Symbiotic government relationships 

The spectacular growth of the government-nonprofit industrial complex.

“If something cannot go on forever, it will stop.” Economist Herbert Stein wrote those words 35 years ago, and the phrase has commonly become known as Stein’s Law. Perhaps he was unfamiliar with the workings of the Minnesota state government.  

American Experiment economist Martha Njolomole recently published a report titled, “A Ticking Time Bomb: Minnesota’s vast and expanding welfare system.” She notes the fast-growing portion of state spending dedicated to the Health and Human Services (HHS) budget area, writing,  

Minnesota’s spending on welfare has consistently grown in both absolute terms and when adjusted for the population in poverty. Additionally, the expansion in welfare spending has often exceeded growth in spending for other programs, gradually increasing welfare’s proportion of the budget. HHS spending as a share of general funds grew 23 percent between 2000 and 2019, surpassing all other major state spending categories.  

The largest agency within the state HHS empire is the Department of Human Services (DHS). This cabinet agency acts as a fiscal agent for a wide array of state and federal welfare programs. Each year, DHS distributes more than $25 billion to private companies, primarily nonprofit organizations. 

In the Minnesota Reformer, Deena Winter and Michelle Griffith reported on the increasing share of HHS and other government spending accomplished through private nonprofits. The Feb. 28 article notes, “State government increasingly relies on nonprofits to complete its work, from preventing violence to encouraging vaccination.”  

The nonprofit Lutheran Social Service of Minnesota (LSSM) illustrates this phenomenon. The charity behemoth has evolved from a tiny rural orphanage in 1865 to an entity that will receive revenue approaching a quarter-billion dollars this year. The terminally naïve may imagine that the bulk of resources supporting something called Lutheran Social Service would come from, well, Lutherans.  

In fact, nearly 90 percent of LSSM’s revenue came from taxpayers over the past decade.  

During this time, LSSM has seen its revenue nearly double. However, the share of its revenue contributed by government entities continues to grow even faster, now approaching 90 percent of the total. Private donations, client fees, and investment income fund the remainder.  

Of the 90 percent in government contributions, a large share of LSSM’s revenue comes from a single government agency: DHS, whose share of LSSM revenue has grown at an even faster rate over the past decade and now represents almost two-fifths (38 percent) of the nonprofit’s total. Government payments are difficult to track, as invoices are paid to more than a dozen separate LSSM accounts.  

Interestingly enough, the current commissioner of DHS is Jodi Harpstead, who has held the post since August 2019.  

Immediately before she was appointed DHS Commissioner, Harpstead served as the CEO of Lutheran Social Service of Minnesota, running the nonprofit beginning in 2011. As DHS Commissioner, she has watched LSSM experience its greatest growth in DHS payments. This graph shows the dollar payments (in millions) from DHS to LSSM over the past 10 years.  

The red vertical line shows the date Harpstead left LSSM to join DHS. The blue line shows the annual payments. Everything to the left of the red line is the years where Harpstead ran LSSM. To the right are payments from DHS to LSSM in the years when Harpstead ran DHS. The slope of the blue line dramatically increased over time, with August 2019 as the inflection point.  

While LSSM experienced a dramatic increase in revenue, joining the Walz administration as head of DHS required a significant pay cut for Harpstead.  

With nearly 90 percent of its revenue coming from taxpayers, LSSM is a government agency in everything but name. But as a nonprofit, it is free to pay senior executives at rates well above government levels. And it is not subject to the same rules and audit requirements imposed on a state agency. According to the nonprofit’s IRS tax returns, Harpstead was paid more than $300,000 per year in her last few years of running LSSM. 

Taxpayers rely on the senior members of the executive branch to ensure that the vast sums spent by the government are not wasted. But one wonders how effective oversight can be when conducted by a former head of an organization run by her former colleagues.  

No one is more frustrated by this situation than current DHS staffers. Some of them have established an anonymous Twitter (X) account to vent their grievances. The account recently posted the following item:  

“So, who watches the watchers?”