Federal cash flows in and then ...?

With billions of dollars in federal stimulus money heading toward Minnesota, the state's legislative auditor said Thursday that he had found lax controls on the federal money the state currently receives and that the problems are part of a disturbing pattern of sloppy record-keeping.

The legislative auditor's office reviewed nine state agencies, including the Department of Human Services, where a former supervisor admitted in January that she had stolen more than $1 million in federal funds over a five-year period. The audits also included the Department of Finance, where Commissioner Tom Hanson now serves as the state's federal stimulus coordinator; the legislative auditor's report, covering fiscal year 2008, found there was a "material weakness" in the internal controls for how the department monitored federal money.

In one finding, the auditor reported that the Department of Finance had not notified counties that the money they were receiving were federal funds, nor did it instruct them on what was required to monitor those funds. Because of that, according to the auditor, at least $100 million in federal money was not properly tracked in local government audits, including money from the medical assistance program, the largest federal program administered by the state.

Legislative Auditor Jim Nobles said the reports, which focused on the state agencies receiving the most federal funding, showed the state had "some deficiencies" in its attempt to comply with federal regulations. "I think it's a real heads-up for the Department of Finance and the other state agencies since we are going to be receiving a lot more [scrutiny with] the federal stimulus," said Nobles, who has garnered headlines in recent months for a series of reports outlining a lack of financial controls at state agencies.

'Serious matter'

With the public outcry now taking place over the lack of accountability in the federal bailout of Wall Street, Nobles said Minnesota -- like other states -- needs to brace for a new level of scrutiny that will likely accompany the estimated $9.1 billion in federal stimulus headed to the state.

Nobles said the annual audits of the state's monitoring of existing federal money showed there was slippage from just a year ago. "I'd say things had deteriorated some -- not dramatically -- but some," he said. Nobles said the lack of controls almost certainly contributed to the $1 million theft by the former state Human Services supervisor.

In the case of the state Department of Employment and Economic Development, the auditor found there was a lack of internal controls at a time when federally funded overtime pay tripled to $1.1 million last year. The department's controls, the auditor said, did not ensure that overtime was documented and approved in advance. One worker received $19,320 in overtime pay "without any documentation to show that the overtime work was necessary or approved" in advance, the report stated. Another worker, according to the findings, received $24,000 in overtime pay even though some of the compensation was for on-call hours, which are supposed to be paid at only one-quarter of the employee's hourly rate.

The auditor also reported that the department, as in three previous audits, continued to have problems with relatively basic accounting procedures. The department, for instance, reported $3 million in expenditures for the federal community development block grant program in the wrong fiscal year, the audit stated.

Dan McElroy, the department's commissioner, agreed with both the overtime and accounting findings in a written response released Thursday. "The department's overtime policy will be updated to require documentation of advance approval [of overtime]," he said.

Nobles said state officials have in recent months indicated they were taking reports of repeated instances of poor record-keeping more seriously, but said his office had found the continuing problems frustrating. He said the results of the nine audits, in finding instances of "material weakness" concerning internal controls at a time of a highly publicized case of fraud, were a "serious matter."

"Given where we are with the federal stimulus money that's going to start pouring through this state, we need to get our systems into shape," he said.