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02/19/92

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Stanford faculty speak out on indirect costs

Some of the same faculty members who two years ago challenged Stanford's indirect cost rates as too high have now told the government that the rates federal auditors currently recommend are illogically low and will do irreparable harm to research and to the nation's intellectual leadership.

"I was one of those who spoke out two years ago about high and projected-to-be-high indirect cost rates," said William Nix, professor of materials science engineering. "I was concerned about our ability to compete. Now I'm very concerned about unrealistically low rates.

"If the rates I've heard proposed come into effect, it would damage, if not destroy, the partnership between the university and the federal government."

Nix is one of an ad hoc group of faculty researchers who have been expressing this opinion in personal conversations, letters to editors and, most vocally, in a heated session last month with representatives of the Office of Naval Research and the Defense Contract Audit Agency. They say:

  • The audit agency's allegation that Stanford's 1988 indirect cost rate should have been 37 per cent is illogical - "it doesn't pass the smell test," said one researcher. Such a rate is half that of other major private research universities and lower than 126 other institutions for 1988. The government originally awarded Stanford a rate of 73 per cent for that year.
  • The deadlock in negotiations about a rate for the current fiscal year has "put molasses in the process" for researchers seeking grants. Most harmed: graduate students with few resources to fall back on while awaiting funding.
  • There are long-term dangers to the nation in moves to sharply lower cost-recovery rates across the country. Such cuts would reduce federal spending in the short run but drive universities out of the business of doing research and training future researchers.
  • Both universities and government agencies are responsible for a research-support system gone awry. The best course would be to seek repairs that are fair to all, without tearing into the quality of research and teaching.

A group of senior faculty members met in mid-January with Michael Kuc, head of the Office of Naval Research special university team, and Joseph Riden, regional director for the Defense Contract Audit Agency.

Those present included Arthur Bienenstock, professor of applied physics; John Brauman and Michael Fayer, chemistry; Charles Kruger and William Reynolds, mechanical engineering; William Nix, materials science and engineering; Roger Noll, economics; Haresh Shah, civil engineering, and Irving Weissman, pathology. Robert Byer, dean of research, Patricia Devaney, associate dean of research, and Peter Van Etten, chief financial officer, also attended.

The faculty members were cautious about appearing to interfere in delicate university-government negotiations.

And they cautioned that they do not claim to speak for the entire faculty. Said one professor: "There is not and probably ought not to be a committee who speaks for all."

Instead, they called on other faculty to join them in speaking out about their concerns.

"I walked out of all of this concluding that the most valuable thing I could do is try to get my point of view across publicly," Bienenstock said. "Over the long haul, having fruitful, honest discussions of all the issues involved will improve the situation."

In their meeting with Kuc and Riden, the group was especially concerned about the audit agency's assertion that Stanford's 1988 indirect costs rate should have been 37 per cent. This compares with an average of 63 per cent for the nation's top 10 other private research universities during the same period. Indirect cost rates in private industry are reportedly well over 100 per cent.

When asked the basis of the 37 per cent figure, Riden and Kuc reportedly said it was based on firm principles of cost accounting.

"But you make assumptions in applying these principles," Reynolds replied.

Reynolds drew an analogy to designing a bridge: engineers use principles, like Newton's laws of physics, and make assumptions, but they also compare a new bridge design to existing bridges to test their assumptions against reality.

"If the analysis gives us a bridge that we know is just too thin, we go back over our assumptions," Reynolds said.

Compare Stanford with similar-sized research universities, he said, and the 37 per cent rate is insupportable.

The group's concern goes beyond Stanford. In a letter to Campus Report, Bienenstock, Nix and Shah cite actions at other universities as indications that "there may be a concerted federal effort underway to undermine and abandon the practice of fair cost recovery for federally-sponsored research."

In the short term, they said this would erode the infrastructure - universities will not be able to afford necessary buildings or services.

Robert Simoni, chair of biological sciences, pointed out that the impact is already evident in Stanford's budget-cutting process. Such services as chemical waste disposal, instead of coming from indirect costs, will now be charged directly to the specific research project's cost.

Over time, Bienenstock's letter predicts, both private and public universities will conclude they cannot afford to underwrite science and technology. That time may come soon.

"We now debate what types of research we can afford at Stanford." Byer said.

Shah told the federal representatives that as accountants they must look beyond the costs side of the ledger. He said they were forgetting the full value of the investment the government makes in research, and in training the next generation of scientists of engineers.

"Our product is not rockets off an assembly line," he said. "Our product is the cream of American minds."

"We are talking about the premiere institutions in this country. This is where the nation's leadership is built."

He warned that it takes generations to build good research and training programs, "but only a short time to tear them down."

Shah spoke of "a psychosis of fear" among young researchers. Already aware of reduced federal support and the difficulty of getting research grants, students are now faced with more uncertainties. Eventually he said, the best minds will turn away from research.

What is necessary for a fair solution to the impasse?

Speed is important, faculty members agreed. The Office of Naval Research must begin to negotiate forward contracts so researchers can satisfy granting agencies and obtain the funds to support projects and students, they said.

For the long term, several favored a negotiated rate that would remain stable over several years. Reynolds called this an "infrastructure support contribution" - an amount that the university could spend as it saw fit. Direct costs would be audited, but the flat rate would avoid the need for expensive, time-consuming paperwork to account for what are now called indirect costs. The university would allocate resources based on the rate rather than raising the rate to recover costs.

Such a rate would assume that both the university and the government were subsidizing research - in Nix's words, "making an investment in intellectual capital."

"There is some optimum indirect cost recovery - less than full recovery, but enough to allow the university to provide essential support for the research operation," Simoni said. "I don't know what that number is, but it can be figured out."

"I would like to see us have a national change," Reynolds said. "I would like to see the university community lead in this direction, though Stanford may not be in the position to be the leader."

The ad hoc faculty committee has met over several months to discuss the indirect costs situation with administrators, chiefly Byer and Van Etten. Other participants have included Simoni; Donald Dunn, engineering/economic systems; Gerald Lieberman, statistics; and James Gibbons, dean of the School of Engineering.

The group's suggestions have been included in the design and execution of some of the cost studies required by the government.

"This is a real change, one should point out," Simoni said.

He was one of several professors to point to a new willingness in the administration to listen to faculty opinion. Simoni said he hoped more faculty members would become involved with the indirect costs committee.

"It's long overdue," he said.

What are the chances for a quick resolution of Stanford's indirect cost rate problem?

Privately, some of the faculty members were pessimistic.

"This is a debate where being right doesn't mean you'll win," said one professor. "In the rush to reform, the consequences could cause irreparable damage."

The Navy and the audit agency won't make measured decisions, said another, "until they get out of the shadow of the Dingell Committee."

Reynolds is more optimistic.

"I think there is a mood in government to recognize that this is a systemic problem, not a Stanford problem," he said. "In the long term, we will find a solution. I hope Stanford doesn't get hurt in the process."

And Bienenstock believes that Rep. John Dingell has a rare opportunity for statesmanship in this situation, along the lines of the task then-Sen. Harry Truman took on during World War II, to strengthen industry yet prevent war profiteering.

"We - the universities and DCAA - are both culpable," Bienenstock said. "DCAA didn't do its job (by neglecting to audit university books); we diverged in our view of what was proper (to be charged as overhead). We both should have been dealing with this over a 10-year period.

"Is it better for the nation that we point fingers at each other and try to destroy each other? Or should we be sitting down to find some fair way to work it out?

"If Congressman Dingell is a Truman-like character, he has the power to bring that about," Bienenstock said.

-jb/facultytoDCAA-

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