(2 of 4)
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.