Sheltered workshops that employ thousands of Minnesotans with disabilities, often for just pennies an hour, would be forced to make drastic changes under a state proposal to eliminate a share of their public subsidies.

This week the Minnesota Department of Employment and Economic Development is expected to approve a plan that would phase out nearly $2 million in annual subsidies and replace them with incentives to move employees into the general workforce.

“It’s time to say, ‘No more,’ to this assumption that people with disabilities can’t work” in the community, said Kim Peck, director of vocational rehabilitation services at the department. “Let’s throw that out and say, everyone needs to contribute and can contribute and how can we … make that happen.”

A recent Star Tribune investigation found that many of these workshops segregate people in cloistered work environments at low pay and with little hope for advancement into the competitive workplace.

While the proposal would be phased in over five years and affects just a small part of the state’s total spending on sheltered workshops, it marks the first major step in decades to reform facilities that have long been a mainstay of Minnesota’s system of support for people with disabilities.

With reduced funding, many of the state’s nonprofit workshop operators will be pushed to redirect their focus to supporting workers in typical jobs in the community that pay at least the minimum wage, state officials say. Currently, about 12,000 Minnesotans with intellectual and developmental disabilities toil at these workshops, which often resemble large warehouses, doing menial tasks such as picking up garbage and packaging retail merchandise.

The state is under pressure from the federal courts to find more innovative ways to integrate people with disabilities into the broader community. Once viewed as a national leader in providing workplace supports, Minnesota now has one of the lowest rates of integrated employment in the nation: Only 13 percent of Minnesotans with disabilities who received state services in 2013 worked in the community alongside people without disabilities.

After a federal judge reproached the state for moving too slowly on disability reforms, the state unveiled a detailed blueprint, known as an Olmstead plan, for expanding employment, housing, transportation and other services for people with disabilities so they can live more meaningful and independent lives. More than 40 other states have already adopted Olmstead plans, which are named after a 1999 Supreme Court decision that found that the unjustified isolation of people with disabilities is discriminatory and violates the Americans with Disabilities Act.

The efforts by other states, combined with the creation of the Olmstead plan and recent Justice Department actions, compelled the state workforce agency nearly two years ago to take a closer look at how its subsidies were discouraging integration, said John Sherman, director of the extended employment program at DEED. The agency is still seeking public comment on the rule, which must be approved by a state administrative law judge before it goes into effect.

“We knew change was coming,” Sherman said. “But the speed and intensity of the change has been surprising.”

The proposal is supported by people like Nathan Miller, 54, of Cambridge, who has worked at a state-subsidized sheltered workshop for the past seven years. Miller estimates that he makes about $4 an hour on the workshop’s janitorial crew; like many of his co-workers, he also works on an assembly line putting parts in boxes.

Miller, who has a cognitive disability, spent more than 20 years working in mainstream jobs for at least minimum wage, and said he is confident he can make the transition back to mainstream employment if he gets reliable transportation and some job coaching. “We deserve better,” Miller said. “The state government should take all the money they’re giving to [sheltered workshops] and put that toward helping us get real work.”

The state’s own analysis suggests that funding workshops is wildly inefficient. It costs nearly $52,000 to create a sheltered workshop job that pays at least minimum wage — nearly 10 times the amount it costs to help a worker with disabilities land a job in the community, according to a 2010 survey by the Minnesota Department of Human Services.

As it stands, the state workforce agency pays workshop operators $1.91 for every hour worked by participants in its extended employment program. That subsidy has increased 60 percent since 1998, when it was $1.19 an hour. Under a draft proposal, the agency would phase out that subsidy over five years and instead spend that money on supporting workers in competitive, mainstream jobs. The rule would also require workshop operators to educate employees about the benefits of working in more integrated settings.

The rule would not affect the more than $200 million that flows to sheltered workshops and day training programs through the state-funded health insurance program. Disability rights advocates say a phaseout of that funding would trigger fierce opposition from parents of adults with disabilities; many parents view the workshops as safe and therapeutic settings for their children.

In the coming years, however, Minnesota’s sheltered workshop operators likely will shrink and refocus their efforts on placing more people in the community, predicted Trixie Ann Golberg, president of Lifetrack Resources, a disability services provider in St. Paul. “The state may lessen its support,” she said, “but [the workshops] will always be an important model for some families.”

Still, the DEED change is likely to spur other agencies and workshop operators to make long-overdue changes, said Daniel Stewart, a supervising attorney with the Mid-Minnesota Legal Aid’s Disability Law Center. “It’s a modest step, but it’s a concrete step in the right direction,” Stewart said. “Hopefully, it will lead to more meaningful steps toward … integrated employment. Because right now, we have fallen behind and need to catch up.”