Stanford University and Government Overhead Payments Included in government research grants to universities are indirect cost payments designed to

Stanford University and Government Overhead Payments

Included in government research grants to universities are indirect cost payments designed to compensate for the researchers’ use of the schools’ facilities.

Stanford University received approximately $240 million in federal research funds annually. About $75 million went to actual research, while Stanford billed the federal government $85 million, or 20 percent of its operating budget, for its overhead.34 The rest of the research funds went toward employee benefits. An audit of Stanford’s research program in 1990 by U.S. Navy accountant Paul Biddle revealed that the school billed the government $3,000 for a cedar-lined closet in president Donald Kennedy’s home (Hoover House), $2,000 for flowers, $2,500 for refurbishing a grand piano, $7,000 for bed sheets and table linens, $4,000 for a reception for trustees following Kennedy’s 1987 wedding, and $184,000 for depreciation for a seventy-two-foot yacht as part of the indirect costs for federally funded research.35

In response to the audit, Stanford withdrew requests for reimbursement totaling $1.35 million as unallowable and inappropriate costs. Stanford’s federal funds were cut by $18 million per year.36

Kennedy issued the following statements as the funding crisis evolved:

December 18, 1990: What was intended as government policy to build the capacity of universities through reimbursement of indirect costs leads to payments that are all too easily misunderstood.

Therefore, we will be reexamining our policies in an effort to avoid any confusion that might result.

At the same time, it is important to recognize that the items currently questioned, taken together, have an insignificant impact on Stanford’s indirect-cost rate. . . . Moreover, Stanford routinely charges the government less than our full indirect costs precisely to allow for errors and disallowances. —From a university statement

January 14, 1991: We certainly ought to prune anything that isn’t allowable—there isn’t any question about that. But we’re extending that examination to things that, although we believe are perfectly allowable, don’t strike people as reasonable.

I don’t care whether it’s flowers, or dinners and receptions, or whether it’s washing the table linen after it’s been used, or buying an antique here or there, or refinishing a piano when its finish gets crappy, or repairing a closet and refinishing it—all those are investments in a university facility that serves a whole array of functions.  —From an interview with the Stanford Daily

January 23, 1991: Because acute public attention on these items threatens to overshadow the more important and fundamental issue of the support of federally sponsored research, Stanford is voluntarily withdrawing all general administration costs for operation of Hoover House claimed for the fiscal years since 1981. For those same years, we are also voluntarily withdrawing all such costs claimed for the operations of two other university-owned facilities.   —From a university statement

February 19, 1991: I am troubled by costs that are perfectly appropriate as university expenditures and lawful under the government rules but I believe ought not be charged to the taxpayer. I should have been more alert to this policy issue, and I should have insisted on more intensive review of these transactions.  —From remarks to alumni

March 23, 1991: Our obligation is not to do all the law permits, but to do what is right. Technical legality is not the guiding principle. Even in matters as arcane as government cost accounting, we must figure out what is appropriate and act accordingly. Over the years, we have not hesitated to reject numerous lawful and attractive business proposals, gifts, and even federal grants because they came with conditions we thought would be inappropriate for Stanford. Yet, with respect to indirect-cost recovery, we pursued what was permissible under the rules, without applying our customary standard of what is proper. . . .

The expenses for Hoover House—antique furniture, flowers, cedar closets—should have been excluded, and they weren’t. That the amounts involved were relatively small is fortunate, but it doesn’t excuse us. In our testimony before the subcommittee I did deal with this issue, but I obviously wasn’t clear enough. I explained that we were removing Hoover House and some similar accounts from the cost pools that drew indirect-cost recovery because they plainly included inappropriate items. What came out in the papers was that Stanford removed the costs because it was forced to, not because it was wrong. . . . That is not so. To repeat, the allocation of these expenses to indirect-cost pools is inappropriate, regardless of its propriety under the law.  —From remarks to alumni37

By July 1991, Kennedy announced his resignation, effective August 1992, stating, “It is very difficult . . . for a person identified with a problem to be a spokesman for its solution.”38 Gerhard Casper, who was hired as Stanford’s new president, said, “I just want this to remain one of the great universities in the world. I ask that we question what we are doing every day.” Kennedy remains at Stanford, teaching biology.39

Stanford’s donations declined that year; 1999 was the first time it saw an uptick in its donations since the time of this government overhead issue.40

Ultimately, Stanford settled with the federal government for $1.3 million, a small percentage of the $185 million of alleged overcharges that appeared in Biddle’s report. The federal government also concluded that there was no fraud by Stanford. Biddle filed suit, seeking recovery of the statutory whistle-blower fee of 10 percent for finding the submitted costs that the government ultimately recovered from Stanford. His suit was dismissed.

Discussion Questions

1. Did Kennedy’s ethics evolve during the crisis? Contrast his March 23, 1991, ethical posture with his December 18, 1990, assessment.

2.  Is legal behavior always ethical behavior?

3. Do Casper’s remarks reflect an ethical formula for Stanford’s operations?

Answer: ll‘fes Kennedy’s ethics evolve during the crisis. At the beginning he was denying that there wasany in ethical issues going on. He thought that everything he was doing was correct. But…

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