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What Happened to Stanford's Expense Scandal?

THE BALTIMORE SUN

It started with wine and flowers, silk sheets and fine silverware, and led to a yacht and an elaborate wedding $H ceremony at a campus mansion.

An elegant courtship? No, your tax dollars at work.

Or so government auditors argued in 1991 when they cited the luxury items as part of a research funding scandal at Stanford University that ultimately caused the downfall of its president.

Last month, Stanford quietly repaid $1.2 million -- a far cry from the $200 million investigators claimed the university overbilled the government for incidental costs.

The university also dropped a claim against the government for $56 million and agreed to a significantly lower rate for reimbursement of its indirect costs, effectively losing millions of dollars annually.

Higher education officials said the Stanford excesses set off a wave of audits at other campuses, and the news stories followed. Johns Hopkins, Harvard, the Massachusetts Institute of Technology, Duke, Michigan and Wisconsin all wound up repaying the government for disputed charges.

"They [Stanford] really took some liberties that many people in the scientific community resent, because it had an affect on all of us," said M. Daniel Lane, director of the division of biological chemistry at the Hopkins School of Medicine.

"Everybody is penalized by that," said the scientist, who receives $500,000 a year in government grants.

As a team of government auditors descended on the Baltimore campus in 1991, Hopkins returned $90,000 as a sign of good faith. When auditors demanded an additional $410,000, a government appeals board sided with Hopkins and denied the claim.

Beyond 'sticker price'

The overruns stemmed from the indirect costs or incidental expenses the universities incurred from their government grants. The sticker price of a grant does not cover all expenses, such as utility and maintenance bills. Other incidentals might be subscriptions to scientific journals, the salaries of administrative assistants who process campus payrolls or a scholar's travel expenses to academic conferences.

Because the incidental expenses are not always clearly linked to a grant, assessing the charges can be tricky.

Each campus negotiates with a single federal agency for all its indirect expenses.

In the case of Stanford, that agency was the Office of Naval Research. At Hopkins and many other universities, the chief negotiator is the Department of Health and Human Services.

The money paid for incidental expenses is not peanuts. From 1981 to 1992, Stanford received $813 million in indirect costs above the nearly $2 billion it received in grants and contracts, officials said.

But once it came under scrutiny, Stanford instituted rigorous new accounting procedures, returned $2.2 million and hired a slew of outside auditors -- at an ultimate cost of $25 million -- to check its books.

Yet unrelenting news reports in 1992 triggered the resignation of Stanford's president, W. Donald Kennedy.

University officials say that more than 1,200 articles were written about the financial difficulties from 1990 to 1992, enough grist for a Stanford graduate student's doctoral thesis.

"I felt no one did anything unethical here," Dr. Kennedy said recently. "We got made an example of. Our treatment in the media was rough."

Stanford officials said recently that the charges for items such as Dr. Kennedy's wedding, the silverware, silk sheets and the upkeep of a yacht donated to the athletic department were relatively minor ones due to clerical errors. Discrepancies on a small scale -- typically in the thousands -- are expected in hundred-million-dollar budgets and ironed out amicably.

Fraud charged

But Paul Biddle, the Navy's representative on the campus, asserted that there was fraud on a massive scale.

Mr. Biddle's suspicions were aroused in 1989 after informal discussions with Stanford professors who feared the university's high reimbursement claims would price them out of the market )) for future grants and contracts.

The concerns ultimately sparked investigations by the Navy, Rep. John Dingell, D-Michigan, and the Justice Department. During one particularly frantic period, the federal government had 30 auditors at Stanford.

"Some schools think of research in the national interest," Mr. Biddle said. "When you start thinking of research from the federal government as an income stream, you have a problem because there you start thinking of profit."

Although no longer with the Navy, Mr. Biddle has filed a federal whistleblower's lawsuit in San Jose, Calif., seeking as much as $200 million from Stanford. If the suit is successful, Mr. Biddle could receive as much as 30 percent of the award. Stanford calls his allegations groundless and self-serving.

Stanford's style

Higher education officials say it was Stanford's cowboy style that drew government skepticism toward academe.

"It had been known to anyone who had had anything to do with the business in the past 20 years that Stanford's stance . . . was what would best be called very aggressive," said University of Maryland system Chancellor Donald N. Langenberg.

"When John Dingell, and, of course, Paul Biddle, decided there was political hay to be made, Stanford was an obvious and, frankly, all-too-easy target."

As the Stanford inquiries expanded in 1991, the government slashed the university's reimbursement rate for incidental expenses from 74 percent to 55.5 percent.

Last month, the harsh allegations that attracted investigative journalists of ABC's "20/20" dissipated almost without notice.

Stanford and the government came to a settlement: the university paid $1.2 million and received a clean bill of ethical health from the Navy.

"As a result of its review of the discovery and other available facts, the Navy has concluded that it does not have a claim that Stanford engaged in fraud, misrepresentation, or other wrongdoing," the Office of Naval Research declared in a statement dated Oct. 17.

"It says that the Navy had no case at all," said Dr. Kennedy, the former Stanford president. "It's an example of a triangular trade of a whistleblower who is a rather strange fellow, a [congressional] subcommittee and a chairman who are very active. . . and a government agency that is scared."

The more spectacular aspects of the Stanford case have obscured one of its major casualties. A federal policy that helped underwrite the explosive growth of campus construction fell victim to the outcry over the indirect cost overruns.

Universities will no longer be able to claim as a legitimate cost the interest they pay to finance new buildings and the purchase of new equipment related to research.

The federal government's new era of restraint in research spending is likely to be furthered by the new Republican majority in Congress, which has proclaimed deficit-busting its top priority.

GOP seeks cutbacks

House Republican leaders have floated a proposal to cut all federal indirect cost reimbursements by 10 percent, which would lead to a savings of $1.6 billion over the next five years.

And campus administrators say the Clinton administration, generally a friend of higher education, is contemplating setting ceilings for reimbursements at levels universities consider painfully low.

New construction will abate, college officials suggested, while older structures demanding renovations will languish.

"I worry about under-building," said Hopkins President William C. Richardson. "It's true here. We have not built up anything using bonds since 1990, when I arrived. I have simply been unwilling for us to do that because of the uncertain climate of funding.

"It could have a chilling effect on the future," Dr. Richardson said.

Hopkins officials have delayed the start of construction on their hospital's $140 million cancer center, which will be built with $75 million in donations and $30.5 million in state dollars.

Another building, which would consolidate five different homes for the nursing program, has been stalled for a year and a half.

Officials also have delayed constructing a social work building and renovations of the engineering school's buildings on the Homewood campus.

Fears of Draconian cutbacks should be "treated with a fair measure of healthy skepticism," said a senior aide to Mr. Dingell who spoke on condition he not be named.

"No one wants to see the universities bankrupted. . . . These kinds of things can endanger support for their research," the aide said.

Hopkins' share

Eugene Sunshine, Hopkins' vice president for finance, noted that Hopkins will receive about $113 million for indirect costs this academic year on grants totaling between $250 million and $275 million.

When allocations for the Applied Physics Laboratory are included, Hopkins receives more federal funds than any university in the country -- slightly more than $740 million in the year ending June 30.

And the university's reduced indirect cost rate, still one of the nation's highest at 66 percent, will climb back to 68 percent next year, Mr. Sunshine said.

Officials at schools across the country say their reimbursement rates for indirect costs tend to be significantly lower than those paid to for-profit hospitals, research institutes and private corporations that perform research for the government.

Public research universities, such as the University of Maryland's College Park, Baltimore County and Baltimore campuses, tend to be paid even lower rates because they have less incentive to seek the money, as most of it reverts to state government coffers. For UMCP it stands at 48 percent, while for UMAB it is 45 percent, officials said.

"One way or another, I've been involved in controversy about indirect cost rates for about 30 years," said Dr. Langenberg, a physicist who has filled a variety of senior posts at research universities and in government.

"The U.S. government tends to lean over backward to make sure the feds aren't paying more than their fair share."

David Folkenflik covers higher education for The Baltimore Sun.

TOP 10 RESEARCH UNIVERSITIES

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Total federal grants for the fiscal year 1992

Johns Hopkins University .. .. .. .. $666,696,000

Stanford University .. .. . .. .. .. 265,687,000

University of Wash. ... ... .. .. .. 257,840,000

Mass. Institute of Tech. .. .. .. .. 237,972,000

Univ. of Mich. .. .. .. .. ... .. .. 223,452,000

Univ. of Cal., San Diego .. .. .. .. 219,843,000

Univ. of Cal., San Francisco ... ... 202,283,000

Univ. of Wisc., Madison .. .. ... .. 199,816,000

Univ. of Cal., L.A. .. .. .. ... ... 180,743,000

Cornell Univ. .. .. .. .. .. ... ... 180,361,000

Note: These figures represent the most recent figures available for federal research and development grants, but do not include grants in the humanities and in other areas.

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