Lawmakers grill DHS chief about shoddy financial controls

State lawmakers leveled tough questions at the head of the Minnesota Department of Human Services (DHS) on Tuesday, with some calling for the breakup of the behemoth agency over its history of poor financial controls and revelations that it failed to adequately oversee tens of millions of dollars in housing grants.

The grilling came in a prolonged Senate hearing exploring DHS' internal processes for ensuring that money awarded to local government agencies and nonprofits actually go to the people they are intended to help. A legislative auditor's report released this month found extensive violations of state legal requirements in the oversight of grants meant to help marginalized populations, including homeless people and people struggling with mental illness, during the COVID-19 pandemic.

The auditor's review found no evidence of misspent funds or fraud, but also could provide no assurance that fraud didn't occur.

"I don't really have any trust in an agency that can't tell me if fraud occurred," said Sen. Karin Housley, R-Stillwater, at the hearing. "That doesn't work. That doesn't fly. I do think we need to take a serious look at overhauling the agency."

Other legislators were more pointed in their criticism, repeating past calls for the agency to be split up into smaller parts to improve accountability. In a display of frustration, Sen. Jim Abeler, R-Anoka, who heads the committee that held Tuesday's hearing, waved a stack of old audit reports critical of DHS to underscore his view that the agency has become too large to manage effectively.

"The trust of the public is what's at stake here," Abeler said. "And I have to say it's not a new discussion."

In testimony, Human Services Commissioner Jodi Harpstead defended the agency's track record of disbursing aid to people in need, while suggesting that excessive regulation may be partly to blame for the agency's recent problems. She highlighted the cumbersome grant-making process, in which DHS must go through more than 80 steps required under state law. Those rules should be streamlined, she argued, so that money can get into the hands of providers faster — particularly in emergencies like the pandemic.

"I will say, once again, that the department manages over $20 billion in funding," Harpstead told lawmakers. "To look at this one audit and declare that DHS is a mess or in trouble is grossly unfair to the caring and competent people at the Department of Human Services."

Still, Harpstead signaled her openness to legislators' calls for a possible restructuring of DHS.

The sprawling agency has more than 7,000 employees, spent $23 billion in the last fiscal year, and oversees programs that serve 1.2 million Minnesotans, including Medical Assistance, mental health care and child-care assistance. In recent years, lawmakers on both sides of the aisle have called for splitting up the agency; and those calls have intensified with each new revelation of financial mistakes and deficient processes.

Near the end of her testimony, Harpstead said that former Deputy Commissioner Chuck Johnson, who retired in June after 38 years at DHS, had recently returned to the agency on a temporary basis to focus on reorganizing the agency. She and Johnson plan to develop recommendations to DFL Gov. Tim Walz on the structure of DHS. "He's back to help me think through all those [reports on the agency] with his vast experience in the department and my three years of experience in the department," Harpstead said.

During the past three fiscal years, the DHS distributed more than $130 million to local governments and nonprofits to help marginalized populations. Many of the grants were designed to provide emergency shelter and space for homeless individuals to help prevent COVID-19 from spreading among that population.

The legislative auditor's office said the agency routinely failed to evaluate the financial stability of the organizations that received the grants and did not perform required site visits to ensure the money was spent properly. The agency also failed to document potential conflicts of interest, the report found. The weaknesses in internal controls left DHS exposed to potential fraud and abuse, the auditor concluded.

State law requires agencies to assess the financial stability of any entity requesting more than $25,000. But in its review, the auditor found that DHS failed to do that review for 91 of 117 grantees. For the remaining 26, the documentation was insufficient, the auditor found. The requirement was even more critical during the pandemic, the auditor said, because many of the grant applicants were new and not familiar to the agency.

"You talk about dotting i's and crossing t's and sometimes there are too many t's and too many i's," said Sen. Michelle Benson, R-Ham Lake, at the hearing. "So let's focus on what needs to be done. But I get a sense that there are a lot of people underneath that action level that still don't get it."

The audit report comes nearly three years after DHS' reputation was badly damaged by a series of costly financial mistakes.

A 2019 review by the legislative auditor found "troubling dysfunction" at DHS, including instances in which individuals were allowed to make decisions to spend Medicaid funds without review and approval from department officials responsible for the insurance program. Those problems resulted in DHS overpaying Indian tribes and counties more than $100 million for substance-abuse treatment services — money that the department had to pay back to the federal government.

In brief testimony Tuesday, Legislative Auditor Judy Randall told the committee that deficiencies in grant oversight were a problem throughout state government.

"I wanted to note that we have released similar reports in previous years about DHS and other divisions, where we had many of the same findings related to grants oversight," she said. "So this is an ongoing concern we have at DHS across multiple divisions with many of the same findings."