U.S. Cuts Funds to Stanford in Billing Dispute

Stanford University got the unpleasant news Thursday that its federal research support could drop about $23.1 million this year as a result of a government challenge to its billing practices.

Federal officials announced that the school’s reimbursement rate for so-called indirect costs of research will be only 55.5%, sharply below the 74% the Northern California campus received last year. The reimbursement pays for maintenance, utilities, libraries and administrative costs related to research. Stanford’s rate had been among the highest of any school in the nation.

The announcement follows government audits and a congressional investigation of alleged billings abuses at Stanford and other schools. As a result, it appears likely that the government will soon cut rates for other universities, officials said.

Stanford has been much criticized for charging the government in part for such items as a yacht and an antique commode in its president’s house. The school has withdrawn about $700,000 of those bills, while Harvard and Caltech each has withdrawn billings of about $500,000.

The announcement about Stanford’s rate was made Thursday in Washington in a press release by Rear Adm. William C. Miller, chief of naval research, whose agency oversees all federal research funds at Stanford. Miller was not available for comment, but other Navy sources said the decision came after tough negotiations with the school stalled.

In addition to setting the lower rate, the Navy office canceled the more than 100 special agreements it had with Stanford. Those so-called memoranda of understanding placed certain costs, such as those at the library, outside annual reviews. Stanford had many more such agreements than any other school in the country. In the absence of annual audits, Stanford may have overbilled the government as much as $200 million since 1980, federal investigators allege.

Stanford President Donald Kennedy and other high-ranking school officials said they still have the right to attempt to prove that the school deserves around 70% after costs for the 1991-92 school year are determined.

Each percentage point drop in the reimbursement rate would cost Stanford $1.25 million, according to the school. A 55.5% reimbursement rate means that for every dollar in pure research grants the school gets, it would receive an additional 55.5 cents for such indirect costs as utilities. Based on that formula, the university will receive $23.1 million less that it did from last year’s 74% reimbursement rate.

Kennedy said he regretted the cut, contending it would harm research efforts at the school if not reversed. “Knowledgeable observers inside and outside the university believe that the 55.5% . . . rate is far below that needed to recover Stanford’s real costs of conducting federally sponsored research,” Kennedy said in a prepared statement.

Studies challenging the government decision are expected to take at least a year. In the meantime, Stanford will announce some budget cuts next week to help the situation, and the university should be able to foot the other unreimbursed research costs for a year or so, officials said.

“The law is clear,” William Massy, Stanford’s chief financial officer, said in a telephone interview. “We are entitled to collect those real costs and we will collect them. We will be able to sustain the burden of proof.”

In the fiscal year ending last Aug. 31, Stanford received $260.25 million in federal research funds, including $84.37 million for the indirect costs of research. Overall, those funds count for about a third of the school’s operating budget, excluding its hospital, nuclear research laboratories and student-supported services, according to Massy.

U.S. Rep. John D. Dingell, (D-Mich.), chairman of the House Energy and Commerce Committee and its investigatory subcommittee that grilled Stanford officials on the billings last month, was not available for comment Thursday. But a Dingell aide in Washington described the lowered rate as “certainly a step in the right direction.”

Asked if other schools faced similar cuts, the aide replied: “I don’t think there is any doubt about that.” While embarrassing items like yachts and parties win headlines, the real big-ticket items under investigations are in less sensational areas, such as library and maintenance costs, he added.

Last year, the average indirect cost rate at the 10 private universities that garner the most federal research dollars was about 66%. But it is expected to drop this year.

Larry Horton, Stanford’s associate vice president for public affairs, was asked in a telephone interview if he thought Stanford was being punished by the Navy. “There’s been a serious set of embarrassments and now there are serious consequences,” he replied. “Rather than dwell on the past, we are going to be very constructive and work with the government and justify the costs.” Among other reforms, Stanford has brought in a new team of accountants.

As the spending controversy spread to other schools, the Bush Administration on Monday proposed tighter rules excluding entertainment, alcoholic beverages, club memberships, advertising, or housing for university officers from any research billings. Meanwhile, the U.S. Department of Health and Human Services, which in addition to the Navy oversees such spending, is starting audits of 13 universities.

Some Stanford professors welcomed the lower rate. They had complained that high rates hurt them in competition with other schools that charge less for indirect research costs.

“I’m in a much better competitive position now. I’ll be much closer to getting the funds for the actual research rather than the overhead,” explained William Spicer, an electrical engineering professor. But he said he is worried that the cut could badly hurt the university overall and result in less funding for maintaining buildings and laboratories.