Iowa Auditor: School Choice Agreement Increased Costs Without Justification

DES MOINES — The Iowa Department of Education failed to follow proper procedures in changing a contract with the company that manages the private school choice program, a move that will significantly increase costs, State Auditor Rob Sand said Tuesday.

The Ministry of Education responded by stating that despite the higher costs, the contract represented the lowest bid for the implementation of the programme and that it provided significant savings compared to other competitors.

Sand, a Democrat, released a report detailing his office’s investigation into the contract with Odyssey, a company that manages programs like Iowa’s that allow students to use public money 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 fees. More than 30,000 Iowa students have been approved for the upcoming school year.

According to Sand’s report, the amended contract, which was previously undisclosed, is expected to more than double the original annual cost to the state of having Odyssey manage the program by fiscal year 2026.

“The cost to Iowa taxpayers to administer the school voucher program has doubled without any clear justification for it,” Sand told reporters. “This is a contract that was signed just a few months after the original contract was signed, and to this day, no justification has been given.”

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

Iowa selected Odyssey in a competitive bidding process in April 2023 to manage the state’s ESA program. The initial contract was for three years, with three optional annual renewals, totaling $4.3 million over the six-year period. The annual cost to manage the program was initially listed at $730,000 in the second year of the contract.

Administrative costs are a small portion of the total cost of the ESA program. These costs cost the state $128 million last budget year and are expected to rise to at least $345 million by the 2026-2027 school year.

Change in increased costs

Sands’ report said the contract was amended in July 2023, three months after it was approved, to include new variable fees. One of those fees requires Odyssey to take 25 basis points — or 0.25 percent — of the total amount paid as a “qualified education expense,” which includes tuition and fees, textbooks, tutoring and certain supplies.

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

Sand said the Department of Education had not implemented appropriate policies 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 all contract modifications. The report said the modification 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 explain the need for the change, but did say it estimated the cost increase for years two and three at $540,500.

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

“There appears to be no legitimate way to make this claim,” Sands’ report said. “However, based on the documentation provided, this claim was not questioned by those reviewing the proposals.”

Department says Odyssey kept costs down

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

Other vendors that manage 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 will cost about $300,000 in the first year, bringing the total to about $985,000.

“Even with the added transaction fees, Odyssey’s fees were nearly four times lower than the nearest competitor,” Doe said.

The state received another viable bid to manage 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 to Odyssey, including transaction cost 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 and the Department of Education has informed the Office of the Auditor of State that it will have documentation of all relevant approvals at the time of execution going 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’s proposal and Merit’s.

“I am 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 starting our second year,” Reynolds said.