When massive fraud scandals erupted in Minnesota’s publicly funded programs in recent years, the political finger-pointing began immediately. But the roots of the crisis run far deeper than any single administration or party. The story of how Minnesota arrived at this moment is a half-century tale of bipartisan decisions that consistently expanded state spending without building the capacity to oversee it—a failure of institutional design that transcended ideology and persisted across Republican and Democratic administrations alike.
Minnesota’s trajectory offers a case study in how well-intentioned government can hollow itself out from within. Two distinct forces converged over decades: conservative efforts to shrink state capacity through privatization and budget cuts, and progressive reluctance to invest adequately in the unglamorous work of auditing and oversight. The result was a service delivery system that grew ever more complex and decentralized even as the mechanisms to monitor it atrophied.
The pattern began in the 1970s during what became known as the Minnesota Miracle, when the state dramatically expanded its social programs and tax base. This era saw significant increases in state spending on education, health care, and human services. But the expansion of services was not matched by a proportional investment in oversight infrastructure. While legislators enthusiastically funded new programs, they showed far less interest in the mundane but critical task of ensuring those programs had adequate monitoring and auditing capacity.
By the late 1970s and accelerating through the 1980s, Minnesota began a fundamental shift in how it delivered services. Following national trends toward what scholars call New Public Management, the state increasingly contracted with nonprofit organizations and private entities rather than providing services directly through state employees. This transition wasn’t driven by a single piece of legislation but emerged gradually from fiscal pressures following the 1973-75 recession and growing property tax revolt sentiments.
The Reagan era of the 1980s brought major acceleration of this model. Minnesota rapidly expanded its reliance on nonprofit providers for human services, mental health programs, developmental disability services, and social programs. The state moved away from direct provision through state-run institutions toward a grant-and-contract model. By the late 1980s, much of Minnesota’s social service infrastructure operated through this hybrid system: state funding flowing to county administration, which then contracted with nonprofit organizations for actual service delivery.
Throughout the 1990s under Governors Arne Carlson and Jesse Ventura, this contracting approach became institutionalized as the default model. Performance-based contracting, competitive bidding, and managed care expanded across human services, job training, chemical dependency treatment, housing programs, and youth services. Minnesota’s strong nonprofit civic culture made the transition appear natural. The state already had a robust voluntary sector ready to deliver services.
But as the delivery system grew more complex and decentralized, oversight capacity failed to keep pace. The institutional weakness became acute during Tim Pawlenty’s governorship from 2003 to 2011. Facing significant budget shortfalls and embracing an explicit small-government philosophy, the Pawlenty administration reduced agency staffing levels across departments. This included cuts to units responsible for grant monitoring, contract compliance, and program evaluation. The administration promoted what it called accountability through outcomes rather than process-heavy regulation, emphasizing performance metrics over traditional compliance auditing.
While oversight authority technically remained intact, fewer state employees were available to conduct detailed monitoring of the growing universe of contractors. The service delivery model expanded outward even as supervisory infrastructure grew thinner—creating what administrative theorists call a capacity gap. More contracts existed but fewer monitors could track them. The fragmented nature of the system, with oversight responsibilities scattered across state agencies, counties, and local administrators, made comprehensive supervision increasingly difficult.
Two other institutional changes during this period further eroded Minnesota’s capacity to monitor public funds. In 1998, the legislature voted overwhelmingly to place a constitutional amendment on the ballot to eliminate the Office of State Treasurer. The Senate approved the measure 62 to 3, while the House passed it 83 to 45. With Republicans controlling the House and the Democratic-Farmer-Labor Party controlling the Senate, the bipartisan support was unmistakable. Voters narrowly approved the amendment that November, and the office was abolished in January 2003.
The elimination of the state treasurer removed a constitutional check on state finances. The treasurer had served as chief custodian of state money, receiving and safeguarding revenues, managing cash flow, and maintaining independent oversight of financial transactions. Most organizations follow basic accounting controls that separate cash receivables from cash disbursements, with different individuals responsible for each. By abolishing the treasurer, Minnesota eliminated this fundamental check without creating an adequate replacement control structure.
Then in 2015, the legislature further weakened independent oversight by allowing counties to opt out of audits conducted by the Office of the State Auditor and hire private accounting firms instead. This change passed with bipartisan support through a divided legislature where Republicans controlled the House and Democrats controlled the Senate. The provision was buried in an omnibus budget bill, making it difficult to track individual votes, but passage required support from members of both parties.
The state auditor, a constitutional officer, challenged the limitation in court. But in its 2018 decision in Otto v. Wright County, the Minnesota Supreme Court upheld the legislature’s authority to restrict the auditor’s county oversight functions. The court ruled that while the state auditor is a constitutional office, the legislature could define its statutory powers. This effectively reduced the auditor’s practical authority and shifted potential oversight away from an independent constitutional officer toward private firms hired by the very entities they would audit.
Mark Dayton’s governorship from 2011 to 2019 brought some restoration of funding and staffing after budget battles and the 2011 government shutdown. Agency budgets increased and compliance rules were strengthened in some areas. However, the underlying architecture of the contracting system remained fundamentally unchanged. The state added oversight resources but operated within a structure that was already highly complex, decentralized, and fragmented. More monitors existed, but the basic model—heavy reliance on pass-through grants to nonprofit providers with oversight conducted largely after the fact—persisted intact.
The system’s vulnerabilities became explosively apparent during Tim Walz’s administration. The COVID-19 pandemic triggered massive expansion of emergency grant programs. Federal relief dollars flooded through existing channels, dramatically increasing the volume and velocity of spending. Large-scale fraud scandals, most notably the Feeding Our Future case, revealed critical weaknesses. Investigations exposed weak real-time auditing, fragmented inter-agency data systems, heavy reliance on reimbursement claims that were difficult to verify, and political hesitation to suspend questionable providers quickly.
The crisis was not simply a matter of pandemic-era chaos or partisan deregulation. Instead, it represented the failure of Minnesota’s long-standing service delivery model to function under scale stress. The hybrid system—state funding channeled through county administration to nonprofit delivery, with oversight conducted retrospectively—worked adequately when programs were modest in size, the nonprofit sector was stable, and fraud incentives were low. But it became fragile when funds scaled rapidly, payment models relied on reimbursement claims, and oversight remained reactive rather than real-time.
Then in 2023, Minnesota faced a massive budget surplus of approximately 17 billion dollars. The legislature and governor used these funds to significantly expand state spending across numerous programs. This represented the second major spending expansion in Minnesota’s modern history, comparable to the Minnesota Miracle era of the 1970s. But once again, the expansion was not accompanied by proportional investment in auditing and oversight capacity. The institutional pattern from five decades earlier repeated itself.
The fundamental problem is one of institutional design rather than partisan ideology. For Republicans, the driving force was a philosophy of diminishing government capacity and power through privatization and contracting out. The belief was that market forces and competition among providers would ensure efficiency and accountability. For Democrats, the issues were more complex: partly traditional patronage relationships with nonprofit community organizations, partly genuine belief in community-based service delivery, and partly inattention to the unglamorous but essential work of building oversight infrastructure.
Both parties consistently failed to follow basic practices that most organizations—whether nonprofit, business, or government—implement as standard controls. The separation of duties in financial transactions, robust real-time monitoring systems, adequate staffing for compliance functions, and strong independent audit capacity are not partisan issues. They represent fundamental management principles. Yet Minnesota’s political leaders from both parties chose not to invest in these institutional capacities even as they dramatically expanded the state’s financial commitments.
What makes Minnesota’s situation particularly instructive is that the weakening of oversight occurred through explicit, recorded decisions. The elimination of the state treasurer passed both legislative chambers with overwhelming bipartisan majorities. The restrictions on the state auditor also enjoyed cross-party support. These were not accidental erosions or unintended consequences. They were deliberate choices by elected officials to reduce independent financial oversight at the very time the state was expanding its reliance on decentralized, contract-based service delivery.
The lesson from Minnesota’s experience is that administrative capacity cannot be treated as an afterthought. When government expands its spending and increasingly relies on complex networks of contractors and grantees to deliver services, oversight capacity must expand proportionally. The monitoring systems must match the complexity of the delivery systems. Independent checks and controls become more important, not less, as financial flows become more diffuse and harder to track.
Had Minnesota’s legislature strengthened rather than weakened the state treasurer and state auditor functions, maintained adequate staffing for compliance monitoring throughout the privatization era, and invested in modern real-time auditing systems when it expanded spending in 2023, the fraud problems might have been prevented or detected far earlier. The necessary tools and institutional structures were known and available. Other jurisdictions have successfully managed similar hybrid service delivery models with robust oversight. Minnesota simply chose not to make those investments.
The story of how Minnesota arrived at its current predicament is ultimately a story about priorities and political will. Across five decades and through administrations of both parties, elected officials repeatedly chose to expand programs and services without building the capacity to ensure those programs operated with integrity. They dismantled existing oversight mechanisms while creating more complex systems that demanded greater scrutiny. The fraud scandals that eventually emerged were not inevitable, but they were predictable consequences of these sustained institutional failures.
As Minnesota grapples with the aftermath of these revelations, the challenge is not simply fixing specific programs or prosecuting individual wrongdoers. The deeper task is rebuilding the state’s institutional capacity for financial oversight—the unglamorous but essential infrastructure that makes democratic governance trustworthy.
That task will require sustained bipartisan commitment to investing in audit systems, compliance staffing, and independent checks on spending. It will require recognizing that effective government demands not just ambitious programs and generous funding, but also the patient, persistent work of ensuring that public dollars serve public purposes. Whether Minnesota’s leaders can muster that commitment remains to be seen. It will also require that the Legislature, when it convenes on February 17, to address the capacity issue as a serious issue and not simply as an election-year partisan issue.
If a car is left unlocked and someone left their purse in the car…and someone steals the purse…is the person a thief or is the door the problem?
It would seem to me, that one would assume everyone is honest and that the door caused the theft.
If Robin Hood stole from the rich and kept some and gave to the poor…Is he a hero or a thief?
If Robin Hood stole from the poor and bought some really nice things for himself, is he a hero or a thief?
If we allow theft period, we will see a society fall apart…situational ethics is essentially no ethics.
Being an academic myself you get. B- for this paper. The problem is your title indicates that your hypothesis is this lack of oversight created the fraud. No, the bad actor politicians created the fraud. They just leveraged a system lacking oversight that you did a good job of explaining. Theoretically, if no one is dishonest and a bad actor, it’s irrelevant what the pitfalls of the system is or is not.
I do not like pieces like this represented this way because it sort of absolves the bad actors because it is the systems fault. Change the name of the piece to how a lack of oversight was created and fine. But systems lacking oversight do not create fraud. It’s people that do fraud.
“Bad actor politicians created the fraud” is simple not true. There is no evidence that any elected or non elected government employee committed fraud. Private organizations, led by private individuals, used a poorly designed and poorly resourced public program to act fraudulently. Schultz does a fairly good job laying out some of the structural issues and got us to this point. However, there is no evidence that elected officials set out, over several decades, to intentionally design a system that contained the loopholes that made fraud easy.
There are many other factors that Schultz doesn’t mention and some that are lightly brushed over. One major missing element is that Minnesota is NOT ALONE in this problem. Medicare fraud is also a rampant problem. Particularly in similar or identical service categories. The “high risk provider types” applies to both state operated Medicaid and CHIP programs and federally operated Medicare programs. These high risk providers deliver largely unlicensed, unregulated services. There is a very low bar to become this type of provider. A few hundred dollars and you can start a company to provide needed, but unlicensed services. Durable medical goods, medical transportation, home care services, autism services, and others are unlicensed services. A well functioning regulatory system should not treat these types of providers the same way we treat licensed services, hospitals, nursing facilities, doctors offices. While there is still occasional fraud in licensed services, there are many barriers that minimize opportunity the opportunities for fraud for licensed services. State and federal regulators must build a system that minimizes the opportunity for fraud in unlicensed services.
This is NOT a Minnesota only problem. The feds and the media are focused on MN for political reasons, not because we are a hotbed of fraud. Many other states, and the feds, have far more fraud than what has been found in MN.
Schultz barely mentions the data systems. The state’s data systems aren’t just siloed between agencies, within agencies they are siloed, archaic and cannot conduct the necessary analytics to spot fraudulent billing patterns. DHS’s systems were designed in COBOL in the late 80s, early 90s and have not been modernized. Systems don’t integrate within agencies or between agencies. Modern IT infrastructure is expensive and Minnesota leadership at the Capitol and in agencies have long delayed modernization, choosing to spend money on direct service, over the infrastructure necessary to support those services and prevent fraud. Instead of preventing fraud, the state has few staff that follow up on fraud complaints. An under resourced reactive complaint based system cannot effectively fight fraud in 2026. It definitely can’t prevent fraud.
The ethos of Minnesota Nice also plays a role. The state Education department tried to cut payments when it first suspected fraud in the feeding our future case. A Ramsey County judge said “no can do.” State agencies did not have the authority to cut or delay provider payments because of suspected fraud, The state and federal protections and due process focused on innocent until proven guilty has greatly limited the ability to stop payment for suspected fraud. State investigators discover probable fraud, and per regulations refer cases to the state AG office and federal DOJ. Then it takes YEARS to work its way through the court system. There needs to be a mechanism to stop payment and close agencies PRIOR to the final adjudication of a case. Even if it isn’t the “nice” thing to do. However, there needs to be a balance. The current delayed payments process is forcing small businesses into closure and leaving residents without services. The discontinuation of certain provider types has also left beneficiaries without services and homeless. At least one recipient has already died.
Government is a not-for-profit venture, yet the structure of public programs particularly health care, relies on for profit service providers. While we know that fee for service delivery is significantly less expensive than managed care, we have a managed care system in Minnesota Medicaid and CHIP. We know services directly provided by government employees is less expensive, we contract with the private sector to provide those services, at a profit. We have seen some bad actors defend themselves as successful business people. They are living the American Dream. Rags to riches. Greed it good. Capitalism is the best system in the world! The US is one of the few countries with for profit health care. And clearly the largest. In 2026 it can be very difficult to see the line between savvy business person and fraudster when role models at the federal level are engaged in the most corrupt era in US history. How is Amazon paying many millions of dollars to the first lady for appearing in a documentary any different than paying a resident of Faribault to see a doctor in the Twin Cities? One day, history will note the unprecedented and unprosecuted levels of fraud at the federal level. Sadly, humans tend to ignore unethical and illegal behavior seen in people they “like” and catastrophize it when the same or similar behavior in someone they don’t “like,” especially when racism is involved.
Excellent
Thanks for publishing this
Our Somali neighbors knew how to take advantage of the kindness and empathy of the people of Minnesota. The level of fraud is staggering and now good people who need help are cut off from resources they need. Do the fraudsters care? And as Joe Thompson said, we are only at the beginning.
We started 2026 with the new Minnesota Paid Family and Medical Leave program and the Minnesota Secure Choice Retirement Program.
As a small business owner, I monitored those programs closely from the moment they were announced through to deployment. I signed up for every e-newsletter available and sat in on every webinar available (hosted by the State, as well as private insurance and compliance organizations), to assure our company was compliant. When presenters were not clear on certain aspects of these programs, I made numerous calls to the State agencies responsible for them. While the staff working for these departments were always friendly and genuinely wanted to help, I cannot count how many times the questions I posed were met with uncertainty.
I hope these two latest programs won’t be in the fraud/mismanagement spotlight a year from now – but I’m not going to hold my breath.
This in-depth report from KARE 11 illustrates how easy the fraud is, and the terrible impact from, the current services delivery model: https://www.kare11.com/article/news/investigations/kare-11-investigates-evicted-homeless-paying-the-price-for-minnesotas-fraud-crisis/89-99a4c9cb-df85-4030-b904-5cc7cd546173
Here’s an excerpt: Body camera video captures the moment deputies knocked on the door.
“We’re here for the eviction,” an officer said as the door opened.
“I’m scared,” Sky responded.
The eviction order was issued for “Jane or John Doe,” a detail that confused Sky, who said she had paid her rent.
“But I’m not Jane or John Doe,” she told deputies. “That’s what’s confusing.”
As she ran through her apartment trying to gather essentials, she waved paperwork at the deputies, “Here’s my lease that shows I have a right to live here,” she said.
Sky lived in the apartment through a Medicaid-funded program called Integrated Community Supports (ICS)—designed to help adults with disabilities live independently in their own apartments with daily, one-on-one assistance.
Her caregivers, American Home Health Care LLC, subleased the space to Sky and held the master lease with the apartment complex.
Sky was current on her rent to American Home Health Care, so on the day of the eviction, she didn’t understand why she was being forced to leave her home.
Court records indicate American Home Health Care had stopped paying rent to the building’s owners, prompting the eviction order.
Deputies, court order in hand, said they had no choice. They ordered Sky to pack what she could carry and get out.”
Very well done. I wish there was more publicity about the Mn whistle blower law. It provides for payment to those who report law violations involving government money. There is a federal law—— called the Lincoln Law. It was directed at sellers of bad goods to the US Army during the Civil War. No proof of fraudulent intent is required. You would think the AG would be promoting it.
Thank you so much for this enlightening explanation of how Minnesota got into this fraud mess. We finally see the forest for the trees. Thanks to the Minneapolis Times for posting Mr. Schultz’ wisdom.