The Minnesota Department of Human Services failed to provide adequate oversight while awarding tens of millions of dollars of grants to support the homeless and others in need of housing assistance, according to a state legislative auditor report released Monday.

The financial audit by the state's top government watchdog found significant weaknesses in the agency's internal controls, as well as violations of the state's legal requirements in the management of grants by two divisions within the agency. Over the past three years, the Department of Human Services (DHS) has doled out more than $130 million in grants to local governments and nonprofits to support people who are homeless, mentally ill, receiving public assistance, or who are runaway youth and possibly at risk of sexual exploitation.

The 52-page report by the Office of the Legislative Auditor, a nonpartisan arm of the Legislature, found nine areas in which the agency's internal controls were inadequate or failed to comply with state legal requirements.

The Department of Human Services did not always document potential conflicts of interest in emergency grants to homeless service providers during the pandemic, the auditor found. Those grants were designed to provide additional shelter and isolation space for homeless individuals, and to help prevent the virus from spreading among that population. The state social services agency also did not evaluate the financial stability of non-governmental entities before making grant awards and failed to perform required monitoring visits — both in violation of state policy, the auditor found.

The findings reflect longstanding problems with the grant-making process at Minnesota's largest state agency. In March 2021, the legislative auditor found pervasive problems in the handling of grants for mental health and substance abuse services in the agency's Behavioral Health Division. At the time, Human Services Commissioner Jodi Harpstead pledged to strengthen internal controls and restore public trust in the agency, which oversees public health insurance programs for 1.1 million Minnesotans.

In a statement Wednesday, Harpstead said it was important to consider the report's findings in the context of the urgent pressures her agency faced during the pandemic to assist people in need.

During the early months of the pandemic, DHS received an influx of state and federal funding to move people experiencing homelessness into safer places. Without additional staffing, the agency had to disperse the money quickly to providers and emphasized speed over following established processes. Harpstead added that her agency has been "working diligently" over the past three years on improvements in its grant-making process, which should resolve many of the report's findings.

The report comes nearly three years after DHS's reputation was badly damaged by a series of costly and embarrassing 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 state's Medicaid 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.

House Deputy Minority Leader Anne Neu Brindley, R-North Branch, said the latest report raises "serious red flags" about financial oversight at the agency, and whether the money awarded to local agencies and nonprofits actually is actually going to support the people it's intended to help.

"It's really critical that we are funding programs that do good work, so it's alarming to learn from this report that DHS didn't even document how it's making these [grant] decisions," Brindley said. "Were they making these decisions based on good policy? Or were they making these decisions based on who was coming to ask? The answer is, we don't know and that's a huge problem."

The housing grants are administered by two DHS divisions — the Office of Economic Opportunity and the Housing and Support Services Division. Before the pandemic, the state's general fund was the primary source of funding for these grants. The department has since received a significant boost in federal funding to provide additional shelter, food, staffing, and isolation spaces for homeless individuals or other persons who were unable to isolate at home. Due to increased need, the annual expenditures for these grants more than doubled between 2020 and 2021, to about $69 million.

The legislative auditor reviewed a sample of grant contracts to determine if DHS followed state legal requirements. The auditor found that the agency did not document potential conflicts of interest for many of the individuals involved in the grant reviews. All told, agency employees did not complete conflict of interest forms for $63.5 million in grants they reviewed, the auditor found.

"Noncompliance with conflict of interest legal requirements leaves the department open to potential fraud and abuse," the report said. "Grant evaluators may award grants in a biased manner, and grants may be issued to applicants who are unable to deliver required services. In addition, applicants who are the most qualified may be denied a grant."

The auditor also found problems with the agency's standardized system of scoring applications, which helps determine who is selected for a grant. In some cases, DHS did not maintain scoring sheets, so the auditor could not determine whether scores were accurately calculated.

In some cases, the agency also failed to comply with a state policy that requires the agency to evaluate the financial stability of outside organizations before awarding them grants. The auditor found that, for 91 of 117 grantees, the agency's staff did not fully complete the financial reviews, yet still awarded about $37.6 million to those organizations. "Without effective review of an organization's financial stability, DHS may award grants to providers that are not financially capable of fulfilling the expected outcomes," the report said.

Once grants were awarded, DHS staff did not always follow up to monitor if the money was being spent appropriately. The agency failed to obtain and review progress reports, and sometimes issued funds to grantees that had submitted past-due reports. In one case, an organization submitted blank progress reports for three quarters yet was still paid $460,907 for that period. DHS also mistakenly paid $73,405 to two service providers who never requested the money, the auditor found.

"There was a pandemic and there was great time pressure to get people to safe places," said Sen. Jim Abeler, R-Anoka, who oversees a key human services committee. "But given the concerns raised in this report, it's now a good time to follow up and see if any of that money was misused."