Regulated Materials Surcharge Issues Q & A

(Click here for a printable PDF file.)

• Why is a regulated materials surcharge needed?
• Who was involved in the decision to impose a regulated
  materials surcharge and what alternatives were considered?
• Why wasn't this decision communicated broadly at that time?
• What are the budget implications of the surcharge?
• Wouldn't it be simpler and fairer to charge units at the time
  they need to dispose of waste or sell or divest equipment?
• Isn't the surcharge unfair to sponsored research projects and a way of double
  charging research grants that already pay indirect cost?
• Why does the surcharge apply to items like computers and lab equipment?
• Why should the surcharge be imposed if the purchased items are consumed
  or disposed of off campus, shouldn't they be exempt from the surcharge?

Why is a regulated materials surcharge needed?

There are substantial costs associated with the handling and disposal of materials that may pose environmental or health hazards. The costs of collecting, treating and disposing of these materials as well as the training, record keeping and permitting for such activities has been and will continue to be paid by the General University Fund. Some auxiliary and affiliated organizations pay a fee for some services, but the services are provided free to all academic units. The program operated by ISU's Environmental Health and Safety (EH&S) Department has been nationally recognized for its cost effectiveness and has served as a role model for programs at many other universities.

The regulated materials surcharge is needed to help pay for a new facility that will house these activities. The new facility is needed because of life safety deficiencies and physical deterioration of the existing facility which was constructed in 1979 as a temporary building. If steps are not taken to replace the existing facility there is the possibility that university activities could be stopped or significant fines and penalties imposed. Construction of the new facility will cost $10 million. Central funding totaling $4 million has been identified but the balance of the funding will be borrowed using self-liquidating revenue bonds. This means that the facility must generate a revenue stream equal to the annual debt service requirements for the bonds. The revenue generated by the regulated materials surcharge will pay for the debt service on the building and when the debt is retired, will be discontinued. It is projected that it will take 10 to 15 years to retire the bonds.

Who was involved in the decision to impose a regulated materials surcharge and what alternatives were considered?

Since the existing facility was first cited for life safety deficiencies over a decade ago, a number of alternatives have been considered.

• Initial consideration focused on modificationsto the existing facility to bring it into compliance with life safety codes.Because of the physical deterioration of the facility, its location away from the core campus, the growing volume of waste and the increasingly strict regulatory standards, the viability of the existing facility no longer exists. Even with modifications, the potential exists for regulators to close the facility or to refuse to grant the necessary permits for its continued operations. The State Fire Marshal's inspection reports of the existing facility placed some urgency in making progress on replacing the facility.
• Environmental Health and Safety studied the impact of closing the waste handling facility and seeking external contractors to provide the services. The operating costs of this arrangement were found to be significantly higher (over $350,000 per year compared to less that $100,000 under the existing arrangement)and would continue to increase as volume and regulatory constraints increased in the future. Additional disadvantages would be the need to house hazardous waste in university buildings, including research laboratories, awaiting disposal by the contracted vendor. Emergency spill-response capabilities would also be negatively impacted.
• In order to address the existing deficiencies, provide for future growth as more materials became subject to regulatory oversight, and to minimize annual operating expense, a new facility was determined to be the best option. If a fundingsource could be found for the initial capital costs, the annual operating expenses charged to the General University Fund could be minimized.
• When it became clear that the cost of the new facility would exceed any centrally available funding, a group was formed to look at funding alternatives. A number of alternatives were considered including charging waste disposal costs to the units that generate the waste, reallocating a portion of indirect cost recoveries for this purpose, and several variations of a surcharge on purchases of a regulated materials. The recommendation for the surcharge and the rationale for the recommendation were submitted to the Vice President for Business and Finance in January 2003. The Vice President discussed the proposal with the President and other administrators and the financing of the facility was approved by the Board of Regents, State of Iowa.

Why wasn't this decision communicated broadly at that time?

Over the years this project has been under consideration and a number of offices were involved in discussing alternatives. There have been a number of changes in staff in EH&S, academic and research administrators. With the announcement in December of the surcharge it became apparent that adequate communications had not occurred. The issuance of bonds to support the construction of this facility has been part of both the University and the Board of Regents capital approval processes throughout 2003. The intention to implement a surcharge has been noted in numerous public documents related to the capital budget for the facility and in the documents supporting the issuance of the bonds last October. Additionally, a work group was formed early in 2003 to develop the systems and procedures to assess and collect the surcharge. Units most affected by the surcharge including Purchasing, Chemistry Stores, Veterinary Diagnostics Lab, Administrative Technology Services and the Microcomputer Products Center were represented on the committee because it affected pricing of the products processed by these offices. It was initially thought that the announcement of the surcharge would be incorporated into the FY04 budget planning. But the details of implementing the surcharge were more complex than originally thought and changes in the Regent's capital planning guidelines created some uncertainty about obtaining final approval for the project. Implementation of the surcharge was delayed until after the final approval was received and the bonds issued in October 2003.

Although many people were aware of the surcharge including major interest groups affected by the surcharge, the communication with the broader campus community was clearly inadequate. When a general announcement was made the implementation deadline was imminent allowing little time for units to adjust. The decision to delay and review implementation is intended to help rectify these mistakes.

What are the budget implications of the surcharge?

The surcharge was specifically designed to try to minimize the cost to any one activity or unit, yet fairly distribute the cost to the primary waste generating activities. The table below illustrates the budgetary impact of the surcharge on a broad range of purchases using FY03 purchasing data.

As this table shows, the primary impacts are not in state appropriated funds or in grant funds but rather in auxiliary services. Some of these auxiliary units provide services to other departments that may become slightly more expensive because of the surcharge. Because gasoline and automotive products are subject to the surcharge, Transportation Services will pay the surcharge on many items they purchase and will include this cost in their rate structure. However, this effect is consistent with the overall desire to more accurately reflect the actual costs of services, especially services provided to external constituencies. The Veterinary Clinic and Veterinary Diagnostic Lab also purchase many items subject to the surcharge and would need to include this cost in their fee structures.

As discussed in more detail below, purchases of computers and laboratory equipment are among the items subject to the surcharge.

Over $300,000 of the amount shown under auxiliaries is due to computer purchases through the Microcomputer Products Center. These charges will be passed along to the ultimate purchaser if the computer is to be owned by the university but not if the purchaser is a student or an individual staff member because the University will have no responsibility for the disposal of the equipment. As computer prices continue to decline this will also mitigate the budgetary impact of the surcharge on computer purchasers.

Expensive laboratory equipment is subject to the surcharge but the amount is capped at $1500. Just as shipping and installation are a cost of equipment acquisition, the surcharge would need to be part of the budget planning for equipment purchases.

Wouldn't it be simpler and fairer to charge units at the time they need to dispose of waste or sell or divest equipment?

From one perspective, the answer to this question is yes. But it would be risky and it wouldn't be cheaper. A concern is some individuals and units would choose to improperly dispose of waste or other regulated items in order to avoid the expenses involved in proper disposal. Even now, when disposal is free, we have many instances of abandoned equipment and waste items that can't be identified to their original user. Improper disposal can result in fines of over $27,000 per instance and there are cases of total fines exceeding $1 million at other universities. Some examplesof recent fines include:

The EPA has recently increased it enforcement activities at universities and the probability of significant fines is higher than ever. In addition to fines, research activities can be significantly disrupted by enforcement actions. Such enforcement action may result in consent agreements that involve expensive and onerous remedial action in addition to the fines as well as negative publicity for the institutions involved. The entire university community benefits by the availability of a facility that provides for the safe and efficient disposal of hazardous materials. It is analogous to paying taxes to support the fire department. You may never need the fire department but you benefit by having it available.

Isn't the surcharge unfair to sponsored research projects and a way of double charging research grants that already pay indirect cost?

No. There is a common misperception that research grants will pay a disproportionate share of the surcharge. The data above show that that is not the case. In fact, the surcharge is designed to be fair to sponsored research because there are so many other activities that use regulated materials but are not subject to indirect cost recovery. The consultants hired to assist the University with the indirect cost rate negotiations reviewed the surcharge proposal. As explained above, the operating cost of the Environmental Health and Safety Department will continue to be paid by the University. EH&S does not directly receive indirect cost recoveries but it is part of the cost pools that make up the operations and maintenance component of the indirect cost rate. The surcharge will only be used to pay debt service on the facility bonds. Since this is not part of the O&M cost pool, double charging is not an issue.

Why does the surcharge apply to items like computers and lab equipment?

Decommissioned lab equipment generates waste. It often contains oils (PCB), heavy metals, hazardous waste batteries and other materials managed by EH&S. Equipment may be checked by EH&S before being sent to asset recovery. Likewise, old computers generate hazardous waste because monitors contain large quantities of lead. Circuit boards contain lead and other heavy metals and internal batteries are often hazardous waste. Regulatory controls over computer disposal are becoming increasingly stringent.

Why should the surcharge be imposed if the purchased items are consumed or disposed of off campus, shouldn't they be exempt from the surcharge?

We have no practical way of knowing at the point of purchase, whether the item will be consumed or disposed of off-campus, and off-campus users should be encouraged to use the facility whenever practical and should feel free to seek services provided in the building whenever needed. EH&S does provide regulated materials services related to off-campus facilities.The new facility will house testing and training facilities activities that will be used by are necessary to regulatory compliance and benefit all users of regulated materials.

Purchasing Department, 3616 Administrative Services Building
Phone 294-4860, purchasinghelpdesk@iastate.edu
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