Iowa auditor: School choice deal hiked cost without justification

DES MOINES — The Iowa Department of Education did not follow proper procedures when amending a contract with the company that administers the private school choice program — a move that will increase costs significantly, State Auditor Rob Sand said Tuesday.

In response, the Education Department said that even with the increased costs, the contract represented the lowest bid for administering the program and was a significant savings compared with other competitors.

Sand, a Democrat, released a report detailing his office’s inquiry into the contract with Odyssey, a company that manages programs like Iowa’s that allow students to use public funds to pay for tuition at private schools.

Iowa’s education savings account program allows students to use the full per-pupil state funding that would go to their public school district to instead pay for private school tuition and other costs. More than 30,000 Iowa students have been approved for the coming school year.

According to Sand’s report, the amended contract, which previously was not disclosed publicly, is expected to more than double the original annual cost to the state for Odyssey to administer the program by fiscal 2026.

“The cost to Iowa taxpayers for the administration of the school vouchers program has doubled with no apparent justification for it whatsoever,” Sand told reporters. “This is a contract that was signed just a couple of months after the original contract was signed, and still today there has been no justification provided whatsoever.”

A spokesperson for Odyssey did not immediately respond to a request for comment.

Iowa selected Odyssey in a competitive bidding process in April 2023 to administer the state’s ESA program. The initial contract was for three years, with three optional annual extensions, and totaled $4.3 million for the six-year period. The annual cost to administer the program initially was listed at $730,000 by year two of the contract.

The administration cost is a small piece of the overall cost of the ESA program, which cost the state $128 million in the last fiscal year and is expected to increase to at least $345 million by the 2026-27 school year.

Amendment ramped up costs

Sand’s report said the contract was amended in July 2023, three months after it was approved, to include new variable fees. One those fees calls for Odyssey to be paid 25 basis points — or 0.25 perecnt — of the total amount paid out as a “qualified education expense” that includes tuition and fees, textbooks, tutoring and certain supplies.

That payment, according to estimates by Sand’s office, will increase the cost to administer the ESA program by hundreds of thousands of dollars per year. It will likely double the annual cost of the contract by fiscal 2026, Sand said.

Sand said the Education Department did not follow proper policy to amend the contract.

According to the report, the department’s policy requires a document describing the need to modify the agreement and requires the Bureau of Accounting to review and approve any contract amendments. The report said the amendment was not formally approved by the Bureau of Accounting until July 12, the same day the department provided the documentation to Sand’s office and six months after Sand requested it.

The department also did not include an explanation of the need for the amendment, but did say it estimated the cost increase for years two and three to be $540,500.

The audit report also said Odyssey proposal to qualify for the contract said it planned to open an office in Des Moines. The company later said it had secured temporary accommodations and listed the address of the Iowa Capitol building.

“There does not appear to be any legitimate means to make this claim,” Sand’s report says. “However, based on documentation provided, this claim was not questioned by those reviewing the proposals.”

Department says Odyssey kept costs low

In a written statement, Iowa Department of Education spokesperson Heather Doe said the transaction fees added in the amendment are a necessary part of any e-commerce platform and were far lower than other competitors. She said the state “conducted a thorough evaluation” to determine whether the added costs would remain competitive.

Other vendors administering ESAs charge a 2.5 percent transaction fee compared to Odyssey’s 0.25 percent, Doe said. Doe said the department estimates the transaction fees in the first year would cost about $300,000, bringing the total to about $985,000.

“Even with the additional transaction fee costs, Odyssey’s costs were nearly four times lower than the next closest competitor,” Doe said.

The state received one other viable bid to administer the program from a company called Merit, Doe said. Merit would have charged $8 million over the first three years of the contract. The cost for Odyssey, including transaction fee estimates, is expected to be about $3.7 million over the first three years, Doe said.

Doe also said the department will ensure it has documentation of contract approvals going forward. “Processes can always be improved upon and the Department of Education notified the Office of the Auditor of State that it will have documentation of all relevant approvals at the time of execution moving forward, which was also accepted by the Auditor of State,” Doe said.

Republican Gov. Kim Reynolds said in a statement that the transaction fees added to the contract should not be passed on to ESA families. She also pointed to the cost difference between Odyssey and Merit’s proposal.

“I’m proud of the work that Director (McKenzie) Snow and the department have done to establish one of the leading school choice programs in the country, and I look forward to the start of its second year,” Reynolds said.