As a result of the alleged wrongdoing in a now-defunct state sports progam, Maryland legislators are beginning to question the cozy relationship some state agencies share with private foundations.

Lawmakers say state health department officials who once ran the Olympic-style Maryland State Games were able to use their alliance with a foundation of the same name to circumvent state policies regulating government expenditures.

The Maryland State Games Foundation Inc., a private, nonprofit corporation, was established in 1989 to raise money for the annual sports competition and to promote "various programs and projects that will further the goals of the Maryland State Games on a statewide and national level," according to an auditor's review.

The foundation was given free office space at Springfield Hospital Center in Carroll County. Its executive director was also director of the health department's State Games project, drawing a state salary. And the foundation received the bulk of its contributions from the state itself, about $631,451 in a 22-month period, including about $490,000 in anti-drug money.

When state auditors finally got their hands on the books of the State Games Foundation, they questioned more than $460,000 in expenditures. And now the controversy involving the Games Foundation is fueling demands for state audits of all foundations with close links to public agencies.

"We think it's important we see these records, because the relationship between a foundation and a state agency is so close that it is almost impossible for the public to know the difference," said Anthony J. Verdecchia, the state's top auditor.

A foundation is broadly defined as a legally independent charitable organization. Regulations now being considered by Maryland lawmakers would apply only to private foundations established solely for the benefit of a state agency. They would not apply to organizations such as the Chesapeake Bay Foundation, which is established to improve public land-use planning and help private conservation efforts.

State auditors already have the power to review records associated with how foundations spend money received from the state. What they lack is the power to review the records of money collected through private fund-raising.

In Maryland, state-affiliated foundations have been established to do everything from raise money for public television to help furnish the governor's mansion. The most common use is to help state-financed colleges and universities.

Verdecchia warned legislators last year about the state's growing reliance on private foundations. In a report in April, he asked for the power that auditors in at least 10 states already have to examine all financial records of foundations.

State Sen. Julian L. Lapides (D-Baltimore) said the troubles of the State Games program should give him the momentum to win passage of a bill giving state auditors that power. Legislation he introduced last year was approved by the Senate but failed in the House after university officials lobbied against it.

Maryland House Speaker R. Clayton Mitchell Jr. (D-Kent) said leaders of both houses will meet to discuss possible audit legislation.

State Senate President Thomas V. Mike Miller Jr. (D-Prince George's) said, "I think something will pass the Senate this year."

Health and Mental Hygiene Secretary Adele Wilzack, who resigned yesterday because of the State Games controversy, said last week that one reason she failed to spot trouble in the program was that she had no idea the foundation was operating solely with state money.

Verdecchia's call for greater oversight was echoed by his counterparts in the District and Virginia, where auditors also lack the authority to examine foundation records fully.

"The problem we have as auditors is that the foundation serves as an arm of a state agency but legally it is supposed to be separate," said Norwood J. Jackson, Virginia's deputy auditor. "As a result, you have put a barrier between state law and an essential component of government."

In opposing audit legislation, Maryland university officials say their foundations are able to attract donations that ordinarily would not come to a state agency, helping the state schools compete with private institutions in raising money.

University officials also argue that their foundations already receive scrutiny. The University of Maryland Foundation Inc., for example, is audited by an outside firm and regulated by the Board of Regents, the Maryland secretary of state and the Internal Revenue Service, foundation President John Martin said.

Martin said opening his foundation's records to state auditors could give the public the impression that problems exist and "diminish donor confidence in the institution."

A survey of 18 state-affiliated foundations by the Maryland Auditor's Office last year found assets and cash totaling about $81 million. The survey noted that there is no complete list of the foundations created to benefit state agencies.

"We're not objecting to the raising of private funds," Verdecchia said. "We only want the ability to look at the total picture to ensure that foundations are keeping their public and private responsibilities straight."

Verdecchia also wondered whether more scrutiny is needed for state officials who sit on the boards of affiliated foundations. He said the dual role can further blur the lines of independence between the two organizations. In the case of the Maryland State Games, the executive director of the foundation was a state employee who served as director of the project.

Once auditors identified trouble in the State Games, Wilzack dismissed the two officials who ran the program for the state and disbanded it. The State Attorney General's Office began a criminal investigation.

"The problem with these things is that, without the right checks and balances, they can really become nothing more than a slush fund," Lapides said.

Lapides said he wasn't surprised that Gov. William Donald Schaefer opposed his audit bill last year. He said Schaefer has been a longtime supporter of using private money to supplement government services.

The Schaefer administration argued that sufficient safeguards are in place.

Del. Charles J. Ryan (D-Prince George's), chairman of the House Appropriations Committee, said the House probably will pass legislation similar to the Lapides bill, "but we won't go as far."

Ryan said auditor oversight "shouldn't, probably, apply to university foundations where there's no state money involved . . . . All I want to do is get {auditors} in there, to say the books are clean or not clean."

Staff writer Fern Shen contributed to this report.