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Provost Condoleezza Rice presents new policy on budgets of "restricted" funds

A new budgeting policy designed to build the university's general fund by tapping into a portion of each school's restricted funds will be announced by Provost Condoleezza Rice on Thursday, Oct. 12, at the first Faculty Senate meeting of the academic year.

More than $3.5 million is expected to be transferred in 1995-96 to cover maintenance costs associated with restricted funds -- gifts that are designated for specific schools or programs.

Unlike federal grants and contracts, restricted funds rarely include reimbursement for costs such as custodial services. On Jan. 1, 1996, this will change under the new policy.

University officials began contacting donors and faculty across campus about the policy change last week to pave the way for the provost's announcement.

Anticipating questions regarding the details of the new policy, the Office of the President and Provost has issued a two-page document explaining the Board of Trustees' rationale for approving the changes plus a series of questions and answers to help clarify the policy. Both documents were mailed electronically on Tuesday, Oct. 10, to faculty, department administrators and staff whose work might be affected by the changes.

"The assumption in the past was that infrastructure costs could be covered by general funds (primarily tuition and unrestricted gifts), while restricted gifts could be used for 'extra' programs and projects," the question and answer document states. "But activities supported by restricted funds have come to represent a significant percentage of the University's total activity. They add costs of operation which should not be borne entirely by tuition or other general income sources. They are no longer just 'extra.' . . . If we are to maintain long-term financial stability, restricted funds must contribute a proportionate share of the cost of the University's infrastructure."

The new policy on restricted and designated funds -- which make up roughly 25 percent of the university's consolidated budget -- was approved in principle by the Stanford Board of Trustees last June, but the details were not worked out until the summer.

"I think that it was an important step in being more realistic about how we treat these funds and to support the infrastructure costs of the university," said John Freidenrich, chair of the Board of Trustees.

Some restricted funds were exempted from the infrastructure charge as a result of discussions and informal talks over the course of the summer between the provost's office, school deans, the chairs of all medical school departments and representatives of the Office of Development.

"One of the items I was specifically concerned about was [not] charging the infrastructure tax on student support and tuition," said Bob Simoni, professor of biological sciences. "After a great deal of discussion, the provost agreed that they should not be included, so those funds are now exempted. I think that's enormously important."

Still, Simoni remains ambivalent about the new charges. "To be honest, I have sort of mixed feelings," he said. "I think under ideal circumstances, gift funds or restricted funds are best left in the hands of the faculty so they have the money to do research and teaching. That's what serves the university mission best. So, from that point of view, to tax a portion of it is not a great idea.

"On the other hand, in order to do our research, we need stuff from the university. We need infrastructure, we need facilities, we need utilities, we need everything. What this policy does, is it now brings in a far broader pool of contributors to those costs than ever before and I think that will work to the institutional good."

As restricted gifts and funds are spent, six cents on each dollar will be used to offset "infrastructure costs" associated with the programs. Such infrastructure costs will not be assessed on gifts that directly replace general fund expenditures -- such as funds restricted to academic-year tenure-line faculty salaries, or undergraduate and graduate student financial aid. Gifts to student organizations and gifts for building projects also will be exempt from the charge.

In addition to the new charge on restricted fund expenditures, there are two other elements of the new policy. A separate utilities charge will be assessed in each school's budget, a portion of which may -- at the dean's discretion -- be drawn from restricted funds. The university also will stop paying schools interest earned on most fund balances from restricted gifts. Any interest earned while funds are waiting to be spent will be applied to general university expenses. Funds in hand before Jan. 1, however, will receive interest until Aug. 31, 1996, after which any remaining balance will not be credited with interest.

Extensive notification of donors through letters, e-mail, telephone conversations and personal contact will take place long before the policy goes into effect in January, said John Ford, vice president for development.

Ford said his office was consulted about the policy changes from the start. "Certainly, from the intensive discussions of the last year that I've participated in, I feel donor interests have been considered thoughtfully, carefully and thoroughly," he said. News of the infrastructure charge isn't expected to send shock waves through the donor community, Ford said.

"I think the majority of Stanford donors will accept what we are proposing to do. Some will need more education. Some will need some downright convincing. And some may never agree with us and we will respect their wishes [regarding existing funds] and make accommodations," he said.

New funds will be handled on a case-by-case basis but it is "highly likely" that gifts will be turned down from donors who will not permit the policies to be applied, Ford said. "If we start making exemptions right and left, we won't accomplish what we have to accomplish. So I think we have to be firm about this."

The new policy puts restricted fund programs more on par with government-sponsored research projects in which "indirect costs" are charged to reimburse universities for overhead expenses. In the latter case, indirect costs are negotiated with the federal government.

Although the rationale behind both processes is similar, the tax, the utilities charge and the elimination of interest payments to the schools, when lumped together, will recover a much smaller percentage of research- and teaching-related costs recovered from federally sponsored projects.

"I think this gets us a little bit closer to the situation that exists with government grants and contracts. But it obviously doesn't cover all of the overhead," said Tim Warner, director of university budgets.

"This policy is a small step in the right direction," added Tony Siegman, professor of electrical engineering, who has been suggesting for many years that the university should have a uniform indirect cost policy for all of its funds and activities. "Indirect costs are just as real and just as large for things the university funds with its own money as things that are funded by outside sponsors," he said.

Stanford's indirect cost rate, which is set at 61 percent, assesses several components including provisions for general and departmental administration, student services support, library resources, sponsored projects support and allowance for depreciation. "We are not charging to restricted funds those kinds of costs," Warner said. "Those are essentially being borne by the central university budget."

Warner estimates the university's general fund will gain at least $3.5 million in 1995-96 from the tax and the utilities charge alone. A clearer financial picture will have to wait until a thorough analysis of fund balances at different schools is completed, he said.

The infrastructure charge should not create unequal effects, said Geoff Cox, vice provost for institutional planning and financial affairs. An across-the-board policy was adopted with the hope that "no school is adversely affected related to other schools," he said. SR


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