The Minnesota Department of Human Services lacks adequate controls to prevent, detect and investigate fraud in the state's child-care assistance program, according to a state Legislative Auditor report released Wednesday.

The 44-page report by the state's top internal watchdog, his office's second in a month, highlights deep structural problems in oversight of the Child Care Assistance Program, which paid $254 million in subsidies last year for approximately 30,000 children from low-income families.

The Office of the Legislative Auditor (OLA) found that the department and county agencies did not sufficiently use independent data sources to verify who was eligible for the program; had weak processes to validate provider billings; lacked the ability to consistently flag errors and recover improper payments; and had inadequate controls for licensing child care providers, among other findings.

The report expands on an OLA report issued last month which found that, despite multiple attempts to tighten enforcement in recent years, fraud remains a serious problem and legal barriers to prosecuting fraudulent providers still persist.

In a statement Wednesday, Human Services Commissioner Tony Lourey said the recommendations "provide a road map for our work." He noted that his agency has already taken steps toward better fraud detection, including developing an electronic attendance and billing system. The agency is seeking other powers — including funding for a new case-tracking system and the ability to monitor new day-care centers more frequently — from the state Legislature.

"We need the Legislature to act by giving us the resources and authority to implement changes," Lourey said.

In some high-profile cases from recent years, parents received cash payments, or kickbacks, from child care centers in return for enrolling their children. Day care providers have also been caught on camera routinely billing the state for days when children were not in attendance, including holidays, and then submitting falsified attendance records.

The legislative auditor was unable to reach a reliable estimate of overall fraud in the program, but concluded that it was more than the $5 million to $6 million that county prosecutors have been able to prove in several cases during the past several years. An independent consulting firm hired by the Department of Human Services estimated that since 2013, about 7% of payments were made to centers that used fraudulent billing practices, totaling $72 million over five years.

Minnesota Republicans pounced on the latest report Wednesday and reiterated their criticism of the administration of Gov. Tim Walz for not acting quickly and aggressively enough. They have proposed a sweeping package of anti-fraud legislation, spread among a dozen bills, that would increase civil and criminal sanctions for child-care subsidy fraud; make it easier for prosecutors to bring criminal charges; and impose tighter restrictions on providers that employ parents of children enrolled in the program, which can be an indicator of fraud.

Sen. Jim Abeler, R-Anoka, chairman of the Human Services Reform Finance and Policy Committee, took the dramatic step Wednesday of introducing a budget amendment that would freeze all payments under the child-care assistance program starting in 2021 until the Department of Human Services (DHS) adopted stronger integrity controls. Abeler has also called for the creation of a separate agency to hold DHS and other state departments accountable.

"We need to deal with these issues of program integrity and quality before we throw more money at this program," Abeler said.

Over the years, the child-care assistance program has been notoriously difficult to police for fraud, largely because it still depends on a cumbersome, paper-based records system. The paper attendance and billing records submitted by child care centers are easy to falsify and time-intensive to verify, making it easy for providers to bill for care that was never provided.

The report also found problems with the procedure for verifying participants' eligibility. State policy does not require local human service agencies to verify applicants' pay stubs and other documents against independent sources, such as federal tax data, the auditor found.

As a result, state regulators have been largely reactive, responding to tips from the public and referrals from county agencies rather than detecting problems before payments are made. Yet even this reactive system has deficiencies: The report found that the investigative unit lacks a case-management system to track ongoing or closed investigations.

The report said many of the system's problems could be remedied by a real-time electronic attendance system — for instance, one that scans the fingerprint of a child or parent, to immediately log and verify when a child attends a particular child care center. "If they could close that significant gap, and verify actual attendance by children against provider billings, it would address a lot of the concerns out there," said Valerie Bombach, audit director at the OLA.

The legislative auditor also recommended that DHS make better use of its licensing division, which conducts on-site investigations of child care providers, primarily for health, safety and staff training standards. The state and counties, however, are not currently satisfying a federal requirement that says licensed child-care centers must be subjected to at least one unannounced inspection every year.

In a letter responding to the report, Lourey said his agency has significantly expanded staffing and is on track to meet the federal inspections requirement beginning in fiscal year 2020. Walz's budget also requests eight more staff in the agency's licensing division. They would focus on a higher level of oversight and technical assistance to newly-licensed child care providers and others identified as high risk for fraud.

Chris Serres • 612-673-4308 Twitter: @chrisserres