The Minnesota Department of Education's inadequate oversight of Feeding Our Future "created opportunities for fraud," a new state report revealed Thursday, scrutinizing the agency's shortcomings in its administration of federally funded meal programs for children in need — the programs at the center of one of the country's largest pandemic frauds.

The Office of the Legislative Auditor's (OLA) report said the Education Department "failed to act on warning signs" in the programs before the COVID-19 pandemic and was ill-prepared to respond to issues or use its authority to hold Feeding Our Future — the St. Anthony nonprofit at the center of the FBI's fraud investigation — accountable to federal requirements.

The 120-page special report by the nonpartisan office that audits state government came out a week after a jury convicted five of seven defendants in the first case to go to trial. Those seven were among 70 people charged in what prosecutors say is a sweeping $250 million scheme to steal federal meal program money.

The defendants were accused of submitting phony invoices and rosters of made-up children's names to collect millions of dollars in U.S. Department of Agriculture funding, spending it instead on luxury cars, homes and trips.

The USDA reimburses schools, nonprofits and day cares for feeding low-income children after school and during the summer. The programs are administered in Minnesota by the Department of Education (MDE), which enforces federal rules.

A Star Tribune review of federal audits in 2022 found that MDE was repeatedly faulted for its management of meal programs before the pandemic and that there were broader federal concerns about the USDA's sloppy oversight of the programs.

On Thursday, Legislative Auditor Judy Randall told the Legislative Audit Commission, the bipartisan 12-member group of state lawmakers that reviews OLA reports, that "time and time again ... MDE missed opportunities to hold Feeding Our Future accountable."

"This is just shocking to me," said Rep. Patti Anderson, R-Dellwood. "This could have all been avoided."

In a sometimes heated two-hour hearing at the State Capitol, Republicans blasted Education Commissioner Willie Jett, who has led MDE since 2023, for the agency's oversight. Jett told lawmakers that the MDE took action in 2020 and 2021 when it saw the number of Feeding Our Future meal distribution sites grow dramatically, denying sites and stopping payments.

"We know there is opportunity to learn and to improve," Jett said, adding that the agency met federal requirements for its oversight and will implement the OLA recommendations. "The department has been intentional and focused on accountability, seeking agency-wide solutions, not just to address past mistakes, but to prevent future issues."

He added that the department has strengthened its oversight, training employees on fraud reporting, contracting with a firm to conduct financial reviews of food program sponsors and adding an inspector general to investigate fraud allegations.

Rep. Duane Quam, R-Byron, asked Jett how many "incompetent" employees were disciplined. Jett said he wasn't going to place blame on anyone. Rep. Steven Jacob, R-Altura, asked if there would be restitution to federal taxpayers. Jett said that decision will come from the U.S. Department of Justice.

Prosecutors have said more people will be charged in addition to the 70 so far, and they've recouped more than $66 million to date by seizing cars, bank accounts and properties.

The OLA report, which was initially scheduled to be released last summer, recommended legislators give MDE authority to conduct its own rulemaking and recommended the MDE do more to verify food program applications and investigate complaints.

The report noted that the MDE didn't have the proper staffing or procedures to manage the millions of dollars that pass through the state and cited several failures, including the MDE not following up on an administrative review in 2018 of Feeding Our Future's operations, which had "serious findings." The MDE also could have denied meal site applications in 2020 due to serious concerns and didn't address what it sees as limits to its authority to enforce the programs years before the pandemic.

Since Feeding Our Future started receiving federal reimbursements in 2018, the agency received at least 30 complaints about the nonprofit and its food sites between that time and 2021. But, the OLA report said, the agency had limited scope in investigating complaints or didn't investigate some at all — including about alleged kickbacks.

The MDE has said that the USDA's approval of more than 100 waivers during the pandemic to loosen rules and in-person monitoring made oversight more difficult. The state returned to pre-pandemic rules in late 2022.

But on Thursday, Katherine Theisen, special reviews director for the OLA, said the MDE's choices made the waivers a source of reduced oversight, not the waivers themselves, and the agency had the authority to address issues without USDA guidance.

Randall said her office didn't see any evidence that the MDE intentionally looked the other way, but she said they were ill-prepared to handle the programs. The MDE and other state agencies, she added, don't have the regulatory mindset; instead, the nutrition program employees were used to help food programs with technical assistance.

"Maybe we all in Minnesota were naïve that there aren't bad actors. This certainly has woken us up," she said.

Political fallout

On Wednesday, Republican U.S. House representatives, including Minnesota's four Republicans, requested documents from the MDE while state Republicans called on Minnesotans to vote out Democratic state leaders this fall. House Minority Leader Lisa Demuth, R-Cold Spring, called it "government malpractice," and Senate Minority Leader Mark Johnson, R-East Grand Forks, blamed Gov. Tim Walz for not holding agencies accountable.

Sen. Mark Koran, R-North Branch, vice chair of the Legislative Audit Commission, said the MDE ignored "significant red flags," including the fact that Feeding Our Future had six times the number of average food sites of other sponsors — organizations that administer paperwork for food sites.

"The taxpayers and hungry children were robbed of $250 million and maybe more," Koran said.

The amount of federal reimbursements for the meal programs grew drastically in Minnesota during the pandemic, from nearly $70 million in 2020 to almost $336 million in 2021, but the MDE only had about 15 employees overseeing the programs, the OLA report said.

Jett said MDE employees became suspicious of the rapid growth in Feeding Our Future's food sites in early 2020, denying meal site applications and terminating some sites. Feeding Our Future then sued the state in November 2020.

The OLA report noted the MDE faced a "public relations campaign" from Feeding Our Future, accusing the agency of discriminating against it because it served minority communities. The legal actions and negative news media attention affected the MDE's regulatory actions, the report noted.

In early 2021, the MDE stopped all payments to Feeding Our Future, but a judge said he saw no regulation allowing the halt. He threatened to hold the agency in contempt if it didn't act quickly on the applications. MDE leaders blamed court actions for preventing them from taking stronger measures against Feeding Our Future.

The MDE resumed payments to Feeding Our Future, and leaders there said they contacted the FBI, which began investigating in April 2021. The massive fraud scheme was publicly revealed in January 2022 when the FBI raided more than two dozen homes and businesses.

"MDE staff were diligent in enforcing program requirements and instrumental in bringing an end to the fraud," Jett said Thursday.

An FBI agent testified in the recent trial that the FBI opened its investigation after MDE employees reported concerns, but Randall said the OLA saw no documentation of that, and instead, the FBI reached out to the MDE in February 2021 before the MDE and the FBI met two months later.

After the news broke in 2022, state Republicans criticized the MDE for not stopping the alleged fraud sooner, holding three hearings to question education leaders and releasing a report about the MDE's management of the programs.

Rep. Rick Hansen, DFL-South St. Paul, said Thursday that "evil exploited" the pandemic, and the MDE tried to do its best in the midst of legal action. Sen. Ann Rest, DFL-New Hope, added that Jett is new to the role, but other leaders of the agency failed and "the buck is still running down the street. That is unacceptable."

State leaders, including Walz and Attorney General Keith Ellison, have previously defended the MDE and blamed investigators for taking 17 months to issue indictments.

In 2023, the Legislature approved new rules for meal programs, and this year, the Legislature gave te MDE's new inspector general more authority to subpoena witnesses and access data about meal program participants.