A Minneapolis nonprofit is accusing the state of unfairly withholding $1.7 million for minority employment services, after a financial review found problems with the nonprofit's record-keeping practices with the grant.

Emerge Community Development filed a lawsuit Wednesday against the Department of Employment and Economic Development (DEED) in Ramsey County District Court, seeking to release the remainder of what was originally a $4 million grant. The funds were part of a $35 million package of grants that the Legislature approved in 2016 to help alleviate the state's racial disparities in employment and other areas.

The grant paid for job training, job placement and GED education, among other programs, targeted toward black residents. It is a collaboration between Emerge, the Minneapolis Urban League, Minneapolis Public Schools, Sabathani Community Center and the Stairstep Foundation.

DEED suspended funding last fall, however, after a grant monitors "uncovered 28 financial and programmatic areas of concern," said agency spokesman Shane Delaney.

"We're not going to be able to complete this work that we sought to do, and that we were challenged to put out by the Legislature," Emerge President Mike Wynne said Thursday. "So our reputation and our tie to this work is on the line. The good faith effort of our organizations to put this work together was put forward, and then we've more or less had the rug pulled out from underneath it. So it has been very devastating to our organizations, our teams."

Delaney would not release the grant monitoring report Thursday, citing the ongoing litigation. An Emerge representative provided a third-party compliance review commissioned by DEED, which concluded in November 2017 that there had been a number of accounting problems during the first six months of the grant.

These included multiple organizations booking the same revenue, improper sign-off on large payouts, poor documentation of expenses and some payments for non-grant expenses.

The review "did not find concrete evidence of malfeasance during the period under review," the report by Felton Financial Forensics concluded, "but uncovered issues emblematic of poor internal controls, undisciplined record keeping, poor understanding of adequate expense documentation and poor understanding of 'allowable' expense under the terms of this grant agreement."

Wynne said the organizations have addressed problems highlighted in the report.

The report "came up with a set of findings that we believed were easily correctable," Wynne said. "Not issues that would equate with a grant suspension."

But Delaney, the agency spokesman, said it has yet to receive all the information and supporting documentation it has requested from the grant recipients.

"DEED takes very seriously its responsibility to ensure accountability of public dollars on behalf of Minnesota taxpayers," Delaney said. "DEED has an obligation to ensure that grantee organizations are in full compliance with state law and grant management policy."

Eric Roper • 612-673-1732 Twitter: @StribRoper