Congress Probes Charges of UC Contract Fraud

A team of congressional investigators opened an inquiry this week into charges that the University of California has defrauded the federal government for more than a decade on research contracts at six of its nine campuses across the state.

The allegations were first raised in a sealed federal lawsuit, filed in U.S. District Court in Sacramento, charging that the university routinely violated federal rules by billing graduate student tuition to research contracts in human health, space science, chemical engineering and many other fields.

The suit, a copy of which was obtained by The Times from congressional sources, asserts that UC provides free tuition to attract top graduate students, particularly foreign nationals, then uses the federal contracts to cover the tuition costs.

At the same time the university tells federal agencies that the tuition payments are a form of direct compensation for research work by students, it tells the Internal Revenue Service that the tuition payments are a form of student aid and are not taxable income, according to the suit.

The suit charges that the university has made an estimated $100 million in illegal tuition billings to federal contracts over the last decade. The university has failed to disclose its practices to the government, even though UC knew that it was violating federal policies, the suit alleges.

The suit, which has not been previously disclosed, was filed in 1996.

UC Vice President Ellen Switkes said that the university was not aware of the congressional investigation or the federal lawsuit but is confident that UC and its nine campuses are complying with the law and would never knowingly carry out unlawful policies.

The Justice Department and the Department of Health and Human Services, which administers the university’s federal contracts, are both reviewing the lawsuit.

The lawsuit was filed under the False Claims Act, which provides whistle-blowers the opportunity to sue on behalf of the federal government and to share in any monetary recovery.

The Times agreed not to name the plaintiff, whose identity is not known to the university. Yorba Linda attorney Phillip Benson, who filed the case, declined to comment.

A team from the General Accounting Office, Congress’ investigative arm, arrived in California this week to begin an investigation requested by Rep. Thomas J. Bliley (R-Va.), chairman of the House Commerce Committee.

In a letter earlier this month asking for the investigation, Bliley charged that UC used federal money to pay for the educational costs of foreign nationals who “would never qualify for federally funded student aid.”

“This committee is deeply concerned that HHS may lack appropriate oversight to safeguard against hundreds of millions of dollars being diverted by some colleges and universities as a form of student aid,” Bliley wrote.

The Bliley letter asked the GAO to examine university practices around the nation. His committee already has been told that Case Western Reserve University in Cleveland and Harvard University report student tuition to the IRS as taxable income.

If UC reported the tuition payments at issue as taxable income, it would have to pay millions of dollars in Social Security taxes on the amount. But Switkes said that the university does not consider the tuition provided to students as taxable compensation because “the student has no constructive receipt of that money.”

According to documents provided to The Times, six of the nine UC campuses are engaged in the allegedly improper billings: Irvine, Riverside, San Diego, Santa Barbara, Berkeley and Santa Cruz. The three campuses that apparently do not engage in the practice include UCLA, according to the documents.

Under UC policies, the six campuses bill at least parts of both out-of-state student tuition and in-state student fees to the federal contracts. The nonresident tuition for UC’s nonprofessional graduate schools averages about $13,500 a year, while in-state fees are about $4,500.

According to the suit, the federal government reimburses about $9,000 a year more for foreign students who perform research than for state residents, even though they do the same work.

“A nonresident alien working toward a PhD and hired by UC as a postgraduate researcher often earns 73% more in total compensation than a U.S. citizen with a doctoral degree hired at the same position,” the suit alleges.

The suit contends that the university is violating federal rules laid out in a regulation known as OMB Circular A-21. The suit cites four tests that show the students do not qualify for the tuition payments, principally because they do not qualify as direct employees and the tuition does not qualify as reasonable compensation for work performed.

UC has fought graduate students who have sought to form unions.

“We don’t consider graduate students employees,” said UC spokesman Rick Malaspina. “They do teaching and research as part of their educational program. We have had a long-standing issue with grad students who want to unionize, because they do research.”