The New UC Mega Scandal? The U.S. Senate Investigates the UC Budget

In 2007, David Kessler, the Dean of the UCSF Medical School was fired after he complained that the campuses had provided him with false and misleading information concerning the state of its budget. According to the documents sent by the UC to senate investigators Kessler did not understand that many of UC’s budget documents are crafted for particular audiences, and the only legally accountable budgetary figures are found in the audited annual statements (attachment B, page 5). In other words, UC admits that the budgetary figures it releases to its employees and the public are often at odds with its own financial statements.

At the heart of the dispute between Kessler and UCSF is the question of indirect funds for external grants and the use of endowment funds. Kessler contends that he was promised access to over $46 million in funds that he could use at his discretion, while the university argues that the dean did not understand the nature of endowments and grants. According to the official UC response to the federal investigators, while endowment money is usually dedicated to specific purposes, many different administrators have discretion over the actual use of the funds. Likewise, external grants often come with indirect funds that are sent to the Office of the President and then redistributed back to the local programs. According to the UC’s legal representation, indirect funds associated with external grants are stored in a Facilities and Administrative “cost pool,” and these funds may be “spent by the University in its discretion” (Attachment A, page 7). The translation of this statement is that the campus has great deal of flexibility in regards to how it uses the large sum of money gathered by the indirect costs of grants (a total of $1 billion in 2009).

The university claims that for each federal grant, it receives an additional 26% for indirect costs, and the real cost should be closer to 29-30% (page 8). Here is where a major accounting conflict ensues. I have been arguing with several UC faculty members about how indirect costs are distributed and accumulated, and I have argued the following: There is no way of knowing if grants individually or on the whole make or lose money. Since most grants give the same generalized percentage to administration, staff, utilities, and maintenance, it is impossible to track the flow of money pertaining to any particular grant. For instance, if my grant to develop a new drug pays $10,000 into general administration, how could anyone tell if I paid enough of many different administrators' salaries.

When you get into the actual details of a grant, you discover, like every other part of the university, that money from many different sources gets mixed together. For example, if I am a dean, I am being paid out of state funds, student fees, grant overhead, some endowment money, etc. This mixing of funds is precisely what the U.S. Senate is investigating in relation to federal NIH grants - the feds have told me that they cannot track the flow of money because it all gets sent to UCOP and then redistributed back to the campus. Also, a question that I was asked by a senate staffer was "how do you put the price on a grant using a particular facility; after all, UC does not appreciate its assets and lists each building based on its original value" (which is also a fiscal fiction). We would all like to believe that this system is rational, but it is not.

This same problem of accounting for grant money is also causing problems for the U.S. Senate’s investigation of the use of endowment funds. After Kessler made his original allegations, the UC embarked on three separate reviews of their accounting processes, and they found no malfesiance. However, UCSF has just signed on for another expensive audit with Pricewaterhouse Coopers, and this time, they promise to look at the actual financial statements regarding the grants and endowment funds. One of the issues in the Kessler case is the question of how much discretion a dean has in relation to an endowment gift. The UC’s lawyers argue that in the case of a grant given for cancer research, the dean may have tremendous latitude in deciding how the endowed funds are used, and the central argument of the administration is that most endowments give a fair amount of discretion to the administration (page 11). What is troubling is that the UC falsely testified to the
state senate that an external audit showed that the tracking of endowments and grants could be verified by the audited financial statements. It turns out, that the outside consultants never tried to match these different records, and they were never given the proper documentation to audit the UC’s financial statements.

To be continued.