Many millions lost. Is the Walz administration taking fraud and waste seriously enough?

When Minnesota's legislative auditor issued a report stating the Department of Education's inadequate oversight of a federally funded meals program created opportunities for Feeding Our Future to steal $250 million, Education Commissioner Willie Jett blamed the alleged fraudsters, not his agency.

"The blame for this once in a lifetime, brazen, flagrant fraud lies with the indicted and convicted fraudsters, not individual food program personnel who have dedicated their careers to feeding children and who tried to stop this fraud," Jett wrote in a letter responding to the audit.

The Office of the Legislative Auditor (OLA) encountered similar pushback when it critiqued the state Department of Labor and Industry for not adequately verifying the eligibility of people who received checks from a $500 million frontline worker pay program. Labor and Industry officials disputed the audit's findings and said it was the Legislature that designed the program to favor expediency over stringent verification.

The OLA is Minnesota's nonpartisan government watchdog, an office long respected by both political parties. But over the past several years, Legislative Auditor Judy Randall said she's noticed state agencies becoming less receptive to audits critical of their work.

"I have seen increasing rejection of our findings and recommendations. Or denial or dismissiveness or excuses," Randall, who's worked in the office for 26 years, said in an interview. "There's definitely a shoot-the-messenger feeling."

The OLA's June reports about the departments of Education and Labor and Industry have prompted renewed scrutiny of Gov. Tim Walz's administration and its oversight of public funds. House Republicans held a news conference Monday accusing the governor of not holding his commissioners and agencies accountable enough.

Both Republicans and Randall have also raised concerns about Medicaid fraud allegations that have emerged in the past month regarding the state's autism program, overseen by the Department of Human Services (DHS). The department told the Star Tribune it has investigated 25 autism providers.

Asked about that revelation Wednesday, Walz said he is concerned about the possibility of fraud in another state program.

"There's folks, they will try and move one step ahead of us, they will continue to try and commit crimes," Walz told reporters after a news conference. "In many of these cases, and Feeding Our Future is one of those, people are going to prison, and that's where they need to go. And then we can continue to strengthen our protections."

Regarding the audits of the departments of Education and Labor and Industry, Walz and DFL lawmakers have stressed that the context of the COVID-19 pandemic must be taken into account. Agencies were scrambling to provide aid during a crisis and the administration says it's made substantial changes to try to prevent fraud.

But Randall said another theme emerged from the audits: Some agencies appear to lack a regulatory mindset, with employees focused more on being a helpful partner to program recipients than on oversight. She said the executive branch must instill a regulatory mindset into its agencies, and the Legislature must hold it accountable for doing so.

Year after year, Randall said, the OLA has found similar cases of financial mismanagement at state agencies.

Asked whether the governor's office takes the OLA's concerns seriously enough, Randall said, "I think they're very concerned about what our reports will say. I don't know about making changes thereafter."

The governor's office declined to make Walz available for an interview. In a written statement, Walz's spokesperson said: "We appreciate the OLA's work and often agree with them, which is why state agencies have implemented many of their suggestions.

"There are also times when the OLA's suggestions don't apply because the audits come out years after we've resolved an issue, they suggest actions that have already been taken, or they evaluate programs that no longer exist.

"Sometimes," the spokesperson continued, "state agencies have expertise and knowledge that the OLA does not, and in those cases we may fundamentally disagree."

'Missed opportunities'

The OLA has audited several state agencies and programs in recent years.

In 2019, it issued a report investigating allegations of fraud in the Child Care Assistance Program administered by the DHS. Auditors said fraud in the program likely totaled more than the $5 million to $6 million that prosecutors had documented.

Walz offered several proposals to improve oversight of state child care subsidies in 2019, his first year as governor.

A 2021 audit found DHS' Behavioral Health Division didn't have adequate internal controls and wasn't complying with grant oversight requirements. A subsequent audit in April of this year found the division was failing to follow safeguards to ensure the best use of grant dollars intended for addiction and mental health needs.

But perhaps no OLA audit was more scathing than the recently released report on the Education Department's oversight of the nonprofit Feeding Our Future. Auditors found the department "failed to act on warning signs" and was ill-prepared to respond or use its authority to hold Feeding Our Future accountable to federal requirements.

At a Legislative Audit Commission hearing in June, Education Commissioner Jett said his agency denied some of Feeding Our Future's meal program sites and stopped payments. The department has since added an inspector general to investigate fraud allegations and trained employees on fraud reporting, Jett said.

The Education Department declined to make Jett available for an interview.

Walz said last month that the OLA report was a "fair critique." But he defended Education Department employees in response to Republicans' calls that they be disciplined.

"There's not a single state employee that was implicated in doing anything that was illegal," he said. "They simply didn't do as much due diligence as they should've."

Looking for accountability

A group of House Republicans aired their frustrations with the governor and the agencies during a news conference on Monday.

"[Walz] has got to take responsibility," said House Minority Leader Lisa Demuth, R-Cold Spring. "If those in his administration and the commissioners that he has hand-selected are not willing to take responsibility, then he needs to."

Democratic state Sen. Ann Rest of New Hope was critical of the Education Department's response to the legislative auditor. Rest said during the audit commission hearing that she hadn't heard of such fraud in other states that have federally funded meals programs for children.

"The buck is still running down the street, running down the street and stopping nowhere," Rest said.

In an interview, Rest said she doesn't always agree with the legislative auditor's findings but thinks the office's work should be respected. She said she was surprised by how defensive agencies were in response to the recent audits.

The Department of Labor and Industry wrote an eight-page letter pushing back on the auditor's report that was critical of how it administered a $500 million frontline worker pay program.

Auditors found the department didn't verify some hours and in-person work requirements to be eligible for the COVID-era payments to more than 1 million frontline workers. Instead, they said, it relied on employees' self-reported work details. The OLA estimated roughly 40% of those who received $487 payments through the program were either ineligible or their eligibility couldn't be confirmed, with the latter making up most of the 40%.

Labor and Industry Commissioner Nicole Blissenbach argued the agency told the Legislature it had no database to quickly verify whether someone worked in close proximity to other people, and the Legislature didn't require the agency to do so.

"Those people who are self-certified to meet those eligibility requirements, we believe they are eligible," Blissenbach said in an interview.

She defended the agency's fraud prevention measures, which she said identified tens of thousands of applications with indications of fraud.

"Setting up a program like this, like any program, there will be some [fraud], but this is a fraction of a percent," she said. "We think the audit confirmed the success of our program."

DFL Rep. Emma Greenman, who serves on the Legislative Audit Commission, critiqued the OLA for making some "policy judgments" about the frontline worker program. Legislators chose to use employee self-verification for the frontline worker program's eligibility requirements. In its review of the program, the OLA retroactively verified with employers.

"To me that says, 'We don't think the policy decision made by legislators to trust workers was the right choice,'" Greenman said.

The frontline worker audit also found the Department of Revenue didn't check adjusted gross income for all applications to verify they met income thresholds to qualify for a payment. State Revenue Commissioner Paul Marquart said less than 3% of individuals who applied didn't have a tax return with the state to be checked and might not have met income thresholds required to file taxes.

Withholding payments could have "penalized and prevented frontline workers who put their life on the line from getting a payment that they really deserved," he said. But Marquart acknowledged that, when setting up new programs quickly, agencies could do more to have a regulatory mindset.

"There just has to be maybe a doubling down of a different mindset on looking at the enforcement part," Marquart said.

Rest said the Legislature was too focused on how many people the program would serve and not enough on safeguards.

"That guiding principle is one that we should all embrace and did," Rest said of the program's mission to aid frontline workers. "It's just the execution of it that we could have done better."

Autism program allegations

New concerns have emerged about possible fraud in Minnesota's autism program, which has grown exponentially in recent years.

The number of autism service providers in Minnesota has increased from 41 in 2018 to 328 last year, according to DHS data.

A DHS spokesman said the agency is actively investigating 15 autism providers and investigated 10 others previously. The Office of Inspector General within DHS has withheld payments from seven providers since 2018.

When DHS identifies fraud, it forwards findings to the Medicaid Fraud Control Unit within the Attorney General's Office for prosecution.

Since October 2018, that Medicaid Fraud Control Unit has recorded 261 criminal convictions for Medicaid fraud, according to data from the office. Judges have ordered about $26.5 million in restitution as a result.

Demuth raised alarm about the "700% increase on the number of people that are doing the diagnosis of autism."

"We have a pattern of systemic fraud in the state of Minnesota," Demuth said.

'Ongoing accountability'

Demuth said the Legislature should hold agencies accountable for implementing the legislative auditor's recommendations before setting budgets.

Randall raised a similar idea. She noted that Colorado's auditor of state government tracks whether agencies implement the recommendations they agreed with. The Colorado Legislature brings in the auditor to report on agencies' progress before setting their budgets, she said.

"This kind of ongoing accountability is hard to do," Randall said. "But it seems like it would be helpful."

Last year, Walz proposed the creation of a new State Fraud Unit within the Bureau of Criminal Apprehension to investigate instances of state fraud involving more than $100,000. But the Legislature didn't pass the measure. Walz's spokesperson said he'll likely propose it again next year.

Minnesota's Management and Budget agency is establishing a new enterprise internal audit unit that will work across state government to "improve financial controls and help prevent fraud and waste," an MMB spokesman said.

GOP Sen. Mark Koran, vice chair of the Legislative Audit Commission, said Minnesota could benefit from having an inspector general for all of state government that's separate from the executive branch. The inspector general offices for DHS and the Education Department are housed within the agencies.

"We need a central repository for all government oversight of fraud, waste and abuse," Koran said.

Staff writer Anna Colletto contributed to this story.