The Cold War and Stanford's Expanding Research Enterprise

Understanding the controversies surrounding Stanford's IDC accounting in the 1990s requires an examination of how research universities, and Stanford in particular, developed after World War II to meet Cold War demands for defense research. Prior to World War II, the federal government made fragmented investments in academic research, primarily for agricultural and defense purposes. After World War II, American engineer Vannevar Bush, in his article “Science: The Endless Frontier,” attempted to convince the American public that the federal government should create a central agency to fund investments in basic research or the discovery of general knowledge without practical goals.Footnote ⁵ He argued that such research would result in technological advances, economic prosperity, and international superiority.Footnote ⁶ Until 1950, approval for the National Science Foundation (NSF) was mired in debate about whether funding decisions should be made democratically or through peer review. The peer review process prevailed, establishing a tacit social contract in which the government allocated funds, trusting a peer review process to disburse grants to researchers, with the expectation that funded research would yield scientific discoveries to strengthen the economy and national defense.Footnote ⁷

Under this system, the Department of Defense became the primary supporter of academic science in the 1950s, particularly after the Soviet Union launched Sputnik in 1957 and the United States clamored to gain technological and defense superiority in the Cold War.Footnote ⁸ Federal funding for university science increased nearly 180 percent between 1958 and 1964, doubling the proportion of defense expenditures in the gross national product. Growth continued into the late 1960s, reaching new funding peaks, even though the rate of growth was slower than the years immediately following Sputnik.Footnote ⁹

Though many universities benefited from access to federal defense contracts and basic research grants, few were able to harness those funds to expand research programs and infrastructure like Stanford. Science and technology historian Stuart W. Leslie wrote that Stanford was “a benchwarmer in World War II … [but] used postwar defense contracts to propel itself from a respected regional university into a science and engineering all-star.”Footnote ¹⁰ Stanford attracted private funding to expand the faculty, who were then able to attain substantial federal grants and contracts. Accordingly, by 1966, Stanford had received the third highest total of NSF funds among all universities, surpassed only by MIT and the University of Michigan.Footnote ¹¹ By 1983, Stanford held $32 million in Department of Defense contracts, representing 23 percent of all federal contracts.Footnote ¹² Stanford's expedient growth in defense research helped it become “the exemplar of the Cold War university.”Footnote ¹³

With the end of the Cold War, federal spending priorities shifted, and universities like Stanford no longer had access to the defense largesse they had enjoyed during the 1960s. As the Cold War concluded, so did the “golden age” of federal support for academic science—defense efforts during the Cold War had been so successful that:

According to science policy scholars David H. Guston and Kenneth Keniston, the social contract for academic science deteriorated in the wake of the Cold War because it was not renewed in light of changing public priorities. Public trust in academic science waned and a new research economy emerged that was no longer supported by wide consensus in the public value of scientific research. In the new research economy, funding for academic science was no longer available at the levels with which research universities had become accustomed.Footnote ¹⁵ At the end of the Cold War, the US economy contracted and legislators became concerned about budget deficits.Footnote ¹⁶ The 1991–92 recession resulted in steep cutbacks in defense funding and job losses in defense-related sectors.Footnote ¹⁷ Legislators sought to contain budget deficits in this economic climate, and research spending became a “tempting target for budget cutters, waste watchers, and anyone with an underfunded program.”Footnote ¹⁸ In particular, the availability of ancillary funds that helped research universities grow their research infrastructure declined throughout the 1970s. In 1964, the federal government funded nearly 75 percent of university research expenditures, but that proportion fell to 60 percent by the end of the 1970s. As a result, many universities struggled to fund the costly research operations that had ballooned during the previous decades, including Stanford, which faced budget deficits.Footnote ¹⁹ As Stanford confronted a relative paucity of federal funds to cover the direct costs of conducting research, the rate by which the institution recouped overhead expenditures from the federal government ballooned to compensate.

Evolving Indirect Cost Regulations

Rules governing reimbursement of IDCs that research universities incurred developed alongside the post-Sputnik expansion of academic science funding and allowed Stanford to increase revenue from IDC reimbursements in subsequent decades when they experienced a decline in federal funding for science. In 1958, the federal Office of Management and Budget (OMB) issued Circular A-21, “Cost Principles for Educational Institutions,” to provide cross-agency guidance and clarity to the reimbursement of direct and indirect research expenditures. Prior to Circular A-21, each granting agency determined their own reimbursement policies and accounting expectations. Circular A-21 defined what expenses were allowable as direct and indirect costs and how universities should calculate and document them.Footnote ²⁰

This cost-sharing model differed from total recovery policies that allowed private sector contractors to recoup their direct and indirect expenses in full, as well as a more generous IDC recovery rate (50 percent) for universities up until the end of World War II. Because university-based research was conceived as a partnership that benefited both the government and universities, higher education was to supply infrastructure and administrative funding to support sponsored research. The first reimbursements of IDC rates were a mere 8 percent of total direct research expenditures. Eventually, as the quantity and complexity of sponsored research increased, university leaders convinced Congress that such levels of cost sharing were subsidizing government work with tuition revenue or philanthropy. The IDC rate cap was elevated to 20 percent in 1964 before Congress, in 1965, allowed institutions to negotiate their own IDC recovery rates with federal agencies based upon actual research expenditures. Institutions documented those expenses and negotiated customized rates with their funding agency (the federal agency supplying the university with the most grant dollars), and these expenses were then verified through external audit.Footnote ²¹ Rates could be predetermined for a number of years or fixed rates could be negotiated with carry-forward, meaning that “any differences between the estimated costs used to establish the fixed rate and actual costs during the period are carried forward to a subsequent period as an adjustment.”Footnote ²² Negotiations with funding agencies served to maintain the principle of cost sharing, though less substantially than the previous decade. Institutions were expected to contribute a nontrivial amount by either not claiming certain overhead expenses or agreeing to lower recovery rates.

In the 1980s, IDC policies evolved in several key areas that opened doors for universities to increase recovery. First, Congress lifted the cost-sharing requirement for sponsored research, trusting that other regulations would appropriately restrain IDC rate inflation.Footnote ²³ This change meant that universities no longer needed to document the extent to which they contributed to federally funded research or the eligible IDCs they had voluntarily excluded. Second, the 1982 revision of Circular A-21 allowed institutions to claim interest on financed research facilities as an allowable IDC, whereas previous regulations only allowed for the depreciation and usage costs of such facilities. This regulatory shift opened the door for institutions to make substantial physical plant investments with the assurance that IDC reimbursements could fund a substantial portion of their debt service for new facilities. The Department of Health and Human Services identified the allowance of facilities interest as a significant contributor toward increased IDC recovery rates. Finally, the 1982 revisions allowed universities to determine recovery rates through statistical sampling of expenses, particularly for the library and utilities. This change reduced the effort required to document the legitimacy of a recovery rate for each cost pool.Footnote ²⁴

“Hell on Wheels”

In 1988, Biddle moved from the Defense Contract Audit Agency (DCAA) to Stanford as its ONR regional representative after the previous representative, Robin Simpson, was promoted to director of the ONR office in Monterey, California.Footnote ³⁸ Tensions quickly escalated between Biddle and the Stanford Controller's Office, marking a stark departure from the collegial relationship Stanford had enjoyed with Simpson. Biddle arrived with a mission to find waste in Stanford's IDCs. He described himself to the Peninsula Times Tribune as “hell on wheels” and a zealot for uncovering government waste. He said, “I am independent and I have a sense of calling. … I am the starch in the shorts, the pebbles in the shoes.”Footnote ³⁹ The newspaper also reported that Biddle hoped to “be a sort of grand inquisitor for accounting abuses at universities across the country” once he finished with Stanford.Footnote ⁴⁰ Though Biddle's mission was largely self-initiated, his approach embodied the shift from Cold War expansion to deficit sensitivity and the contraction of federal investments characteristic of this period.

In that spirit, after he arrived at Stanford, Biddle began making accusations that overhead rates were too generous and unsupported with proper documentation, testing the patience of his supervisors at the ONR in Monterey. In his testimony to the congressional Subcommittee on Oversight and Investigations, he said that his supervisors, Jack Ducey and Robin Simpson, told him in February 1989, “If you think they're such damned bad overhead rates, why don't you detail why they are so bad. So, I just pulled one out, the library study was the thickest folder, and chose that to initiate the documented critiquing of the development of overhead components.”Footnote ⁴¹

Biddle's capricious selection and scrutiny of the library study, performed in 1981 to statistically estimate costs indirectly supporting sponsored research, became a major point of conflict between Biddle and the Controller's Office. Biddle consistently expressed vague concerns with the study's methodology, which had been used to support previous years’ negotiated rates without contest. However, he waited sixteen months to provide a detailed critique to the Controller's Office, thus delaying a new study of 1988 library usage and forcing Stanford to request using the outdated 1981 data, which Biddle denied.Footnote ⁴² In October 1989, Fred Bentley of Stanford's Sponsored Projects Office, and Sweet met with Thomas Dolan, the ONR Director of University Business Affairs to discuss their doubts about Biddle. In addition to concerns regarding Biddle's undefined apprehensions with the 1981 library study, they discussed Biddle's tendencies to work directly with faculty rather than through the Controller's Office, that no final vouchers had been signed to reimburse IDCs since Biddle arrived, and that he was meddling in the DCAA audit process.Footnote ⁴³ Biddle also frustrated Sweet with last-minute requests for documents, some dating back twenty-five years, and made substantial budget requests for additional employees, new phones and computers, and better facilities.Footnote ⁴⁴

Frustrations with Biddle's manner grew to the point that Sweet began bypassing him and communicating directly with Simpson, which only strengthened Biddle's resolve to uncover IDC abuses. On May 11, 1990, Sweet sent Simpson a handwritten note, marked “Off the Record” to follow up on their personal conversation, during which Simpson agreed to force Biddle to retract a memo that accused Stanford of submitting reimbursement vouchers in excess of their allowance. Sweet also complained that she had only received a memo on the process for conducting the library study, but no details as to why the Stanford study was insufficient, adding that she hoped Simpson would allow the extended use of the old study until the matter could be resolved. Finally, Sweet wrote:

Sweet's wishes to return to the smooth working relationship Stanford enjoyed with Simpson would become the basis for Biddle's suspicion that IDC rates under Simpson were biased. To Biddle, cooperation with the contractor was nearly inseparable from leniency.

In August 1990, Biddle wrote to Simpson, copying Sweet, to complain that Sweet was meddling in the DCAA audit, Simpson was too accommodating to the Stanford Controller's Office during his tenure at the ONR, and that Simpson was undermining his work: “I hope this letter provides opportunity for you to deliberate, discuss and document why or whether you intend to undercut this office by confidences with Stanford entered into by you or others apart, and without awareness of ONRRR-Stanford.”Footnote ⁴⁶ He also accused Simpson's office of being cozy with Stanford and claimed that Stanford employees had made off-the-record comments of “compromised negotiation” and “special interests accommodated.”Footnote ⁴⁷

Sweet responded to Biddle's letter, writing that it was unprecedented for her to have to ask the ONR to intervene in a contracting officer's duties, and she rejected notions of coziness and the ONR's compromised independence, and took personal offense at being mentioned alongside “such distortion and mischaracterization of the facts.” She also responded to a portion of Biddle's letter that mentioned he would follow his superior's orders and submit “memos to file” to record disagreements. Sweet accessed these memos through the ONR's Legal Office and wrote:

Their escalating correspondence, which called each other's integrity into question, left little hope that Stanford could normalize their relationship with the ONR under existing reporting structures.

Biddle met with Frank Riddle, Sweet's supervisor, on August 15, 1990, to share his concerns. Riddle wrote:

Biddle also mentioned that he had received several whistle-blower reports of IDC recovery fraud and said he was suspicious that “superiors are blocking him from doing his job,” again asserting coziness between Stanford and the ONR. That same day, Biddle met with Kennedy, repeating his concerns that Sweet was “stonewalling” him and that Stanford should be providing broader access to documents than he was receiving. In notes he sent to Rosse and Robert Byer, Vice Provost for Research, Kennedy wrote:

Kennedy also suggested that Riddle be designated as Biddle's new contact person, instead of Sweet, which seemed to please Biddle. At the close of their conversation, Kennedy reported that Biddle claimed Stanford had over-recovered somewhere between $200 and $400 million in IDCs since 1982. Kennedy assured him of his “continued interest.”Footnote ⁵¹

Breaking News

Prolonged tensions between Biddle and Stanford, and between Biddle and his superior at the ONR, set the stage for Biddle to vent his frustrations to an external audience. Much to Sweet's dismay, Biddle befriended John Madey, an electrical engineering professor who had left Stanford after the university audited his lab because he took advantage of policy loopholes to maximize the portion of his grants available for direct costs.Footnote ⁵² Biddle conferred with Madey about his suspicions concerning IDC recovery fraud, and Madey connected him with Michigan congressman John Dingell, who, as chair of the Subcommittee on Oversight and Investigations for the Energy and Commerce Committee, had a reputation for cracking down on government waste.Footnote ⁵³ Dingell proved to be a receptive audience for Biddle's allegations.

In late August 1990, Stanford officials became aware that San Jose Mercury News reporter Jeff Gottlieb had filed a Freedom of Information Act (FOIA) request for documents showing that Biddle had communicated his concerns to Dingell.Footnote ⁵⁴ When Stanford received the FOIA documents, they discovered Biddle had relayed allegations of fraud to Dingell's office. On August 20, Kennedy received a letter from Dingell notifying Stanford that an investigation was beginning and requesting access to documents dating back to 1983.Footnote ⁵⁵ In the course of a few weeks, Stanford officials braced themselves as their IDC rate troubles transitioned from internal squabbles and conflict with a rogue contracting officer to a national story that would play out in the press and in Congress.Footnote ⁵⁶

Among the documents sent to Dingell was a March 6, 1990 letter that Biddle wrote, but never sent, to Dolan accusing Stanford of abusing the system, distorting facts, and embarrassing the government. In the letter, he accused Stanford of “leveraging upon their personal access to ONR … to affect the scope and content of DCAA fieldwork”Footnote ⁵⁷ Also, the letter claimed that anonymous sources within Stanford believed that some of Stanford's IDC recovery claims were fraudulent. The letter took particular issue with the extent to which IDC recovery rates relied upon MOUs between Stanford and the ONR. Biddle alleged that the number of MOUs was excessive and allowed Stanford to over-recover indirect expenses.Footnote ⁵⁸

Though Stanford officials were familiar with Biddle's claims, they had not anticipated that he would share them publicly or attract congressional attention. Larry Horton, Stanford's Associate Vice President for Public Affairs, led efforts to arrange for the story to break in the media. On August 27, Horton's office prepared an internal document weighing the benefits of issuing a press release to preempt Gottlieb's story in the Mercury News. Among the reasons to act preemptively, the document listed, “We know all the facts, and have answers to even the toughest questions,” “Pull the rug from under SJ Mercury / Gottlieb,” and “Helps contain the negative publicity and fallout that will inevitably be produced by release of this information [emphasis in the original].”Footnote ⁵⁹ Yet the document acknowledged that a reason not to act preemptively was that Stanford may not know all the facts. Additionally, the document listed strategies for managing Biddle:

Confident that Stanford could answer the tough questions and contain Biddle, Kennedy released a preemptive press release on September 12 that explained Biddle's unsubstantiated allegations of over-recovery and Stanford's internal audit to test those claims. The statement minimized the potential severity of the controversy:

When Gottlieb published his story in the Mercury News a few days later, he wrote, “Rosse, who is second in command, downplayed the situation. ‘We don't regard it as an enormous crisis.’”Footnote ⁶²

In addition to the press release, Kennedy made several attempts to portray the investigation as normative to internal audiences. Kennedy sent a letter to trustees and addressed the faculty senate, reiterating that Biddle's accusations were unfounded and the Dingell investigation not of serious concern. He explained to the faculty that their public protests of high IDC rates were partially to blame for the scrutiny, which likely did not endear them to his cause. Additionally, he said, “For auditors to question costs and for contractors to respond is also normal stuff, and at this moment we know of nothing to lead us to believe that we are dealing with anything other than normal stuff.”Footnote ⁶³ To the trustees, he wrote that Stanford had no information to suggest that they over-recovered $200 million and that merely following federal guidelines sometimes looks salacious to the press. As an example, he wrote, “Some recovery of costs associated with providing staff health and recreation facilities is allowed. In your morning newspaper, this becomes ‘tennis courts for faculty.’ So we need to be prepared for some bad press.”Footnote ⁶⁴ Though he recognized the reality of sensationalized headlines, he believed that he could “minimize the damage.”Footnote ⁶⁵ These statements attempted to assure campus constituencies that allegations were blown out of proportion and shouldn't cause great consternation.

Kennedy's activism to discredit Biddle at the ONR and lobby friends in Congress intimated that he was more concerned with the potential consequences of the controversy than his press releases and speeches would otherwise indicate. Stanford officials leveraged their contacts to gain support at the ONR, the DCAA, and in Congress. Riddle relayed Stanford's concerns directly to Simpson, writing that Biddle's “accusations are coming from a person who neither participated in or appears to understand the development of the MOUs at Stanford.”Footnote ⁶⁶ He went on to assert that Biddle's behavior had so damaged the working relationship between Stanford and the ONR that he could no longer participate in “a fair and equitable negotiation.”Footnote ⁶⁷ Riddle took a similar approach when he called Joseph Riden, the branch manager of the DCAA. Summarizing their phone call in a memo, Riddle confirmed that Riden found Stanford officials to be cooperative with government audits. Riddle also appealed for some discretion in their working relationship going forward. “We will no doubt continue to have our differences of opinion and differences over needed documentation levels, but we can have those disagreements without ‘trial by press release.’”Footnote ⁶⁸ Riddle also emphasized that Riden had no reason to believe that MOUs could be rescinded retroactively in order to influence Stanford's IDC recovery rates for years still awaiting audit.

Stanford officials also made preparations for the scrutiny of Dingell's investigation. Kennedy and Horton drove to San Jose on August 28 to meet with Rep. Don Edwards (D-CA), a Stanford alum, to build support for Stanford's position in Congress.Footnote ⁶⁹ Kennedy also initiated conversations with Stuart Eizenstat, an attorney from Powell, Goldstein, Frazer & Murphy in Washington, DC, who had represented the Association of American Universities in IDC matters. In a letter to Kennedy summarizing their conversation, Eizenstat wrote:

Both the meeting with Representative Edwards and the engagement of Eizenstat's firm suggest that Stanford officials did not approach the investigation as “normal stuff” and actually believed that vindication would not come without outside assistance.

When Biddle's relationship with both Stanford and his ONR superior became untenable, he made his concerns public and instigated congressional investigation and media attention. As a result, Stanford prepared a public relations strategy to project confidence in the institution's accounting records and to pledge calm cooperation with government inquiries, even as university officials primed themselves to weather a great deal of negative press and cultivated contacts with access to Dingell's subcommittee. These strategies to emphasize the integrity of their IDC practices and discredit Biddle would not serve them well, as the investigation uncovered valid accounting errors and Kennedy's staff was summoned to Washington.

A Seventy-Two-Foot Problem Called Victoria

As the General Accounting Office (GAO) investigation commenced in September 1990, both the findings and continued sparring with Biddle kept Stanford officials in turmoil. In December, the GAO investigators learned that Stanford had charged $184,286 in depreciation for their seventy-two-foot yacht, the Victoria, to an IDC pool. Horton initially denied that Stanford charged the yacht to the government, but eventually admitted that the charges were a “mistake, an honest human error” and pledged to repay the government.Footnote ⁷¹ Aside from the yacht, the IDC pools also contained a number of other lavish items, most in the administrative pool that covered a portion of expenses for Herbert Hoover House, the historic home of President Hoover, which was Kennedy's residence and a campus event space that Stanford maintained as a historical site with period decor and furnishings. Items for Hoover House included $6,000 cedar closets, $2,000 for fresh flowers every month, $7,000 for extra-large bed sheets, Voltaire chairs at $1,500 each, and over $45,000 for a Lake Tahoe retreat.Footnote ⁷² The cost pools also contained expenses for a reception for Kennedy and his new wife, hosted by the Board of Trustees. Unlike the yacht, Stanford did not initially offer to repay the government for those expenses, claiming that they were allowable in the cost pools under Circular A-21 and negotiated MOUs.Footnote ⁷³

While the news stories of improper expenses raged on, Biddle and Sweet continued to clash on campus. Biddle was angry that the Controller's Office was becoming less responsive to his requests, which Sweet attributed to the demands of the GAO investigation. Biddle said that the “explanation of pressures on staff time does ring a bit hollow.”Footnote ⁷⁴ He continued:

He dared Sweet to again contact his superiors to have his words retracted. She responded, disputing the accusations of untimely responses and flatly denying she had asked Biddle's superiors to retract his letter, which, of course, she had when she contacted Simpson the previous May.Footnote ⁷⁶ Additionally, Riddle responded to Biddle to confront the tone of his correspondence:

Riddle's plea did not tame Biddle's tactics. In December, Biddle refused to approve IDC reimbursements, unilaterally claiming that the MOU's were no longer valid in the eyes of the ONR and that he could reduce Stanford's current IDC recovery rate, perhaps by as much as 20 percentage points.Footnote ⁷⁸ Turning his attention to Kennedy, Biddle wrote a nine-page letter detailing many complaints and a renewed pledge to be tough on Stanford. He claimed that Stanford was sending false information to the press and that campus press releases were riddled with misinformation:

Biddle notified Kennedy that he would be a tougher representative of taxpayers’ interest, writing:

Biddle's cantankerous rhetoric, which stemmed from his personal aspirations to reduce Stanford's IDC rate rather than an official ONR mandate, only served to diminish his credibility with Stanford officials, who came to view him as a lone zealot rather than a contracting officer with legitimate concerns deserving legitimate responses. Stanford's relationship with Biddle had devolved beyond repair, as he refused to acknowledge the validity of Stanford's preexisting agreements with the ONR.

Interpersonal conflicts with Biddle influenced Stanford officials’ preparation for the Dingell hearing. Because Biddle refused to honor the MOUs or sign IDC reimbursement vouchers, Kennedy, Riddle, Sweet, and Horton felt as though Stanford was a victim, particularly since their accounting practices had been perfectly acceptable to Biddle's predecessor. From their perspective, a rogue ONR agent on a mission to find faults in Stanford's cost pools created a public relations nightmare, exhausted the institution's audit and accounting departments, and threatened to unilaterally make deep cuts to its IDC recovery potential. This defensiveness was apparent to others as Kennedy readied for the hearing. Marshall Smith, the Dean of Stanford's School of Education, met with several contacts in Washington in January 1991, leading up to the hearing. He reported that Kennedy was not well received when he had similar meetings. According to Smith, Sen. Edward Kennedy's (D-MA) chief education aide said that Donald Kennedy was overly defensive and that attempts to justify luxurious expenditures would not serve Stanford well.Footnote ⁸¹ The warning did not cause Stanford officials to reconsider their defensive approach, which ultimately would not succeed in weathering the continued barrage of sensational headlines and a congressional subcommittee with little patience for complaints about onerous government inquiries into wasted taxpayer dollars.

In the Hot Seat

On March 13, 1991, Dingell's subcommittee heard testimony from officials of both the ONR and Stanford, asking how both organizations allowed the mismanagement of overhead costs to persist. Dingell's opening statement framed the subcommittee's inquiry with a disclaimer:

He went on to explain the nature of IDCs and the particular problems at Stanford, lauding Biddle's “lonely battle for months with his own intransigent Navy bureaucracy” and lambasting Stanford for luxurious expenditures, a lack of proper financial controls, and attempts to manipulate charges to “circumvent Government regulations.”Footnote ⁸³ Dingell's statement focused the hearing squarely on IDC issues and explicitly avoided discussion regarding the value or costs of the research directly funded with federal dollars.

Milton J. Socolar, the special assistant to the comptroller general for the GAO, testified first. He shared the results of the GAO inquiry conducted at the subcommittee's request, testifying that Stanford had a particularly aggressive strategy for recouping IDCs, and that MOUs were unsupported with proper data, signed without government review, and used to recover more costs than typically allowed.Footnote ⁸⁴ Yet when Rear Admiral William C. Miller testified on behalf of the ONR, he said that Biddle's claims that Stanford over-recovered $200 million were unsubstantiated by the inspector general's investigation, though some degree of over-recovery was probable since audits were not closed on fiscal years 1981–89.Footnote ⁸⁵ The subcommittee scrutinized Miller, with Simpson and Biddle sitting at his side, inquiring how MOUs could be signed without proper review. Simpson, in particular, was aggressively questioned for forcing Biddle to retract his letter and for otherwise frustrating his efforts to confront Stanford's IDC practices.Footnote ⁸⁶ The unanimous opinion of the bipartisan subcommittee was that Biddle's strong-willed and assertive stewardship of taxpayer dollars was praiseworthy and that Simpson had neglected Biddle's concerns.Footnote ⁸⁷ By the time Kennedy, Riddle, and Sweet were sworn in, they had been sharply criticized by each member of the subcommittee, the GAO, and the ONR. Their strategy to vindicate Stanford, and academic research on the whole, would prove more difficult than anticipated.

In his opening sentences, Kennedy hedged responsibility for over-recovery, stating that Stanford's accounting issues stemmed, in part, “from Government rules that may no longer match the reality of public expectation,” but also from some deficiencies in Stanford's procedures.Footnote ⁸⁸ But before addressing those problems, Kennedy took the opportunity to lecture the subcommittee on the history and importance of academic research overall and at Stanford in particular. He recounted the grand success of federal investments in academic science following World War II, arguing that similar investments would be required to maintain the country's “unquestioned preeminence in basic scientific research and higher education.”Footnote ⁸⁹ Then, as if the very notion of IDC recovery was at stake, he testified that, “universities could simply not afford to do the research the government wants done” without IDC recovery.Footnote ⁹⁰ He explained, in meticulous detail, how IDCs are calculated, claimed, and recovered, emphasizing that full cost recovery was an entitlement under current rules. He further asserted that, even though a total cost recovery model was allowed, Stanford actually shared in the costs of conducting research because certain government grants do not reimburse overhead. “Stanford voluntarily forgoes many items of costs through waivers and agreements with the government,” he claimed. While Kennedy's statement was accurate, averring that Stanford was actually exercising generosity to the government in its IDC recovery practices was an insensitive tactic to alleviate concerns over the Victoria and other luxury items that captivated the subcommittee's attention.

In regard to specific IDC allegations, Kennedy explained that “in the course of logging in nearly three million transactions that go through 17,000 accounts in our system each year, we have also found we made some mistakes.”Footnote ⁹¹ Here, he admitted the depreciation on the Victoria and other charges for athletic equipment were mistakes and had been redressed. But he defended other luxury expenses as allowable under government rules. “These expenditures,” he argued, “were evaluated individually for their appropriateness as university expenditures, but not separately evaluated … for their appropriateness as government reimbursable expenditures. Our working assumption has been that such items found to be appropriate university expenditures would also be appropriate for government cost accounting purposes.”Footnote ⁹² Kennedy then emphasized that such expenses were legal, continually repeating the phrase, “technically allowable.”Footnote ⁹³ William T. Keevan, Stanford's consultant from Arthur Andersen & Company, also testified that expenses such as linens and flowers met the criteria for allowability because the university determined them to be both prudent and necessary for university operations.Footnote ⁹⁴ But Kennedy reported that Stanford withdrew those expenses as a result of the GAO investigation, recognizing that the allowability of expenditures was in direct tension with their effect on Stanford's credibility: “We withdrew those costs, even though they were technically allowable because I wasn't comfortable with them, because I don't think they contributed to public credibility and because I felt we'd be better off without them, so we took them out.”Footnote ⁹⁵ While Kennedy's words were likely intended to display a spirit of cooperation and a recognition that some expenses were difficult to defend, the skeptical subcommittee viewed the withdrawn expenses as too little too late. The expenses had only been withdrawn after the investigation had begun and seemingly to ward off further negative press.

Additionally, Kennedy's emphasis on the investigation's burden on his staff counteracted his attempts to appear responsive and cooperative before the subcommittee. In response to the subcommittee's request for details and intimations that Stanford was unresponsive to government requests, Kennedy complained of the excessive effort required for Stanford to respond to government requests, investigations, and audits. In addition to their normal staff, Kennedy said they added “half a dozen temporaries, and they are, at my discretion, spending full time responding to DCAA requests for audits. We have 3,700 DCAA requests. We are behind on responding to them. No one in that shop … is doing anything but servicing DCAA and GAO auditors, nothing.”Footnote ⁹⁶

Dingell was unsympathetic to their complaints, particularly when Riddle and Sweet were unable to provide specific details about items in the cost pool, how much money was paid back to the government, and when it was returned:

Some of the questions that subcommittee members levied were of such granular nature that Stanford officials would not have had satisfactory answers at the ready, such as the exact dates of returned funds or the number of cars in the IDC pool. But such questions were exactly the point for subcommittee members who seemed determined to make the hearing an embarrassment for Stanford. In his 2017 memoir, Kennedy wrote, “Up against determined congressional legislators, one doesn't really have a chance to say ‘that's an unfair accusation’—even when the chairman is deliberately misrepresenting reality.”Footnote ⁹⁸ While Stanford officials were surely prepared for such treatment, their insistence on the allowability of scrutinized expenses did not convince the subcommittee that Stanford was ready and willing to change.

When subcommittee members suggested that Stanford needed a more sophisticated accounting system for IDC expenditures and more rigorous controls to ensure that unallowable costs were excluded, Kennedy initially conceded that improvements could be made to increase accuracy. But Riddle later defended the system and claimed that it was normal for other similar research universities.Footnote ⁹⁹ Keevan, whom Stanford had contracted to help improve its accounting functions, told the subcommittee that a more advanced system, such as those typically adopted by defense contracting firms, would be costly to Stanford and would be passed on to the government as legitimate IDCs.Footnote ¹⁰⁰ This caveat did not sit well with committee members, who interpreted it as dismissive and indicative of Stanford's resolve to continue business as usual.Footnote ¹⁰¹

Kennedy's pedantic and comprehensive exposition of the purpose of academic science and IDC recovery, imbued with Cold War–era assumptions of expanded support for basic research, was misaligned with Dingell's statement that the hearing aimed to illuminate inappropriate IDC expenditures, not challenge IDC recovery policies. The refrain of “technically allowable” to reinforce that Stanford acted within the boundaries of the rules was not received as a sincere apology or resolution to eliminate such expenses in the future, nor did it pacify public outrage toward the substance of those expenditures. Finally, insinuations that government inquiries were a burden and claims that a more exacting accounting system would increase the cost passed on to the government did not bolster Stanford's esteem among the subcommittee. Conversely, it contributed to perceptions that Stanford was elite, entitled, and tone-deaf to public concerns, a theme that echoed in the media for several months.

On the Front Page

Though reporters in the Bay Area covered Stanford's IDC practices frequently in 1990 and early 1991, with occasional stories surfacing in national outlets, national press coverage escalated after the Dingell hearing, most notably with a prime-time television story on ABC's 20/20 on March 15, 1991. Reporter Stone Phillips interviewed both Biddle and Kennedy, portraying Biddle as a tenacious and righteous defender of taxpayers’ interests and Kennedy as the president of an institution adorned in government-funded luxury. Biddle said the yacht charges were not an isolated mistake but an indicator of systemic problems. He also claimed that allocating expenses to the government was a black-and-white process: “You don't have entertainment and you don't have liquor [in the cost pools]. … The law says they're not allowable.”Footnote ¹⁰² The segment did not explain that Circular A-21 allowed universities to seek reimbursement for a negotiated portion of the total cost pool, including costs indirectly related to research along with costs unassociated with research. Such arrangements, which Stanford and the ONR codified in MOUs, simplified accounting so the university did not have to sort through millions of transactions individually.Footnote ¹⁰³ And while Kennedy gave an extensive interview to Phillips in January, his perspective received very little screen time when the program aired.Footnote ¹⁰⁴ In the aired excerpts, Kennedy explained, as he did to Congress, that many of the expenses receiving publicity were allowed, including expenses for Hoover House, because events in the house partially supported research.Footnote ¹⁰⁵

However, attempts to clarify the narratives and nuance accusations with technical explanations of Circular A-21 and IDC mechanisms proved insufficient to overcome the negative press and public appetite for scandal. Media coverage of the Stanford investigation continued to stress Stanford's extravagance and recalcitrance, exploiting national dissatisfaction with higher education. Newspaper headlines berated Stanford for the stark luxury of expenses charged to the government, tapping into public attitudes toward higher education. Such headlines included, “Stanford's Image: It's One of a Greedy School that Sees the Government as a Reservoir to Be Tapped,” “Turning Labs into Cedar Chest,” “U.S. Funds Used for Wedding,” “Sleaze Knows No Class,” and “Top Scientist Pays for University High Life.”Footnote ¹⁰⁶ An editorial cartoon pictured Kennedy and his wife (a Stanford attorney) in bed, with the caption: “A Federally Subsidized Stanford Research Facility.”Footnote ¹⁰⁷

Kennedy believed those stories to be unfair and mischaracterizations of how IDC recovery actually operated. In his opinion, “The triangular trade among congressional investigators, a ‘whistleblower’ with a personal agenda, and the selectively fed media had a powerful impact on public opinion and frightened federal agencies into some hasty and unfortunate decisions.”Footnote ¹⁰⁸ Kennedy's grievances garnered little sympathy from the public or the faculty, who eventually convinced him to resign. In Kennedy's book Academic Duty, he discussed the IDC controversy at length—admitting that the lesson of that difficult period was “that universities have to earn public trust and not simply count on it because they are doing things for society.”Footnote ¹⁰⁹ He acknowledged that universities operated in a new environment that was less willing to give them the benefit of the doubt.

Kennedy was correct that declining public trust fostered a new and challenging environment for universities—anti-elite and anti-university discourses surged in the late 1980s and early 1990s. Despite long-running concerns about K-12 schooling in America, higher education was largely shielded from public disillusionment until the 1980s, when “quite unexpectedly, there erupted a whole succession of government reports, best-selling books, and articles critical of the nation's colleges and universities.”Footnote ¹¹⁰ Escalating tuition had drawn negative attention for years, but new reports claimed that college graduates were functionally illiterate, tenure caused faculty to become unproductive and uninterested in teaching, and leftist ideologies had taken over the curriculum in ways that subverted traditional American values.Footnote ¹¹¹ In addition to these more general critiques of higher education, academic science suffered its own crisis in public support. By the early 1990s, the public believed “that academic scientists [had] become arrogant and self-indulgent, rejecting legitimate oversight of the use of public money, claiming ‘entitlement’ to ever-escalating funding, and [were] unwilling to share responsibility for dealing with the growing deficits, trade imbalances, and other economic ills of their country.”Footnote ¹¹² As education historian Christopher J. Lucas notes, higher education could no longer enjoy the benefit of the doubt in the public sphere.Footnote ¹¹³ Robert Rosenzweig, president of the Association of American Universities during the early 1990s, contextualized Stanford's IDC troubles in this stream of public hostility.Footnote ¹¹⁴ Likewise, former Stanford professor Stuart Rojstaczer's reflections on his academic career at Stanford in the post-golden age of the research university connects a rising public outrage with more austere approaches to university research funding.Footnote ¹¹⁵

Dingell's strategy to aggressively confront greed and waste played to this skepticism toward elite institutions. In the subcommittee hearing, he employed rhetoric to emphasize Stanford's elitism. Describing Stanford's IDC pools, Dingell chided, “Charges were made for refinishing an antique grand piano, the purchase of antiques, and over $1,000 a month for laundry charges at a French laundry. I'm Polish and I have my laundry done at a Chinese laundry.”Footnote ¹¹⁶ Such pithy criticisms served to align the subcommittee with the average American and concerns that leaders of elite institutions were using government funds to live in luxury. Stanford's responses to this criticism, in which they voluntarily withdrew embarrassing expenditures while steadfastly insisting upon their technical allowability, did not assuage Dingell's concerns but rather reinforced that Stanford's priorities were out of sync with public expectations.

Overall, the investigation, hearing, and press coverage had a tangible impact on Stanford's IDC recovery potential. The ONR inspector general determined that there was no evidence to support Biddle's claim that Stanford over-recovered $200 million,Footnote ¹¹⁷ but the DCAA determined that the MOUs were not sufficiently supported with evidence and recommended that Stanford's IDC rate be decreased to 52 percent.Footnote ¹¹⁸ In April, the ONR cut the rate from 78 percent to 55.5 percent without entering into the normal negotiation process, causing an estimated $28 million reduction in revenue.Footnote ¹¹⁹ In response to these changing IDC recovery conditions and continued negative press, Stanford faculty began calling for Kennedy's resignation. In a faculty senate meeting, political science professor John Manley asked Kennedy to step down, but Kennedy refused. Then a May 1991 poll revealed that almost half of the respondents were unhappy with Kennedy's leadership and one-third believed he should resign. In July 1991, Kennedy announced his resignation, effective July 1992, admitting that his association with the IDC controversy would frustrate efforts to solve those problems.Footnote ¹²⁰ According to the Los Angeles Times, “Kennedy said he accepted responsibility for the spending problems, but not the blame, which he attributed to faulty accounting.”Footnote ¹²¹ Riddle resigned several months later, in September 1991, citing similar reasons.Footnote ¹²² Stanford's many attempts to counter sensationalized media coverage were ultimately unsuccessful in swaying public opinion, with national ramifications for academic science.

Beyond Stanford

Kennedy's resignation did not curtail federal scrutiny of IDC practices, either at Stanford or at other private research institutions with high overhead recovery rates. Investigations and audits continued at Stanford until 1994, when Stanford settled with the Navy for $1.2 million and the ONR ended investigations into the university's IDC pools.Footnote ¹²³ Because of the Dingell hearing and investigation, other research universities tightened their IDC controls to avoid similar scrutiny and publicity. Some institutions, including Harvard, MIT, and Cal Tech, opted to voluntarily refund the government for items in their cost pools as a precautionary measure.Footnote ¹²⁴ Dingell's subcommittee requested that the ONR audit all forty-one universities for which it was the responsible agency, and the Department of Health and Human Services followed suit with audits at twenty research universities. The subcommittee held a second hearing on May 9, 1991, with government auditors, which revealed luxurious and embarrassing IDCs at several universities, including Dartmouth, Duke, MIT, Johns Hopkins, and Cornell.Footnote ¹²⁵

In response to the hearings, Rep. Henry Waxman (D-CA) initiated legislation to cap IDC rates, though the OMB issued new rules to preempt the bill, placing a 26 percent cap on reimbursement for administrative costs. However, Congress continued to attempt to cut federal expenditures on IDCs in order to fund other legislation or reduce the federal budget deficit throughout the 1990s.Footnote ¹²⁶ In 1991, the OMB issued a revision to Circular A-21 that directly accounted for the issues raised during the Stanford investigation. In addition to the cap on administrative reimbursements, “alcoholic beverages; entertainment; alumni activities; housing and personal expenses of officers; defense and prosecution of criminal and civil proceedings, claims, appeals, and patent infringements; and trustees’ travel” all became unallowable IDC expenses.Footnote ¹²⁷ Universities could continue to claim their debt-service expenses, but only for buildings that were used exclusively for federal research. In 1993, another update to Circular A-21 required institutions to explain the accounting procedures and controls governing their IDC practices. Kennedy commented, “The accounting rules established as a result of that controversial episode more closely resemble product-procurement regulations in the Department of Defense than the procedures that have traditionally been applied to basic research in not-for-profit institutions.”Footnote ¹²⁸ By 2005, the Council on Governmental Relations estimated that the cap on administrative overhead was, on average, causing research universities to under-recover $5 million in indirect expenses and spend about $2 million on compliance processes.Footnote ¹²⁹ Cumulatively, these changes and enduring scrutiny of IDC recovery practices affected total cost recovery practices associated with federally sponsored university research.