Auditor says amended contract for ESA program administration doubled cost

Iowa Auditor of State Rob Sand held a news conference Feb. 15, 2024 to discuss the impacts of a 2023 law restricting the office's access to certain documents. (Photo by Robin Opsahl/Iowa Capital Dispatch)

Iowa Auditor of State Rob Sand released a report Tuesday that says the state will pay more to the company managing the Education Savings Account (ESA) program than originally planned.

Odyssey, a New York-based company, was chosen in February 2023 to oversee the disbursement of funds for the ESA program a month after the measure was signed into law by Gov. Kim Reynolds.

The program provides funding to Iowa’s K-12 students, which for the 2024-25 school year amounts to $7,826 for private school tuition and associated costs. The law implemented the program over a three-year period based on family income levels. All kindergarteners, Iowa public school students and private school students that have a family income of 300% over the federal poverty line are deemed eligible for the 2023-2024 school year. The income limit will be raised to 400% of the FPL for the second year of implementation, and there will be no income limit beginning with the 2025-26 school year.

The auditor’s report says that while the initial contract states Odyssey would be paid $682,333.75 in the first year of implementation and $729,550 in following years, the contract was amended by the Iowa Department of Education to include a transaction fee of 25 cents per $100 of qualified educational expenses.

This would result in a cost of roughly 5 cents per ESA transaction done through the Odyssey system, Sand said in a news release. The new contract means the cost for the state will be “more than double by fiscal year 2027.”

The audit stated that an additional $267,250 was paid to Odyssey in fiscal year 2024 because of the fees approved through the amended contract. In FY 2025, an added cost of $390,750 above the Legislative Services Agency estimate will by paid to the company, the audit found, as well as$784,750 in FY 2026 and $852,750 in FY 2027.

Sand, the only Democrat to hold statewide elected office in Iowa, said in a news conference Tuesday that these estimates are “conservative,” and that the new contract could result in even higher costs for the state.

“For example, the governor recently announced the 30,000 students were approved for ESAs in this coming upcoming year,” Sand said. “If 30,000 receive the full voucher then, actually, that would cost for that fiscal year an additional $587,000, when our report only estimates an additional $391,000. So our report actually is on the conservative side here.”

Reynolds said in a statement Tuesday that the contract was amended to cover operational expenses of the program that “shouldn’t be passed on to Students First ESA participants and their families.”

“Even if the state incurs all projected transactional fees, Iowa’s three-year contract with Odyssey totals $3.7 million, less than half the cost of its closest competitor’s estimate of $8 million,” Reynolds said in a statement. “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.”

In an email to the Iowa Capital Dispatch, Iowa Department of Education Communications Director Heather Doe said that “transaction fees are a common and necessary cost of transferring money through an e-commerce platform,” and that the costs incurred by the amended contract with Odyssey are still below the costs incurred from a contract with other vendors.

“The state conducted a thorough evaluation to determine whether the amended contract would remain competitive compared to the original contract pricing,” Doe wrote. “… Other vendors providing ESA services charge a 2.5% transaction fee, ten times higher than the fee charged by Odyssey. The amendment terms specified that all transaction fees would be passed directly to the state with no upcharge and transactions would be consolidated by participating non-public schools, further limiting the number of transactions subject to the $0.25 charge.”

By comparison, Doe said, the closest ESA contract bidder would have a first-year cost of $3,600,000.

The state has already taken on larger costs than the LSA estimated for the ESA program, with roughly $23 million more being spent in the first year than predicted because more families participated than were expected.

Sen. Herman Quirmbach, D-Ames, said in a statement Tuesday that the audit showed “an alarming lack of transparency and accountability from the Department of Education when it comes to the proper stewarding of taxpayer funds.”

“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.”

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