The spectacular growth of the government/nonprofit industrial complex

“If something cannot go on forever, it will stop.” Economist Herbert Stein uttered those words nearly 40 years ago. Perhaps he was unfamiliar with the workings of Minnesota state government.

My colleague Martha Njolomole recently published a report under the headline “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. She writes about,

how 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 fiscal agent for a vast array of state and Federal welfare programs.

Less well known, each year, DHS doles out more than $25 billion (with a “b”) to private companies, mostly nonprofit organizations.

Deena Winter of MN Reformer recently wrote about how an increasing share of HHS and other government spending is accomplished through private nonprofits. She notes,

State government increasingly relies on nonprofits to complete its work, from preventing violence to encouraging vaccination. 

To illustrate this phenomenon, we will focus on a single nonprofit, Lutheran Social Service of Minnesota (LSSM). This charity behemoth has evolved from a tiny rural orphanage in 1865 to an entity that will take in revenue approaching a quarter-billion dollars this year.

The terminally naive 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 comes from taxpayers, as shown in this table charting revenue over the past decade,

Over the past decade, Lutheran Social Service has seen its revenue nearly double. However, the share of its revenue contributed by government entities continues to grow at an even faster rate, now approaching 90 percent of the total. The remainder is funded by private donations, client fees, and investment income.

A large share of LSSM’s revenue comes from a single government agency, DHS. The Department’s share of LSSM revenue has grown at an even faster rate over the past decade, and now represent 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 CEO (styled “Commissioner”) of the Department of Human Services, is Jodi Harpstead, who has held the post since August 2019.

Immediately before her appointment as DHS Commissioner, Harpstead served as the CEO of Lutheran Social Service of Minnesota, running the nonprofit beginning in 2011.

It has been under her watch, as DHS Commissioner, that Lutheran Social Service has experienced its greatest growth in DHS payments.

To illustrate this point, I drew this crude graph (from the numbers above) showing the payments (in $millions) from DHS to LSSM over the past 10 years,

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

In her last few years of running LSSM, Harpstead was paid an annual salary of more than $300,000 per year, as recorded in the nonprofit’s IRS tax returns.

Joining the Walz Administration as head of DHS required taking 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.

Taxpayers rely on the senior members of the executive branch to make sure that the vast sums spent by 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. A group of them have established an anonymous Twitter (X) account to vent their grievances. The account recently posted the following item,

Quis custodiet ipsos custodes?