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 Institutions 23
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 billion 1. 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
“Another Downer of a Year for College and University Endowments,” by John L. Pulley. January 24, 2003. The Chronicle of Higher
Education.
2
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.
“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.
5
6
“Digest of Educational Statistics 2000, Table 313”, National Center for Statistics. 2000. US Department of Education.
“North Carolina and Texas Try to Buck Trend of Tuition Increases,” by Will Potter. February 21, 2003. The Chronicle of Higher
Education.
7
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:
$452,710,000
17%
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:
Research
Funding
for
Contracts
& Grants
are
received
from:
Federal Agencies (e.g.,
National Institute of
Health, National
Science Foundation)
Employees
Private Sponsors (e.g.,
corporations,
foundations)
Economic
Cycle
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, UNCChapel 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
Name
Product
Embrex
Cree Research
Probiologics
Gentra Systems
LipoScience
ID Technologies
Zymotech
3 Tex
TriboFilm
Xanthon
Biolex
Pilot Therapeutics
HowStuffWorks
Db Tag
Nitronex
Origen
SentriSystems
Zetta Core
Mi-Corporation
Togabi
ArrayExpress
BioMarck
Silicon Semiconductor
Pharmaceuticals
Semiconductors
Biotech
BioTech
Medical
InfoTech
Biotech
Textile
Chemicals
BioTech
Biotechnology
Pharmaceuticals
InfoTech
Electronics
Chemicals
MicroBiology
InfoTech
Nanoscience
InfoTech
Wireless Tech
MicroBiology
Pharmaceuticals
Semiconductors
University of North Carolina at Chapel Hill
Year
Founded
1985
1987
1987
1988
1994
1994
1996
1996
1996
1996
1997
1998
1998
1998
1999
1999
1999
1999
2000
2000
2000
2001
2002
Name
Product
Mycosearch
Numerical Design
Virtual Reality Games
Inspire
Lari Software
MiCell Technologies
Novalon
Kucera
AlphaVax
Renaissance Cell
ADMETech
LeukoMed
DeltaSphere
nanoManipulator
Applied NanoTech
Incara
DarPharma
Ercole
Parion Science
Oriel
Hemocellular
Asklepios
Pharmaceuticals
Computer Graphics
Computer Game
Pharmaceuticals
Computer Graphics
Chemicals
Pharmaceuticals
Chemicals
Pharmaceuticals
Pharmaceuticals
Chemicals
Pharmaceuticals
Computer Graphics
Computer Graphics
Nanotechnologies
BioTech
Pharmaceuticals
BioTech
Therapeutics
Therapeutics
Therapeutics
BioTech
Year
Founded
1979
1982
1994
1995
1995
1996
1996
1997
1998
1998
1999
2000
2000
2000
2000
2000
2000
2001
2001
2001
2003
2003
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 welleducated 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, UNCChapel 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
Start Up Companies Formed
1997
1998
1999
2000
2001
2002
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
103
102
107
149
135
NCSU
42
48
60
76
57
N/A
UNC-Chapel Hill
61
54
47
73
78
78
199
207
264
282
326
307
NCSU
105
101
148
169
211
188
UNC-Chapel Hill
94
106
116
113
115
119
Licenses & Options Yielding License
Income
Invention Disclosures Received
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
Ranking
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Institution
University of California
MIT
Cal Tech
Stanford
Princeton
University of Texas – Austin
Cornell
Columbia
University of Wisconsin
University of Washington
Johns Hopkins
UNC – Chapel Hill
University of Pennsylvania
Duke
University of Michigan
Penn State
University of So. California
University of Minnesota
University of Utah
University of Florida
University of Illinois – UC
North Carolina State
Georgia Tech
Harvard
Pittsburgh
Technology Strength12
2001
460
227
178
137
105
89
88
79
75
71
68
58
57
56
55
46
44
41
41
40
39
37
37
35
34
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
1996-2000
383
186
101
102
37
120
65
63
80
74
63
42
69
41
64
31
17
42
33
40
22
29
21
38
28
Rank
1
2
5
4
20
3
9
11
6
7
11
14
8
16
10
25
48
14
24
18
37
26
42
19
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.
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.
13
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
Chapel Hill
Hill
University of
of North
North Carolina - Chapel
Percentage
by Key
Key Sources
Sources**
Percentage of
of Total
Total Revenues
Revenues Contributed
Contributed by
45%
State
State Appropriations and
Appropriations
State Grants &
and State Grants
Contracts
& Contracts
40%
35%
Federal and
Federal and Private
Private Grants &
Grants & Contracts
Contracts
30%
25%
20%
Tuition and Fees,
Tuition and Fees, Net
Net
15%
10%
5%
0%
1987
*
1989
1989
1991
1991
1993
1993
1995
1995
Excludes Service
Revenues
1997
1997 1999
1999 2001
2001 2003
2003
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
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.
Proprietary and Confidential
16
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
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.
“Paying for University Research Facilities and Administration,” by Charles A Goldman, T Williams with David M. Adamson, and
Kathy Rosenblatt. Rand Corporation. © 2000.
15
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
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
California
Florida
Georgia
Indiana
Iowa
Kansas
Michigan
North Carolina
Ohio
Oregon
Pennsylvania
Utah
Illinois
New York
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 21 st 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
1
University of Washington
$356,241
2
University of Michigan
$302,311
3
University of California – San Francisco
$350,418
4
University of California – Los Angeles
$273,488
5
University of California – San Diego
$217,229
6
University of Pittsburgh
$264,561
7
University of North Carolina – Chapel Hill
$236,804
8
University of Wisconsin – Madison
$187,013
9
University of Minnesota
$192,082
10
University of Alabama – Birmingham
$189,833
11
University of California – Berkeley
$91,743
12
University of Iowa
$148,698
13
University of Illinois – Urbana/Champaign
$43,017
14
Indiana University
$107,420
15
University of Virginia
$121,216
16
Oregon Health and Science University
$129,752
17
University of Utah
$112,749
18
University of Arizona
$89,404
19
University of Illinois – Chicago
$99,719
20
University of California – Davis
$88,447
21
Ohio State University
$89,588
22
Pennsylvania State University
$79,788
23
University of Florida
$85,650
24
University of Maryland – Baltimore
$97,708
25
University of California – Irvine
$79,026
Source: National Institutes of Health and National Science Foundation
NSF Funding
$68,328
$54,440
$1,929
$39,276
$80,302
$13,818
$22,832
$54,741
$43,132
$5,571
$67,374
$9,592
$112,059
$31,169
$16,643
$7,222
$21,255
$33,156
$21,049
$29,660
$26,326
$35,413
$28,228
$7,076
$20,494
Total
$424,569
$356,751
$352,347
$312,764
$297,531
$278,379
$259,636
$241,754
$235,214
$195,405
$159,117
$158,290
$155,076
$138,589
$137,859
$136,974
$134,004
$122,560
$120,768
$118,107
$115,914
$115,201
$113,878
$104,784
$99,520
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
1993
1995
1997
1999
2001
2003
2005
2007
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
“AAAS R&D Funding Update in the FY 2004 NIH Budget.” American Association for the Advancement of Science © February
2003.
19
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
pharmaceuticals, wireless communications devices, or medical instrumentation. To succeed,
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 UNCChapel 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
1
2
3
4
5
6
7
8
9
10
City
Boston
New York City
San Diego
Philadelphia
Baltimore
Seattle
Chapel Hill/Durham
Los Angeles
Houston
San Francisco
Number
3,269
2,847
1,445
1,833
1,626
1,292
1,306
1,268
1,054
1,012
All Awards
Amount (in $000’s)
$1,215,200
$1,062,872
$754,538
$659,091
$618,177
$588,457
$499,555
$475,037
$435,251
$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.
“Innovation U.: New University Roles in a Knowledge Economy,” by Louis Tornatzky, Paul Waugaman, and Denis Gray.
Southern Growth Policies Board. © 2002.
21
22
Raleigh ($13M) and Research Triangle Park ($52M) had relatively low NIH support .
Proprietary and Confidential
21
2. Carolina North (UNC-Chapel Hill)
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 UNCChapel 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 UNCChapel 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
research staff and state-focused, agency-based employees makes it very difficult, and sometimes
Proprietary and Confidential
23
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)
Alaska
Arizona (1)
Arkansas
California (5)
Delaware
Florida (1)
Georgia (1)
Illinois (1)
Indiana (1)
Kentucky
Maine
Massachusetts
Michigan (1)
Mississippi
Missouri
Nebraska
New Hampshire
New Jersey
New Mexico
North Dakota
Ohio (1)
Oklahoma
Oregon
Pennsylvania (1)
Tennessee
Texas (3)
Utah (1)
Vermont
Washington (1)
West Virginia
Wyoming
18 States In Which Universities Operate Within the
State Personnel System
Colorado (1)
Connecticut
Hawaii
Idaho
Kansas
Louisiana
Maryland (1)
Minnesota (1)
Iowa (1)
Nevada
South Carolina
New York
South Dakota
North Carolina (1)
Virginia (1)
Rhode Island
Wisconsin (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.
a. Salary
Proprietary and Confidential
24
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 UNCChapel 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, UNCChapel 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 formuladriven, 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
24
Ibid.
Proprietary and Confidential
26
Carolina Purchase and Contract regulations reads: “No agency may purchase any commodities,
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
California - Berkeley
Iowa
Maryland
Nebraska
Ohio State
Texas
UCLA
Florida
Illinois - UC
Michigan
Minnesota
Penn State
Rutgers
Virginia
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 UNCChapel 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 muchneeded 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-ofthe-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:
Proprietary and Confidential
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.
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
25
“UNC Health System Proposed,” by Jane Stancill. The News and Observer – Durham edition. August 13, 1998.
“New UNC Health System Wins Legislative Approval,” by Jane Stancill. The News and Observer – Durham edition. October 29,
1998.
26
Proprietary and Confidential
33
importance, the State and the public research universities will create a partnership that will have
significant long-term benefits for the economy.
Proprietary and Confidential
34
Appendix 1: A Sample of North Carolina Businesses
Spawned by the State’s Public Research Universities
27

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 UNCChapel 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
Information provided by both UNC-Chapel Hill and NCSU’s Offices of Technology Transfer, company websites, and the Council
for Entrepreneurial development.
27
Proprietary and Confidential
35
products designed to bring enhanced treatment options for a variety of diseases including asthma
and Chronic Obstructive Pulmonary Disease (COPD).

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
36
Imm
Con
trib
More ute 10%
o
to Re
tirem r
ent
edia
te V
Retir esting in
eme
nt
Dent
al
Paid Insuran
ce
by U
nive
rsity
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
Yes
No
8
7
4
11
14
1
5
10
7
8
4
11
Peers
Rank
Univ
ersi
100% ty Cover
s
Emp
lo
Heal yee
th
1
Part
Yes
Inde
Univ
ersit
Con
y
tr
Depe ibutes to
nden
t Hea
lth
pend
en
Bene t of Sta
te
fit Pl
ans
ial T
ui
for D tion Wai
ve r
epen
dent
s
Appendix 2: Benefits Scorecard
Total
11
4
Totals
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
37
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
UNC-Chapel Hill and NCSU
1
Average Number of Plans
Offered Hill and NCSU
UNC-Chapel
4.3
8/8
Ranking
Source: UNC-Chapel Hill
Proprietary and Confidential
38
Appendix 3: Benefits Comparisons (continued)
Health Plan Comparison
Family Coverage, Ranked by Monthly Employee Cost
1,200
1,000
800
600
878.84
400
577.00
285.92
537.00
508.88
609.21
781.00
557.00
686.42
857.70
842.52
436.29
416.00
433.54
427.48
200
in
a
C
ar
ol
Du
ke
rg
in
ia
Vi
Em
244.42
No
rth
206.00
194.00
or
y
193.21
Te
xa
s
rb
ilt
Va
nd
e
an
a
Employee Contribution
171.00
155.11
ich
ig
M
O
hi
o
or
id
Fl
no
is
Illi
155.09
St
at
e
150.98
113.00
109.00
W
as
hi
ng
to
n
Ch
i
ifo
rn
ia
Ca
l
co
ns
in
W
is
ca
go
5.80
0.00
0
34.00
Employer Contribution
Source: UNC-Chapel Hill
Proprietary and Confidential
39
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
$ 363
Expenses
UNC-Chapel Hill and NCSU
13 / 13
Ranking
(Assumes family of four, four office visits at $75/visit, one emergency room
visit at $200, and 24 generic prescriptions at $25/prescription.)
and 24 generic prescriptions at $25/prescription.)
Source: UNC-Chapel Hill
Proprietary and Confidential
40
Appendix 4: The SPA Employment Process
Hiring
Department
Generalist
Requisition
manually keyed
and sent via HRIS
Requisition
processed and
approved
Human
Resources
Employment
Information
manually
keyed into
mainframe
Candidate
Mainframe data
posted to website
nightly
Folder
created for
position
number
Applications
forwarded to
mailbox
Forms printed
for folder and
data keyed
into
mainframe
Applicant
completes
forms and
sends
Each
application
reviewed and
qualifiers
forwarded
Hiring department
conducts a screening
for the most qualified
Reference check is
conducted; review
priority employment
considerations
established by the OSP
Candidate
Selected
Qualifying Salary
determined and
criminal conviction
check is requested
Department makes
a salary
recommendation
Generalist
determines salary by
reviewing candidate’s
experience and
education
Candidate
Accepts/Declines
Offer
Verbal Job Offer
Made
Candidate attends a Job
Offer Acceptance
session and signs
necessary paper work
Demographic
information
entered into HRIS
Requisition
closed and
materials
stored in
folder
Requisition
folder filed
Education
verification
Requisition closed
in daily count
database,
mainframe and
HRIS
Commitment
package
copied and
filed
Proprietary and Confidential
Employee
records
submits to
OSP
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