TIME: Almanac 1993/TIME Almanac 1993.iso/time/031891/0318120.000

Text File | 1992-08-28 | 11.1 KB | 234 lines

                                                                                EDUCATION, Page 74

Scandal in the Laboratories


Inquiries at Stanford turn a harsh light on how university
research is funded

By SUSAN TIFFT -- Reported by Katherine L. Mihok/Palo Alto and
Nancy Traver/Washington


    The earthquake that rocked San Francisco almost two years
ago did $160 million worth of damage to nearby Stanford
University. This week tremors of a different sort threaten to
rattle the elite Palo Alto-based institution -- and dent its
coffers by as much as $200 million. On Wednesday, Michigan
Democrat John Dingell, chairman of a House investigative
subcommittee, is to hold a daylong hearing on allegations that
throughout the 1980s, Stanford routinely overcharged taxpayers
for millions of dollars in research-related expenses.

    No fewer than four federal agencies are looking into the
creative-bookkeeping practices that enabled the university to
bill Uncle Sam for depreciation on a 72-ft. yacht; faculty
discounts on tickets to athletic events; and a percentage of
the cost of flowers, bedsheets, tablecloths and antiques for
the president's house. In January, Stanford agreed to refund
$500,000 in government money used to maintain three
university-owned houses, including the president's, and to pay
back more than $180,000 on the yacht, a charge that the school
said was an accounting error. But Dingell, who has
hyperbolically likened Stanford's deeds to the
defense-contractor scandals of the 1980s, wants to use the
transgressions to stir debate on the lack of accountability in
the government-university relationship. "At a time when U.S.
scientific efforts are falling behind," says Dingell, "to have
research money spent frivolously is simply not acceptable."

    Stanford's predicament raises troubling questions about how
the government and universities spend taxpayer dollars intended
for scientific research. This week's hearing is expected to
focus not only on Stanford's questionable accounting practices
but also on the agency that monitored the school's federal
contracts, the Defense Department's Office of Naval Research.
That group failed to audit thoroughly Stanford's overhead
costs for almost a decade. Says Middlebury College President
Timothy Light of the current system for underwriting
university-based research: "It's a ghastly mess."

    At the center of the maelstrom is a set of arcane rules,
installed gradually after World War II, that turned the Federal
Government into America's primary sponsor of university
research. Under these regulations, the government foots the
bill for research and many of the overhead costs of doing
research. These so-called indirect costs, which are not
attached to any single project, include university-wide
expenses like administration, libraries, roads, utilities and
building maintenance. Every university charges the government
a different rate for overhead, based on such considerations as
geography, which determines a school's energy and wage costs,
and the size and age of its facilities. The rates are set
during periodic haggling sessions with one of three U.S.
agencies: the departments of Defense, Energy, or Health and
Human Services.

    Stanford's 74% overhead rate was among the highest in the
country (it was recently slashed to 70%), in part because the
school was unusually aggressive about recouping every nickel
it could. "I expect our controllers to do their best on behalf
of the university," says Stanford President Donald Kennedy.
Some would argue, however, that Stanford's controllers were
overly zealous in their quest for money. Defense Department
auditors say the university has been so uncooperative in the
investigation that they threatened last week to turn the matter
over to the Justice Department.

    Defenders of the funding system hasten to note that a 74%
overhead rate does not mean that 74 cents out of every research
dollar is spent on library books and electric bills. Under
government regulations, universities are prohibited from
applying overhead rates to certain research-related expenses.
Equipment purchases, for instance, are not permitted in the
total; neither are subcontracts over $25,000. Thus if a Johns
Hopkins professor gets a $100,000 grant to cover his direct
costs of research, he may be able to apply his school's
indirect-cost rate -- 65% -- to only $60,000 of it, making the
tab for overhead $39,000. Consequently, the university would
receive a total of $139,000 in government funds.

    Nor do low indirect-cost rates necessarily add up to a
better deal for the public. The University of Wisconsin at
Madison, for instance, has a rate of just 44%, but that is
partly because state taxes help cover the cost of buildings,
heat and other overhead expenses connected with research.
Taxpayers still pay the bulk of the bill, just as they do at
Stanford; there are simply more state tax dollars in the mix
than at a private school. Rates are typically lower at public
institutions anyway. Unlike Cornell or M.I.T., these schools
have little incentive to comb federal guidelines for every
allowable expense since, in some states, most of the overhead
recovered from the government goes into state coffers, not the
universities'.

    The items that schools include in their overhead bills vary
widely. Columbia, Harvard, M.I.T. and Cornell argue that their
presidents' residences are part of "general administration" in
support of research, and they charge the government anywhere
from 14% to 68% of the maintenance costs. Other universities,
such as Yale and Johns Hopkins, consider the amount involved
too small to bother recovering from the government. Unlike
those for Stanford's yacht, such charges are legal. Still, they
are difficult to defend. "The public doesn't think the
president's mansion ought to be shifted to the research
budget," says Norman Scott, vice president for research and
advanced studies at Cornell. "It doesn't smell good."

    The Federal Government is supposed to audit a university's
overhead charges every two or three years. In the case of
Stanford, however, the Office of Naval Research did not
adequately check claims and receipts for fiscal years 1983
through 1988 and did not audit 1981-82 at all. Worse still,
during that time it signed off on 125 "memoranda of
understanding," formal agreements that exempted Stanford from
accounting standards the government imposes at other schools.


    Washington also shoulders some blame for creating the
impossible tangle of rules that govern overhead reimbursements.
"It's important to remember that the same people who produced
the tax law produced this horrible cost-recovery system," says
Robert Zemsky, director of the Higher Education Research
Program at the University of Pennsylvania. Even those schools
that are determined to redeem allowable expenses say it is too
complicated and time consuming to try to reclaim the full cost
of doing research.

    Administrators point out that private industry charges
overhead rates well over 100%, making university-based projects
a relative bargain. "We're not looking at a situation where
people are getting rich," says former M.I.T. Provost John
Deutch. "This is not like Michael Milken." Despite an overhead
rate of 77%, for example, Harvard Medical School in 1989 still
had to finance 17% of research-related indirect costs out of
its own pocket. The rate has since soared to 88%, and Harvard
Medical is now asking government negotiators to agree to an
even more mind-boggling figure: 104%.

    Lurking behind the debate about out-of-sight overhead rates
and suspicious-sounding bills for flowers and bedsheets is a
deeper issue: the high cost of modern research. During the
Sputnik era, Washington launched an ambitious university
building program, which it abruptly abandoned in the late
1960s. Since then, private universities have had to raise their
own construction and renovation funds. At the same time, they
have had to grapple with unrealistic government regulations
that require them to write off building costs on a 50-year
timetable, despite the fact that most scientific facilities
outlive their usefulness in just two decades.

    In order to recoup some of the skyrocketing costs of
erecting new labs and technical libraries, schools have become
increasingly aggressive about billing Washington for overhead.
It is no accident that Stanford's indirect-cost rate jumped 16%
from 1982 to 1990, a period that coincided with a building boom
on the campus. At some schools, reimbursements for overhead
have come to account for alarming chunks of the budget. In
fiscal 1990, Stanford relied on federal overhead to make up 22%
of its operating funds. "They're hooked," says Middlebury's
Light. "They've become dependent on the research money for
regular functions."

    The government, meanwhile, faces a budget crunch that makes
it less willing than ever to help universities expand or update
their scientific infrastructure. "The National Science
Foundation and others are saying, `If we've got to set
priorities, we'd better do the substance,'" says Joseph
Gilmour, vice president for strategic planning at Georgia Tech.

    Administrators fear that this week's hearing may turn into
a university-bashing free-for-all. If that happens, Congress
may move to limit sharply what can be considered a legitimate
overhead expense, or anxious research institutions may have to
cap their indirect-cost rates -- or both. Closer regulation of
indirect-cost charges is obviously needed. But for schools
already squeezed by the recession, declining enrollments owing
to the baby bust and outrage over high tuition costs, yet
another budgetary constraint could prove devastating.
"Universities are fragile places," says Marvin Ebel, associate
dean of the graduate school at the University of Wisconsin at
Madison. "They don't operate with big cushions. Bad years can
lead to some real destruction."

    For the near term, universities had better be prepared for
tighter belts and closer scrutiny. Already the General
Accounting Office is delving into overhead charges at Harvard
Medical School. And this spring Dingell's subcommittee plans
to initiate similar probes at M.I.T., Johns Hopkins, Columbia,
the University of Pennsylvania and the University of Southern
California. The aftershocks of the Stanford tremors are certain
to be felt for some time to come.


____________________________________________________________
FOCUS ON FUNDS


    Top 10 recipients of federal research-and-development
expenditures and their indirect cost rates. (This rate
determines what universities may charge for their overhead
expenses.)


    Johns Hopkins                   65%     Stanford
              70%     M.I.T.                        57.5%
U. of Washington               53%     U. of Michigan
          59%     U.C. at San Diego               49%     U. of
Wisconsin at Madison     44%     U.C. at San Francisco
  38.5%     UCLA                            48%     Cornell
                      75%