More Oversight Won't Fix Minnesota's Fraud Problem

Romina Boccia and Tyler Turman

The lesson from Minnesota’s fraud scandal is that no amount of red tape can fix a system built on misaligned incentives.

Last month, a House Judiciary Committee hearing discussed the more than $9 billion in fraudulent spending across 14 of Minnesota’s state-administered, federally funded welfare programs over the past decade. Officials and experts including Dylan Hedtler-Gaudette of the Project on Government Oversight correctly noted that fraud on this scale stems from “deep, structural flaws, gaps, and weaknesses in our system of government,” not just isolated bad actors.

But his “systemic solutions” were mostly just a litany of familiar fixes: more regulation, more supervision, more enforcement mechanisms, and, most likely, more money to pay for all of it.

The structural flaw at the heart of this problem, as Cato scholar Chris Edwards has noted, is that all the programs implicated in Minnesota’s scandal share one defining trait: They’re administered by the state but funded almost entirely by the federal government. This financing structure gives state officials little incentive to run these programs efficiently or to prevent wasteful spending. It’s no surprise that Minnesota was so tepid in its response to financial mismanagement in the programs it was running—it’s someone else’s money, so it’s someone else’s problem.

For example, Minnesota officials had flagged irregularities in the nonprofit Feeding Our Future’s funding for years but continued to approve payments. Perhaps the state would’ve been more decisive if the $250 million that went toward a phony children’s nutrition program had come out of its own coffers.

This entire debacle exemplifies the vulnerabilities of federal aid-to-state programs. Fraudsters can exploit the system with scant resistance because those closest to the problem don’t bear the cost of mismanagement, while those who do are too far removed to act quickly.

Stronger federal oversight might catch fraud sooner, but the better solution is to realign incentives by ending federal funding for state-administered programs.

If Minnesota wants to run assistance programs, it should do so with Minnesota taxpayer dollars. True accountability in America’s welfare programs begins with states bearing the full consequences of running them poorly.