The Washington Connection

Federal agencies supply nearly 40 percent of Stanford's budget. How will the University cope now that the era of big government is over?

July/August 1997

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The Washington Connection

Photo: Fred Mertz

An alien space ship blows up the White House and destroys the nation's capital. That scene from last year's box-office hit Independence Day is typical of Hollywood's penchant for blockbuster pyrotechnics. But what made the moment unusual was that so many moviegoers cheered wildly at the sight of Washington in flames.

The audience response was a reflection of public skepticism and even hostility to government. The signs of discontent were everywhere. On the radio, vitriolic talk-show hosts helped to transform "government" into a dirty word. At the polls in 1994, voters put Republicans in charge of Congress after a GOP campaign to cut federal spending and balance the budget. Their plan called for eliminating $1.5 trillion in red ink by the year 2002.

For higher education, the details were especially unnerving. There was talk of shuttering two Cabinet agencies--Education and Energy--whose support for universities is critical, and of slashing nonmilitary research funding by 35 percent. Two prominent deficit hawks in the Senate proposed a 60 percent cut in basic Pentagon research, most of which is done on campuses. Even student aid was singled out as wasteful.

All this was enough to make Stanford administrators cringe. "I was incredibly worried," recalls Provost Condoleezza Rice, whose high-level stints in Washington make her no stranger to the alchemy of policy and politics. Rice knew that research funding would at least be on the table at budget talks; after all, the federal commitment to all sorts of programs was under review. "I wasn't surprised that the question was there," she says. "I just wasn't sure what the answer was going to be."

University budget chief Timothy Warner, MBA '77, spent much of 1995 trying to imagine how he would balance Stanford's books if support from Washington dropped off. "The federal government is extremely important to Stanford's financial operations," says Warner, a soft-spoken former journalist with an inclination toward understatement. "It's a critical part of what we do."

No wonder Rice and Warner were so worried: Stanford got some $566 million from Washington this year. Put another way, that's about $1.6 million in federal support each day. With an annual operating budget of $1.4 billion, the University relies on Washington to supply nearly 40 percent.

Eventually, the frenzy to slash funding for higher education subsided. Democrats dulled the budget axes by portraying proposed GOP cuts as mean-spirited. Republicans, partly in response to lobbying by universities, began to see the value of backing basic research. As for student aid, politicians actually found themselves in a bidding war to see which party could spend more.

Still, the outlook for federal funding to campuses, while better than it was two years ago, remains bleak. President Clinton's budget this year increases student aid but takes a big chunk out of all-important science funding--the money for basic research that in past years has provided a launchpad for the biotech and computer industries. Science research grows a paltry 1.8 percent in 1998 under his plan. Accounting for inflation, science funding under his plan actually is projected to fall 14 to 18 percent by 2002. And that comes on top of a 9 percent drop from 1990 to 1997, according to an inflation- adjusted analysis by the American Association for the Advancement of Science. This erosion, it's worth noting, started when Democrats controlled Congress and has continued under Republicans.

The budget scare puts a basic reality about Stanford in sharp relief. Like other universities, Stanford is entwined in a relationship with the federal government that has grown increasingly complicated over the last 50 years. How the Washington connection plays out over the next decade will have a huge impact on the bottom line at Stanford and other major research universities.

While the future remains murky, the trend line is clear. That's why officials at Stanford are moving to wean the University from its reliance on government research grants. In April, President Gerhard Casper announced that Stanford had raised $108 million from private industry--part of a $200 million drive to fund at least 300 new fellowships in the sciences and engineering. The goal of the campaign, Casper said, is "to make our graduate students less dependent on the vagaries of federal funding."

The story of how Washington's corridors of power became so important to the halls of academe is also the tale of Stanford's metamorphosis from a regional to an international university.

Like other universities, Stanford received virtually no research support from Washington in the early part of this century. World War II changed all that. Thanks in part to an influx of European Jewish scientists fleeing Hitler, U.S. campuses became repositories of expertise on nuclear physics and quantum mechanics. Science policymakers quickly saw the potential for harnessing the nation's universities as engines of wartime research. Indeed, while European countries segregated research from teaching by building separate research centers, America exploited the powerful synergism of placing teaching and research in the same institutions.

Frederick Terman, Stanford's dean of engineering in the post-war era, seized on this new arrangement between universities and Washington. (see sidebar) "Terman recognized the opportunities there," says Stanford Dean of Research Charles Kruger, a slim, bearded man who is an expert in plasma dynamics. Stanford, recalls Kruger, "was mostly an undergraduate college that was not particularly recognized outside California or the West. It is now one of the greatest universities in the world by anyone's reckoning. That happened with a period of growth of faculty and a period of growth of graduate students and a period of growth in federal research funding."

That sort of explosive government-fueled growth also has occurred at a handful of other research universities. The evidence: The federal government today gives $30 billion annually to colleges and universities, according to the U.S. Department of Education.

What's amazing is that Stanford this year received almost 2 percent of this $30 billion total. But that $566 million can sound deceptively large. Fully $205 million is earmarked for the Stanford Linear Accelerator Center, the two-mile-long, tennis-racket-shaped atom smasher in the foothills. Of the remainder, the breakdown is rather simple: $26 million for student aid, $335 million for research grants.

The research funding comes in the form of 2,400 separate grants. Most of the money goes directly to fund the technicians, test tubes and lasers that the scientists need in the lab. About $84 million of this total is billed as indirect costs, or overhead. Indirect costs are expenses such as utilities, libraries and administration that cannot be linked to a particular science project.

To Stanford ears, an "indirect cost" is not simply another bit of obscure accounting jargon. The memory of congressmen grilling Stanford officials over allegations that the University improperly billed flowers and antique furniture as indirect costs is still painful. The school's recovery of overhead expenses temporarily plummeted by $28 million a year, and the legal and accounting fees required to settle the matter have run to nearly $40 million. The fallout cost President Donald Kennedy his job.

In October 1994, the federal Office of Naval Research (ONR) announced that its exhaustive investigation had turned up no evidence of "fraud, misrepresentation or other wrongdoing" by Stanford. For the most part, the University had simply billed according to the government's arcane and sometimes outdated rules. In the end, Stanford paid back a total of $3.5 million--nothing close to the allegations of $200 million or more in overcharges.

"I complained bitterly in a number of public settings that when the ONR concluded there was nothing wrong at Stanford, the press hardly carried it," says Cornelius Pings, the president of the Washington-based Association of American Universities, which tracks research issues. "Many newspapers didn't even touch it. But boy, when things were going the other way, we really took a beating."

The episode did lead to some accounting changes that have proven costly to the University. Under one seemingly small technical alteration in how graduate student tuition is paid, the government now supplies $10 million less per year than it used to. "That's a pretty big number," says Warner.

Larry Horton is responsible for smoothing out kinks in Stanford's relationship with Washington. The director of the University's government and community relations office, Horton, '62, MA '66, has a taste for good books, original art and fine cuisine.

It's Horton's job to keep an eye on every government issue that could possibly affect Stanford. The breadth is enormous: tax treatment of philanthropic gifts, Medicare reimbursement to hospitals, hazardous waste disposal regulations, earthquake reimbursement funding and animal protection legislation, to name a few.

The stakes are just as big. A decade ago, for example, Congress approved a bill that limited the amount of tax-free bonds private schools could use to finance capital projects. This provision alone, which Horton is now working to reverse, costs Stanford an estimated $5 million a year.

For the most part, Stanford's priorities are different from those of other universities. Because Stanford's federal research dollars ($335 million this year) dwarf its federal student aid dollars ($26 million this year), research is the most important thing on Horton's mind. Simply put, he lets other schools worry about stressing to legislators the importance of financial aid.

Unlike most of its peers, Stanford has no lobbying office in Washington. As a result, the University relies on interest groups-- and on Horton's travel schedule. "Stanford faces a particular challenge in that they are 3,000 miles away from the federal government," says Terry Hartle, vice president for government relations at the American Council on Education.

Horton tries to get to Washington once a month. He makes his itinerary from a computer Rolodex brimming with names of Stanford friends and alumni in strategic positions, from low-level staffers to Cabinet secretaries. According to Horton's lists, nine U.S. senators have some tie to Stanford. So do 14 representatives, including the chairman of the House science committee, F. James Sensenbrenner, '65.

In April 1995, within weeks of the GOP takeover of Congress, Horton and Rice hosted a reception in a stately second-floor room in the Senate wing of the Capitol Building. Several dozen alumni attended, including congressional staffers, a few executive branch officials and Montana Democratic Sen. Max Baucus, '64, JD '67.

The ostensible purpose was to celebrate the work of Stanford graduates on the Hill. It also provided an opportunity for Rice, a disarmingly engaging public speaker who has served on the staff of the Joint Chiefs of Staff and was Soviet adviser to President Bush, to get in a few talking points. As alums sipped wine and nibbled cheese, Rice spoke of Stanford's willingness to share in the budget pain. Rather than urge that someone else's budget be slashed, Rice emphasized only that universities need flexibility to implement whatever cuts are passed.

Over a recent lunch at Stanford's Faculty Club, Horton explained the philosophy behind this sort of positive message. "A cardinal rule in lobbying," he advises, is "never succumb to the temptation to tell lawmakers they should save your program by cutting something else."

Horton also believes that scientists themselves are often the best advocates in Washington. For examples, Horton needed to look no farther than a nearby Faculty Club table, where theoretical physicist Sidney Drell and chemistry professor Richard Zare were engaged in animated conversation. As deputy director of SLAC and a top arms-control expert, Drell--an opera buff like Horton--is a respected consultant to Washington policymakers and frequently called to testify before Congress. Zare has a more formal role in national policymaking. Last year, he was named chairman of the presidentially appointed the federal government. Zare says he is worried about whether federal funding for science will remain adequate in the coming years.

He should know. Zare's Stanford lab depends on $2 million in grants from the National Science Foundation, the National Institutes of Health, the Navy, the Air Force, the National Aeronautics and Space Administration and the Department of Energy. Without this sort of federal support, Zare probably would not have made the discovery last year of what he believes to be signs of life on Mars.

When Stanford scientists can't make it to Washington, they're eager for Washington to visit them. Four members of the House science committee, for example, dropped by campus in August 1995. Accompanied by nine staffers, the entourage visited SLAC, the Center for Integrated Systems and the Hansen physics labs.

"They had graduate and undergraduate students doing the briefings for us,"recalls Robert Walker, who was chairman of that committee at the time and now works at a Washington lobbying firm. "Their enthusiasm was infectious."

At the Hansen labs, committee members were shown a NASA- funded experiment known as Gravity Probe B. The 40-year project, which is budgeted at $560 million ($200 million of which is earmarked for research at Stanford), will test Einstein's theory of general relativity, a proposition that is useless to ordinary taxpayers. Yet, says Walker, "The program did itself a lot of good with the members who were part of that trip. Gravity Probe B is really fundamental research.

"What particularly impressed me was that they were providing a fundamental science basis for the economy of the area. As I talked to some of the executives of the companies up and down the Silicon Valley, nearly all of them referenced the work at Stanford as being important to the development of their companies."

Stanford lobbyists couldn't have said it better themselves.

How science was spared from huge budget cuts--at least for now--is a classic Washington story of rhetoric versus reality. It was easy to talk about slashing the budget. But actually doing it required painful choices that, members of Congress realized, could have a lasting negative impact. "As we began to talk around, we found that there was nobody opposed to science," recalls Pings, president of the AAU. Science cuts were simply a byproduct of budget-cutting, not an end in themselves.

So the higher education lobbyists developed a plan aimed at showing lawmakers they couldn't afford the consequences of slashing science funding. Basic research, the lobbyists said, was simply an investment in the future.

The symbolic breakthrough came in a 90-minute face-to-face meeting between House Speaker Newt Gingrich and MIT president Charles Vest in 1995. Vest presented Gingrich with two objects: an outmoded vacuum tube and a computer chip. The message was clear: Federal funding to universities had helped computer technology evolve from clunky vacuum tubes to sophisticated silicon chips. "Gingrich put those in his pocket and would carry them around, and he would use them for his speeches," says Hartle. "It would become a prop in his standard speech."

In the end, the lawmakers did a complete turnaround, deciding to heavily support basic science. And since this sort of research is what most affects Stanford's bottom line, University officials were delighted. It pleased them even more that for the first time in a decade, there was no proposal pending to reduce indirect costs.

Even more remarkable was the change in attitude toward student aid in 1996. At first, Republicans in Congress had vowed to cut aid by a third. But then they began worrying about being labeled cold-hearted and anti-education. "In about a four-day period, we had almost a food-fight in the halls of Congress to see which party could thrust more money on us in student aid," says Pings. "Republicans basically gave up almost all they had won earlier and gave us incredible increases in student aid." In the end, Congress agreed to add $1.3 billion to the student aid budget.

Then, in January of this year, President Clinton unveiled a plan to increase federal support for college education from $24 billion a year when he entered office to $58 billion by the year 2002 (not including federal support for research done at universities). His initiative offers a $1,500 tax credit for the first two years of college education or, alternatively, a $10,000 tax deduction for families.

But the good news for student aid is tempered by the prospect of big cuts in the research funding that is far more important to Stanford. For University officials, that means living with a sense of uncertainty--and some gloom. "At this point, you can't look out five years and make any kinds of projections," says Warner, Stanford's budget guru. "You can generally say that there is concern as the federal government looks to balance the budget." Rice argues that any cutbacks that do pass will clearly be felt on campus. "The cumulative effect of relatively small cuts--5 percent, or whatever, per year--could be quite great. One has to remember that it takes a long, long time to build up places like this. It could take no time at all to tear them down."

Already, reports of increasingly tight funding are filtering up from some campus researchers. Robert White, an emeritus professor of electrical engineering and materials science, was shocked by a recent conversation he had with a program manager at the Office of Naval Research. "I don't care how good your proposals are," the beleaguered program manager told White, explaining that he didn't know whether there was sufficient money to fund even approved grants much less new ones. "If you're looking for money," White sighs, "that's sort of disheartening."

That suggests the trimmed-down future is already here. And it explains why the University is scrambling to find new ways to reduce its reliance on Washington's generosity.


Jock Friedly, '90, is a reporter for The Hill, a newspaper in Washington, D.C.


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