Minnesota's Department of Human Services doesn't have good financial controls over a multi-million dollar child care subsidy program.

That's according to a report released Wednesday by the Office of the Legislative Auditor, the second such "special review" released by the state government watchdog this spring. They focus on the state's Child Care Assistance Program, a program that paid $254 million in subsidies for care of about 30,000 children from low-income families in the last fiscal year.

"The Department of Human Services' (DHS) program integrity controls are insufficient to effectively prevent, detect, and investigate fraud in Minnesota's Child Care Assistance Program (CCAP)," says the report.

The report says state and local officials should take a number of steps, including:

• Do more to verify the eligibility of families receiving the subsidies 

• Make sure child care providers were only being paid for care they provided

• Boost the ability of the state's payment system to flag and fix problems

• Improve the system for licensing child care centers

• Systematically assess the risk and potential scope for fraud

A report by KMSP-TV last May alleged that as much as $100 million of annual subsidies were paid out fraudulently, citing a former Department of Human Services employee. The news report also said some of the money was being sent abroad — possibly to fund terrorist organizations in east Africa, particularly Al-Shabab, based in Somalia. The legislative auditor stated in March that they could find no evidence to substantiate those allegations. 

State officials had already conceded that fraud was a problem as early as 2013, and the legislative auditor's staff previously found indications of "large scale overbilling" by child care businesses, kickbacks to parents for enrolling in suspect programs, collusion, poor financial controls and other problems.

The auditor's staff also had previously found that about a dozen people had been criminally prosecuted in the last five years for financial improprieties connected with the state's child care assistance program — although about $6 million had been recovered in criminal prosecutions.

"We agree that there is more fraud than has been proven in prosecutions, but we could not substantiate the $100 million a year estimate, nor could we find or establish a reliable estimate of how much CCAP fraud exists," the March report said.

The March report noted that while there had been terrorism-related criminal cases brought in Minnesota, there was no way to know for sure if illegally obtained child care subsidies were being funneled to Al Shabaab or any other foreign groups.

Since the initial report, the state has also put the Department of Human Services' Inspector General, Carolyn Ham, on what officials described as "investigative leave." The March report by the OLA had said there had been a "serious rift" between the inspector general and fraud investigators in the department.

In response to the most recent report, DHS officials said some of the recommendations had already begun.

"We have already taken the first steps toward developing an electronic attendance system, electronic billing and direct deposit for child care providers - key improvements recommended by the OLA," said the statement released by DHS commissioner Tony Lourey. "Following the initial OLA review in March, Governor Walz stepped up reform efforts in his revised budget proposals, including requiring attendance records be made available immediately upon request, adding child care licensors and making it easier to investigate and take action against fraud." He said the legislature could make other changes as well.

Republicans have been highly critical of the CCAP program and its problems, and the more than $100 million the state puts into the program has become the subject of a budget fight between the Republican-controlled Senate and DFL-controlled House.

House Republicans have been particularly vocal.

"The program is so vital for working families on the edge of poverty. But there seems to be no commitment or interest from the department in doing the reforms necessary to make sure there isn't rampant waste fraud and abuse," said Rep. Nick Zerwas, R-Elk River, who said taking budget action may be the only solution. "Without a commitment to make those reforms, I think I'm at the point now, after reading through this audit... that we need to just stop the madness until they can get their act together."

Listen to MPR at 100.5 FM in Duluth, 89.3 in the Ely area, 89.7 in the Grand Marais area, 107.3 in the Grand Rapids area, 88.3 in International Falls and 92.5 in the Hibbing-Virginia area.