Education

Regents given rosy UI Children's Hospital budget, but...

Records indicate project will run millions over approval

Under budget or over budget? Days after the first patients moved into the University of Iowa Stead Family Children’s Hospital, UI officials forwarded to Iowa’s Board of Regents information showing the project would be more than $9 million under budget. But an earlier budget that has surfaced as part of a lawsuit shows a very different outcome. While lawsuits continue that will determine the final cost, the hospital has gained national acclaim for “the wave.” Fans wave Sept. 1 at patients in the Children’s Hospital between the first and second quarters of the game against the Northern Illinois Huskies at Kinnick Stadium. (Cliff Jette/The Gazette)
Under budget or over budget? Days after the first patients moved into the University of Iowa Stead Family Children’s Hospital, UI officials forwarded to Iowa’s Board of Regents information showing the project would be more than $9 million under budget. But an earlier budget that has surfaced as part of a lawsuit shows a very different outcome. While lawsuits continue that will determine the final cost, the hospital has gained national acclaim for “the wave.” Fans wave Sept. 1 at patients in the Children’s Hospital between the first and second quarters of the game against the Northern Illinois Huskies at Kinnick Stadium. (Cliff Jette/The Gazette)
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IOWA CITY — Just two weeks after the new University of Iowa Stead Family Children’s Hospital welcomed its first patients in February 2017, then-Board of Regents President Bruce Rastetter asked for an update on the project’s budget.

A day later, UI executives circulated a Children’s Hospital budget showing “projected final costs” running $9.5 million under the $360.2 million approved level — a favorable outlook forwarded to the board.

To be sure, the document showed that existing and expected financial commitments would exceed the budget — but that “anticipated adjustments” then would shave $15.2 million off the total.

UI administrators cited plans to, among other things, reject “unsubstantiated” reimbursement requests from contractors for unexpected project changes.

“The net effect is that the total project cost is expected to be $350.9 million, or $9.4 favorable to budget,” UI project manager Jason Miller wrote March 16, 2017, to then-Children’s Hospital Executive Director Scott Turner. He noted that the “project remains in a strong cash position.”

That optimistic projection for the largest construction project in regents history does not jibe with an earlier — and costlier — version that came to light in court proceedings with contractors suing over millions they say they are still owed by the UI for work on the project.

The earlier version showed the contractors’ expense portion of the total project budget — the lion’s share of it — was forecast to be $36.4 million over its allotment.

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Nonetheless, the reassuring report was forwarded to the Board of Regents office, albeit it with a deletion.

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.”

In a deposition of Kates — taken July 18 in connection with one of two contractor lawsuits against the UI — Kates said he did not authorize Turner or Miller to change numbers to make the project look more favorable to regents.

“Were you aware that Mr. Miller or Mr. Turner had changed the financial information, specifically the projected trade contractor costs, before you forwarded it on?” asked contractor attorney Jeff Stone.

“I was not,” Kates said. “Mr. Turner or Mr. Miller never had any instructions or permission from me to alter any numbers.”

The budget shifting exemplifies gripes that Children’s Hospital construction project manager Gilbane Construction articulated in email after email — including in one sent Dec. 26, 2016, about two weeks after the hospital missed a Dec. 10, 2016, date to move in its first patients.

“The root cause of the schedule situation of this project is that Scott (Turner) wasn’t and isn’t straight-forward with Ken (Kates), and now Scott is both trying to fix it and to not be exposed,” Gilbane senior project executive Jennifer Halstead wrote in the email obtained by The Gazette, adding, “We are headed for the same scenario with the budget.”

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“Scott knows the risk well because he has been pushing money to other budgets and now removing forecast costs from the trade costs,” she wrote. “Next he minimizes the situation when presented to Ken, and then uses us as the scapegoat in public.”

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.”

“Were you aware that forecasted trade contractor costs were being removed from estimated costs?” attorney Stone asked.

“Absolutely not,” Kates said.

Turner, who has since left UIHC and now serves as chief operating officer for the Children’s Hospital of Wisconsin in Milwaukee, did not respond to questions from The Gazette about his oversight of the UI project. UIHC officials also didn’t comment for this article.

In an updated project budget UIHC provided The Gazette in June, hospital officials reported commitments of nearly $370 million — though they still projected a final cost of $356.6 million following adjustments of more than $13 million.

The university didn’t expressly note the source of those adjustments, although it’s fighting over tens of millions in backcharges and unpaid bills with two contractors on the Children’s Hospital project. Modern Piping Inc. won a $21.5 million award — most of it for work on the hospital — from the UI, but the university is appealing. Merit Construction, which is headed to arbitration, is seeking about $13 million more from the UI.

While those disputes play out and could affect the bottom line, a third and final version of what has been a critical internal audit of the Children’s Hospital project shows a different projected final cost, of $364.1 million, about $4 million over budget.

That audit, publicly released last week, is scheduled to be presented to the regents Wednesday in Iowa City.

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Regents policy requires board approval for any project cost overrun exceeding $2 million, board spokesman Josh Lehman said.

“Neither the board nor board office has approved any budget increase,” he told The Gazette this week.

When asked about a possible increase during his July deposition, Kates said he wasn’t aware of such discussion.

The university already has upped its Children’s Hospital budget from $270.8 to $360.2 million following an internal audit that was critical of the project management style, excessive design changes, lack of contingency funds and delays.

The final report notes that “team-building and partnering workshops” resulted in “significant improvements in communication, collaboration, and teaming,” resulting in an “effective and well-documented closeout process.”

Kates, who is retiring this fall, said in his deposition he had little involvement in tracking the project’s financial status or implementing audit suggestions.

He noted, though, UIHC was “always focused on bringing in the projects at completion at budget” and said ongoing design changes depended on “available money in the budget.”

“Examples might include the — some of the features in the main lobby … having a children’s press box and things like that on the twelfth floor.”

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The hospital’s “press box,” where pediatric patients and families can overlook neighboring Kinnick Stadium, has achieved acclaim for the “wave,” where Hawkeye fans acknowledge the kids during home games.

Fallout from rampant design changes, as uncovered in an investigation by The Gazette, included a delayed first-patient opening from Dec. 10 to Feb. 25.

Several months after the hospital opened, in September 2017, UIHC officials reported the enterprise had ended its 2017 budget year with operating income nearly 50 percent below budget and more than 72 percent below the previous year.

It also reported starting the new fiscal year with an operating income deficit of nearly $7.2 million. That deficit prompted the UI to launch an $86 million savings and revenue-enhancement initiative, which officials this week are expected to report achieved $65.5 million through June.

When asked during his deposition about revenue the new Children’s Hospital expected to generate, Kates said, “We did expect incremental revenue to come in once the new Children’s Hospital was open.”

But, he added later, he does not believe the hospital has operated profitably since it opened.

Larry McKibben — among the longest tenured regents on the current board, who was serving on its UIHC committee at the time the Children’s Hospital opened — said he expects to take an close look at the university’s handling of that project.

“I think we and the university both want this to be handled properly,” he said. “And that things in the future are handled differently than they were.”

Several lawmakers have said they intend to open a legislative investigation when the new session convenes to look into the UI’s handling of the project and its treatment of contractors.

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And McKibben said he will be listening to updates from UI President Bruce Harreld and Vice President for Medical Affairs Brooks Jackson.

But, he said, he has no reason to believe the UI did not provide accurate information to the board.

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