For nearly three years, the Minnesota Department of Human Services (DHS) doled out tens of millions of dollars in grants for mental health and substance abuse services without providing adequate oversight over the grant-making process, according to a state Legislative Auditor report released Monday.

The audit by the state's top internal watchdog found extensive mismanagement and violations of state legal requirements in the handling of grants awarded by the department's Behavioral Health Division, which has a staff of 140 and made grant expenditures of about $134 million in fiscal year 2019.

The 56-page report by the Office of the Legislative Auditor, a nonpartisan arm of the Legislature, concluded that the Behavioral Health Division's grant-making process failed to comply with a "significant number" of state policy and legal requirements, and did not ensure that employees had the appropriate skills, knowledge and job descriptions to manage grants in compliance with state and federal requirements.

The division also did not follow state rules and policies to document potential conflicts of interest, according to the report. The audit was focused on grants and payments made between July 2017 through March 2020.

The Legislative Auditor's office "found that internal controls over the areas in our audit scope were not adequate to ensure that DHS, through its Behavioral Health Division, safeguarded assets and ensured compliance with legal requirements and state policies related to grant oversight," the report states. In some cases, division supervisors assigned grants to staff who lacked grant management training and experience or staff whose job duties did not explicitly describe duties and tasks related to managing grants, the auditor found.

The findings reflect long-standing problems within the DHS Behavioral Health Division, and come as Human Services Commissioner Jodi Harpstead is working to strengthen internal controls and restore public trust in the massive social service agency, which has a $21 billion budget and oversees public health insurance programs for 1.1  million Minnesotans.

In an interview Monday, Harpstead and DHS Compliance Officer Shireen Gandhi said the agency was already aware of management problems with the Behavioral Health Division and began to address them early last year through a series of process improvements, including an overhaul of the division's grants-management approval process and new training to ensure that all grants and contracts within the division are properly documented.

The division is also rolling out an automated system for tracking and reporting on grant management activities, which should help standardize procedures, they said.

"After my first 90 days as commissioner, I said that some areas of DHS are soft around the edges and we need to work on crossing the t's and dotting the i's," said Harpstead, the former head of Lutheran Social Service of Minnesota. "We've spent the past year working intensely on evaluating our processes and putting the pieces in place to start implementing changes."

The audit found 14 areas within the Behavioral Health Division where internal controls were inadequate or failed to comply with state legal requirements. While arcane, the internal controls are significant because they are the nuts-and-bolts procedures that govern how an agency performs its work and makes key decisions, like how to disburse funds or evaluate who is best qualified to receive a grant.

The DHS is still trying to recover from revelations nearly 18 months ago that it made more than $100 million in unauthorized Medicaid payments to Indian tribes and counties for substance-use treatment services, which had to be repaid to the federal government.

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 state's Medicaid program.

"Every time an audit comes out, DHS insists that the issues have been addressed, yet every time the [Legislative Auditor] seems to uncover new problems," said Rep. Tony Albright, R-Prior Lake, a member of the House Human Services Finance and Policy Committee, in a written statement. "We need real reform and real accountability, not more excuses, slogans, and window dressing."

Since taking the helm of the DHS in August 2019, Harpstead has rolled out a series of process-control improvements that have drawn praise from lawmakers and put the department on sounder financial footing. Those measures include centralizing financial decisionmaking and compliance, identifying gaps in grant-making processes, and convening quarterly leadership meetings on compliance and risk mitigation strategies.

DHS also has established clearer lines of communication between its division leadership and officials responsible for the state's Medicaid program, to prevent the sort of costly missteps that occurred in 2019.

The agency has repaid the federal government $103 million in Medicaid overpayments to Indian tribes and counties, and completed a review that found no further payment errors in 2020.

"I would say we're in the second inning of a nine-inning ballgame," Harpstead said of the process-control improvements. "It's not all fixed and behind us. It's all figured out. And we know what to fix and we're working through the steps to fix it."

Chris Serres • 612-673-4308

Twitter: @chrisserres