The Iowa Board of Regents and the UI Children’s Hospital

This post is part of an extended Open Letter to the Iowa State Auditor.

A little over eleven years ago, in March of 2008, the University of Iowa Hospitals and Clinics (UIHC) — which is owned by the state and administered by the Iowa Board of Regents — commenced a feasibility study for constructing and operating a new, dedicated children’s hospital. That study was in turn the result of decades of conversation about moving the various pediatric units into a single facility, thus building out UIHC’s infrastructure in a market already heavily influenced by the university’s massive, sprawling medical complex. Despite the fact that much of the campus would soon be inundated with catastrophic flooding, by 2011 that study had turned into an active and accelerated plan, with an initial budget of $270M. (Project timeline here.)  

As for covering the considerable cost of the new UI children’s hospital, after narrowly missing out on a substantial grant the project was to be funded with a mix of bonds, patient revenue and charitable giving. Despite ownership by the state, the regents took pains to note that the project would involve no taxpayer money — which might also imply that the Iowa State Auditor would have no need or even authority to look at the project books. While legislative appropriations may not have played a direct role in construction, however, any amount of money borrowed by or spent by the Board of Regents is state money, including bond offerings, money from patient revenue, and money donated by private citizens.

Between 2011 and 2015 the projected cost of the new UI children’s hospital increased 27%, first from $270M to $292M, then to $360M. The board’s pitch on funding the project, however, remained unchanged. From the current webpage for the UI children’s hospital:

Cost: Approximately $360 million – funded through bonds, patient revenue, and private gifts. No tax dollars being used.

The updated $360M estimate for construction was released on September 1st, 2015 — the same day that an obscure candidate for the vacant UI presidency conducted his now-infamous open forum, which made clear that he was unqualified for the position. Despite tacking on another $68M to the cost, however, above and beyond the prior $22M increase, the regents continued to insist that the entire budget would not involve any state appropriations. From the Gazette’s Vanessa Miller, on 09/01/15:

The 507,000 square feet of new construction, plus 56,250 square feet of renovated space, originally was budgeted to cost $292 million, to be paid through bonds, patient revenue and gifts.

Safety updates, clinical upgrades, patient environment enhancements and construction considerations have pushed that total upward of $360 million. Construction is on track to finish in fall 2016, with occupancy slated for that winter. The extra $68 million to pay for it will come from hospital revenue bond proceeds and gifts — not taxpayers.

Two days later, the Board of Regents shocked the UI community and the higher-ed industry nationwide by appointing the obscure and unqualified presidential candidate — former business executive J. Bruce Harreld — to preside over the University of Iowa for the next five years. Two months later, when Harreld finally took office at the beginning of November, he not only took ownership of the school, but of construction of the new children’s hospital, which was behind schedule and over budget. Bringing his private-sector experience immediately to bear, Harreld first chastised the hospital administrators for specifying a firm opening date in late 2016, which they would not be able to meet, then formulated his own broad, opening-date range, which the school then also failed to meet.

On the budget front, for almost two and a half years following Harreld’s hire the regents did not update the cost of construction, or update the funding picture, even after parts of the children’s hospital opened in 2017. Then, starting in March of 2018, reports began to appear — largely from the Gazette’s Vanessa Miller — which made clear that all was not well. From 03/30/2018:

The University of Iowa has been ordered to pay a Cedar Rapids contractor nearly $21.5 million following a yearslong legal battle over its work on the new Stead Family Children’s Hospital and Hancher Auditorium.

Documents made public this week show an arbitration panel issued the final award March 5 in Modern Piping Inc.’s favor, noting the contractor “incurred substantial expense in performing additional work for which Iowa was clearly responsible to pay.”

Multi-million-dollar disputes with contractors were not the only concern. As more details emerged about the bungled management of the project, it also became clear that money was being spent without sufficient controls, and without any consequence or accountability from the university or the regents. From a report by Miller on 05/10/18:

Temporary fixtures and facades for a November 2016 open house at the new University of Iowa Stead Family Children’s Hospital cost nearly $300,000, according to information obtained by The Gazette in a public records request.

The $360 million hospital wasn’t as far along as administrators had let on, making the facade necessary.

Days after tens of thousands toured the hospital during the Nov. 5-6 open house, some of the building’s temporary ceilings, carpet — even a sprinkler system — came down.

Then, less than two weeks before the planned December opening, UI officials announced the hospital wouldn’t start seeing patients until January or February due to construction delays.

From an extensive profile of the entire project, on 07/09/18:

The extra $239,116 included 698 worker hours to expedite production and delivery of the doors, which flew from Switzerland to California on three planes. Then the doors made the journey by truck to Iowa City, with drivers taking turns through the night to get them here on time.

But just days before the UI planned to show off its new hospital to the public, the executives handed down a new directive: never mind.

The UI postponed much of the rushed installation until after its public tours, saying it got a certificate of occupancy anyway. But the delay meant crews would be called back to town later, at yet more expense.

The swap increased the cost of the doors from $122,080 to roughly $1.2 million.

Only days later, additional reports about legal problems appeared (here and here), precipitating a bitter court fight well into 2019. That battle eventually culminated in Harreld and a regent publicly charging a former contractor with “extortion”, while also asserting that the new children’s hospital — which the university and board had opened to patients more than a year earlier — was unsafe, and at risk of leaks or explosions.

On the funding side, an important tipping point seems to have occurred early on, in March of 2016 — only four-plus months into Harreld’s tenure at UI:

UI Health Care Chief Financial Officer Ken Fisher kept in the favorable numbers but removed the commentary characterizing the project being in a “strong cash position.”

“The project is not in ‘strong cash position,’” he wrote to UI Hospitals and Clinics Chief Executive Officer Ken Kates. “But UIHC is. We are now using our cash.”

…

When asked during his deposition if he was aware other UIHC budgets were being tapped to pay for Children’s Hospital construction, Kates said, “Absolutely not.”

If UIHC was self-funding the children’s hospital from patient revenue, reports at the time did not mention that fact, even as UIHC began evidencing financial concerns of its own. In September of 2016, UIHC reported its “best budget year in history“. One year later, in September of 2017, UIHC reported a deficit:

University of Iowa Hospitals and Clinics’ operating income for the 2017 budget year that ended June 30 was down nearly 50 percent from its budget and more than 72 percent from the previous year.

Nowhere in the reporting on that financial freefall, however, was there any mention of construction costs for the new children’s hospital, let alone how those costs might be eating into UIHC’s profits — and such questions have never been publicly addressed. On the legal front, much of the chaos seems to have been resolved in the past few weeks, but a full accounting of many of those matters has also not been made, and may never be made if the University of Iowa and the Board of Regents remain the only finders of fact. As to the total project budget, the current cost of the UI children’s hospital now stands at almost $400M, with additional residual legal action anticipated by the same contractor that Harreld persecuted in the courts for over a year.

Perhaps not surprisingly, in the past month or two there has been a notable change in how funding of the most-recent cost overruns is being characterized. Instead of insisting that no taxpayer revenue has been or will be used, the university made a rhetorical shift without calling attention to that change. From 04/04/19:

In the UI statement Thursday, officials reported the UI Hospitals and Clinics is a self-supporting enterprise and will pay for the Children’s Hospital cost increase — meaning the money won’t come from the university’s general education fund.

The statement didn’t elaborate on where the money would come from [in] the UIHC budget.

From 04/09/19:

“The university, in conjunction with the Board of Regents, has reviewed and improved its contracts, procedures, and delivery methods as it relates to construction projects,” Harreld said in a statement.

UIHC building usage funds will cover the higher cost, not general education dollars.

The University of Iowa’s General Education Fund is primarily comprised of state appropriations (about $215M in FY2019) and tuition revenue (about $483M). These recent statements about the Gen-Ed Fund would seem to confirm that no state appropriations or tuition revenues are being spent on construction costs, but that’s not the only money that is now outstanding. As to the cash that has been forfeit as a result of the aggressive and hostile legal stance taken by UI, that’s outside of the arbitrated awards for the cost of construction.

* On 04/16/19 the Daily Iowan’s Marissa Payne reported that UI paid $3.9M to blackball a contractor (Modern Piping) from construction of the new UI pharmacy building, in apparent retribution for legal setbacks related to the children’s hospital.

* On 05/15/19, when UI finally relented and paid the millions it owed to that same contractor — after losing multiple court cases at considerable cost — included was $2M in interest, which accrued when UI refused to pay the judgement after it was originally awarded.

* On 05/17/19, after receiving belated compensation from UI for work already completed, the contractor in question announced that it would sue the university for an additional $3.1M, for the time and expense of defending itself against UI’s “frivolous legal argument”.

In sum, the University of Iowa incurred an additional $6M in costs apart from construction, and may eat another $3M judgment before all is said and done. That’s a potential $9M in state assets ($3.9M + $2M + $3.1M = $9M) that would be forfeit as part of the overall cost of the new UI children’s hospital, yet not a dollar of that money would be spent on the actual building. So where is all of that additional money coming from, if it isn’t coming from state appropriations or tuition revenue?

The rhetorical shift from prior claims that no “taxpayer” money was being used to fund the children’s hospital, to claiming that no “general education fund” revenue is being used, is not an accident, yet without access to the books we have no way of determining which money was spent on what. Despite such rhetorical shell games, which are routinely perpetrated by the board and the state universities, and despite the disparate sources of funding, by definition all of the money that was used to construct the UI children’s hospital was state money at the time that it was spent on that project. And of course what should matter most to the board and UI is whether that state money was spent responsibly or recklessly, yet so far we have not seen a single person suffer any consequence even for demonstrably negligent, derelict or wasteful acts.

The UI children’s hospital may be the single most expensive construction project in the history of the Board of Regents. In that context, over the past six years the board has paid for an ongoing external audit — or series of audits — by Navigant Consulting. Despite repeated reference to those audits in the press, however, the documents themselves do not seem to have been posted online. (For context in the following quote, note that the problematic ‘planegate’ audit, which was conducted internally by the Board of Regents, was overseen by now-retired Todd Stewart.)

From the Gazette’s Miller, on 03/30/18:

The legal fights exemplify issues an internal audit highlighted back in March 2015 — nearly three years after construction on the hospital started in 2012 and two years before the it opened. That audit, conducted by Navigant Consulting, determined the UI chose an uncommon and “not ideal” contract structure and delivery method that would drive up the project cost and delay its schedule.

Board of Regents officials don’t know if a copy of that report was provided to board members, although auditor Todd Stewart mentioned it briefly during an April 2015 meeting.

Stewart at the time said hospital officials were “pleased” with the audit and its findings, and no regent asked questions. Five months later, the university asked for board approval to increase the Children’s Hospital project budget more than $68 million to $360.2 million — pointing to a need for new design changes in the areas of safety, programmatic and environmental enhancements.

In its September 2015 request for more money, which regents unanimously approved, UI officials mentioned tornado events requiring stronger windows; an Ebola outbreak requiring specialized infrastructure; and environmental features to facilitate hospital wayfinding.

This audit spanned 2012 to 2015 — meaning it was largely completed before Harreld took office — yet it is not clear that it was ever made available to members of the board, let alone to the public. Befitting the duration and complexity of the entire project, and setting aside the absurdity of the justifications that were offered for going an additional $68M over budget, Navigant continued to monitor progress on the project, then issued another report three years later. From the DI’s Katie Ann McCarver, on 09/13/18:

Over the last three years, Navigant Consulting Inc. has conducted an investigation into the efficiency of policies, procedures, and internal controls at the Children’s Hospital and its remaining construction costs.

The Navigant review of the facility comes as the UI defends itself against allegations by Modern Piping, which claims that the UI did not pay what was owed during the construction of the Children’s Hospital. Harreld responded to the case at the state regents’ Audit and Compliance Committee meeting in the IMU on Wednesday.

…

“Auditors noted a lack of accurate progress reporting and monthly updates,” Chief Audit Executive Patrice Sayre said. “There were insufficient contingency funds and limitations in software, including no efforts to integrate with university systems.”

Further points included misalignment of scope and budget, insufficient scheduling, slow turnaround times for change orders, and more.

“At the conclusion, management has altered many processes according to the suggestions made by Navigant,” Sayre said. “They’re changing turnaround times and providing the appropriate documentation for variation of amounts.”

Overall, the Children’s Hospital has made changes to its development and management of schedules, standardization of guidelines, and enhanced use of technology, Sayre said.

“We welcome audits on campus,” Harreld said. “We knew we had issues, and knew we needed to change some things. So we did.”

While it is reassuring that UI President J. Bruce Harreld welcomes audits — including, presumably, those conducted by the State Auditor of Iowa — neither of the Navigant audits seem to have been posted to the UI or Board of Regents websites, nor have a number of the reported irregularities been subsequently explained. (The audits, and presentations about same to the board, are listed in the board’s meeting agendas, but the audits themselves are not linked. Note also that at the November 2018 regent meetings, former State Auditor Mary Mosiman gave a report about state audits during the same meeting that the board talked about the second Navigant audit, yet no one seems to have asked the state auditor to review the construction of the new children’s hospital, which would soon approach $400M in total cost. Indeed, the only substantive conversation in the minutes of that meeting involves the board encouraging Harreld’s failed litigation strategy, which will cost the state an additional $6M-$9M.)

From what little we do know, there is probably no better example of the excess and financial disregard that permeated the entire project than the fake construction which was approved and then ripped out, merely to engender positive publicity. From the Gazette’s Miller, on 05/10/18:

Temporary fixtures and facades for a November 2016 open house at the new University of Iowa Stead Family Children’s Hospital cost nearly $300,000, according to information obtained by The Gazette in a public records request.

The $360 million hospital wasn’t as far along as administrators had let on, making the facade necessary.

Days after tens of thousands toured the hospital during the Nov. 5-6 open house, some of the building’s temporary ceilings, carpet — even a sprinkler system — came down.

Then, less than two weeks before the planned December opening, UI officials announced the hospital wouldn’t start seeing patients until January or February due to construction delays.

At the time, UI Health Care spokesman Tom Moore said administrators were working with project manager Gilbane Building Co. to “more fully understand the reasons for the delay” on the project.

In 2016 there was an open house at the children’s hospital on November 5th and 6th. Less than a week later, however, on November 11th, UI also held the dedication ceremony for the new children’s hospital, at which Jerre Stead and his wife made a personal appearance. It is not clear from reporting at the time whether the fake construction was ripped out before or after the dedication ceremony, but given that Stead initiated and championed Harreld’s presidential candidacy, then Harreld almost immediately dedicated the hospital to the Stead family (as detailed in the previous post), it is worth asking whether the fake construction wasn’t installed for the dedication ceremony in the first place. (Photos from the dedication here; video here. In that video — which was shot just over a year after Harreld took office, and after Harreld told repeated lies about his prior relationship with Stead — note also that Harreld describes Jerre Stead as “my good friend”.)

While we don’t know the specifics, as a factual matter someone did order that a significant amount of money be spent on fake construction, on a state project that was already behind schedule and over budget. Even if that money was donated to UI, that is not a responsible use of state resources unless that money was expressly donated for that extravagant purpose. And of course if that money came from patient revenue, or from bonds issued by the regents, there is no scenario in which that expenditure would be valid. Despite the fact that the state auditor’s office routinely conducts special investigations, however — which often involve much smaller amounts of money — no public accounting of that particular expense has ever been made.

On that same point, it should be abundantly clear — both in the aftermath of the ‘planegate’ debacle, and following the persistent lack of oversight on the UI children’s hospital — that the Board of Regents cannot be trusted to audit itself with any integrity, whether internally or externally. Despite overt examples of wasteful spending, which may have been motivated by crony associations, the board has not held anyone publicly accountable for mismanaging the construction of the UI children’s hospital, even as the total cost is now closer to half a billion dollars than to the original $270M budget. In the absence of any investigation, it should also be expected that the board will simply move on, if only to avoid accounting for where all of that money actually went.

All of which brings us to an obvious question:

Why has there been no official state audit of the construction of the UI children’s hospital?

Among specific concerns that need to be addressed:

* Who changed the shape of the building just prior to the commencement of construction, thus vastly inflating the cost?
* Who ordered construction to commence before the design was completed?
* Who signed off on the special doors, and expedited delivery of same, at a cost of $1.2M?
* Who ordered, and who ultimately paid for, the $300K in fake construction?
* How much money was spent on change orders?
* What are “UIHC building usage funds” and where does that money come from?
* How much patient revenue was diverted to construction costs?
* Were construction funds moved around internally at UIHC, to cover cash-flow shortages?
* Were operating funds moved around internally at UIHC, to cover cash-flow shortages related to construction?
* Did construction costs impact UIHC operations, financial performance, or patient care?
* Has any taxpayer revenue been used to fund construction, either directly or indirectly?
* Has any taxpayer revenue been used to fund litigation, either directly or indirectly?
* Has any tuition revenue been used to fund construction or litigation?
* How much money has the UI Foundation/Center for Achievement contributed in donations?
* Why did it take six years and multiple audits before proper controls were put in place?
* What is the current total projected cost of construction?
* What is the current total projected cost of litigation?
* Who decided to pursue litigation at all costs?
* What is the current total projected cost of the entire project?
* Is there any money that is not properly accounted for, and if so how much?

Despite spending almost $400M over six-plus years, and despite multiple external audits — and despite the board hiring a former business executive to run UI — there were insufficient controls and safeguards in place during construction of the UI children’s hospital. From fake construction to extravagant upgrades to pursuing a belligerent legal strategy, this massive state project is a testament to disregard for state resources, yet there’s much we don’t know. At the very least, it would seem to be in the state’s interest to shine a bright light on any improper decisions that were made, if only to preclude similar waste and abuse in the future.

Mark Barrett