Scandal in The Laboratories

By Susan Tifft

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.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Steve Hart

CAPTION: FOCUS ON FUNDS

With reporting by Katherine L. Mihok/Palo Alto and Nancy Traver/Washington