Facing a major budget shortfall, the Minnesota Department of Human Services (DHS) is preparing to lay off staff and slash millions of dollars in spending on state-run programs that serve vulnerable populations as well as sex offenders.

The budget cuts, disclosed in a memo to state employees Wednesday, include shifting the operation of some group homes for people with disabilities to private operators and the termination of a satellite program for treating sex offenders at the state prison in Moose Lake.

The agency also plans to leave dozens of positions unfilled at the state's main psychiatric hospital in St. Peter and lay off 15 employees at the Minnesota Sex Offender Program, which houses about 740 sex offenders at state-operated treatment centers.

The cost-saving measures are part of a broader effort by Minnesota's largest state agency to close a budget gap resulting from growing employee costs, while preserving the social safety net for impoverished families and others hard hit by COVID-19. So far, the pandemic has eviscerated state and local budgets in Minnesota and nationally as costs for responding to the virus skyrocket while revenue plunges. The administration of Gov. Tim Walz has projected a staggering $4.7 billion shortfall for 2022 and 2023 because of the pandemic.

The cuts at the DHS are focused on a large division within the agency known as Direct Care and Treatment, which is projected to spend $533 million in the current fiscal year and provides care to about 12,000 people with mental illnesses, developmental disabilities and substance-use disorders, as well as for hundreds of sex offenders who are civilly committed for treatment.

As a whole, the division faces a $27 million shortfall for the rest of the current budget cycle, and a projected $96 million gap for 2022 and 2023. The proposed cuts would reduce those deficits to $7.1 million and $70.7 million, respectively.

"While these adjustments help in the short term, the decisions will only get harder going forward," said Human Services Commissioner Jodi Harpstead in the memo to DHS employees. She added, "We will consider every idea while staying focused on our goals of mitigating closures of vital services, avoiding layoffs and balancing our budget."

Walz sought extra funding for the Direct Care and Treatment division within his supplemental budget, but two summer special sessions adjourned without lawmakers reaching a resolution. In both sessions, budgetary concerns became overshadowed by a debate over police reforms in the wake of George Floyd's killing.

Staff at the DHS have been bracing for cutbacks for months, and Harpstead's memo provided some details and a glimpse into future rounds of belt-tightening. She said the DHS will reduce operational expenses across the agency with stricter limits on hiring, training and recruitment. It will also suspend the process of filling 44 vacant positions at the Minnesota Security Hospital in St. Peter, the state's largest psychiatric facility.

The state is also seeking savings through a longer-term shift away from operating its own group homes for people with disabilities. Currently, the DHS operates 120 group homes across the state that provide services for people with developmental disabilities such as autism. This system of state-run homes historically has operated at a deficit, in part because of inadequate reimbursement rates.

As far back as 2013, the state's legislative auditor found that services in the state-run homes were often duplicated in the private sector, which already operates more than 4,000 group homes in Minnesota. Then in 2017, the Legislature required state-run group homes to focus on serving people with complex behavioral needs that cannot be met by private, community-based providers. The DHS now estimates that about 113 residents who currently live in state-run group homes do not require that higher level of care and could be served by private providers.

Over the past few years, the DHS has transitioned about two dozen state-run homes to private providers. Now this shift will be accelerated. Currently, 17 DHS-operated homes are transitioning to private care providers. Another 10 to 15 homes also will begin this transition.

The shift will happen over the next 12 to 18 months, the agency said, with regular input from group home residents and families.

Marshall Smith, the head of Direct Care and Treatment at the agency, referred to the cuts as "difficult but necessary," in a message to staff.

"Over the past several months, we repeatedly explained our financial situation to lawmakers, all the while holding out hope that they would recognize both the urgency and validity of the request," Smith wrote in the memo. "But as one legislative session has blended into the next and the next and the next, those hopes have faded."

Chris Serres • 612-673-4308

Twitter: @chrisserres