Contract costs double for company running ESA program in Iowa

The company that oversees Iowa’s education savings account program is being paid more than the state originally agreed to after the contract was changed without adequate documentation, an annual audit by the Iowa Department of Education found.

Governor Kim Reynolds signed the Education Savings Account Act into law in 2023, which allows families to apply for about $7,800 per child in taxpayer-funded scholarships to help pay for private school costs, such as tuition and other fees.

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

An audit released Tuesday by state Auditor Rob Sand found that the state later amended the contract with Odyssey to increase the amount the company would receive, but no documentation was provided to justify the amended agreement.

“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 going to double the cost, but I’m not going to give you anything extra,’ you’ve got to be a dupe.”

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

During fiscal year 2024, “an additional $267,250” was paid to Odyssey for the fees, the audit found. 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 additional contract costs for fiscal year 2027 are more than double the original contract amount of $729,550,” the audit found.

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

“The Department of Education amended its contract with Odyssey to account for transaction fees that would be incurred through the ESA process,” she said. “Rather than deducting fees from each participating student’s education savings account, and noting that ESA student funding amounts are set by law, the Department absorbed the costs of the fees on behalf of the state.” Doe said Odyssey’s proposed fee structure was significantly lower than its competitors.

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

Gov. Kim Reynolds said in a statement that the state has amended its contract with Odyssey “to cover operational costs that should not be passed on to Students First ESA participants and their families.”

“I am proud of the work that Director (McKenzie) Snow (Department of Education) 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 figures were calculated based on estimates from the independent Legislative Services Agency for the total 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 high demand. And the total cost of the Odyssey contract will depend on how many Iowans participate in the program.

Iowa spent $129.9 million on the program during the past school year, when 16,757 students received college savings accounts, about $23 million more than the state initially projected.

More than 30,000 students have already been approved for student financial aid for the 2024-2025 school year, which could cost the state more than $234 million if all of these students successfully enroll in an accredited private school.

More: Kim Reynolds says more than 30,000 students will be eligible for a college savings account next year

The audit’s findings are notable because it costs the state more to run the program than previously stated and because the Department of Education failed to submit proper documentation to justify the additional costs for the modified contract, Sand said.

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

The Ministry of Education’s response to the audit said it had provided the audit service with documents related to the approval of the new contract for Odyssey.

“Going forward, the ministry will ensure that all relevant approvals are documented at the time of implementation,” the ministry said in its response.

Sen. Herman Quirmbach (D-Ames), the ranking Democrat on the Senate Education Committee, said the audit reveals “an alarming lack of transparency and accountability” from the Department of Education.

“It’s bad enough that the voucher program siphons hundreds of millions of dollars from our public schools, but now we see that the Reynolds administration understated the estimated payments to the private company that runs the program and hid the cost increases until the state auditor forced disclosure,” Quirmbach said in a statement. “Reynolds has damaged the public’s trust in both education and the stewardship of taxpayer dollars.”

Overpaid for para-educators

The 2023 audit also found that more than $840,000 in federal funds intended for teacher and principal training were instead used for teaching assistants.

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 allowable expenses, according to the U.S. Department of Education. The funds are earmarked for use by teachers, principals and other school leaders.

As schools return to in-person learning during the COVID-19 pandemic, Iowa officials and lawmakers have been working to expand the roles that teaching assistants can fill in school districts amid ongoing staffing shortages.

The Iowa Department of Education received about $430,000 in ESEA funds for fiscal year 2020, $455,000 in 2021 and $455,000 in 2022, for a total of about $1.3 million, the report said. As of June 30, 2023, the department had distributed about $1.2 million of those funds to community colleges and schools.

Of this amount, $849,672 was spent on teaching assistant programs.

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

The Department of Education is working with the federal government to resolve the issue, Sand said. The state could be required to repay the funds or future funds could be withheld.

Samantha Hernandez writes about education for the Register. Reach her at (515) 851-0982 or [email protected]. 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 [email protected] or by phone at 515-284-8169. Follow him on Twitter at @sgrubermiller.