction and Leasing Policy...... 33 B. Precedent...... 33 C. Summary...... 33 Appendix 1: A Sample of North Carolina Businesses Spawned by the State’s Public Research Universities...... 35 Appendix 2: Benefits Scorecard...... 37 Appendix 3: Benefits Comparisons...... 38 Appendix 4: The SPA Employment Process...... 41 Appendix 5: Sample Research Scorecard...... 42
Proprietary and Confidential 2 Executive Summary
North Carolina’s public research universities are increasingly critical to the State’s economy. The two largest public universities, The University of North Carolina at Chapel Hill (UNC-Chapel Hill) and North Carolina State University (NCSU), attracted $560 million in Federal and private research funding into the State in Fiscal 2002, a 50% increase over Fiscal 1997. This funding generated over $930 million in spending for the State’s economy, nearly the equivalent of the total output of North Carolina’s apparel and textile industries. From an economic perspective, $1.70 of spending takes place throughout the North Carolina economy for every $1.00 of research funding obtained. Research funding from Federal and private sources supports North Carolina businesses and jobs, providing direct economic benefit and driving long-term economic growth at a time when many other components of the economy are stagnating. The ability to attract research funding, which must be regenerated each year, is highly dependent upon faculty talent and research staff. Nationally, the competitive environment for research funding and faculty is at its most challenging in decades, fueled in part by more universities chasing after federal and private funds that are available at a declining pace, and the recognition among many states that university-based research is a major contributor to economic growth. University-based research is one of the bright spots in the State’s economy, creating unique opportunities for North Carolina to receive more external (Federal and private) support and create new jobs. To maximize the statewide economic benefits of university research, North Carolina must position its research universities in a way that enhances their ability to compete for Federal and industry research grants. The premise of this report is that North Carolina’s public research universities are at a competitive disadvantage in growing research funding, as compared to their nationally recognized peers, due to the burden stemming from several key administrative support functions and processes that constrain the competitive position of the research enterprise. To preserve and enhance the value of research for the State economy, the General Assembly, UNC Office of the President, UNC-Chapel Hill, and NCSU should strengthen their collaboration to fortify and improve the competitive position of the universities and their research operations. This is necessary to maximize the impact of university-based research on State economic recovery, growth, and development. Specifically, we recommend the following actions: The General Assembly should continue to support research at public universities by allowing institutions to retain 100% of their indirect cost recoveries. Actions in previous legislative sessions protecting these funds have provided an important means for maintaining a robust research enterprise. Given the uncertainty of the State’s future economic situation, it should be recognized that future diversion of these critical resources would seriously undermine the ability of North Carolina’s public research universities to contribute to the economic development of the State. UNC-Chapel Hill and NCSU should aggressively seek opportunities to streamline internal operations to improve their competitive position and to ensure that funding from all sources is being used efficiently and effectively. NCSU and UNC-Chapel Hill leadership should conduct a focused review of the research relationship between the two institutions and Duke University. Although numerous examples of scientific collaboration among the institutions already exist, competition for research and administrative talent continues. Scientific competition is generally beneficial, however, the creation of independent research silos among the three institutions will lead to higher cost and diminished collaboration. The close proximity of Duke University represents a tremendous asset to the State and its public research universities, providing a strong incentive for the three universities to work together to maximize the impact of their collective research enterprise on the North Carolina economy.
Proprietary and Confidential 3 The General Assembly should widen the exemption of North Carolina’s public research universities from the State Personnel System. North Carolina is increasingly an outlier among states with prominent public research universities with respect to involvement of the institutions in a centralized state personnel system. Increased autonomy for the universities will enable them to more competitively recruit the faculty and staff talent that ultimately attracts research funding from Federal and private sources. The General Assembly should modify State purchasing regulations such that UNC-Chapel Hill and NCSU can be empowered to use State purchasing contracts when advantageous from a cost, quality, and/or service perspective. As in most other states, the research universities should also have the authority to choose alternative vendors when lower costs, higher quality, or superior service are available. The General Assembly should ease existing restrictions on construction and leasing arrangements for campus buildings that are constructed or acquired through self-liquidating sources. The growth of the research enterprise is highly dependent on the availability of essential research facilities and timely access to them. Streamlining and easing existing restrictions will have dramatic benefits in terms of growth of the research enterprise. In exchange for granting UNC-Chapel Hill and NCSU delegated authority in personnel, purchasing, and facilities management, the General Assembly should, nevertheless, still expect appropriate accountability. However, in lieu of tightly prescribed State requirements that currently apply to all agencies, the General Assembly should move to “performance audits” that evaluate results, effectiveness, and efficiency of university business practices. Such “performance audits” should be based on customary business standards used in the corporate sector, modified to ensure applicability to the academic environment.b
Precedent exists in North Carolina for providing legislative action to relax administrative restrictions on a public entity in order to enhance its competitive position. On November 1, 1998, recognizing inherent differences in the competitive challenges that UNC Hospitals faced relative to other health care systems, the State of North Carolina created the UNC Health Care System, and gave it greater autonomy in managerial decision-making. The precedent set by this legislation has significant implications for North Carolina’s public research universities. As was true for the UNC Hospitals in 1998, UNC-Chapel Hill and NCSU are at a disadvantage vis a vis many private and public research universities with whom they compete for research funding because those institutions generally do not face the same restrictions. By streamlining regulations and reducing unnecessary constraints at UNC-Chapel Hill and NCSU, the General Assembly will enable the institutions to protect and increase their competitiveness and increase their contribution to the growth of North Carolina’s economy. The recommendations in this report are conceptually consistent with commonly used economic development initiatives created by the State, such as the creation of tax and other financial incentives designed to stimulate new businesses. While implementation of these recommendations would have similar positive economic benefits as those derived from incentives for businesses, the State’s required financial investment for the recommendations in this report would be minimal. Although this study addresses the competitive issues facing UNC-Chapel Hill and NCSU, it is likely that other UNC campuses would also benefit from these recommendations.
Proprietary and Confidential 4 Introduction
This report has been prepared by Huron Consulting Group and The Washington Advisory Group with funding from FedEx, GlaxoSmithKline and Winston Hotels to assess opportunities for North Carolina’s public research universities to enhance their economic impact on the State and local economies. The corporate funders of this project have a major stake in North Carolina’s future economic success, and their leaders recognize the key role that university scientists, students, programs and facilities play in helping the state and its economy move forward. While many factors affect economic growth, the nation’s largest public research universities have played critical roles in contributing to economic growth within their geographic regions. The University of North Carolina at Chapel Hill (UNC-Chapel Hill) and North Carolina State University (NCSU), the state’s two largest research universities, have generated significant economic activity that has shown resiliency in challenging economic times. This report focuses on opportunities and makes recommendations for enabling these research institutions to enhance their contributions to the economic well being of the State. A. Project Objective The objective of this Study was to identify opportunities for the State of North Carolina and its public research universities to increase their collaboration in order to significantly enhance the financial and economic impact of University-based research on the State economy. To achieve the project objective, this report: Discusses the economic impact of the research enterprise at UNC-Chapel Hill and NCSU Describes the complexities and competitive challenges faced by these universities Considers the impact of certain aspects of the State’s administrative and regulatory environment on the research enterprise at UNC-Chapel Hill and NCSU Proposes recommendations to enable these institutions to be more competitive in conducting research, thereby enhancing the State of North Carolina’s future economic growth and success B. Economic Challenges at the Federal and State Level The United States presently is confronted with its most serious economic challenge in a generation. The troubled national economy has created even more serious conditions for the states. The cumulative budget gap for Fiscal 2004 for all 50 states is estimated to be $80 billion1. With most states bound by balanced budget requirements, legislators are confronting difficult decisions about funding priorities and examining how existing programs can be managed more efficiently. The State of North Carolina is not immune to this challenging economic climate. Although the State budget model is complex, there are several readily identifiable causes for the economic challenges, including declining tax revenue resulting from reduced economic activity and increasing costs for public services and Medicaid. Although there have been recent indications that the economy may be recovering, economic pressures are not likely to abate any time in the near future. As a result, State lawmakers are considering a variety of measures aimed at reducing the State’s costs and increasing economic development in an effort to improve North Carolina’s tenuous economic position.
1 “2003 State Issues Digest.” American Association of State Colleges and Universities. © March 2003.
Proprietary and Confidential 5 C. Impact of a Stagnant Economy on Colleges and Universities Colleges and universities are being severely impacted by economic travails in the last three years. Endowments, one of the principal sources of operating funds for many large universities, have declined dramatically in recent years.2 Private gifts and donations, another important source of revenue for educational institutions, have been reduced commensurate with reductions in personal wealth. In 2002, total charitable gifts to colleges and universities declined for the first time in 15 years.3 Due to the decline in private support and the rate of return earned on endowment balances, academic institutions have had significant difficulty balancing their budgets. State budget problems are compounding the effects of declining endowments and gifts. With nearly every state predicting a budget deficit in 2004, most states are planning to reduce higher education appropriations.4 By the end of Fiscal 2003, it is likely that state aid to colleges will have dropped below the amount provided in 2001-2, which represents the first year-to-year cuts in more than a decade.5 This trend follows a difficult Fiscal 2002 in which 36 states made budget cuts in the middle of the year. Anticipating a continued weak economy, public universities are being forced to rethink how to meet public expectations in an environment of declining state appropriations. Some states have used tuition increases to address budget shortfalls at their public institutions. However, this tactic is increasingly unpalatable in the context of a 15-year trend in which tuition increases have outpaced inflation to a significant degree. Tuition has increased at an average annual rate of 5.49% since 1987, while the Consumer Price Index has increased at an average annual growth rate of only 3.01%.6 Lawmakers and university administrators in North Carolina are confronting the reality that further tuition increases may not be acceptable to North Carolinians already weary from a 62% increase over the past three years.7 D. The Strategic Importance of Research to the State and to Universities In the context of these financial and economic realities, many states are focusing on university-based research to provide a stimulus for the economy. The vast majority of research funding for colleges and universities comes from Federal or private sponsors, and the related spending spawned by the research funding has enormous benefits for state and local economies through job creation, commercial purchases, and construction. For many states, investing in the research enterprise of public research universities has taken on renewed importance in resuscitating stagnant state and local economies. Similarly, University administrators recognize the critical role that the research enterprise can play in sustaining operations as funding from other sources stagnates. In fact, at many universities, research funding now represents their largest source of revenue. At The University of North Carolina-Chapel Hill, Federal and private research funding as a percentage of total University funding has increased from 21% to 34% over the past 15 years, while the University’s relative reliance on State appropriations has declined from 40% to 24% over that same period. In 2002, for the first time, Federal and private research funding exceeded State appropriations at UNC-Chapel Hill. State support for public universities continues to be a primary factor in the ultimate success of the
2 “Another Downer of a Year for College and University Endowments,” by John L. Pulley. January 24, 2003. The Chronicle of Higher Education.
3 “Alumni are Less Charitable in Giving to Higher Education,” by Mary Beth Marklein. March 13, 2003. USA Today.
4 “State Budget Update: February 2003.” National Conference of State Legislatures. © February 2003.
5 “State Budget Deficits for Fiscal Year 2004 are Huge and Growing,” by Iris J. Law and Nicholas Johnson. January 23, 2003. Center for Budget and Policy Priorities.
6 “Digest of Educational Statistics 2000, Table 313”, National Center for Statistics. 2000. US Department of Education.
7 “North Carolina and Texas Try to Buck Trend of Tuition Increases,” by Will Potter. February 21, 2003. The Chronicle of Higher Education.
Proprietary and Confidential 6 institutions, but research funding clearly represents an opportunity for universities to diversify revenue sources – a critical attribute for any billion-dollar organization.
Proprietary and Confidential 7 I. Research at North Carolina's Public Universities Has a Broad and Significant Economic Impact
A. The Flow of Funds Related to University Research Major research enterprises generally have substantial positive effects on the economies of states and regions in which they are located. This is certainly true in North Carolina. As shown in Exhibit 1, UNC-Chapel Hill and NCSU received nearly 90% of their research funding from Federal and private sources in Fiscal 2002. In fact, research funding from a single Federal sponsor, the National Institute of Health (NIH), was four times greater than research awards made to these institutions by the State of North Carolina in Fiscal 2002. Exhibit 1:
North Carolina Research Universities - Research Funding By Source, Fiscal 2002 Total: $623M 10% Federal Grants and Contracts: 17% $452,710,000 Private Grants and Contracts: $106,666,000
73% State Grants and Contracts: $63,437,000
Source: Annual Reports of UNC-Chapel Hill and NCSU, Fiscal 2002 As is true at most major public research universities, expenditures resulting from research funding at UNC-Chapel Hill and NCSU cycle through the State and local economies several times, resulting in a transformation of Federal funds into revenue for local residents and North Carolina businesses. Data provided by UNC-Chapel Hill show that 80-90% of the University’s research funding evolves into income for employees or revenue sources for in-State businesses. That personal and commercial income, in turn, cycles through the economy, eventually translating into tax revenue for the State Government, as depicted in Exhibit 2 below. Exhibit 2:
Federal Agencies (e.g., Employees National Institute of Research Health, National Funding Science Foundation) for Contracts Private Sponsors (e.g., Economic & Grants corporations, are foundations) Cycle received from: North Carolina Government Businesses
Tax Payments N.C. Government Proprietary and Confidential 8 B. University Research is a Prominent and Stable Source of Employment for North Carolinians University research supports a significant number of jobs within the university communities and the businesses that provide goods and services that support research. On a combined basis, UNC- Chapel Hill and NCSU employ approximately 20,000 North Carolinians, more than any other state agency. Approximately 6,200 of these employees conduct or support research.8 In total, we estimate that NCSU and UNC-Chapel Hill research supports approximately 22,000 full-time-equivalent jobs throughout the State, including jobs within businesses that support research activity.9 As noted previously, a majority of research funding for universities comes from Federal and private sources; the related jobs are therefore much less susceptible to contractions in the State economy than are jobs with other State agencies and with industry. C. Measuring the Annual Economic Impact of Public University Research on the State of North Carolina There have been many economic models prepared by and for various colleges and universities, all aiming to demonstrate the enormous economic benefit that accrues to the state taxpayers from investment in the local public universities. This report does not evaluate the attributes of the many economic models used to assess economic activity. For purposes of this report, we used a commonly accepted economic model to provide a reasonable basis for putting into perspective the economic impact from research expenditures resulting from North Carolina’s public research universities. The precise economic impact is of less importance than the overall magnitude of the economic benefit. In this analysis, we used IMPLAN, a modeling system and database originally developed by the U.S. Department of Agriculture, to estimate the economic impact to the State of North Carolina resulting from sponsored research spending at UNC-Chapel Hill and North Carolina State University. This model is designed to follow the research dollars spent by the institutions as they are cycled through the State’s households and businesses. It does not take into account the less easily quantifiable impacts of the research conducted at the universities – such as the creation of spin off companies and attraction of companies to the area – nor does it account for the impact of State-funded research expenditures on capital projects or construction, both of which would tend to increase the extent of the economic impact. Using the IMPLAN system, we estimate that Fiscal 2002 sponsored research funding at UNC-Chapel Hill and NCSU generated a total of over $930 million for the State’s economy, which is roughly equivalent to the total output of North Carolina’s apparel and textile industry. 10 This amount is based on combined research expenditures of $544 million11 at UNC-Chapel Hill and NCSU during Fiscal 2002. The IMPLAN model suggests a multiplier of approximately 1.7, indicating that $1.70 of spending takes place throughout the economy for every $1.00 of research expenditure. The multiplier of 1.7 is consistent with other economic impact studies that have been performed for broader university-wide expenditures.
8 The University of North Carolina at Chapel Hill Office of Institutional Research and Huron Consulting Group analysis.
9 Calculated based on Total 2002 Sponsored Research expenditures of $613 million (from all funding sources) and an employment multiplier of 36 per $1 million of expenditures; this multiplier was developed by the U.S. Commerce Department’s Bureau of Economic Analysis (BEA) for the “Colleges, Universities, and Professional Schools” sector per the Association of American Universities. 10 The Economic Impact of the UNC System on the State of North Carolina, Luger, Koo, Perry, Billings, July 2001. 11 Calculated as total research expenditures at UNC-Chapel Hill and NCSU of $443M and $170M, respectively, less State funded research expenditures of $26M and $38M, respectively, plus total combined privately funded construction on research facilities of $58M, minus payments to out-of-state subcontractors of $47M and capital expenditures of $16M. This estimate would be substantially higher if the model accounted for equipment purchases and spending by the numerous individuals who visit North Carolina for research-related reasons.
Proprietary and Confidential 9 Absent the research enterprises at UNC-Chapel Hill and NCSU – much of the $930 million would be at risk to the North Carolina economy because the Federal and private research funding would otherwise be directed toward major research universities in other states. This $930 million estimate, while impressive, ignores several less quantifiable, yet more substantial, economic impacts of a robust research enterprise including: Spawning new local businesses Attracting existing businesses to the region Technology transfer Entrepreneurial development Industry education and training partnerships Career services and placement Industrial extension and technology assistance Community relations Industry research Each of these economic impacts is described in further detail in Sections D and E below.
D. University Research: A Birthplace and Magnet for Corporations and Intellectual Talent In addition to the direct economic impact of research expenditures, a vibrant university research environment contributes to economic development by spawning new companies, technologies, and/or industries within the State, and by attracting existing corporations to the State. Since 1994, research at UNC-Chapel Hill and North Carolina State University has resulted in the formation of over 50 North Carolina-based corporations. A sample of these corporations is presented within Exhibit 3. Detailed information on many of these companies is included in Appendix 1.
Proprietary and Confidential 10 Exhibit 3:
UNC-Chapel Hill and NCSU Start Up Companies (based on technologies developed in whole or in part at the universities) North Carolina State University University of North Carolina at Chapel Hill Year Year Name Product Name Product Founded Founded Embrex Pharmaceuticals 1985 Mycosearch Pharmaceuticals 1979 Cree Research Semiconductors 1987 Numerical Design Computer Graphics 1982 Probiologics Biotech 1987 Virtual Reality Games Computer Game 1994 Gentra Systems BioTech 1988 Inspire Pharmaceuticals 1995 LipoScience Medical 1994 Lari Software Computer Graphics 1995 ID Technologies InfoTech 1994 MiCell Technologies Chemicals 1996 Zymotech Biotech 1996 Novalon Pharmaceuticals 1996 3 Tex Textile 1996 Kucera Chemicals 1997 TriboFilm Chemicals 1996 AlphaVax Pharmaceuticals 1998 Xanthon BioTech 1996 Renaissance Cell Pharmaceuticals 1998 Biolex Biotechnology 1997 ADMETech Chemicals 1999 Pilot Therapeutics Pharmaceuticals 1998 LeukoMed Pharmaceuticals 2000 HowStuffWorks InfoTech 1998 DeltaSphere Computer Graphics 2000 Db Tag Electronics 1998 nanoManipulator Computer Graphics 2000 Nitronex Chemicals 1999 Applied NanoTech Nanotechnologies 2000 Origen MicroBiology 1999 Incara BioTech 2000 SentriSystems InfoTech 1999 DarPharma Pharmaceuticals 2000 Zetta Core Nanoscience 1999 Ercole BioTech 2001 Mi-Corporation InfoTech 2000 Parion Science Therapeutics 2001 Togabi Wireless Tech 2000 Oriel Therapeutics 2001 ArrayExpress MicroBiology 2000 Hemocellular Therapeutics 2003 BioMarck Pharmaceuticals 2001 Asklepios BioTech 2003 Silicon Semiconductor Semiconductors 2002
Sources: Huron Consulting Group research, Office of Technology Development at UNC-Chapel Hill and Centennial Venture Partners at NCSU, and “The Economic Impact of the UNC System on the State of North Carolina,” by Lugar, Koo, Perry, and Billings. (July 2001).
The potential long-term impact of research spin-offs is exemplified by the success of Quintiles and SAS. Founded in 1976 by former NCSU faculty member Jim Goodnight, SAS is the world's largest privately held software company with almost 9,000 employees at 202 offices worldwide. Having topped $1B in revenues three years ago, the company is an industry leader in terms of the percentage of revenue reinvested in research and development. Quintiles was incorporated in 1982 by a former professor at UNC-Chapel Hill. With $2 billion in revenue, Quintiles has about 16,000 employees worldwide and offices in more than 40 countries. Quintiles Transnational helps improve healthcare worldwide by providing a broad range of professional services, information and partnering solutions to the pharmaceutical, biotechnology and healthcare industries. Research universities also serve as magnets for businesses pursuing expansion or relocation strategies. Established businesses that relocate to North Carolina are often influenced by ready access to the well-educated employment pool in the State’s central region. The incremental economic activity provided by corporate operations, research and development programs, and construction of corporate and university research facilities represent an indirect, yet important benefit resulting from the strength of the research enterprise at North Carolina’s public research universities.
Proprietary and Confidential 11 E. Additional Long-Term Impacts of University Research Are Substantial Consistent with most other large public research universities, there are a series of intangible yet significant benefits that accrue to the State economy as a result of the university-based research enterprise. Among the most obvious benefits are: Technology transfer: Comprehensive programs dedicated to commercializing the product of successful research are critical to converting innovation into economic development. Invention disclosures result in patents and licenses, which often result in the establishment of new commercial ventures. Entrepreneurial development: Research at NCSU and UNC-Chapel Hill has led to the proliferation of business development services and facilities, as well as local organizations focused on providing incubation services for new and emerging companies. Industry education/training partnerships: NCSU and UNC-Chapel Hill provide access to educational and training opportunities for local businesses, which fosters research collaboration and contributes to the growth of the educated population. Career services and placement: The reciprocal access of local businesses to a well- educated employment pool and of the graduates to valued employment opportunities fortifies university-industry interdependency and collaboration. Approximately 62% and 58% of NCSU and UNC-Chapel Hill graduates, respectively, remain in North Carolina to work following graduation. Industrial extension and technology assistance: Through these relationships, industrial innovation and performance growth is enabled, without a dependency on duplicative research at the corporations. Community Relations: To promote effective university-industry collaboration, North Carolina’s public research universities have established committees, boards, and councils dedicated to promoting mutually beneficial development strategies. Centennial Campus at NCSU and the Carolina North development at UNC-Chapel Hill, for example, are both being planned by committees comprised of University and local civic leaders. In addition, UNC- Chapel Hill and NCSU faculty members serve on an extensive number of corporate boards throughout the State. Industry research partnerships: External funding in the form of industry grants and contracts are important mechanisms that contribute to the financial health and reputation of research universities, while providing a potentially valuable service to the company. Support for Instruction: Universities are often able to acquire for research purposes library materials and technical journals, technology, and scientific facilities, providing access to students to enhance their educational experience. Centennial Campus at NCSU is an example of this sharing of knowledge. Of equal importance, major research institutions attract high-profile scientific talent, stimulating the academic attractiveness of the university for faculty and students. F. Measures of Technology Transfer Success Show Encouraging Signs of Growth Most research universities have made significant efforts to create an environment where internally developed ideas and technology can be transferred as quickly as possible to the commercial market place. Technology transfer generates independent revenue streams for the university and creates the potential to create jobs and new commercial ventures. The Association of University Technology Managers (AUTM) prepares an annual survey to monitor and compare the progress of research universities with respect to technology transfer. Exhibit 4 below details some of the key statistical categories that AUTM measures, as well as the related data
Proprietary and Confidential 12 reported by UNC-Chapel and NCSU. This information further underscores the influence that these public research universities have had in generating income, commercializing research, and starting new companies. All of these factors serve to attract additional investment and create more jobs for the North Carolina economy. Exhibit 4:
AUTM Summary of Selected Technology Transfer Measures for North Carolina’s Public Research Universities 1997 1998 1999 2000 2001 2002 Start Up Companies Formed 3 6 8 10 19 8 NCSU 1 5 8 6 7 5 UNC-Chapel Hill 2 1 0 4 12 3 US Patents Issued 58 67 71 92 59 62 NCSU 24 29 30 45 27 35 UNC-Chapel Hill 34 38 41 47 32 27
Licenses & Options Yielding License 103 102 107 149 135 Income NCSU 42 48 60 76 57 N/A UNC-Chapel Hill 61 54 47 73 78 78 Invention Disclosures Received 199 207 264 282 326 307 NCSU 105 101 148 169 211 188 UNC-Chapel Hill 94 106 116 113 115 119
Source: Association of University Technology Managers Annual Tech Transfer Surveys 1997 – 2000 and interviews with NCSU and UNC-Chapel Hill Offices of Technology Transfer. As Exhibit 4 suggests, North Carolina’s public research universities have recently enjoyed increasing success with respect to technology transfer and other scientific metrics. These achievements are further supported by the Annual Technological Strength rankings produced by MIT’s Magazine of Innovation, the 2002 results of which are provided as Exhibit 5. North Carolina is one of three states with three research universities ranked among the Top 25 according to MIT’s selected criteria for technological strength.
Proprietary and Confidential 13 Exhibit 5:
Technology Review MIT’s Magazine of Innovation University Research Scorecard 2002 Technology Strength12 Ranking Institution 2001 Rank 1996-2000 Rank 1 University of California 460 1 383 1 2 MIT 227 2 186 2 3 Cal Tech 178 3 101 5 4 Stanford 137 4 102 4 5 Princeton 105 5 37 20 6 University of Texas – Austin 89 6 120 3 7 Cornell 88 7 65 9 8 Columbia 79 8 63 11 9 University of Wisconsin 75 9 80 6 10 University of Washington 71 10 74 7 11 Johns Hopkins 68 11 63 11 12 UNC – Chapel Hill 58 12 42 14 13 University of Pennsylvania 57 13 69 8 14 Duke 56 14 41 16 15 University of Michigan 55 15 64 10 16 Penn State 46 16 31 25 17 University of So. California 44 17 17 48 18 University of Minnesota 41 18 42 14 19 University of Utah 41 19 33 24 20 University of Florida 40 20 40 18 21 University of Illinois – UC 39 21 22 37 22 North Carolina State 37 22 29 26 23 Georgia Tech 37 23 21 42 24 Harvard 35 24 38 19 25 Pittsburgh 34 25 28 28
Source: MIT’s Magazine of Innovation Success in university research breeds further success – the best faculty attract the most funding, which supports the best facilities, infrastructure, and compensation packages, which attracts more faculty, more funding, and so on. The relative success of North Carolina’s public research universities should, therefore, be a primary concern and focus of the State’s government and citizenry. G. North Carolina’s Public Research Universities are Key to the Continuing Transition of the State Economy North Carolina is transitioning to an economy that is more dependent on technology, science, and other knowledge-based industries for future economic growth. A recent study by the Southern Growth Policies Board suggests that there are four characteristics that underscore a successful transition: More reliance on products and services that result from progress made in science and technology A more globalized economic system fostered by more open trade, better transportation and telecommunication
12 Technological strength: The number of U.S. patents multiplied by the Current Impact Index. Number of patents: The total number of U.S. patents awarded, exclusive of design and other special-case inventions. Current Impact Index: A measure of how frequently an institution's patents for the previous five years are cited in the current year, relative to all patents in the U.S. system.
Proprietary and Confidential 14 Growth in entrepreneurial enterprises and other venture funded organizations, leading to innovation outside the sphere of large corporate dominance Significant dependence on highly educated and highly skilled workers In North Carolina, research has a prominent role in the State’s continuing economic transition from its traditional core in agriculture and manufacturing13 to a knowledge-based economy focused on industries such as biotechnology and engineering. Scientific research provides the foundation for this transition, and the State’s public research universities contribute top talent, knowledge, and investment underpinning this research. Governor Easley recently reiterated the State’s commitment to this transition: “We must create an environment that rewards discovery and innovation, and knowledge and technology. We can do this by reforming our R&D tax credit to attract growth industries. We can do this by capitalizing on our commitment to the Golden LEAF. Golden LEAF has an aggressive biotechnology initiative. We are one of the few states poised to be the biotech capital of the world. This initiative puts us in a great position to lure business, research, jobs, and investments across the State. And the North Carolina Biotechnology Center, in partnership with the universities and community colleges – with a modest state investment – will send the message in a loud and mighty voice that North Carolina workers plan to lead the world in biotechnology and we will not be denied!”14 Together, UNC-Chapel Hill, NCSU, Duke University, and the Research Triangle Park make North Carolina’s Raleigh/Durham area one of the country’s top research destinations of choice. North Carolina is clearly established as a national leader in scientific research. Its challenge is to continue leveraging the State’s research base to enhance the related economic benefits in an increasingly difficult competitive environment.
13 Historically, the State of North Carolina is one of the United States’ most reliable producers of tobacco, sweet potatoes, livestock, and other agricultural goods. Estimates suggest that agriculture contributes almost $63 billion to the State’s economy –tops among State industries representing 22% of the State’s total revenues and 20% of jobs. Similarly, North Carolina’s textile mills have been consistent contributors to the State’s economy growth. North Carolina is the 8th largest manufacturer of goods and services.
14 “State of the State Address to North Carolina General Assembly,” by Governor Michael Easley. March 3, 2003.
Proprietary and Confidential 15 II. Protecting the Vibrancy of Public University Research is Critical to the Growth of the North Carolina Economy
With the exception of Medicaid, public research universities differ from other State agencies, including other public universities, because they receive a large portion of their funding from Federal and private sources, and these funds are then spent in the State, creating a multiplier effect as dollars cycle through the local and regional economies. In order to preserve this funding stream, national research universities must compete with one another for the best faculty and students, who then compete for research grants. The ability of North Carolina’s public research universities to attract and retain the best faculty and students, and to support their efforts to attract funding, is critical to their success, and therefore critical to their ability to generate economic benefits for the State. A. Funding for Public Research Universities Over the past 15 years, North Carolina’s public research universities have successfully established themselves as leading institutions in attracting grants and contracts. The growth in their research activity has corresponded to growth in the State economy. For example, as shown in Exhibit 6, State funding sources (e.g., appropriations and State grants and contracts) to UNC-Chapel Hill, as a percentage of total institutional funding, have declined from 40% to 24% since 1987. During that same period, Federal and private research funding at UNC-Chapel Hill has grown from 21% to 30% of total institutional funding. Exhibit 6:
University of North Carolina - Chapel Hill Percentage of Total Revenues Contributed by Key Sources* 45% S t a t e S t a t e A p p r o p r i a t i o n s A p p r o p r i a t i o n s 40% a n d S t a t e G r a n t s & a n d S t a t e G r a n t s C o n t r a c t s 35% & C o n t r a c t s
F e d e r a l a n d 30% F e d e r a l a n d P r i v a t e P r i v a t e G r a n t s & G r a n t s & C o n t r a c t s 25% C o n t r a c t s
20% T u i t i o n Ta nu id t i oF ne ea s n , d N F e e t e s , N e t 15%
10%
5% * Excludes Service Revenues 0% 1987 19891989 19911991 19931993 19951995 19971997 19991999 20012001 20032003
Source: UNC-Chapel Hill Annual Reports for 1988-2002 and estimates from the UNC-Chapel Hill Comptroller for 2003 *This analysis excludes Sales and Services, Patient Services, and other revenue categories
The long-term success of a public research university depends largely on access to funding sources other than State appropriations because State finances are subject to economic cycles. The State of North Carolina has been more supportive of its universities, as measured by appropriations per
Proprietary and Confidential 16 student, than most other states. However, it is clear that, given uncertainties in the State’s economy, there will be a strong focus on external funding to enable the research enterprise to thrive. Robust research enterprises, such as those found in North Carolina, can soften the impact of a downward spiral in the economy by attracting Federal and private dollars that would otherwise be directed to other states. For example, the NIH and National Science Foundation (NSF) have had substantial year after year funding increases despite slowdowns in the national economy. The availability of funding for these two Federal agencies has led to stable funding for many engineering and biomedical programs at NCSU and UNC-Chapel Hill. States without prominent research universities have not benefited from an influx of Federal research funds. Research programs also provide a more stable foundation from which to begin an economic recovery because their financial success is not materially impacted by local economic fluctuations.
B. The Economics of Operating a Research University UNC-Chapel Hill and NCSU obtained $623M in Federal, State, and corporate support for research in Fiscal 2002. Despite the high level of external support, the cost of conducting this research exceeds the revenues received for the research. This attribute is not unique to North Carolina public research universities. A report issued by the Rand Corporation in 2000 revealed that most research universities recover 86 cents for every dollar spent on the research enterprise.15 Given the $623M base of research funding at North Carolina’s public research universities, this translates into approximately $87M of unfunded costs that must be absorbed by university operations on an annual basis, and in light of new administrative requirements described below, this may actually underestimate the unfunded cost of research. The administrative cost of research is expanding at an alarming rate. Among the new and emerging administrative requirements faced by research universities are those related to: Human research subject protection Clinical compliance and Health Insurance Portability and Accountability Act (HIPAA) Laboratory animal research Biological safety and bioterrorism Facility, laboratory and transport security of hazardous waste and materials Environmental cleanup Oddly, the costs of complying with these regulations and other Federal initiatives, which are fully recoverable by commercial enterprises that do business with the Federal Government, are often not fully recoverable by research universities because of the Government’s arbitrary limits on the recovery of administrative costs by universities.16 In the early 1990’s, the federal government placed an arbitrary cap on the recovery of administrative costs for research universities, limiting reimbursement to 26% of the direct cost of research. Most major research universities incur administrative costs in excess of this cap. As a result, as administrative costs increase as a portion of total costs, the gap between actual costs of research and reimbursable costs widens. A recent study by the Council on Government Relations (COGR) indicates that on average, the cost of new administrative requirements for a major research university will exceed $17.5 million for the
15 “Paying for University Research Facilities and Administration,” by Charles A Goldman, T Williams with David M. Adamson, and Kathy Rosenblatt. Rand Corporation. © 2000.
16 Reimbursements of research related administrative costs are capped at 26% of modified total direct cost of sponsored research under existing Federal rules.
Proprietary and Confidential 17 period 2000-05, none of which is recoverable as part of the indirect cost recovery if the institution is over the administrative cap. UNC-Chapel Hill last year spent more than $3.7 million on activities directly related to compliance. C. The Importance of F&A Funding for Research Universities One of the key economic aspects of research universities is that they generate and depend on indirect cost recoveries to support their research infrastructure. Similar to overhead costs in a corporate environment, these indirect costs, typically referred to as facilities and administrative (F&A) costs, are those that are incurred to support the broad research enterprise but are not associated with a specific research project. Examples of facilities costs include operation, maintenance, and depreciation of buildings used for the research, research equipment for which the university has paid, interest on debt associated with buildings placed into service after 1982, and library expenses. Examples of administrative costs include: financial management, departmental administration, and activities related to meeting environmental, safety, and health standards.17 In the United States, research universities provide initial institutional funds for construction, operation, and maintenance of research facilities. In addition, they often take primary responsibility for faculty salaries and administrative services. Sponsors, such as the NIH, NSF, corporations, or private foundations, reimburse these expenditures including F&A costs. F&A receipts pay for a portion of the non-assignable, yet very real, costs of research to the institution. The level of reimbursement typically depends on the institutional F&A Rate, which is the ratio of research-related indirect costs as a percentage of certain modified direct costs 18. Thus, if an institution spends $1,000 on activities associated with a field experiment, and the university has a negotiated F&A rate of 52%, the sponsor will typically reimburse the university $1,520; $1,000 for the direct costs and $520 for the associated indirect costs. The rate is established by a complex set of Federal regulations. Unfortunately, many Federal and state agencies do not reimburse at the Federally negotiated rate, further widening the shortfall associated with the cost of research. Many of the top research universities, public and private, therefore have to identify alternate funding sources, such as private gifts, in order to maintain the strength of the research enterprise. An institution’s F&A Rate and the related recoveries are critical to the financial success of its research programs. Exhibit 8 provides a partial list of states where the public research universities retain 100% of indirect cost recoveries. Exhibit 8:
Representative List of States Allowing Public Research Universities to Retain 100 Percent of Indirect Costs Arizona Indiana North Carolina Utah California Iowa Ohio Illinois Florida Kansas Oregon New York Georgia Michigan Pennsylvania Virginia Representative List of States Allowing Public Research Universities to Retain Only a Portion of Indirect Costs
Maryland Texas
Source: Independent Huron Research and “Making a Life, Making a Living in 21st Century Texas,” by Malcolm Gillis
17 “A Fair Deal for Federal Research Universities,” by Arthur Bienenstock. Issues in Science and Technology Online. Fall 2002.
18 Reimbursement rates may also be negotiated on a grant-by-grant basis. In a competitive proposal situation, universities will often accept an F&A reimbursement rate lower than their institutional rate to gain a competitive advantage. In such cases, the university bears the residual administrative costs.
Proprietary and Confidential 18 Exhibit 9 ranks the nation’s top public research universities in terms of funding from two key Federal sources, the National Institutes of Health and the National Science Foundation. This Exhibit illustrates that 24 of the top 25 NIH and NSF public universities are located in states that allow their universities to keep 100% of indirect cost receipts. There appears to be a strong correlation between research success and full access to indirect cost recoveries. Exhibit 9: NIH and NSF Awards to Public Research Universities for FY 2001 (award data in $000’s)
Rank Institution Research Award Data NIH Funding NSF Funding Total 1 University of Washington $356,241 $68,328 $424,569 2 University of Michigan $302,311 $54,440 $356,751 3 University of California – San Francisco $350,418 $1,929 $352,347 4 University of California – Los Angeles $273,488 $39,276 $312,764 5 University of California – San Diego $217,229 $80,302 $297,531 6 University of Pittsburgh $264,561 $13,818 $278,379 7 University of North Carolina – Chapel Hill $236,804 $22,832 $259,636 8 University of Wisconsin – Madison $187,013 $54,741 $241,754 9 University of Minnesota $192,082 $43,132 $235,214 10 University of Alabama – Birmingham $189,833 $5,571 $195,405 11 University of California – Berkeley $91,743 $67,374 $159,117 12 University of Iowa $148,698 $9,592 $158,290 13 University of Illinois – Urbana/Champaign $43,017 $112,059 $155,076 14 Indiana University $107,420 $31,169 $138,589 15 University of Virginia $121,216 $16,643 $137,859 16 Oregon Health and Science University $129,752 $7,222 $136,974 17 University of Utah $112,749 $21,255 $134,004 18 University of Arizona $89,404 $33,156 $122,560 19 University of Illinois – Chicago $99,719 $21,049 $120,768 20 University of California – Davis $88,447 $29,660 $118,107 21 Ohio State University $89,588 $26,326 $115,914 22 Pennsylvania State University $79,788 $35,413 $115,201 23 University of Florida $85,650 $28,228 $113,878 24 University of Maryland – Baltimore $97,708 $7,076 $104,784 25 University of California – Irvine $79,026 $20,494 $99,520 Source: National Institutes of Health and National Science Foundation Institutions highlighted in yellow are in States where public institutions only keep a portion of indirect costs Note: North Carolina State University ranks 68th in terms of total NIH and NSF funding with $38,016,730.
Given the economic challenges currently faced by the State, the legislature recently has debated whether indirect cost recovery, which currently is returned entirely to the universities, should be partially diverted to other State needs. Although the most recent legislative session acted to continue protecting the return of indirect cost revenue to the universities, a future revision to that policy would seriously undermine the ability of the North Carolina public research universities to fund the research programs that contribute so significantly to the economic development of the State. Partial diversion of indirect revenues will impact the ability of UNC-Chapel Hill or NCSU to recruit and retain key researchers and will significantly impair the ability of the universities to construct or renovate research facilities, which are often funded by F&A recoveries. Although the impact of a decision to divert university recoveries would likely have short-term implications, the more significant ramifications
Proprietary and Confidential 19 would be felt over the next several years through a decline in the strength of the research enterprise and a corresponding decline in the impact of public university research on the State economy. D. National Competition for Research Funding is Intense and Growing The economic benefits of a robust research enterprise have been evident and widely recognized for many years. However, recent spending trends of the Federal Government have generated increased interest from policy makers and academic administrators. As Exhibit 10 shows, NIH funding increased 93% from 1996 to 2002, however, the NIH has recently announced its annual increases in funding for extramural research will slow to just slightly more than inflation.19 At a time when the number of institutions competing for external research funding is growing, one of the principle funding sources, the NIH, is forecasting that available funds will flatten (illustrated in red on the exhibit). Although there will be increases in research funding related to homeland security and biodefense, the net effect will create increased competition for research dollars as more universities compete for lower levels of total research funding. Exhibit 10:
NIH Extramural Research Funding 1992 thru 2007 (in billions of dollars)
$30
$25
$20
$15
$10
$5
$0 1991 1996 2001 2006
Source: National Institutes of Health The desire to access these Federal funds has led many states and universities to spend hundreds of millions of dollars on construction of new research facilities and on recruiting well-known faculty members and top students. In fact, 41 states have developed formal plans for new research centers, primarily to take advantage of the economic opportunities related to scientific research.20 An institution’s or State’s ability to obtain research awards is dependent on the quality of its research environment, including the physical, financial, and intellectual assets in place to conduct the research. Each state and region is, therefore, ultimately engaged in a national competition to attract the best resources—faculty, students, on-campus and corporate off-campus research facilities. While the jobs and other benefits may be local, the competition is always at least national. For example, virtually all university-originated high-tech start-ups are targeted at a national or international market, such as pharmaceuticals, wireless communications devices, or medical instrumentation. To succeed,
19 “AAAS R&D Funding Update in the FY 2004 NIH Budget.” American Association for the Advancement of Science © February 2003.
20 “Cities and States Clamor to Be Bio Town, U.S.A.,” by Andrew Pollack. The New York Times. June 11, 2002.
Proprietary and Confidential 20 companies, universities, and regional economic organizations are assembling compelling packages to retain and attract the intellectual elite because they recognize the importance of human capital.21 In addition, they are aggressively developing the infrastructure necessary to effectively conduct complex research programs. E. Infrastructure: A Critical Facet of A Robust Research Program North Carolina’s premier public research universities – UNC-Chapel Hill and North Carolina State University – have been able to have a large impact on the State and regional economy because of the significant infrastructure that already exists to support technology transfer at those institutions. The institutions benefit from being clustered near the Research Triangle Park, Duke University, RTI, and one another. With multiple scientific enterprises located so close to one another, the synergy between the public research universities and industry enables even greater economic development. The immense research infrastructure in the Triangle is a significant competitive advantage for UNC- Chapel Hill and NCSU and North Carolina as a whole. Exhibit 11 further underscores the significance of the area as a hub of research activity. Relative to other major research centers in the United States the Durham/Chapel Hill area ranks 7th overall in terms of NIH funding. Exhibit 11: Top 10 Cities in Terms of NIH Support, FY 200122 (includes research grants, training grants, fellowships, R&D contracts, and other awards)
Rank City All Awards Number Amount (in $000’s) 1 Boston 3,269 $1,215,200 2 New York City 2,847 $1,062,872 3 San Diego 1,445 $754,538 4 Philadelphia 1,833 $659,091 5 Baltimore 1,626 $618,177 6 Seattle 1,292 $588,457 7 Chapel Hill/Durham 1,306 $499,555 8 Los Angeles 1,268 $475,037 9 Houston 1,054 $435,251 10 San Francisco 1,012 $407,315 Source: National Institutes of Health UNC-Chapel Hill and NCSU are poised for further expansion of research activity. Recognizing that top talent and top corporations are attracted to top facilities, both institutions are moving forward with plans to develop new research parks. 1. Centennial Campus (NCSU) Described by University leadership as “an advanced technology community for university, industry, and government partners,” Centennial Campus facilitates collaboration by bringing together the key participants in technology transfer. The union of business incubators, housing for University employees, and other facilities is unique to this campus. When completed in 2004, this 1300-acre “technopolis” will integrate business partnerships with advanced technology infrastructure, R & D “neighborhoods,” and conference facilities capable of attracting top scientific seminars and meetings. Over thirteen buildings and three R&D neighborhoods are already in place on Centennial Campus. 2. Carolina North (UNC-Chapel Hill)
21 “Innovation U.: New University Roles in a Knowledge Economy,” by Louis Tornatzky, Paul Waugaman, and Denis Gray. Southern Growth Policies Board. © 2002. 22 Raleigh ($13M) and Research Triangle Park ($52M) had relatively low NIH support.
Proprietary and Confidential 21 In 2001, UNC-Chapel Hill began planning the development of Carolina North, a 900+-acre tract of land located two miles north of the Chapel Hill campus. Initial plans are focused on the potential for close collaboration between industry and university researchers and the creation of premier research facilities. Carolina North represents a profound opportunity for the University to sustain research growth within the State and to enhance the university-industry collaboration that is so critical to job creation and corporate research investment.
F. Efficient Processes Must Support Research Programs North Carolina’s research universities have been fortunate to have above average support from the legislature. As future resource allocation decisions are made, it will be critical for the legislature and the public to have an adequate perspective on the cost and economic contribution stemming from the growth of new and existing research universities. Due primarily to the success of researchers and a high level of State support, UNC-Chapel Hill and NCSU have extensive resources and research facilities at their disposal with which to make the research enterprise increasingly effective. The State legislature has a history of providing UNC- Chapel Hill and NCSU with flexibility in certain administrative areas, such as budgeting, purchasing, and some personnel policies. In response to this flexibility, the universities have instituted accountability measures to demonstrate that state resources are being used in an efficient manner. However, speed and adaptability are essential to success in a competitive environment. As opportunities arise in the research marketplace, researchers and institutions must have the ability to react quickly, and to respond to those opportunities in a manner that will create competitive advantage. Efficient administrative processes and structures must effectively support research programs once awards are received to promote the ultimate success of the research itself, as well as compliance with a myriad of regulations. Administrative inefficiencies not only slow the impact of research but can also jeopardize researcher’s ability to compete. Major research universities routinely benchmark themselves against their competitors, continually seeking opportunities to improve the quality of their research, as well as the efficiency and the effectiveness of the administrative processes and structures that support research. Research universities, state government, and university-system administration all must view the research enterprise as a crucial asset. An institution’s ability to compete nationally for research requires continual improvements in effectiveness and efficiency. Universities must undertake evaluations of their internal administrative practices, looking for solutions that may strain cultural norms but nevertheless represent sensible business practice. Similarly, the State must acknowledge that public research universities require greater administrative independence – in return for enhanced economic returns and greater accountability for performance. It is unlikely that success will be achieved unless these groups can find common ground in understanding each group’s perspective on business and operational challenges.
Proprietary and Confidential 22
III.State and University Policies Materially Impact Research Success at North Carolina's Public Institutions
Although most university-based research funding comes from Federal and private sources, State and university policies have a material impact on the success of research at public institutions. Certain regulatory restrictions and policies inhibit the performance and economic impact of a public research university because they limit speed, efficiency, and responsiveness necessary for the research enterprise to compete successfully. Excessive regulatory restrictions and policies can significantly influence the institution’s ability to obtain external funding, recruit the best researchers, develop an appropriate administrative infrastructure, and compete with other research universities. North Carolina’s public research institutions are subject to a number of policies many of which were established at the State level and are commonly applied to many state entities. Given the national and international arena in which North Carolina’s research universities compete, the application of policies to UNC-Chapel Hill and NCSU that were initially developed for state entities severely restricts and ultimately inhibits the ability of these universities to compete. Few would suggest that institutions such as UNC- Chapel Hill and NCSU, which rank 9th and 27th, respectively, in terms of combined FY 2001 NIH and NSF funding (exhibit 8), are struggling to compete for research dollars. However, it is easier to argue that the ability to achieve their potential as research centers is limited by regulatory and policy restrictions. The following are examples of policies and procedures that could be streamlined to strengthen the expansion of research at North Carolina’s public universities and the resulting contribution to the growth of the economy. A. Human Resource Policy Can Hamper Research Productivity As described previously, North Carolina’s public research universities are engaged in a fierce national competition for the best intellectual talent. The ability to recruit and retain researchers with consistent records of innovation and research success is key to effectively developing and growing the research enterprise. Exceptional faculty researchers and their critical technical staffs form the core of large research programs. State or university regulations that hinder the ability of an institution to recruit and retain the best talent effectively limit the ability of the institution to compete and generate economic benefits for the State and region. Furthermore, the efficiency and effectiveness of human resources administration at a university can have a material impact on the success of its research enterprise. For example, once sponsors approve a research program, the faculty recipient must move very quickly to assemble a staff of research assistants (e.g., lab technicians, research assistants, other administrative personnel) to support the program. Inefficiencies in the hiring process delay the progress of the research, which in turn delays the potential impact of that research on the economy. 1. North Carolina’s State Personnel System Limits the Ability of the State’s Public Research Universities to Attract and Retain Critical Resources A majority of employees at North Carolina’s public research universities are subject to the same compensation structure, benefits, and job classification system as employees of every other State agency. However, public research universities face the added challenges of recruiting in a national job market, making the human resource environment for public research universities fundamentally different than for other State agencies. Research universities, federal research labs, corporations, and other public and commercial organizations engaged in research compete nationally for the same pool of research faculty and staff as do North Carolina’s public research universities. A personnel system that does not differentiate between nationally marketable
Proprietary and Confidential 23 research staff and state-focused, agency-based employees makes it very difficult, and sometimes impossible, for North Carolina public research universities to compete for top research and laboratory talent. The State Personnel Act (“The Act” or “SPA”) is contained in Chapter 126 of the North Carolina General Statutes. The Act governs all the employees of the State of North Carolina – unless otherwise exempt, setting out terms and conditions of state employment. At UNC-Chapel Hill, for example, Chapter 126 covers 6,000 permanent SPA employees, including research and laboratory technicians and assistants. Public university involvement in a state personnel system is not prevalent across the United States – in fact, public universities in 32 of 50 states conduct human resources functions independent from the state personnel system, as shown in Exhibit 12. 26 of the Top 50 research universities in terms of NIH funding are public institutions. Of those 26 public research universities, only 7 participate in a state personnel system. Exhibit 12:
32 States In Which Universities Operate Independent from the State Personnel System Alabama (1) Illinois (1) Nebraska Pennsylvania (1) Alaska Indiana (1) New Hampshire Tennessee Arizona (1) Kentucky New Jersey Texas (3) Arkansas Maine New Mexico Utah (1) California (5) Massachusetts North Dakota Vermont Delaware Michigan (1) Ohio (1) Washington (1) Florida (1) Mississippi Oklahoma West Virginia Georgia (1) Missouri Oregon Wyoming 18 States In Which Universities Operate Within the State Personnel System Colorado (1) Kansas Nevada South Carolina Connecticut Louisiana New York South Dakota Hawaii Maryland (1) North Carolina (1) Virginia (1) Idaho Minnesota (1) Rhode Island Wisconsin (1) Iowa (1) Montana
NOTE: The parenthetic numbers indicate the number of Top 50 public research universities in terms of NIH funding within the state
In North Carolina, some classifications of employees at public research universities are exempt from the Act, including research and instructional faculty and senior academic and administrative officers; these groups include more than 4,800 faculty members and nearly 2,600 non-faculty members. Only Article 6 (Equal Employment and Compensation Opportunity; Assisting in Obtaining State Employment) and Article 7 (The Privacy of State Employee Personnel Records) of the Act apply to Exempt employees. Nevertheless, the applicability of the Act to other classes of employees has a material impact on the universities’ ability to attract and retain the best research talent. In many cases, a key factor in a researcher’s decision to join an institution is his or her ability to bring the research “team” to the new institution, including laboratory technicians, research specialists, analysts, and other research assistants. The uncompetitive salaries, benefits, and incentives provided for in the Act severely impacts the hiring practices, as described in more detail below.
Proprietary and Confidential 24 a. Salary The salary limits within the Act generally are not competitive in the Triangle area or among the nation’s finest research institutions, making it difficult for North Carolina’s public institutions to attract full research teams. These limits also contribute to retention issues at the institutions. The combined annual turnover rate for research technicians and assistants at NCSU and UNC-Chapel Hill is 30 percent23. Moreover, for many technical personnel and research assistants, there is no strict counterpart in the state personnel system. This lack of comparability produces problems and limits competitiveness. b. Benefits The State provides identical retirement and health insurance benefits for SPA employees in state agencies and public universities. Benefits for faculty are identical except that faculty members may choose between participation in the State’s defined benefit retirement system or a separate University-defined contribution plan. This has significant implications for researchers, as their staff is subject to relatively inflexible benefits packages. There is no flexible benefits program or ability to tailor benefits to the needs of particular groups of employees. Appendix 2compares the benefits package provided by the State Personnel System to employee benefits provided by a group of eight peer public institutions of UNC-Chapel Hill and NCSU. This scorecard indicates that North Carolina’s public research universities rank behind the majority of their peers with respect to employee benefits. This finding is consistent with a recent report produced by UNC-Chapel Hill entitled “Faculty and Staff Benefits at The University of North Carolina at Chapel Hill: A Comparison to Benefits Offered by Peer Institutions,” which cites deficiencies in the health insurance, retirement, dental insurance, long-term disability, and life insurance plans offered by UNC- Chapel Hill relative to peer research institutions. Several excerpts from this report, specifically relevant to health insurance, are included within Appendix 3. The excerpts indicate that, compared to peers, UNC-Chapel Hill and NCSU offer the fewest health plans for employees. In addition to the relative lack of health plan options, UNC- Chapel Hill and NCSU also have the highest average employee costs for family health coverage, and the highest average out-of-pocket costs for plan participants. c. Performance Management The salary scale for SPA employees is very rigid with limited provisions to reward exceptional performance or to deal with substandard or inadequate performance. The Act does not provide for variable pay for performance. Salaries within pre-defined ranges are formula- driven, hinging primarily on experience and education without regard for other compensation factors such as scarcity of skills or potential contribution to The University. The State Personnel System provides for terminations, but such action is rare because the grievance process is cumbersome and involves several layers of appeal and other bureaucratic control.
The requirements described earlier in this section hamper the ability of North Carolina’s public research universities to attract and retain premier research talent. That talent ultimately drives the institution’s ability to obtain, and subsequently renew, research funding from Federal and private sources and, therefore, the ability of the institution to generate economic activity. Imposing State personnel System requirements on public research universities limits the potential impact of university research on the State’s economy.
23 NCSU and UNC-Chapel Hill management
Proprietary and Confidential 25 2. Inefficient Processes Related to Human Resources Administration Delay Research Progress and Activity A primary Human Resource objective is to fulfill organizational personnel needs. Within the research environment, the speed with which Human Resources fulfills those needs is critically important to a university’s competitive position. Based on our review of the Human Resources function at UNC-Chapel Hill, we identified certain business processes that tend to inhibit the effectiveness of campus Human Resource operations. At UNC-Chapel Hill we noted highly manual and partially redundant processes that often result in delays between the time a representative of a department or school files a personnel requisition with Human Resources and the time that the resource arrives on campus. State policies and Personnel Act requirements exacerbate this problem. The employment process at UNC-Chapel Hill with respect to SPA positions is presented in graphic format at Appendix 4. On average, 79 days pass between the initiation of this process and employment of the new resource.24 Only two years ago, the same process consumed 92 days, on average. Appendix 4 reveals some of the inefficiencies in the SPA employment process, including the prevalent use of manual forms and processes and the existence of multiple systems and stakeholders. This underscores the necessity of investment in information technology by research universities, as technology is a critical enabler of efficient processes. Intellectual talent is the most valuable asset of a research enterprise. Policies, practices, or systems that inhibit the ability of a research university to attract and retain the best faculty and staff members, in effect, decrease the potential economic impact of the research programs, as well as the speed with which the related economic benefits will flow through to the State.
Recent changes incorporated by the UNC Health Care System demonstrate the impact that improved flexibility can have on recruitment and retention of personnel in a competitive market. UNC Health Care System established a new health-care based compensation system that includes job families, employment market job pricing, pay for performance, special pay options, such as sign-on and retention bonuses, enhanced on-call pay, and education bonuses. With the implementation of the new system, turnover has decreased from 31.2% to 16.4%. This improved turnover has been particularly significant in the nursing area where the Health Care System has experienced a net gain in nursing staff of 117 in fiscal 2002 and 111 in fiscal 2003. This gain has allowed the Health Care System to keep all of its licensed beds open. Prior to the new system, 42 beds were closed due to staff shortages. The Health Care System has also significantly reduced the number of employee grievances through the use of a new arbitration, mediation and grievance procedure, developed by a task force of employees and managers. Positions are established or reclassified more quickly – typically measured in weeks rather than previous methods that were measured in months. B. Purchasing Regulations Interfere with Cost Reduction and Fast Delivery State policy requires North Carolina’s public research universities to use State-term contracts when desired items are covered by such agreements. In fact, university personnel must use the terms of a State-term contract for the desired item, irrespective of their ability to negotiate lower prices, obtain higher quality merchandise, or receive faster delivery. Chapter 5, Section 1101 of the State of North Carolina Purchase and Contract regulations reads: “No agency may purchase any commodities,
24 Ibid.
Proprietary and Confidential 26 printing, or services covered by a statewide term contract from any other sources.” This requirement does not foster aggressive or creative cost reduction effort by University personnel. 1. Comparative Data Indicates a Competitive Disadvantage Exhibit 13 provides data on State and institutional regulations with respect to State-term contracts at 20 public research institutions located in states other than North Carolina. Each of the 20 institutions listed has access to State-term contracts to procure goods and services. However, only 1 of the 20 institutions – the University of Wisconsin at Madison – is required to abide by the terms of these contracts, irrespective of their ability to negotiate more favorable terms. The other 19 institutions use State-term contracts as a matter of convenience, rather than requirement.
Proprietary and Confidential 27 Exhibit 13:
Institutions Surveyed Regarding State Term Contract Requirements
Arizona Iowa Nebraska Texas California - Berkeley Maryland Ohio State UCLA Florida Michigan Penn State Virginia Illinois - UC Minnesota Rutgers Washington Indiana Missouri - Columbia SUNY Wisconsin – Madison* *Denotes a university that is required to use State-Term Contracts, irrespective of other available terms; all others use State-Term Contracts as convenient. 2. State Regulations Impact Timing The State Procurement and Contract Office must review high quantity purchases by public universities, as well as all purchases that exceed $500,000 in total cost. This review process frequently delays the acquisition of the desired goods. In several documented instances, a requisition process involving the State Procurement and Contract Office took over four times as long as an average requisition managed internally using sealed bids. 3. Participation in Mandatory State-Term Contracts Costs Researchers Funding As mentioned earlier, personnel at UNC-Chapel Hill and NCSU are required to use the terms of State-term contracts irrespective of their ability to negotiate lower prices, obtain higher quality merchandise, or receive faster delivery. Huron Consulting Group performed a detailed analysis of purchasing records at UNC-Chapel Hill relative to several common spend categories, and benchmarked the results against those observed at two other academic institutions and two corporations with similar purchasing volume. Our analysis suggested that there might be significantly improved buying opportunities at UNC- Chapel Hill. On most research grants, a reduction in supply costs enables increased spending on critical human resources or equipment. This reallocation promotes the effectiveness of the research programs and, in many cases, reduces overall institutional spending on administrative costs relative to research; these administrative costs are generally unrecoverable beyond limits established by the Federal Government. Just before the release of this report, the 2003 session of the North Carolina General Assembly passed legislation designed to give the UNC System the ability to negotiate its own contracts if certain conditions are met. Within the next six months, the UNC System should have enough experience operating under the new legislation to assess its effectiveness in providing the much- needed flexibility for research. C. Facilities Policies Challenge Research Facility Needs Facilities are a critical aspect of a research enterprise. Faculty and sponsors often consider the quality and capacity of facilities when evaluating the merits of a university research program, as well as the institutional commitment to research. In addition, the ability of North Carolina’s public research universities to effectively conduct research is largely dependent on the quality and capacity of the institutions’ research facilities. Although a tight regulatory environment with respect to facilities exists in many states, North Carolina’s public research universities compete against private institutions, as well as their peer public institutions, for faculty, funding, and recognition by the broader research community. State regulations therefore place public institutions at a competitive disadvantage in this important area.
Proprietary and Confidential 28 1. State Regulations Limit Leasing Efficiency Leases are important for developing an adequate research infrastructure at a university. The State’s current lease procurement process often keeps critical space needs from being satisfied in an effective and timely manner. A nine-month turnaround is typical for such approval, and it is not uncommon to have the duration for approval exceed nine months. For example, in June 2002, UNC-Chapel Hill began discussions with the State Property Office concerning a lease request for a pending space need on behalf of the Kenan Institute. The Institute had already been operating in the same office space under a use agreement set to expire in March 2003. The State administrative regulations coupled with the lengthy time period required to gather and review information about the user and ultimately to get approval from the Board of Trustees, Board of Governors, and Council of State caused the Kenan Institute to seek a different entity to lease the space on its behalf. Grants are occasionally awarded to institutions that do not have the space or equipment to do the research. Leasing a pre-existing facility provides a solution to this problem and avoids expensive and time-consuming construction projects. Setting up leases in a way that efficiently serves the interests of the research community is important because it is common for grants and contracts to have explicit language about the timing of events, as well as the date of an expected conclusion. The State of North Carolina has established a number of dollar thresholds that govern the acquisition of leased property or facilities. The State’s public research universities are often challenged by policies that limit leasing efficiency. Chapter 146 of the State’s regulatory code establishes the State’s leasing requirements. Multiple approval layers are one of the primary challenges created by these regulations. Depending on the dollar value, various layers of approval are required to consummate a lease. Certain leases must be approved by the University Board of Trustees, the System Board of Governors, the State’s Joint Legislative Committee on Operations, and the Council of the State. These multiple approvals slow down the leasing process. At NCSU, for example, leases with annual rent in excess of $50,000 take, on average 3-5 months to consummate. When the space is necessary to conduct Federally or privately funded research, these delays slow the related impact on the State economy. 2. State Regulations Lengthen Construction Timelines While leasing facilities is a necessary and appropriate alternative in some situations, it generally is in the best interest of the universities to own the facilities in which faculty members conduct research. The physical expansion of the research enterprise is important for maintaining state-of- the-art buildings that not only enable research to take place, but also help enhance institutional reputation and lure top scientists. It is important, therefore, that the construction of new facilities and the renovation of existing facilities occur in a manner consistent with each institution’s research objectives and opportunities. Chapter 146 of the North Carolina General Statues establishes the rules for acquisition and disposition of State land. A public university, as a state agency, is subject to these laws as well as any regulations developed pursuant to them. While the Governor and Council of State may grant exemptions to these regulations, limited delegation to the university-level has taken place. The Board of Governors and Board of Trustees, in addition to the Governor and the Council of State must approve most real property transactions prior to consummation. State and university policies tend to lengthen construction and renovation timelines for North Carolina’s public research universities. Chapter 146 requires multiple layers of University, System, and State oversight to ensure that costs are controlled and building-specifications are compliant. Resulting delays hinder the progress of construction and hamper competitive positioning of North Carolina’s public research universities relative to other institutions. For
Proprietary and Confidential 29 example, in several recent cases at UNC-Chapel Hill, required approvals from the State Department of Insurance delayed renovation of research laboratory space by 36-42 days. When complications in the approval process arise, the resulting delays can be in excess of several months. Such delays not only impact the competitive position of the research universities, they also slow the impact of the related spending on the State economy. D. Summary Based on the data cited above, it appears that North Carolina’s public research universities are at a competitive disadvantage with respect to several key administrative support functions and processes, including Human Resources, Purchasing, and Facilities. As discussed earlier in the report, the competitive position of these institutions is a critical determinant of their success as they pursue Federal and private research funding. To preserve and enhance the value of research at these institutions, the State and the universities should collaborate to fortify and improve the competitive position of the universities and their research operations. This is critical to maximizing the impact of university-based research on State economic recovery, growth, and development.
Proprietary and Confidential 30 IV. Key Policy Changes will Enhance the State of North Carolina’s Future Growth and Success
Today’s policy decisions in North Carolina will affect the future of the State’s public research universities and, therefore, the future of the State economy. Given the challenges that are currently facing the North Carolina economy and the likelihood that improvement will take time, now is the time to secure the competitive abilities of one of the State’s most consistent and effective economic engines: its public research universities. State government and universities must continue to work towards improving their partnership aimed at transforming the state economy by attracting academic talent and businesses to the State. Collaboratively creating an environment that builds upon the internationally recognized competencies at UNC-Chapel Hill and NCSU will provide measurable long-term benefits to North Carolina. North Carolina is not alone in trying to enhance the size and quality of its research institutions. Many states realize the economic benefit that accrues from a robust research enterprise, and they are investing heavily to fund or protect university-based research at their public universities. Every public institution and agency in North Carolina is affected by the State’s budget problems, and each ultimately will have to find a way to do more with fewer resources. The research universities must continue to scrutinize internal operations to ensure that resources are being used in an efficient and effective manner; however, they should not have to bear unnecessary burdens associated with being managed like a state agency. Although a majority of funding for university research comes from Federal and private sources, State policy still has a material impact on the success of research at public institutions. The ability to compete on a national and global level is constrained, at least partially, by the regulatory environment in the State. A. Recommendations Research activity at UNC-Chapel Hill and NCSU can have substantially greater beneficial impact on the North Carolina economy. Implementation of the following recommendations will facilitate research expansion at these universities, while preserving an appropriate oversight role for the State relative to its investment in public universities.
1. Maintain 100% F&A Retention Recommendation: The General Assembly should continue its support for public university research by allowing institutions to retain 100% of their indirect cost reimbursement.
2. Review Internal Operations Recommendation: Similar to operational assessments that take place at many corporations and businesses, UNC-Chapel Hill and NCSU should aggressively seek opportunities to streamline internal operations and find ways to most effectively administer its operations Research volume at UNC-Chapel Hill and NCSU is expected to increase, and the cost of performing that research will likely increase at a faster pace. Assessment of business processes and their cost, including mandatory processes imposed on all state agencies, will improve the likelihood that research funding is being used efficiently and effectively.
Proprietary and Confidential 31 3. Review Relationships with Duke University Recommendation: NCSU and UNC-Chapel Hill leadership should conduct a focused review of the relationships between the two institutions and Duke University. Although numerous examples of scientific collaboration among the institutions already exist, competition for research and administrative talent continues. Recent examples of successful collaborative research include the recently awarded $45 million federal grant for biodefense. Scientific competition is generally beneficial, however, the creation of independent research silos among the three institutions will lead to higher cost and diminished collaboration. The three universities should work together to maximize the impact of their collective research enterprise on the North Carolina economy.
4.Improve Institutional Accountability Recommendation: University management should develop an accountability plan that will provide meaningful accountability and communication to constituents regarding the effectiveness of the research enterprise and the related business processes. Given the significant Federal, State, and institutional investment that is made in research, it is critical that the research universities be accountable for performance to the legislature and public for communicating its accomplishments and contributions to the State. A systematic reporting mechanism, such as a Research Scorecard attached as Appendix 5, will convey their progress and status with respect to research expansion and success.
5. Lift Restrictions on Employment Processes and Benefits Recommendation: The General Assembly should widen the exemption of North Carolina’s public research universities from the State Personnel System. North Carolina is increasingly an outlier with respect to research university involvement in and control by a centralized state personnel system. Increased autonomy for the universities should enable them to more competitively recruit the faculty and staff talent that ultimately attracts research funding from Federal and private sources.
6. Modify State Purchasing Rules Recommendation: The General Assembly should modify State purchasing regulations such that UNC-Chapel Hill and NCSU can be empowered to use State purchasing contracts when advantageous from a cost, quality, and/or service perspective. As in most other states, the universities should be given the flexibility to choose alternative vendors when lower costs, higher quality, or superior service are available. The legislature should also evaluate whether similar relief for other UNC institutions is warranted. Increased independence from State regulations on procurement would create cost savings opportunities and greater efficiency, while making Universities and investigators more accountable.
Proprietary and Confidential 32 7. Review Construction and Leasing Policy Recommendation: The General Assembly should ease existing restrictions on construction and leasing arrangements. The growth of the research enterprise is highly dependent on the timely availability of essential research facilities. Streamlining and easing existing restrictions will have substantial benefits in terms of growth of the research enterprise.
B. Precedent Legislative changes creating an independent UNC Health System provide precedent for the positive impact that can result from easing certain administrative restrictions. On November 1, 1998, recognizing inherent differences in the competitive challenges that UNC Hospitals faced relative to other State agencies, the State of North Carolina created the UNC Health Care System and, in doing so, gave the new entity greater autonomy in managerial decision-making. In essence, this change gave the Health Care System the ability to compete,25 by creating a system with greater flexibility in hiring, building, purchasing and acquiring property. Supporters, at the time, said the plan would provide North Carolina's only State-owned medical hospital with the institutional flexibility necessary to adhere to its public mission yet still effectively compete with private hospitals such as Duke University Health System.26 The precedent set by this legislative decision has significant implications for North Carolina’s public research universities. Similar to the situation faced by UNC Hospitals in 1998, UNC-Chapel Hill and NCSU are challenged by certain State policies when trying to compete against private and public research universities that have comparatively smaller regulatory burdens. The easing of similar restrictions should now be applied to UNC-Chapel Hill and NCSU. C. Summary Increased flexibility for public research universities with respect to Human Resources, Purchasing, and Facilities will serve the economic and financial interests of the State by enabling UNC-Chapel Hill and NCSU to provide greater impact on economic development within North Carolina. For example, each 5% increase in Federal and private research funding obtained by UNC-Chapel Hill and NCSU would generate approximately $50 million for the North Carolina economy based on the multiplier referenced in Section 1 of this report. Furthermore, the policy changes recommended above, if implemented, would accelerate the economic impact of research, which is critical as the State tries to recover from its current economic challenges. The State of North Carolina regularly provides tax and other economic incentives to corporations in the interest of economic development within the State. Policy accommodations are also warranted to support the expansion of public university research. Although public universities are fundamentally different from corporations in that they cannot relocate from state to state, normal market forces will weaken the research enterprise and its ability to contribute to economic growth unless the administrative operating environment is freed from its most non-competitive attributes. The State of North Carolina should, in the interest of its own economic success, take action to facilitate and support research at its public institutions. By reducing the administrative burdens upon UNC-Chapel Hill and NCSU, the General Assembly will be acting with prudence by enabling the institutions to substantially enhance their impact on the North Carolina economy. Of equal importance, the State and the public research universities will create a partnership that will have significant long-term benefits for the economy.
25 “UNC Health System Proposed,” by Jane Stancill. The News and Observer – Durham edition. August 13, 1998.
26 “New UNC Health System Wins Legislative Approval,” by Jane Stancill. The News and Observer – Durham edition. October 29, 1998.
Proprietary and Confidential 33 Appendix 1: A Sample of North Carolina Businesses Spawned by the State’s Public Research Universities27
MiCell, Inc., a start-up company based on inventions by a chemistry professor from UNC-Chapel Hill, markets technologies for cleaning fabric and industrial parts using carbon dioxide instead of toxic solvents. Recently, DuPont licensed this professor’s process for using CO2 to improve the manufacture of Teflon. The company spent $40 million to build a plant based on the technology in Bladen County, North Carolina. The plant employs about 100 workers. An idea hatched in an NCSU lab is enabling Raleigh's Nitronex Corporation to become a worldwide leader in the development of gallium nitride semiconductors, expected to become the basis for the next generation of mobile wireless technology. In anticipation of expanding production, Nitronex is preparing a new 69,000-square-foot facility in Research Triangle Park. It's part of a stunning growth spurt for the four-year-old university spin-off that has already raised $34 million in venture capital. AlphaVax, Inc. was established in 1997 to develop and commercialize an innovative vaccine delivery technology. Originally conceived and developed through research at UNC-Chapel Hill, this technology is based on a proprietary vaccine vector system that represents a potential advance in the approach to vaccines (both human and veterinary) as well as in protein expression. Since 1999, AlphaVax has been awarded $20 million in sponsored research as well as $20 million in private equity funding. Established in 1997 by NCSU investigator, Dr. Anne Marie Stomp, Biolex, Inc. was the first tenant of the Entrepreneurial Development Center at NCSU’s Centennial Campus. Biolex is a biotech company that uses proprietary protein manufacturing technology based on the Lemna plant gene expression system. Biolex, which is located in Pittsboro, has signed research collaboration agreements with Bayer and Debiopharm to further develop its technology. Inspire, Inc. was established in 1993 (and went through an IPO in 2000) to commercialize discoveries at UNC-Chapel Hill. Specifically, the original technology was licensed from UNC- Chapel Hill after discovering that UTP is capable of increasing airway surface hydration and improving mucociliary clearance. Through this and other breakthroughs, Inspire has developed drugs to treat dry eye, upper respiratory disorders, cystic fibrosis, and retinal disease. Inspire has 57 FTEs and revenues of nearly $5 million in FY02. Kucera was incorporated in spin-off from Wake Forest University's School of Medicine and the University of North Carolina at Chapel Hill, which develops chemical entities designed to create safer, more selective and efficacious drugs to improve the health and quality of life for patients with acute and chronic diseases, including a novel lead compound targeted against resistant HIV, an emerging problem in treating the virus known to cause AIDS. Hemocellular Therapeutics, Inc., is a start-up company formed to commercialize technology developed jointly at UNC and at East Carolina University. The technology involves a lyophilized (freeze dried) blood substitute product that is far more effective than stored human platelets at stopping bleeding. Oriel Therapeutics, Inc. employs a new vision of pulmonary drug delivery using a universal dry powder aerosolization system, growing out of research conducted in laboratories at UNC-Chapel Hill. It plans to partner its platform delivery technology with pharma/biotech companies to develop products designed to bring enhanced treatment options for a variety of diseases including asthma and Chronic Obstructive Pulmonary Disease (COPD).
27 Information provided by both UNC-Chapel Hill and NCSU’s Offices of Technology Transfer, company websites, and the Council for Entrepreneurial development.
Proprietary and Confidential 34 With technology developed at UNC-Chapel Hill, Karyogen produces cell and animal models that accurately reproduce real-world genetic mutations underlying human disease. In the near-term the company expects to sell products that focus on single-gene traits and identify the genes underlying complex, multigenic traits. The company’s immediate goal is to service current demand for its three initial product offerings to its approximately 40 academic customers. This is the first start-up company formed based on the research discoveries in the new Genomics Center in the School of Medicine.
Proprietary and Confidential 35 Appendix 2: Benefits Scorecard
r n e e t i
v t a i r s g t y n a t s h o e t n s r e t i e S i n l c t e o t f n W e s e t a % m n r n a v y s o l n d y e e 0 e a e e o o t s r t r n l i 1 i P o e H v i C h i V m t n s t u t t e p t t e e i i l r n e e u s e t f p y n r t u t m a e i d e b n U u R e i e I t e v i a n T E i s i r e b n D d l y i o l r H t e n d r t e r n a b R a e % n t t p i e B o U e e e t v 0 o n d n f i r r p i m 0 e o d C o a n e a 1 n Peers D m C I P U D P I M Rank Total Yes 1 University of Michigan 5 No Yes Yes Yes Yes Yes Yes 2 Johns Hopkins 4 Yes No Yes No Yes Yes Yes 2 University of Virginia 4 No No Yes Yes Yes Yes Yes 4 Duke 3 Yes No Yes No Yes No Yes 4 Ohio State 3 Yes No Yes No No Yes Yes 4 University of Chicago 3 Yes No Yes No Yes No No 4 University of Illinois 3 Yes No Yes Yes No No Yes 4 University of Washington 3 No No Yes Yes Yes No Yes 4 Vanderbilt 3 Yes No Yes No Yes No Yes 10 Emory Univ 2 Yes No Yes No No No Yes 10 University of California 2 No No Yes Yes No No No 10 University of Florida 2 Yes No Yes No No No Yes 10 University of Texas 2 No Yes Yes No No No No 10 University of Wisconsin 2 No Yes Yes No No No No 15 University of North Carolina 1 No Yes No No No No 11 Yes 8 4 14 5 7 4 Totals 4 No 7 11 1 10 8 11 The Yes/No scorecard suggests that UNC-Chapel Hill (with only 1 yes) ranks behind its peers in selected areas that comprise institutional benefit plans.
Proprietary and Confidential 36 Appendix 3: Benefits Comparisons
Number of Health Plans Offered to Employees
University Number of Health Plans California 9 Wisconsin 8 Illinois 7 Washington 7 Michigan 6 Ohio State 4 Chicago 4 Vanderbilt 4 Duke 3 Emory 3 John Hopkins 3 Texas 3 Florida 2 Virginia 1 AverageUNC-Chapel Number Hill and of PlansNCSU 1 UNC-ChapelOffered Hill and NCSU 4.3 Ranking 8 / 8
Source: UNC-Chapel Hill
Proprietary and Confidential 37 Appendix 3: Benefits Comparisons (continued)
Health Plan Comparison Family Coverage, Ranked by Monthly Employee Cost 1,200
1,000
800
600 878.84 842.52 781.00 285.92
557.00 686.42 436.29 857.70 537.00 400 508.88 416.00
609.21 577.00 433.54
200 427.48
244.42 193.21 194.00 206.00 150.98 155.09 155.11 171.00 34.00 109.00 113.00 0.00 5.80 0
a t a n i o n is a te n il s y ia e n i n g to d a b a r k li s r a o ri ta g r x o in u o n o c g lin S i e e g r o lif i in Il lo h d T m ir D a c a h h F o ic n E V is C s i a C C a h M h W O V rt W o N
Employee Contribution Employer Contribution
Source: UNC-Chapel Hill
Proprietary and Confidential 38 Appendix 3: Benefits Comparisons (continued)
Health Insurance Comparison with Peers
University Out of Pocket Expenses Ohio State $ 157 Wisconsin $ 160 Chicago $ 210 Florida $ 233 Illinois $ 260 Michigan $ 278 Virginia $ 282 Washington $ 320 Vanderbilt $ 320 California $ 330 Duke $ 375 Emory $ 395 John Hopkins $ 640 Texas $ 740 North Carolina $ 740 Average Out of Pocket Expenses $ 363 UNC-Chapel(Assumes family Hill of andfour, NCSUfour office visits at $75/visit, one emergency room visit atRanking $200, and 24 generic prescriptions at $25/prescription.)13 / 13
and 24 generic prescriptions at $25/prescription.)
Source: UNC-Chapel Hill
Proprietary and Confidential 39 Appendix 4: The SPA Employment Process
Proprietary and Confidential 40 Human Resources Hiring Generalist Employment Candidate Department
Information Requisition Requisition Mainframe data manually manually keyed processed and posted to website keyed into and sent via HRIS approved nightly mainframe
Folder created for position number
Forms printed Applicant Applications for folder and completes forwarded to data keyed forms and mailbox into sends mainframe
Each Hiring department application conducts a screening reviewed and for the most qualified qualifiers forwarded
Reference check is conducted; review priority employment considerations established by the OSP
Candidate Selected
Generalist Qualifying Salary Department makes determines salary by determined and a salary reviewing candidate’s criminal conviction recommendation experience and check is requested education
Candidate Verbal Job Offer Accepts/Declines Made Offer
Candidate attends a Job Demographic Offer Acceptance information session and signs entered into HRIS necessary paper work
Requisition closed and Requisition Education materials folder filed verification stored in folder
Requisition closed in daily count database, mainframe and HRIS
Commitment Employee package records copied and submits to filed OSP
Proprietary and Confidential 41 Appendix 5: Sample Research Scorecard
Institutional accomplishments and business model Appropriations Awards Percentage of research to total operating budget (compare to peers) Spin-offs Tech transfer statistics Licensing/ royalty income Equity positions Invention disclosures Diversity (specifically relevant to research)
Investments in research Total research expenditures Facilities/infrastructure for research Square footage per faculty member Quality Start up faculty packages Administrative expenditures per faculty member Total research expenditures per faculty member Non-quantitative measures (surveys from research community)
Quality/Reputation of scientists Publications or citations Membership in: National Academy of Sciences Institute of Medicine National Academy of Engineering Number of Howard Hughes Investigators Number of post-docs and/or graduate students attracted Training grants Track subsequent location of program of participants
Proprietary and Confidential 42