Minnesota agencies too lax on grant safeguards, legislative auditor finds

Minnesota’s Behavioral Health Division is failing to follow safeguards to ensure the best use of tens of millions in grant dollars to address addiction and mental health needs, according to a new report scrutinizing grant management by the division that has a history of problematic financial controls.

State officials need to make changes to prevent conflicts of interest, increase transparency in funding decisions and ensure the government isn’t giving taxpayer dollars to financially risky groups, the Office of the Legislative Auditor recommended.

“In recent years, legislators, government officials, and others have raised concerns about grant administration in Minnesota,” the auditor’s office wrote in a program evaluation released Thursday, which also examined the Minnesota State Arts Board. “Because grants represent a large investment of public funds and can be susceptible to fraud or abuse if not properly managed, there is widespread interest in protecting grant investments.”

The nonpartisan watchdog office said its staff focused on the two agencies that have awarded the most grants to nonprofits in recent years.

Lawmakers have been calling for more oversight of state dollars to nonprofits in the wake of the nonprofit Feeding Our Future scandal, which federal prosecutors have called a “massive scheme” to defraud the government. The Minnesota Department of Education oversaw funding in that situation.

The Behavioral Health Division of the Department of Human Services gave out about $28 million in state-funded competitive grants to 114 recipients last fiscal year, the report states. Nonprofits, local governments, tribal nations and individuals all got some of the dollars.

The Arts Board distributed $29 million to 778 artists and arts organizations, the auditor’s office noted, and another $12.5 million to regional arts councils.

Behavioral health staff failed to appropriately conduct or document risk assessments of grant recipients in 44% of the cases the auditor’s office reviewed. Those assessments are supposed to ensure a recipient of taxpayer dollars is financially sound. The Arts Board generally complied with the state’s financial review policy, but did not do assessments in a few cases.

The auditor’s office said it doesn’t know if the lack of assessments led to bad outcomes, but warned the agencies “may inadvertently award grants to entities that may not be financially healthy or capable stewards of state funds.”

Minnesota Department of Administration is in charge of improving state grant processes. The report recommended the department provide more guidance to agencies and said it should require state workers who make funding decisions to complete a conflict-of-interest disclosure for each grant process.

This wasn’t the first time the auditor’s office looked into Behavioral Health’s grant management. A 2021 audit found the division did not have adequate internal controls and wasn’t complying with grant oversight requirements. The auditor’s office also looked into the Arts Board grant administration in 2019 and found it generally followed state policies, but needed some improvements.

DHS Commissioner Jodi Harpstead agreed with a number of recommendations in the new evaluation, including the need for grant reviewers to disclose conflicts of interest and that the division should complete risk assessments before awarding money to organizations.

In a letter responding to the report, Harpstead said the agency has made changes to improve how grants are handled, including developing a web-based system to manage contracts and store related documents and creating a Central Grants Office to oversee DHS grantmaking and align it with state and federal requirements.

“DHS can take immediate action and promptly implement these recommendations as part of the newly established systems and supports, which are either fully established or in various stages of implementation, as identified in this letter. Ensuring compliance and integrity in the contract and grantmaking process remains paramount and is among our highest priorities,” Harpstead wrote.

A DHS spokesman said Thursday the agency doesn’t have any new information or additional comment beyond the commissioner’s letter.

Minnesota State Arts Board Executive Director Sue Gens noted in a letter that the auditor’s office highlighted strengths in the Arts Board’s work, including engaging Minnesotans in grantmaking and identifying and mitigating conflicts of interest.

However, the report found the Arts Board did not provide required documentation justifying situations where it deemed only one organization could reasonably fulfill a grant’s purpose. Gens said the board will complete justification forms for such situations in the future.