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State agencies aren't complying with policies to properly oversee hundreds of millions of dollars in grants to Minnesota nonprofits each year, according to a state legislative auditor's report issued Thursday.

Various state agencies, including the Education and Public Safety departments, have increased the millions of dollars given each year to nonprofits. State grants to nonprofits grew from $389 million in 2018 to $558 million in 2022, according to the report.

The nonpartisan Office of the Legislative Auditor (OLA) says policies overseeing that money are vague and that there's "pervasive noncompliance" by state agencies with the policies in place — with no enforcement.

The report recommends that the Legislature increase oversight of grants management, improve statewide data on grants and boost training for state employees.

Sen. Mark Koran, R-North Branch, who chairs the Legislative Audit Commission, a bipartisan group that requested the report, said better oversight of nonprofit grants is needed and the report will likely prompt new reforms.

"We've failed to do the very basics," he said. "We just want to make sure [state funding] goes to the people with great need, and waste, fraud and abuse just can't be tolerated."

The report doesn't mention Feeding Our Future, a St. Anthony-based nonprofit at the center of a $250 million scheme that prosecutors say is the largest pandemic-related fraud in the nation. The report focuses on state grants to nonprofits, not the millions in federal dollars that passes through state agencies such as the Education Department, which was in charge of overseeing U.S. Department of Agriculture reimbursements going to Feeding Our Future.

The FBI's investigation into Feeding Our Future and its associates, which has led to charges against 50 people so far, has increased scrutiny of the Education Department and intensified concerns over government funding of nonprofits. The Legislative Auditor's Office is expected to issue a special review of the Education Department's oversight of Feeding Our Future this summer.

The Feeding Our Future investigation came up Wednesday in Congress, when the bipartisan U.S. House Committee On Oversight and Accountability held a lengthy hearing on fraud and waste in federal pandemic spending. Rep. Virginia Foxx, R-N.C., asked federal officials if the Feeding Our Future fraud could've been stopped sooner.

Michael Horowitz, chair of the Pandemic Response Accountability Committee and Inspector General at the Justice Department, said that was difficult to say. In other programs, he said, checking applicants' names, dates of birth and other details could have helped verify records.

"There were multiple steps that could have been taken in many of these instances" to make sure applicants for federal pandemic funding were eligible, Horowitz said.

The legislative auditor's report was requested by legislators just after the FBI's investigation into Feeding Our Future was publicly revealed in January 2022. The OLA spent the last 10 months completing the report, one of the five or six it issues each year on state programs.

The Legislative Audit Commission will hold a hearing to discuss the report in more depth, Koran said.

"When they're dispersed, it's very difficult to track all of those grants," he said. "This report really brings to light data that's rare and really difficult for us to receive, even as a state legislator."

The Minnesota Council of Nonprofits was consulted by the OLA and said it supports many of the recommendations in the report.

"Part of the reason there's so much money going to nonprofits is relieving the burden of government and providing services that government needs to provide," said Marie Ellis, the council's public policy director.

The council has long pushed to improve the state's grantmaking system and recently released a report on how to develop a more efficient and equitable grants system. Ellis said more oversight is needed, but it shouldn't be overly standardized.

"We don't want to see the same level of oversight on a $2,000 grant as on a $2 million grant," she said.

While the report didn't look into whether fraud happened as a result of lax oversight, the lack of such oversight opens up grants to possible misuse, said Jodi Munson Rodríguez, the deputy legislative auditor.

The FBI raided the offices of Twin Cities nonprofit Feeding our Future on Jan. 20, 2022.
The FBI raided the offices of Twin Cities nonprofit Feeding our Future on Jan. 20, 2022.

Elizabeth Flores, Star Tribune file

Improvement needed

This isn't the first time the OLA has reviewed the state grants system. In 2002, it issued a report on the $550 million in state grants going to quasi-governmental and nongovernmental organizations, including nonprofits. That report made several recommendations, including better monitoring and auditing of grantees.

Then in 2007, spurred by national stories of the misuse of funds by nonprofits, the legislative auditor found a "fragmented" system of state grants that lacked oversight and accountability. That led to creation of the state Office of Grants Management, which developed 13 policies that state agencies must follow.

The Office of Grants Management "was a great step in the right direction," Munson Rodríguez said. "It doesn't mean it can't be improved."

Minnesota is one of only a few states with a grants management office and statewide grants management requirements. But the new report points out that the Office of Grants Management focuses on assisting agencies rather than enforcing policies. In 2022, the office had three full-time staff members who responded to more than 550 inquiries, including one who was responsible for statewide grants management policies.

Thursday's report notes that no comprehensive data is kept on state grants, so legislators and the public can't review how well state agencies are managing grants. Rep. Ginny Klevorn, DFL-Plymouth, said in a statement that the Office of Grants Management, as well as the Education and Public Safety departments, have requested more resources in the last four years to ensure effective grant management.

"Unfortunately, under our divided Legislature, those dollars were not forthcoming," she said.

The report focuses on the state Education and Public Safety departments, which in recent years have issued an average of $81 million and $27 million, respectively, in grants to nonprofits annually.

The Education Department didn't conduct monitoring visits for most of its grants and only partially compiled with policies, according to the report. Public Safety, while largely complying with policies, should formalize its procedures, the report says. Leaders in both agencies said they're making changes.

The Council of Nonprofits says most of the 9,000-plus nonprofits in the state don't receive any government funding. However, all nonprofits benefit from more oversight, Ellis said, which can root out fraud to protect trust in a sector that relies on public support.

"The way the state provides oversight of its grants to nonprofits is critical for our whole sector," she said. "Even nonprofits that aren't receiving any state funding have a stake in ensuring that nobody can use that system to commit fraud."