Contract cost for company running Iowa's ESA program has doubled, state auditor says

The company overseeing Iowa's education savings account program is being paid more than the state originally agreed to after the contract was amended without adequate documentation, according to an annual audit of the Iowa Department of Education.

Gov. Kim Reynolds signed the education savings account law in 2023, allowing families to apply for about $7,800 per child in taxpayer-funded scholarships to pay private school expenses such as tuition and fees.

The state contracted with Odyssey , an out-of-state company, to oversee the disbursement of funds. The initial contract said Odyssey would be paid $682,333.75 in the first year and $729,550 in subsequent years.

An audit released Tuesday by State Auditor Rob Sand says the state later amended the contract with Odyssey to increase what the company would be paid but failed to provide documentation to justify the amended contract.

"A deal is a deal is a deal," said Sand, the only Democrat holding statewide office in Iowa. “And I think every Iowan knows that if someone comes back to you and says, ‘Hey, thanks. I'm gonna double costs but I'm not giving you anything extra' that you're being had.”

After the initial Odyssey contract was signed, it was amended to include additional costs including transaction fees, Sand said in an interview. Those fees include 25 cents per $100 in qualified educational expenses processed through the Odyssey system, 5 cents per ESA transaction, a $100,000 "standalone system fee" and reimbursement for payment processing fees, Sand said in a news release.

During the 2024 fiscal year, "an additional $267,250" was paid to Odyssey because of the fees, the audit states. Moving forward, the program is expected to cost an additional $390,750 in fiscal year 2025, $784,750 in fiscal year 2026 and $852,750 in fiscal year 2027.

"The fiscal year 2027 additional contract cost is more than double the original contract amount of $729,550," the audit states.

In an email Tuesday, Heather Doe, a spokesperson for the Iowa Department of Education, defended the inclusion of transaction fees, calling them "a common and necessary cost of transferring money through an e-commerce platform."

"The Department of Education amended its contract with Odyssey to account for transactional fees that would be incurred through the ESA process," she said. "Instead of deducting fees from each participating student’s education savings account, and noting that ESA student funding amounts are defined in statute, the department assumed the cost of the fees on behalf of the state."Doe said the fee structure proposed by Odyssey was significantly lower than its competitors.

Doe said the state estimated that the transaction fees added about $300,000 to the first year of the contract with Odyssey, bringing it to about $985,000. Over three years, Doe said the state expects to spend $3.7 million on the Odyssey contract, which she said was less than half the price offered by its closest competitor.

Gov. Kim Reynolds said in a statement that the state amended its contract with Odyssey "to cover operational expenses that shouldn't be passed on to Students First ESA participants and their families."

"I’m proud of the work that (Department of Education) 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 in the statement.

The audit's figures were calculated using estimates by the nonpartisan Legislative Services Agency for the overall cost of the program.

However, the first two years of the education savings account program have already exceeded the agency's initial estimates due to a high number of applications. And the overall cost of the Odyssey contract will depend on the number of Iowans participating in the program.

Iowa spent $129.9 million on the program during the last school year, when 16,757 students received education savings accounts. That's about $23 million more than the state had initially projected.

More than 30,000 students have already been approved for education savings accounts for the 2024-25 school year, which could cost the state more than $234 million if all those students successfully enroll in an accredited private school.

More: Kim Reynolds says over 30,000 students approved for education savings accounts next year

The audit's findings are notable because it is costing the state more to run the program than previously stated and the Department of Education did not submit the proper paperwork to justify the additional costs for the amended contract, Sand said.

"Conservative estimates show that alone could cost Iowa taxpayers an additional $2.3 million by 2027," Sand said in a statement. "But we won’t know exactly how much more Iowans will pay for these administrative fees until we know how many students are enrolled in the program."

The Department of Education's response to the audit states that it has provided the auditor's office with documents related to the approval of the new contract for Odyssey.

"Moving forward, the department will ensure documentation of all relevant approvals at the time of execution," the department said in its response.

Sen. Herman Quirmbach, D-Ames, the top Democrat on the Senate Education Committee, said the audit reveals "an alarming lack of transparency and accountability" from the Department of Education.

"It is bad enough that the voucher program is syphoning hundreds of millions of dollars out of our public schools, but now we find that the Reynolds administration low-balled the estimated payments to the private company running the program and hid the cost increase until the State Auditor forced the disclosure," Quirmbach said in a statement. "Reynolds has broken faith with the public’s trust on both education and stewardship of taxpayers’ money."

Too much paid to out for paraeducators

The 2023 audit also showed more than $840,000 in federal funds meant to be used by educators and school leaders to cover training was instead used for paraeducators.

The funds came from the federal Elementary and Secondary Education Act Title II Part A or ESEA Supporting Effective Instruction State Grants and can be used to pay for professional development and other allowed expenses, according to the U.S. Department of Education. The funds are earmarked to be used for teachers, principals and other school leaders.

Since schools return to in-person classes during the COVID-19 pandemic, Iowa officials and lawmakers have worked to expand the roles paraeducators can fill in school districts because of ongoing staffing shortages.

The Iowa Department of Education received approximately $430,000 in ESEA funds for the 2020 fiscal year, $455,000 in 2021 and $455,000 in 2022 totaling about $1.3 million, the report states. By June 30, 2023, the department had dispersed about $1.2 million of those funds to community colleges and schools.

Of those funds, $849,672 was spent on paraeducator programs.

The state was allowed to allocate 3% per year of the ESEA funds for paraeducators. Sand said. The more than $800,000 spent was well above the 3% per year allowed under ESEA.

The Department of Education is working with the federal government to remedy the matter, Sand said. The state might be required to repay the funds or future funds may be withheld.

Samantha Hernandez covers education for the Register. Reach her at (515) 851-0982 or svhernandez@gannett.com. Follow her on Twitter at @svhernandez or Facebook at facebook.com/svhernandezreporter .

Stephen Gruber-Miller covers the Iowa Statehouse and politics for the Register. He can be reached by email at sgrubermil@registermedia.com or by phone at 515-284-8169. Follow him on Twitter at @sgrubermiller .

This article originally appeared on Des Moines Register: Contract cost for company running Iowa's ESA program has doubled, state auditor says