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Lab Rats

As president of the UofA, John Schaefer began the university's push toward becoming a research powerhouse.
Bruce Reade

TUCSON -- First there was a Harvard, then came a "Harvard of the South," a "Harvard of the Midwest" and a "Harvard of the Plains."

Indeed, great statesmanship in expansionist America was often defined by how quickly the local hayseed college could, without widespread snickering, be deemed the "Harvard of Whatever Region You're In."

By the 1970s, the University of Arizona was probably the "Harvard of the Southwest," which wasn't saying too much. The UofA was a lower-echelon Category I research institution with a decent reputation and an above-average ability to acquire federal grant moneys in Washington.

By the late 1970s and early 1980s, some Arizonans wanted more from their state university.

So the university's president at the time, John Schaefer, began an extremely ambitious campaign. His goal: Expand the UofA into one of the top research institutions in America. His sales pitch to legislators and Arizonans: Together, they would build "The Harvard of the West."

Perhaps that goal was reached. Twenty years later, the UofA is now widely considered one of the top 15 public research universities in the country.

This is a particularly stunning achievement considering Arizona's increasingly abysmal record of supporting education.

But it came with a price. And the financial practices used to build this research powerhouse may have damaged the university's ability to educate students, attract and keep non-research professors, and cope with financial draughts like the one it presently faces.

New Times found:

• That millions in earmarked state allocations were routinely spent on projects other than those approved by state officials.

• That researchers and their federal grants were routinely overcharged or charged twice by university maintenance crews and other service providers. These extra revenues were then funneled through a maze of accounts to prop up over-budget construction projects and pet research projects such as the university's mirror lab and Mount Graham telescopes.

• That major construction projects were often based on unrealistically optimistic financial projections. Those projects routinely ran into financial trouble, with the shortfalls then covered by money earmarked for other purposes.

• That top researchers were sometimes lured to the university with incentive packages administrators had little hope of providing.

• That most researchers or faculty who complained about the university's spending practices were blackballed or fired soon after airing complaints.

• That University of Arizona ranked last among more than a dozen peer institutions in the amount of money returned to university coffers from patents, compared to the amount spent on research.

• That tens of millions of dollars that could have been spent on improving student services and education at the University of Arizona had to be diverted to prop up ill-conceived construction and research projects.

• That these past financial practices, while keeping alive this dream of a research powerhouse, are a key reason the University of Arizona has slipped among peer institutions in critical categories such as faculty salaries and student retention.

Past and current university officials deny any wrongdoing. They deny, too, that this rush for research gold damaged the university's ability to fulfill its other missions.

New Times obtained more than 2,000 university financial documents from current and past employees, as well as from court documents in university-related lawsuits. From those documents and more than two dozen interviews, a clear 15-year pattern of financial wizardry, problems and indiscretions takes shape.


Once John Schaefer conceived the Harvard of the West idea in the late 1970s, it was Gary Munsinger's job to make it happen.

Schaefer and Munsinger's largest obstacle, of course, was money. New research buildings alone would cost hundreds of millions of dollars. Operating those buildings over time would cost hundreds of millions more.

At the time, state law dictated that university research buildings could only be built using money the state already had.

It was a fiscally conservative, pay-as-you-go philosophy. Munsinger, the university's brilliant, politically cagey and often reviled financial officer who served under both Schaefer and President Henry Koffler, would need a line of credit from state legislators to make the dream possible.

"We had to get revenue bonding approved," Munsinger says. "That was critical to the whole deal."

The sales pitch went like this: The University of Arizona is poised to become a great research university. Great researchers are willing to come here. If they were here, these great researchers would enhance the reputation of the university, bring federal grant money and, later, patent money from the inventions they created. All these researchers would foster the construction of a massive private-research complex. High-tech businesses would locate in Arizona to feed off the university's creations and students.

Some of this ultimately came true.

But the university was cramped into tiny, outdated buildings. It needed laboratory space -- lots of it.

 

Build it and they will come.

Revenue bonding was pitched as a win-win for legislators. The politicians didn't have to justify pulling tens of millions of dollars from state coffers. They just had to give the university the ability to borrow money by issuing bonds.

This wouldn't cost the state, they were told, because the debt and maintenance of the buildings would be paid for by federal grants. Those grant dollars would come with all the federally funded researchers attracted by the thought of running a big, new high-tech lab.

For every dollar the federal government gives to researchers, about 50 cents would also be given to the university for the administrative and upkeep costs of lab space -- called "indirect costs." In effect, the theory was that indirect costs recovered from the federal government would be enough to pay the mortgage.

Any financial shortfalls, they claimed, would be more than covered by the massive infusion into Tucson of private research dollars drawn by the research complex. Munsinger, Schaefer and Koffler envisioned 100 blocks of high-tech industry sprouting out of the north end of the UofA campus.

At the time, one university financial officer referred to the plan as "Munsinger's wet dream."

The Silicone Desert never materialized.

Munsinger and other UofA officials spent several years lobbying legislators. Munsinger fought with several regents who believed he was overstepping his authority.

Nonetheless, research revenue bonding was approved in the early 1980s.

"All of a sudden, you didn't have to shake the cash out of the Legislature," he says. "It opened up access to an immense amount of cash."

It also opened up the university to an immense amount of debt.

All the lobbying had other effects. During the early 1980s, Arizona universities received significantly larger state allocations, adjusted for inflation, than they do now.

Many legislators bought into the Harvard of the West dream, Munsinger says. After receiving financing for projects, university administrators would bring legislators to Tucson, wine and dine them and show them the results of their "investments." It made legislators feel like part of the vision, he says.

In some cases, it didn't seem to matter if the project they were invited to see was not the project they had originally okayed.

"We told them what we wanted to do," he says, "and then later we'd show them what we had done. And that was very effective."

University of Arizona leaders also worked closely with Arizona State University officials to increase overall state funding for higher education. However, they did so by competing, Munsinger says, not cooperating.

"We would compete, but we knew that competing for money would help both of us," he says. "If we got $2 million, ASU could say, 'Hey what about us?'"

Over time, regents and legislators grew tired of the quid pro quo game. By the late 1980s, the universities were discouraged from lobbying, particularly for projects in similar disciplines. Munsinger says this diminished pressure on legislators to properly fund the universities. This, he says, is a key reason allocations to universities have dropped over time when adjusted for inflation.

"I think that's had a very corrosive effect on the amount of money going to higher education," he says.

While Munsinger was playing state politics, he and other top administrators were pooling money to attract top researchers.

Sometimes that money was yanked from salaries in other departments. Sometimes it was money already earmarked by legislators for other positions and needs.

University officials approached leading national experts in key disciplines -- particularly astronomy, physical sciences, biochemistry and medicine. These were areas in which the university was already strong. They were also areas where the federal government was spending liberally.

"We'd say: 'We've got all this money for you. And we're building this new building and the new equipment you need will be in this building. That, combined with our clear commitment to build a great research institution, seemed to be very attractive."

Schaefer and Munsinger also brought a new mindset to the university's administration. To succeed, they believed, the university needed to be agile and bold, more like a private corporation than a university. In this new culture, things like faculty committees became cumbersome relics. In time, top administrators took a father-knows-best attitude to the allocation of resources.

"The things we knew the university needed are the kind of things easily lost in procedure," Munsinger says. "Particularly with a university, where committees will talk for years, you've got to clear out some of that procedure to make things work."

Schaefer, Munsinger and other key administrators set into motion the financial and administrative machinery capable of building a great research institution in what would have appeared to be an impossible financial and administrative climate.

 

But New Times found critical holes in this grand scheme, holes that would, over time, cause damage to basic university programs and services, and could hamper the overall mission of the university for decades to come.

One key flaw, for example: There was often significant lag time between a building's completion and the arrival of those federal grants that were supposed to pay for that building. The university, during the late-1980s building boom, became increasingly inept at coming in on time and on budget for building design and construction. Filling those financial gaps, particularly during the recession of the early 1990s, demanded increasingly dangerous, and covert, financial gymnastics.

A trick devised by top construction and financial officials compounded the problem.

University officials would approach legislators and federal granting agencies saying they needed a new research building.

In a few cases, instead of completing the building as initially proposed, the university ultimately built a larger structure, leaving several floors uncompleted.

In the case of the university's Ag Lab and Life Sciences buildings, those extra floors were later finished with money pulled from other university funds, as well as revenue bonds earmarked for campus remodeling projects.

The bigger buildings gave the university's research complex room to grow.

But because of inflation and logistical difficulties, finishing this "shell space" was much more costly than it originally would have been.

As one ex-university financial officer described it: "For Arizonans, it was like buying a car without an engine. 'Oh, you wanted an engine? That will be a lot more money.'"

Arizona's taxpayers, in essence, ended up paying for parts of the same building twice.

Where were all the financial controls? Apparently, in this culture of stripping the university of cumbersome review processes, the university's facilities design and construction director, Michael Haggans, was freed from critical oversight. Instead of having to report cost overruns on individual buildings, as was past university policy, Haggans only had to report financial problems on the total construction budget.

During this time, documents show money flying from later projects to shore up problems in earlier projects. And in many cases, administrators and financial controllers above Haggans had no idea this was happening.

Haggans refused several New Times requests for interviews.

As cost overruns mounted, Munsinger's promised cavalry of corporate spin-offs never arrived. Recession hit. By 1991, the research powerhouse dream was in serious trouble.

Compounding the problem was legislators' increasing unwillingness to allocate money to the universities. From 1990 to 1995, university operational budgets were slashed.

For example, Vice President for Research Michael Cusanovich found himself trying to pay for 30 percent greater operational costs while absorbing a 25 percent cut in state appropriations.

"We were getting our clock cleaned by the Legislature," says Cusanovich, who ran the university's research office from 1988 to 1998. "We didn't and still don't have the money to operate effectively. We've had to cover that somehow."

Those cuts also hampered the university's ability to effectively manage and monitor grants and contracts, Cusanovich says. At the UofA, he says, staff members oversee four times more research project accounts than peers at other universities.

Through this time, top officials and their financial managers appeared to take on a new mindset regarding the use of university revenues:

The end always justifies the means.


Between 1985 and 1993, the University of Arizona, compared to peer institutions, went from the 50th percentile in long-term debt to the 90th percentile. From 1989 to 1993, new research buildings accounted for a $130 million increase in debt.

The building of the Mt. Graham telescope complex began. The agriculture laboratory building, now known as the Marley Building, was started in the mid 1980s, as were buildings known as Life Science North and Life Science South.

The university as a whole did see increased revenue from federal grants and investment income from endowments, which helped offset the new liabilities. Under Cusanovich, grants increased from $180 million to $330 million.

If the University of Arizona was a private business, where all revenues can be applied to any deficits, there would have been no ethical or legal problems maintaining solvency. The UofA always has enough cash coming from somewhere, be it endowments, state allocations, tuition or federal or private grants.

For a moment, imagine money as water and budgets as valleys. In business, numerous streams of revenue can trickle into one end of a large reservoir of cash, and that cash can be released from the other end in any number of new streams at the CEO's discretion.

 

This is not how a public university works.

While some moneys are allowed to be pooled in a large cash reservoir, many are not. State allocations mostly are earmarked for salaries. Revenue bonds are clearly earmarked for specific projects. While indirect cost recovery from grants can be pooled, the money must be spent on specific services such as maintenance of university lab space.

Donors to Native American programs expect their donations to be spent on Native American students. State legislators who approve the hiring of microbiologists expect that money to be spent on microbiologists. Federal legislators and administrators expect the money they've released for Alzheimer's research to be spent on Alzheimer's research.

Out of critical necessity, though, some university financial officers began increasingly treating all those separate pools of money as one big reservoir. This Harvard of the West could not be realized if accounts weren't raided to pay off construction bond debt and cover increased building maintenance costs, cost overruns, pet projects and gaps in state and federal grant funding.

If there wasn't enough money in all those separate pools, new revenue streams had to be created. To generate new revenues, university facilities' billing practices changed dramatically. Some researchers began finding their individual grant accounts being charged for services the university was mandated to perform, using indirect-cost dollars it receives.

Other university departments or state agencies found prices skyrocketing for university services. Sometimes, university research or facilities managers simply got charged twice for the same work, or charged for work that was never done.

The New Times obtained documents from more than a dozen sources confirming numerous examples of disingenuous, if not fraudulent, billing practices from 1986 to 2000.

But Munsinger and a later key financial officer, comptroller Bert Landau, both vehemently deny that fraud was ever knowingly committed to keep the university's mounting bills paid.

"Everything along the way was done with the proper oversights," Landau says. "The feds watch where their money is going, the Board (of Regents) watches where the money is going and Standard and Poor's and Moody's [are] always watching the health of any bonds. It would be very difficult to slip in under the kind of oversight that's out there."

Cusanovich also denies that money was ever handled improperly.

"It is a very complex process in a difficult environment," he says. "But anything we did had a legal foundation."

While the overall financial health of the university is clearly well monitored, documents obtained by New Times show Landau is overstating the quality of detailed oversight, particularly prior to 1991.

To some degree, he also overstates the latitude a university has in spending federal grants, state allocations and bond revenues.

"There's sort of a misconception out there with the public," Landau says. "We may have asked for money for a particular project, but once that money was in hand, we were allowed to use it any way we deemed necessary."

Landau's comment echoes a comment attributed to Haggans, the former director of Facilities Design and Construction, in a discussion with an architect concerned that the UofA was misusing a $4.4 million USDA grant for the Ag Lab building. The grant was awarded for an increase in lab space in the building, but instead was used to increase shell space.

"All the USDA is due is a name plate on the door," Haggans reportedly said to a project architect.


In January of 1989, William Feldman, director of the university's Boyce Thompson Arboretum near Superior, wrote a complaint letter to UofA's Planning Services department, a division under Haggans' control.

The arboretum's offices were being remodeled and Linda Taraldson, a university employee whose salary was paid for by the state, was doing the design work.

Feldman had been told that Taraldson's fee would be 5 percent of the furniture budget, not to exceed $1,000. When Feldman got the bill from planning services, though, he had been charged $3,373 for Taraldson's work, about 21 percent of the remodeling budget.

"I frankly find this exorbitant and wonder what departments are able to support such a tariff," he wrote.

Through various surcharges and other billing artifices, the rates for university design advice had increased 20-fold from 1986 to 1989.

An analysis of planning services financial records also shows the arboretum and other peripheral departments being billed at this new rate for hundreds of hours of consulting work that were not performed.

This rate of inflation was justified using specious accounting.

For example, Taraldson's new billing rate was supposedly set so the university could recover the cost of her salary. However, her billable hourly rate, set at $56.50, was based on her working 20 billable hours a week.

 

A full-time employee, she often billed 40 hours a week, a practice she tells New Times was forced on her by her supervisors.

If the intent was to cover costs, her clients within the university system, in effect, should have been paying $28.25, not $56.50.

Those extra dollars went into a general pool of facility and design moneys, dollars that could then be tapped to shore up design and furniture shortfalls in the new research buildings.

What's this all mean? It means the annual pass you bought to Boyce Thompson Arboretum wouldn't have gone to support the arboretum. It went to buy a conference table in a research building in Tucson that was supposed to have been paid for by university bonds supported by federal grants.

Taraldson complained and was fired soon after, documents show.

A former supervisor in the same department, Charles Bryfogle, also complained and, according to him, was soon fired because of those complaints. In a lawsuit filed against the university, Bryfogle contested the firing and accused officials of bond fraud and illegal commingling of funds.

That case still lingers before the Ninth Circuit Court of Appeals.

In the mid-1990s, as part of his case, Bryfogle deposed Haggans. The two sparred, essentially accusing each other of putting the overbilling scheme in place:

"Did you instruct Miss Taraldson at any time during the time you were director of Planning Services to . . . take time that she was working on something else to bill it against projects that had funding?" Bryfogle asked. "No," Haggans said. "However, I was told by you that that's what you did before I got to the university."

Overbilling in planning services was just a tiny piece of a much larger pattern of what, in effect, was the university equivalent of money laundering.

The hardest hit, in many cases, were departments that fell out of favor with top university administrators, particularly Haggans in facilities management and Cusanovich, then vice president for research.

The university's department of microbiology and immunology is a prime example.

In the mid 1980s, two researchers in the department, the husband and wife team of Carol and Harris Bernstein, began building a reputation for defending faculty and staff members who had been terminated on questionable grounds.

The Bernsteins were often taking on Gary Munsinger and some of his later protégés.

In 1988, amid this tumult of building and recruiting, the administration submitted to the Legislature a proposal by medical researchers to add nine new faculty and staff positions in the department. Legislators, who were told the nine positions were critical to the university's ability to do basic medical research, agreed to pay for the new staff positions.

But the department never saw the new staff. The additional money, $642,000, was diverted away from the department to fund salaries elsewhere. At the same time, several positions were created outside the department, including one that was filled by the wife of Cusanovich.

The Legislature has since improved oversight on the university's spending of earmarked allocations.

During this period, one of the nation's premiere immunology and microbiology researchers, John Marchalonis, was lured by then-president Henry Koffler and other top administrators to come to the university.

Marchalonis was wooed with promises of nine staff members, as well as equipment that was never given to his department upon his arrival, researchers in his department say. Marchalonis and two other department chairmen would not speak on the record with New Times.

Other department heads describe similar scenarios. "A lot of us got bait-and-switched," says one department head, who declined to speak on the record for fear of retaliation. "It became something of a running joke."

In the early 1990s, Marchalonis convinced one of the nation's top Alzheimer's researchers, Marguerite Kay, to come to Tucson. Kay was a star in the area of aging research. Through the 1990s, Kay brought to the university more than $4.6 million in private, state and federal grants.

In the mid-1990s, though, Kay began suspected her grants were being overcharged for university services. She began looking closely at the university bills she was receiving, bills that in their complexity and maze of vague surcharges, look like a homeowner's phone bill from Qwest.

Most researchers don't bother.

According to documents obtained by New Times, she was correct in her suspicions.

Echoing complaints regarding Haggans' department, Kay saw her grants being overcharged for maintenance work. For instance, she was charged $3,500 for the installation of electrical outlets an outside contractor said he could do for $200.

She also discovered university research administrators had charged the Veteran's Administration $23,000 for an aging study that was never performed.

 

The university also made her pay for the janitors, a basic service that should have been provided by the university through the indirect-cost money received from the federal government.

Soon after she complained, Kay was accused by the university administrators of scientific misconduct.

Those charges have been deemed ludicrous by more than a dozen top researchers in her field. For example, one of the charges accused Kay of harboring a dangerous strain of polio in her lab, a virus that doesn't even exist. Also, all the tests she was accused of fabricating have since been proven legitimate in tests at other universities.

Indeed, in 1998, the university licensed the use of a technology based on the same research by Kay that the university had accused her of falsifying.

The university's Technology Transfer office sold the license to a British firm for $34,000. That firm then sub-licensed the technology for $1.5 million.

In essence, the university claimed Kay's research was invalid, then sold it for about one-44th of its worth.

Administrators still refuse to drop the allegations and the university has spent more than $1.3 million on attorneys' fees defending its actions.

Cusanovich would not discuss Kay's complaints because "she never brought them to me."

The records documenting Kay's banishment reveal previously hidden details of how the university's Office of Research handles grant money.

Kay's research was officially halted as of April 23, 1997. She was fired in July 1998, rehired on Feb. 4, 2000, then immediately placed on administrative leave and banned again. She remains banned from her lab today.

Yet in 1998, the university's Office of Research removed $13,907 of direct-cost money and $1,391 of indirect-cost money from Kay's Arizona Disease Control Research Commission grant, during a time when it was impossible for Kay to have done the research specified in the grant.

State disease-control officials quietly complained to then-Vice President for Research Michael Cusanovich. In 1999, the money reappeared in Kay's university accounts.

Cusanovich's response: "I don't remember the details of that. I could have dealt with it, I don't know. I don't remember how it was resolved."

The federal government, however, apparently is not watching its money as closely.

University research account records obtained by New Times show more than $120,000 in National Institute of Aging and Veterans Affairs direct-cost grant moneys being drained from Kay's accounts in late 1997 through 1998.

Remember: Kay was banned from her university labs during that time.

"I don't know about that," Cusanovich says. "All I know is that we were only stewards of that money. We would only do something with direct costs at the direction of the granting agency."

Carol Tippery, a director of the Office of Policy for Extramural Research within the National Institutes of Health, did not respond to three requests from New Times to discuss the handling of federal research dollars by the University of Arizona.

It appears no university account was off-limits to raiding.

In 1998, Glenn Johnson, director of the University of Arizona Indian Graduate Center, discovered money missing from an account set up by a benefactor to provide emergency financial assistance to Native American students. University accountants told him the account was $800 in the red. Johnson knew the account hadn't been tapped. His records showed that it held $6,000.

After receiving numerous denials of any mistake or wrongdoing by university financial managers, it was finally revealed that $5,000 was missing. Auditors explained the money was misplaced as thousands of dollars were shuffled between Graduate Center accounts and other accounts. The university then remedied the deficit by pulling $5,000 from a scholarship fund set up by several area Indian casinos.

Johnson complained to President Peter Likins and other administrators about the university chronically ignoring the intentions of donors.

He was accused of being insubordinate and the university ultimately eliminated his job.

Among other complaints, plant pathologist Tien Wei Yang also had complained about misspending of his grant money. On May 6, 1994, administrators in the university's agriculture department, with the go-ahead from university attorneys and the Office of Research, bulldozed two of Yang's plots of creosote bushes, destroying three years of research.

"There was a very clear message to researchers," Marguerite Kay said during an interview with New Times last year. "If you complain, you will be destroyed. The squeaky wheel gets thrown away. It's a pretty successful policy. It keeps almost everybody's mouth shut."

Kay denied a more recent request for interviews, saying she was concerned it would affect her attempts to be reinstated to her position at the university.


In 1991, the university canceled subscriptions to numerous medical journals critical for researchers to keep informed about new developments in their field.

 

Indirect costs are intended to pay for upkeep of those libraries.

A 1992 letter from Colin Kaltenbach, a vice dean of the college of agriculture, to facilities deputy vice president Bob Hatch, gives another indication of the cash scramble caused by the university's skyrocketing debt and other financial commitments.

"Bob, it has been brought to my attention that there are residual funds of approximately $150,000 in the Marley Building (the Ag Lab building) account," he wrote. "Rumor has it that central administration wishes to capture these funds. . . . Attached is a list of real needs that will have to be funded at some time, by some means. I hope you will consider this request so that we can make the building at least reasonably functional at this time."

It would appear that when legislators and regents approved revenue bond moneys for the buildings, they had reason to expect they'd get fully operational structures. The revenue bond contract reads: "The Bonds are being issued on behalf of the University of Arizona, Tucson, Arizona, to pay the costs of acquiring, constructing and improving projects described in a general way as . . . (ii) the construction and equipping of a new Agricultural Laboratory Building."

A 1989 document shows the federal grant and state bond funding sources for the nearly $18 million "Phase III" of the Ag Lab complex. The bottom of the document reads: "Bond proceeds of $1,875,000 reallocated to Life Sciences Phase I."

That Life Sciences project was to be completed with the proceeds from a separate research revenue bond.

Another document shows that more than $300,000 was redirected from a campus building project to help cover costs of telescope construction on Mt. Graham.

The Mt. Graham telescope projects were a major drain on the university's research and construction accounts throughout the 1980s and '90s.

In 1985, Peter Strittmatter, director of Steward Observatory, sent a memo to the planning and budgeting office requesting a waiver to use state-funded faculty salary dollars for telescope operation costs. It was a plan originally devised by Gary Munsinger.

"Normal procedures for temporarily utilizing vacant salary lines are terribly awkward and restrictive," Strittmatter wrote. "We need to expend some $225,000 in state salaries in order to provide additional operations."

The plan was approved. Those "normal procedures" were mandated by state law.

In 1991, Landau, the university's former comptroller, sent an internal memo expressing grave concerns about the impact of proposed Mt. Graham project expenditures on university finances.

"At the current rate of expenditure growth, we will overspend current operating fund revenues by over $10M.

"The net result is that, at current growth rates, over a two-year period of time, we will have consumed more than half of our entire current operating fund balance. This will doubtless trigger a downgrading of currently issued debt as well as future debt."

But the bonds were refinanced, some spending was reduced and the federal government helped bail out the project. Money also appeared from other internal sources. Landau now says his concerns were in response "to preliminary reports."

The building of Mt. Graham's telescopes became a masterpiece of creative financing, one that apparently violated state and federal guidelines for competitive bidding and grant procurement.

For example, Strittmatter, director of the university's Steward Observatory, also served as president of the nonprofit Columbus Corporation, a group of public and private organizations that was paying for the construction of the telescopes.

In May of 1993, Strittmatter, a university department head, wrote a letter to research vice president Michael Cusanovich "acknowledging receipt of two proposals from the University of Arizona for work relating to the Large Binocular Telescope project."

The university was, in effect, telling Strittmatter that for $5.9 million, it could build the mirror the Columbus Corporation wanted.

"On behalf of the Columbus Corporation, I hereby notify you that these proposals have been accepted," Strittmatter wrote.

Not a surprising acceptance, since it was Strittmatter doing the proposing for the university. He was also director of the university's mirror fabrication program.

Two months earlier, Strittmatter, this time acting as director of the university's observatory and the mirror lab, made a request to Cusanovich to temporarily increase the university's mirror lab casting account from $800,000 to $1.44 million so the lab could buy 19 metric tons of "Columbus glass from Ohara."

"We are expecting that substantial funding through the Columbus Corporation will be in place prior to the receipt of the first shipment of glass."

The deal effectively blocked any other university or company from making a competitive bid on building the immense mirrors, work that some people argued could be done more cheaply by an institution or company with existing mirror fabrication equipment.

 

Cusanovich says that deal, too, was perfectly legal. He says the Columbus Corporation was set up as a not-for-profit corporation, which essentially allowed it to procure as its members saw fit. A federal grant from NASA that supported the project, he says, was given long after the mirror fabrication bid had been "won" by the UofA.

Those strange documents were "us doing what we had to do to be within the letter of the law."

Cusanovich and Strittmatter apparently found another device to maximize the amount of cash flowing into their telescope project.

"It is my understanding that this work will be carried out free of University overhead charges," Strittmatter wrote to Cusanovich in his acceptance of his own proposal.

Those overhead expenses, then, would have to be made up somewhere else. It was during this time that Kay and others began seeing the odd university overhead billings on their grants.


By 1992, the UofA was facing the same problems many businesses and residents in the state are facing right now. They had spent liberally through the good times. Then money got tight, which made it tough to pay the big mortgage.

On the upside: In 1992, like now, you could find a great interest rate if you needed to refinance.

In 1992, the university began consolidating and refinancing its revenue bonds.

The refinancing was smart. The consolidating washed away accountability.

In the process, academic revenue bonds, funded by student fees and tuition, were consolidated with the research revenue bonds.

Remember: University officials had spent much of the 1980s promising those research revenue bonds would be paid off from the new indirect costs from new researchers' federal grants.

Instead, with the consolidation of bonds, revenue flowing in from almost any source -- tuition, fees, research grants -- could be pooled to pay off the new bonds.

This re-funding became another spigot with which moneys could be drawn from tuition, fees and state allocations to prop up research projects.

"We did nothing illegal that I was ever aware of," says Landau, who oversaw much of the university's finances from the mid-1980s until the mid-1990s. "It's probably an issue of us legally having much more flexibility than the general public might realize."

With this reservoir of cash, the research powerhouse got built. The construction and luring of top researchers continues today.

But did the UofA become that "Harvard of the West?"

For some researchers -- perhaps. For most students and educators -- no.

The erosion in faculty salaries and student and faculty retention rates began as classrooms were being converted to laboratories in the mid-1980s.

Landau says there is no correlation between those problems and all the research construction.

"None," says Landau. "It's apples and oranges."

That's unlikely. As the university's research buildings and other projects came under financial stress, sly mechanisms appeared that ultimately propped up research construction projects with student tuition, student fees and state allocations. That is money that otherwise could have been used for teaching positions and student services.

And certainly, large chunks of money were diverted from teaching positions and pooled to pay for high-dollar researchers, many of whom have no teaching assignments.

With the administration's limited budget focused on construction and prestige through the 1980s and '90s, allocations for things such as institution-wide pay raises became undesirable.

"When you do the model for a pay raise for everyone, it becomes an incredibly expensive proposition," Landau says. "In comparison, when you consider the cost recovery from grants, buildings can give you a lot more bang for your buck."

By 1994, the UofA had more than 200 vacant faculty positions outside the few key research disciplines on which the university administration focused. The average salary began slipping compared to peer institutions.

Through that time, student retention rates languished.

Each year, about one-fourth of incoming students leave before their sophomore year, well above the national average.

University salaries now stand 9 percent below the national average. The institution could be as much as 15 percent behind the national average by 2005 if state allocations continue to drop.

The professors who left were lured with salaries that averaged 32 percent more than they were paid by the UofA, a study showed.

As the university scrambles to offer healthy raises to prized faculty, an increasing number of positions go unfilled to make up the costs.

Still, key researchers, and several million dollars of their federal grants, have left in the last few years.

"If that continues," Munsinger says, "it could have a profound effect on the university's financial health. Those grants are critical."

 

Growing university endowments have helped mitigate some of the financial instability. The market value of university endowments by 2000 was $285 million, more than double their 1994 value.

Still, the UofA ranks near the bottom among peer institutions in its endowment dollars. Ohio State, for example, has four times more endowment money.

The University of Arizona has also performed terribly in the amount of dollars earned selling the licenses and patents for work done at the university. Again, in this category, the university ranks last among peer institutions.

In 1999, for example, the UofA spent $320 million on research while bringing in $314,000 for licenses and patents, or less than $1 for every $1,000 it spent on research.

One of its peer institutions, Michigan State University, spent $207 million on research in 1999 and had licensing income of $24 million, or $115 for every $1,000 it spent on research.

ASU spent $60 million on research and brought in $1.3 million in licensing income, or $22 for every $1,000 it spent on research in 1999.

Cusanovich points out that those millions made by other universities typically come from "one or two home-run projects." The UofA hasn't yet produced a financially lucrative discovery, but, he says, there are several current university projects that show great promise of generating substantial income.

To be fair, some of the administrative problems have been addressed in recent years by subsequent university administrations. Institution-wide financial oversight has been reinstituted in some areas since 1991. The university's current president, Peter Likins, and his predecessor, Manuel Pacheco, quietly dismissed or reassigned several university administrators responsible for lax or irresponsible money management. Likins has also begun an aggressive campaign to bolster private donations to the university.

The university's technology transfer office has a new director charged with increasing the amount of patent dollars earned by the university and its professors.

And some of the university's departments continue to rank in the top 10 in several academic disciplines, including analytical chemistry, audiology, business management, creative writing, geology and higher-education administration, according to US News & World Report.

The UofA also moved up from 48th place to 44th place in the Report's rankings of national public universities.

Cusanovich argues that the aggressive push to build an upper echelon research institution has been only beneficial to the state and the university's students. Any financial problems, he says, can be traced to the actions of past Legislatures, not to university spending practices.

Of critical importance, he says: While the Legislature cut operational budgets at the university during the lean financial times of the early 1980s, those moneys were never returned when the economy improved.

"We are still spread ridiculously thin," he says.

A state allocation increase of $2,000 per student would bring Arizona closer into line with national averages for state spending. The $60 million infusion of cash would instantly stabilize the university's finances.

The other solution: Raise tuition, which presently is the second lowest in the country for state universities, he says.

"If we could get up to 37th or so, we'd be in good shape," he says. "That wouldn't be greedy, would it?"

If successful, President Peter Likins' campaign to raise a billion dollars in donations would "provide those alternative sources of income to help us weather these problems," Cusanovich says. Likins, however, recently had to suspend that campaign in a cost-cutting measure.

Still, others argue that to make real progress toward greatness, university officials must steer some attention away from research prestige and begin focusing again on the average student.

"We've seen where the university's priorities have been and we've seen the impact of that on education," says Carol Bernstein, president of the state chapter of the American Association of University Professors. "I just hope it doesn't have a crippling effect on the future of education in the state. Only time will tell."


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