OL A

OFFICE OF THE LEGISLATIVE AUDITOR
STATE OF MINNESOTA

Financial Audit Division Report

Department of Corrections
Special Review: MINNCOR Industries and
Minnesota Correctional Education Foundation

July 27, 2006

06-21

Financial Audit Division
The Office of the Legislative Auditor (OLA) is
a professional, nonpartisan office in the
legislative branch of Minnesota state
government. Its principal responsibility is to
audit and evaluate the agencies and programs of
state government (the State Auditor audits local
governments).

OLA is under the direction of the Legislative
Auditor, who is appointed for a six-year term
by the Legislative Audit Commission (LAC).
The LAC is a bipartisan commission of
representatives and senators. It annually selects
topics for the Program Evaluation Division, but
is generally not involved in scheduling financial
audits.

OLA’s Financial Audit Division annually
audits the state’s financial statements and, on a
rotating schedule, audits agencies in the
executive and judicial branches of state
government, three metropolitan agencies, and
several “semi-state” organizations. The
division also investigates allegations that state
resources have been used inappropriately.

All findings, conclusions, and
recommendations in reports issued by the
Office of the Legislative Auditor are solely the
responsibility of the office and may not reflect
the views of the LAC, its individual members,
or other members of the Minnesota Legislature.

The division has a staff of approximately forty
auditors, most of whom are CPAs. The
division conducts audits in accordance with
standards established by the American Institute
of Certified Public Accountants and the
Comptroller General of the United States.
Consistent with OLA’s mission, the Financial
Audit Division works to:
• Promote Accountability,
• Strengthen Legislative Oversight, and
• Support Good Financial Management.
Through its Program Evaluation Division, OLA
conducts several evaluations each year.

To obtain a copy of this document in an
accessible format (electronic ASCII text, Braille,
large print, or audio) please call 651-296-1235.
People with hearing or speech disabilities may
call us through Minnesota Relay by dialing 7-1-1
or 1-800-627-3529.
All OLA reports are available at our web site:
http://www.auditor.leg.state.mn.us
If you have comments about our work, or you
want to suggest an audit, investigation, or
evaluation, please contact us at 651-296-4708
or by e-mail at auditor@state.mn.us

OLA

OFFICE OF THE LEGISLATIVE AUDITOR

State of Minnesota • James Nobles, Legislative Auditor

Senator Ann H. Rest, Chair
Legislative Audit Commission
Members of the Legislative Audit Commission
Ms. Joan Fabian, Commissioner
Department of Corrections

We have conducted a special review of MINNCOR Industries, the correctional industry
program for the Department of Corrections for the period July 1, 2003, through March 31,
2006. We conducted the special review after receiving allegations about certain MINNCOR
business practices. The allegations included potential conflicts of interest, the improper
disposition of surplus property, and questionable contracting practices. In addition, it was
alleged that MINNCOR had inappropriately made donations to certain nonprofit organizations,
including the Minnesota Correctional Education Foundation. Based on our initial assessment,
we decided to conduct a special review and issue this report.
The enclosed Report Summary highlights our overall conclusions. We discuss the issues
more fully in Chapter 2 and Chapter 3 of the report, which contains 8 findings and 16
recommendations.
We would like to thank the staff at the Department of Corrections for their cooperation during
this special review.
/s/ James R. Nobles

/s/ Cecile M. Ferkul

James R. Nobles
Legislative Auditor

Cecile M. Ferkul, CPA, CISA
Deputy Legislative Auditor

Report Signed On: July 21, 2006

Room 140 Centennial Building, 658 Cedar Street, St. Paul, Minnesota 55155-1603 • Tel: 651/296-4708 • Fax: 651/296-4712

E-mail: auditor@state.mn.us • TDD Relay: 651/297-5353 • Website: www.auditor.leg.state.mn.us


Special Review: Minnesota Department of Corrections
• MINNCOR Industries
• Minnesota Correctional Education Foundation

Table of Contents 


Page
Report Summary

1

Chapter 1. Introduction

3

Chapter 2. MINNCOR Industries

7

Chapter 3. Minnesota Correctional Education Foundation

13

Agency Response

19

Audit Participation
The following members of the Office of the Legislative Auditor prepared this report:
Cecile Ferkul, CPA, CISA
Marla Conroy, CPA, CISA
Sonya Johnson, CPA
Laura Peterson, CPA

Deputy Legislative Auditor
Director of Investigations
Investigator
Audit Director

Exit Conference
The following representatives from the Department of Corrections participated in the exit
conference held on July 10, 2006:
Joan Fabian
Dennis Benson
Lisa Cornelius
Rich Schoenthaler
Chris Pizinger
Marcie Koetke
Chris Dodge

Commissioner
Deputy Commissioner
Assistant Commissioner
Chief Financial Officer, MINNCOR
Chief Executive Officer, MINNCOR
Director of Education
Financial Management Director

Special Review - Department of Corrections
• MINNCOR Industries
• Minnesota Correctional Education Foundation

Report Summary 


Key Findings:

Audit Scope:

•	 The Department of Corrections did not
adequately resolve a conflict of interest
involving three MINNCOR employees who
attended a National Football League game as
guests of a vendor. (Finding 1, page 7)

In response to allegations, we
conducted a special review of
MINNCOR Industries, the
correctional industry program for the
Department of Corrections for the
period July 1, 2003, through
March 31, 2006. Our review included
the Minnesota Correctional Education
Foundation.

•	 MINNCOR Industries did not comply with
state statutes or department policies when it
disposed of surplus property. (Finding 2,
page 9)
•	 The Department of Corrections did not have
statutory authority to establish the Minnesota
Correctional Education Foundation. (Finding
4, page 13)
•	 Conflicts of interest from having public
officials serving on the foundation board have
not been appropriately addressed. (Finding 5,
page 14)
•	 The Department of Corrections may not have
complied with federal grant requirements.
(Finding 6, page 16)
•	 The Department of Corrections inappropriately
transferred $60,500 from MINNCOR to the
Minnesota Correctional Education Foundation.
(Findings 7 and 8, pages 17 and 18)

The audit report contained a total of eight
findings - three relating to MINNCOR business
practices and five relating to the department’s
relationship with the Minnesota Correctional
Education Foundation.

1


Background:
MINNCOR Industries provides
inmates an opportunity to acquire
certain knowledge and skills prior to
release. MINNCOR operates in eight
correctional facilities and produces
various products and services, which it
sells to state agencies, local units of
government, and businesses.
In 2004, the Department of
Corrections established the Minnesota
Correctional Education Foundation, a
nonprofit organization that supports
the department’s postsecondary
education program for inmates.

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• MINNCOR Industries
• Minnesota Correctional Education Foundation

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Chapter 1. Introduction

Background
We conducted a special review of MINNCOR Industries, the correctional industry
program for the Department of Corrections for the period July 1, 2003, through
March 31, 2006. We conducted the special review after receiving allegations about
certain MINNCOR business practices. The allegations included potential conflicts of
interest, the improper disposition of surplus property, and questionable contracting
practices. In addition, it was alleged that MINNCOR had inappropriately made donations
to certain nonprofit organizations, including the Minnesota Correctional Education
Foundation. Based on our initial assessment, we decided to conduct a special review and
issue this report.
We also issued a performance audit of the Department of Corrections for the period
July 1, 2003, through June 30, 2005 (Report #06-20), which was released as a public
document on July 27, 2006. The audit scope included personnel and payroll controls and
governmental grants and subsidies.
MINNCOR Industries
MINNCOR Industries provides inmates an opportunity to work and acquire certain
knowledge and skills prior to release. MINNCOR operates in eight state correctional
facilities and provides various products and services that are sold to state agencies, local
units of government, and businesses. Some of the products produced and services
provided by MINNCOR include custodial supplies, park and patio accessories, and
office, library, and residential furniture, data entry, market research, laundry, and sewing
services. MINNCOR Industries also enters into partnerships with private and public
sector businesses, where MINNCOR provides inmate labor and on-site production
facilities, and the business provides product specifications, raw materials, and equipment.
MINNCOR’s financial activity is recorded on the state’s accounting system in the
Minnesota Industries Revolving Fund, a fund that allows income to be used to finance
continuing operations. Table 1-1 summarizes MINNCOR’s Revenues and Expenditures
for fiscal years 2004 and 2005.

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• MINNCOR Industries
• Minnesota Correctional Education Foundation

Table 1-1 

MINNCOR Revenue and Expenditures 

Fiscal Years 2004-2005
Sales
Cost of Goods Sold
Gross Margin

2004
$29,906,078
(14,606,788)
$15,299,290

2005
$32,326,875
(16,591,775)
$15,735,100

Manufacturing Costs (Note 1)
Operating Income
General and Administrative Costs
Net Income

($9,269,866)
6,029,424
(3,555,198)
$2,474,226

($8,884,064)
6,851,036
(5,526,536)
$1,324,500

Note 1:

The manufacturing costs are those costs incurred at the state correctional facilities.

Source:

MINNCOR’s 2005 Annual Report-Comparative Income Statement (unaudited).

Minnesota Correctional Education Foundation
The Minnesota Correctional Education Foundation is a nonprofit organization whose
mission is to provide eligible inmates with appropriate academic and vocational
opportunities to prepare them for release as productive and contributing citizens. The
foundation, established in July 2004, held its first board of directors’ meeting in March
2005. Mr. Curt Peterson was the foundation’s first executive director until he resigned in
November 2005. Ms. Liz Evensen has served as the foundation’s executive director
since December 2005.
The foundation partners with the Department of Corrections and a consortium of higher
education institutions to provide postsecondary education to inmates. Since its
establishment, the foundation’s role has been promoting postsecondary education in the
correctional facilities and raising funds. The department contracted with Inver Hills
Community College to provide, in part, educational planning and assessments at certain
correctional facilities. The educational assessments determine the inmates’ academic
ability and eligibility for the program. The department used a federal grant from the
U.S. Department of Education, Grants to States for Workplace and Community
Transition Training for Incarcerated Youth Offenders (CFDA #84.331), to pay Inver
Hills Community College for these services.
From December 2004 through March 2006, the foundation had approximately $200,000
in revenues and $51,000 in expenditures. The department provided office space and
general administrative support to the foundation. The department also paid the salary of
the foundation’s executive director from the Grants to States for Workplace and
Community Transition Training for Incarcerated Youth Offenders. Table 1-2
summarizes the foundation’s financial activity.

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Table 1-2 

Minnesota Correctional Education Foundation 

Receipts and Disbursements 

December 2004 through March 31, 2006 

Receipts
Corporate and Individual Donations
MINNCOR (Note 2)
Interest Revenue
Total Receipts (Note 1)

$139,021
60,500
488
$200,009

Disbursements
Vocational Training (Note 3)
Golf Tournament (Note 4)
Insurance
Supplies and Postage
Application for Nonprofit Status and Other Services
Other
Total Disbursements (Note 1)

$ 35,500
10,204
1,800
1,004
989
1,112
$ 50,609

Ending Cash at March 31, 2006

$149,400

Notes:
1. 	 The Minnesota Correctional Education Foundation stated that it received administrative support from the
Department of Corrections valued at approximately $75,000 for the executive director’s salary, office space,
equipment, and supplies. The receipts and disbursements in this table do not reflect this amount.
2. 	 MINNCOR payments included $10,000 to sponsor the foundation’s golf tournament, $15,000 for general
support, and $35,500 for vocational training.
3. 	 MINNCOR paid the foundation for vocational training. The foundation then paid a private vocational/technical
college for conducting the training.
4. 	 The amount includes $9,954 expenditures for the first golf tournament held July 28, 2005, and a $250 deposit
related to the 2006 golf tournament.
Source: 	 Auditor prepared from the Minnesota Correctional Education Foundation’s bank statements and other
supporting documentation.

Objective and Methodology
Our objective in conducting this special review was to answer the following questions:
•	 Did a conflict of interest result when three MINNCOR employees attended a
National Football League game as guests of a business partner?
•	 Did MINNCOR comply with applicable state statutes and department policies and
procedures when it disposed of certain surplus property?
•	 Did MINNCOR comply with applicable department policies and procedures when
developing certain business partnership agreements and related pricing for goods
produced?

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• Minnesota Correctional Education Foundation
•	 Did the Department of Corrections have authority to establish and financially
support the Minnesota Correctional Education Foundation?
•	 Have potential conflicts of interest related to the foundation been appropriately
addressed?
We reviewed relevant documents, including selected MINNCOR business partnership
agreements and financial records. We reviewed applicable state statutes and Department
of Corrections’ policies and procedures. We also examined the accounting records of the
Minnesota Correctional Education Foundation. We interviewed staff from the
departments of Corrections and Administration and the Minnesota Correctional
Education Foundation. We also obtained information from one of MINNCOR’s business
partners. Our review was not a full audit of MINNCOR Industries, the Minnesota
Correctional Education Foundation or the federal Grants to States for Workplace and
Community Transition Training for Incarcerated Youth Offenders.

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• MINNCOR Industries
• Minnesota Correctional Education Foundation

Chapter 2. MINNCOR Industries


Chapter Conclusions
The Department of Corrections did not adequately resolve a conflict of
interest involving three MINNCOR employees who attended a National
Football League game as guests of a vendor. In addition, MINNCOR
did not comply with state statutes and department policies and
procedures when disposing of surplus property, executing business
partnership agreements, establishing sales prices, and paying vendor
invoices.

In response to allegations, we conducted a review of certain MINNCOR transactions that
occurred during fiscal years 2004 through 2006. The allegations included potential
conflicts of interest, the improper disposition of surplus property, and questionable
contracting practices. In addition, it was alleged that MINNCOR had inappropriately
made donations to certain nonprofit organizations, including the Minnesota Correctional
Education Foundation.
During our review, we found that MINNCOR had internal policies and procedures
specific to particular operations; however, the policies were either not followed or did not
reflect current MINNCOR practices. The following findings relating to surplus property,
pricing, and contracts are examples of this situation. As a part of its policy, the
department scheduled periodic reviews and updates of its policies and procedures.
MINNCOR did not follow this schedule in 2005.

Current Findings and Recommendations
1. The Department of Corrections did not adequately resolve a conflict of interest.
The Department of Corrections did not adequately resolve a conflict of interest involving
three MINNCOR employees who had influence over business partnership agreements.
On November 21, 2005, the employees traveled to Green Bay, Wisconsin to discuss
manufacturing processes and contract terms with a business partner. The company
offered the MINNCOR employees tickets to the Monday night football game between the
Green Bay Packers and the Minnesota Vikings. The tickets were for the company’s
private box. The employees said they each reimbursed the company $67, which was the
face value of the ticket. Although the employees reimbursed the company the face value
of the tickets, that did not reflect the full value of attending the game, which included use
of the private box, food, and beverages. We determined the total value of attending the
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• MINNCOR Industries
• Minnesota Correctional Education Foundation
game was approximately $400 per person. In addition, the company also paid for the
MINNCOR employees’ meals and hotel accommodations.
Minnesota Statutes 2005, 15.43, prohibits state employees who may influence a
purchasing decision from accepting anything of value from a company to which a
contract or purchase order has been awarded. In addition, Minnesota Statutes 2005,
43A.38, subd. 2 states:
Employees in the executive branch in the course of or in relation to their
official duties shall not directly or indirectly receive or agree to receive
any payment of expense, compensation, gift, reward, gratuity, favor,
service or promise of future employment or other future benefit from any
source, except the state for any activity related to the duties of the
employee…
A conflict of interest occurred when the company paid the MINNCOR employees’ meals
and hotel expenses and when the employees accepted tickets to the game. A conflict also
existed because these tickets were not available to the general public, but only to the
company and its guests.1 MINNCOR’s chief executive officer was aware of the
employees’ attendance at the football game, but did not consider it a problem since the
game occurred outside of work hours and the employees paid the company the face value
of the tickets.
A MINNCOR employee indicated the company had paid for their hotel accommodations
pursuant to the department’s contract with the company. The department’s contract
required the company to, “…provide initial and ongoing product training as may be
required by STATE to effectively sell and manufacture products covered under this
agreement....” The contract did not require the company to pay state employee meals and
hotel accommodations. The Department of Corrections is responsible for employees’
travel expenses while conducting state business. Allowing a company or vendor to pay
these expenses violates statutory provisions designed to ensure fair contracting practices.
Recommendations
•	 The Department of Corrections should ensure the three MINNCOR
employees reimburse the company the full value of attending the
football game.

1

Minnesota Statutes 2005, 43A.38, subd. 5, provides that certain actions by an employee shall be deemed
a conflict of interest including “... use or attempted use of an employee’s official position to secure benefits,
privileges, exemptions or advantages for the employee or the employee’s immediate family, or an
organization with which the employee is associated, which are different from those available to the general
public;...”

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• MINNCOR Industries
• Minnesota Correctional Education Foundation
•	 The department should reimburse the company for any travel costs
paid on behalf of its employees.
•	 The department should ensure its employees are aware of and comply
with legal provisions regarding conflicts of interest.

2.	 MINNCOR did not comply with state statutes and department policies and
procedures when disposing of surplus property.
Department officials incorrectly believed that items produced by MINNCOR for resale
were exempt from state statutes governing surplus property. The statutes do not exempt
these resale items from surplus property requirements. Minnesota Statutes 2005, 16C.23
gives the Department of Administration authority to dispose of surplus property for the
state. The statute defines surplus property as:
…state or federal commodities, equipment, materials, supplies, books,
printed matter, buildings, and other personal or real property that is
obsolete, unused, not needed for a public purpose, or ineffective for
current use.
There were several instances where MINNCOR did not comply with statutory
requirements or department policies when disposing of surplus items:
•	 In January 2006, MINNCOR discontinued its Minnesota Line of farm equipment.
MINNCOR sent out flyers to farm implement customers and posted the flyer on
its website announcing that “The Minnesota Line Farm Equipment will be
discontinued January 1, 2006,” and that “all wagons and gravity boxes will be
sold.” MINNCOR sold the farm implement equipment at discounted prices.
MINNCOR also sold the remaining farm implement service parts in lots after
obtaining two verbal bids.
MINNCOR did not contact the Department of Administration before selling the
equipment or service parts. In addition, MINNCOR did not comply with its own
policies and procedures regarding the sale of the parts. The department’s policies
and procedures required MINNCOR to advertise the sale to the general public and
sell the items either by pre-pricing or making them available through sealed bids;
however, MINNCOR accepted verbal bids. Some customers, who had purchased
wagons or gravity boxes at discounted prices, said they were unaware the service
parts were available for sale and were angry that they were not given an
opportunity to bid on the items.
MINNCOR sold the parts based on a $10,000 verbal bid when its inventory
records reflected the items originally cost over $400,000. MINNCOR’s chief
financial officer explained the inventory records were not accurate, indicating that
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• MINNCOR Industries
• Minnesota Correctional Education Foundation
some of the parts were nearly 30 years old, and MINNCOR should have written
down the inventory value to zero several years ago.
•	 MINNCOR did not contact the Department of Administration before donating 52
wooden cabinets to a local nonprofit organization. The Department of
Administration’s User Guide to State Property Management states that a nonprofit
organization “must be certified eligible by the [Department of Administration’s]
Surplus Services in order to receive surplus property from any state agency.”
MINNCOR did not contact the Department of Administration’s Surplus Services
when it donated these items, nor was the nonprofit certified to receive surplus
property from the state.
•	 In October 2005, MINNCOR held a garage sale to dispose of water damaged
furniture. MINNCOR did not contact the Department of Administration to
determine the most appropriate method of handling the disposal of these items.
The department’s policies made a distinction between “surplus product” and “surplus
property.” The policy defined surplus product as customer returns, damaged products,
product prototypes, obsolete products, or any MINNCOR product that could not be
marketed and sold as new. The policy required MINNCOR to advertise the sale of
surplus products to the general public and sell the items either by prepricing or making
them available through sealed bids. In contrast, MINNCOR defined surplus property as
surplus fixed assets and equipment previously used by MINNCOR for manufacturing or
delivery purposes. Department policy stated surplus property would not be sold unless
approved by the Department of Administration’s Surplus Property Division. Although
the department made this distinction between surplus product and surplus property, it is
not reflected in statute.
Recommendations
•	 The Department of Corrections should ensure MINNCOR complies
with Minnesota Statutes regarding the disposition of surplus property.
•	 The department should ensure its policies coincide with statutory
requirements concerning surplus property and that MINNCOR follows
these policies.
•	 The department should ensure MINNCOR’s inventory records are
accurately maintained.

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• MINNCOR Industries
• Minnesota Correctional Education Foundation
3. 	 MINNCOR did not comply with department policies with regard to contracts
and pricing and state statutes with regard to prompt payment of invoices.
MINNCOR did not comply with department policies and procedures when executing
business partnership agreements and establishing sales prices. In addition, MINNCOR
did not follow state statutes regarding prompt payment of invoices. Several of the
business partnership agreements had no evidence of an approval by MINNCOR’s
executive team before being sent to the business partner for signature. Members of
MINNCOR’s executive team include its chief executive officer, chief financial officer,
director of administration, and the vice presidents of sales, business development, and
operations.
Department policy 403.080 requires proposed contracts be submitted to the executive
team for final approval before contracts go to the customer for signature. MINNCOR
officials said the executive team reviews and approves these contracts; however, there
was no evidence in executive team meeting minutes or other documentation to support
the review and approval of contracts. Documentation of the executive team’s discussion
and approval of a contract would be helpful if questions arise regarding the contract’s
terms and conditions.
MINNCOR did not adequately document how it established product and service sale
prices. Department of Corrections policy 405.020 requires MINNCOR to use a pricing
sheet for all products and services. The policy requires that the cost of raw materials,
overhead, general and administrative expenses, and any other expenses be included when
determining product and labor service costs. The cost is to be increased by a minimum of
ten percent for profit. Although MINNCOR tracks these costs, the department did not
sufficiently document how it arrived at the sale prices. Documentation may include
analysis of market conditions, profit margins, or other factors considered when setting the
sale prices.
MINNCOR did not comply with statutory requirements concerning timely payment of
vendor invoices. MINNCOR did not pay four of nine invoices tested in a timely manner.
The department paid the four invoices during the period of August 2004 through
September 2005. According to Minnesota Statutes 2005, 16A.124, subd. 3, state
agencies generally must pay vendors within 30 days following the receipt of the invoice
for the delivery of the product or service. Nontimely payment of invoices subjects the
department to additional and unnecessary costs.
Recommendations
•	 The Department of Corrections should ensure MINNCOR complies
with its policies and procedures concerning the approval of business
partnership agreements and pricing of products and services.
•	 The Department of Corrections should ensure all invoices are paid in
accordance with the statutory prompt payment requirement.

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• Minnesota Correctional Education Foundation

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Chapter 3. Minnesota Correctional Education Foundation 


Chapter Conclusions
The Department of Corrections created and financially supported the
Minnesota Correctional Education Foundation without statutory authority.
Conflicts of interest from public officials serving on the foundation board have
not been adequately addressed. In addition, the department may have
inappropriately used a federal grant to pay the entire salary of the foundation’s
executive director. It also inappropriately transferred MINNCOR money to the
Minnesota Correctional Education Foundation.

During our review of MINNCOR, we found that officials at the Department of
Corrections had transferred money from MINNCOR to the Minnesota Correctional
Education Foundation. We questioned the department’s authority to make the transfer
and decided to expand our review to include the foundation.

Current Findings and Recommendations
4. 	 The Department of Corrections created and financially supports the Minnesota
Correctional Education Foundation without statutory authority.
State law did not authorize the department to establish and financially support the
Minnesota Correctional Education Foundation. The department created the foundation as
a private, nonprofit organization, transferred money to the foundation, and provided it
with office space and other administrative support. Department of Corrections’ officials
stated that the foundation’s purpose is to support the department’s postsecondary
education program for inmates.
State agencies operate under explicit and detailed statutory authority and restrictions,
particularly in their use of money appropriated by the Legislature. Absent specific
authority, state agencies cannot create separate legal entities (such as a nonprofit
organization), transfer money, and provide administrative support to those entities. In
this case, the department’s unauthorized actions create concerns about accountability and
conflicts of interest.
When the Legislature authorizes the creation of a nonprofit organization, it typically
defines the entity’s purpose and obligations, as well as how the entity will interact with
state agencies. The authorizing legislation also normally defines the composition of the
governing body and identifies the laws with which it must comply, such as the state’s
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• MINNCOR Industries
• Minnesota Correctional Education Foundation
Open Meetings Law, the Government Data Practices Act, Code of Ethics, and other laws
that set standards for how state business must be conducted. Since the Department of
Corrections created the Minnesota Correctional Education Foundation without
authorizing legislation, neither the Legislature nor the Governor (who is part of the
lawmaking process through the power to sign or veto legislation) were able to set
standards or expectations for the foundation’s operations. Essentially, the foundation is
operated at the discretion of officials in the Department of Corrections. For example:
•	 The department’s director of education is the immediate supervisor of the 

foundation’s executive director. 

•	 The Department of Corrections provided administrative support, including office
space, supplies, and equipment to the foundation estimated to be worth nearly
$24,000.
•	 The department “donated” $25,000 to the foundation. (Finding 7 further 

discusses this concern.) 

•	 The commissioner of the Department of Corrections, MINNCOR’s chief
executive officer, and the department’s director of education are among the ten
voting members on the foundation’s board of directors.
In addition to the fact that state law did not authorize creation of the foundation or define
its relationship with the Department of Corrections, no agreement exists between the
department and the foundation to define their respective roles, responsibilities, and
liabilities. State agencies should not operate or use public money in such an informal and
unauthorized way.
Recommendation
•	 The Department of Corrections should obtain statutory authority
during the 2007 Legislature to provide administrative or financial
support to the Minnesota Correctional Education Foundation. If the
authority is obtained, the department should enter into a detailed
agreement with the foundation that clearly defines their respective
roles, responsibilities, and liabilities. If the statutory authority is not
obtained, the department should stop providing administrative and
financial support to the foundation.
5. 	 Conflicts of interest from public officials serving on the foundation board have
not been appropriately addressed.
Conflicts of interest resulted when department officials served on the Minnesota
Correctional Education Foundation’s board. Department officials who served on the

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• Minnesota Correctional Education Foundation
foundation’s board did not comply with the state’s code of ethics statutes and department
conflict of interest policies. Minnesota Statutes 2005, 43A.38, subd. 5, provides that
certain actions by an employee shall be deemed a conflict of interest and subject to
procedures regarding resolution of conflicts.
These actions include:
...use or attempted use of an employee’s official position to secure
benefits, privileges, exemptions or advantages for . . . an organization
with which the employee is associated, which are different from those
available to the general public.
In addition to the financial support discussed in Finding 4, the department issued three
payments to the foundation totaling $60,500 from the Minnesota Industries Revolving
Fund.
•	 MINNCOR’s chief executive officer, who is also a member of the foundation’s
board of directors, authorized two payments totaling $25,000 to the foundation.
•	 Another MINNCOR employee, who reported to MINNCOR’s chief executive
officer, authorized a third payment for $35,500.
Department employees authorized the use of state funds to the benefit of the foundation,
an organization they were associated with as board members. These funds may not have
been as available to other organizations as they were to the foundation because of this
association.
In addition to conflicts related to department officials serving on the board, conflicts arise
from the fact that the president of Inver Hills Community College is also a member of the
foundation’s board. The Department of Corrections entered into an interagency
agreement with Inver Hills Community College in which the college agreed to provide a
full time executive director for the foundation. The department agreed to provide Inver
Hills Community College up to $55,000 in salary, benefits, and travel expenses for the
foundation’s executive director. The department used money from the federal Grants to
States for Incarcerated Youth Offenders (CFDA #84.331) for these costs. (The use of
these federal grant funds is further discussed in Finding 6.)
Inver Hills Community College paid the foundation’s first executive director under a
consulting contract and received reimbursement from the Department of Corrections. In
December 2005, an employee of Inver Hills Community College became the
foundation’s executive director. She remained on the college’s payroll, and the college
obtained reimbursement from the Department of Corrections.
When a person holds positions in two or more organizations, there is a potential conflict
of interest if the person can use one position to influence decisions that benefit another
15 


Special Review - Department of Corrections
• MINNCOR Industries
• Minnesota Correctional Education Foundation
organization with which he or she is associated. State law contains procedures to avoid
having these potential conflicts become actual conflicts. Given the potential for conflicts
by having public employees serve on the foundation’s board, these employees should
comply with Minnesota Statutes 2005, 43A.38, subd. 6, which requires employees avoid
situations where they believe a potential conflict exists.
Recommendation
•	 If the foundation continues, the Department of Corrections should
ensure that public employees serving on the foundation board comply
with the Minnesota Statutes 2005, 43A.38.

6. 	 The Department of Corrections may not have complied with federal grant
requirements.
The department may have inappropriately used federal grant funds from the U. S.
Department of Education to reimburse Inver Hills Community College for the salary,
benefits, and travel costs of the Minnesota Correctional Education Foundation’s
executive director. Grants to States for Workplace and Community Transition Training
for Incarcerated Youth Offenders (CFDA #84.331), restricts the use of funds to benefit
inmates who are 25 years old or younger and who are eligible for parole or release within
five years.2 The foundation’s mission does not limit its support or efforts to inmates who
meet the federal grant eligibility requirements.
To comply with federal grant provisions, the department should only use the federal grant
for the portion of the executive director’s salary, benefits, and travel costs that relates to
the foundation’s support of eligible inmates. The remaining costs would need to be
funded from a source other than this federal grant. Since the foundation has not used its
resources for the direct benefit of any inmates as of March 31, 2006, the use of these
federal grant funds for the executive director’s salary may not be allowable.
Recommendations
•	 The Department of Corrections should work with the U.S. Department
of Education to determine whether the use of federal grant funds to
pay the executive director’s salary, benefits, and travel costs is
allowable.

2

The federal grant’s guidelines allow the use of funds to pay the costs of administering the federal grant
program. The guidelines state the administrative costs must be necessary and reasonable and may include
costs of coordinating and collaborating with public and private agencies, institutions, and organizations in
order to identify resources that can be used to supplement the federal grant program.

16 


Special Review - Department of Corrections
• MINNCOR Industries
• Minnesota Correctional Education Foundation
•	 The department should only charge the federal grant for the portion of
the executive director’s salary, benefits, and travel costs that relates to
its support of eligible inmates.

7. 	 The Department of Corrections inappropriately transferred $25,000 from
MINNCOR to the Minnesota Correctional Education Foundation to sponsor the
foundation’s golf tournament and provide a general donation.
The Department of Corrections inappropriately transferred $25,000 from MINNCOR’s
Minnesota Industries Fund to the foundation. In January 2005, MINNCOR paid the
foundation $10,000 to sponsor the foundation’s first annual golf tournament. In March
2005, MINNCOR paid the foundation an additional $15,000 “as a supporter of the work
of the Minnesota Correctional Education Foundation.” These payments did not comply
with Minnesota Statutes 2005, 241.27, subd. 2, concerning the appropriate use of the
Minnesota Industries Fund. The statute states:
…The revolving fund established shall be used for the conduct of the
industrial and commercial activities now or hereafter established at any
state correctional facility, included but not limited to the purchase of
equipment, raw materials, the payment of salaries, wages and other
expenses necessary and incident thereto….Additionally, the expenses of
inmate vocational training . . . may be financed from the correctional
industries revolving fund ….
The foundation deposited the $10,000 golf sponsorship and the $15,000 donation in its
savings account. As of March 31, 2006, the foundation had not expended these funds.
MINNCOR no longer had direct control over how these funds were used. While state
statutes provide that Industries Fund monies can be used for the payment of inmate
vocational training, the department no longer controls these funds and cannot assure that
the monies are used for their intended purpose.
Recommendations
•	 The Department of Corrections should obtain repayment of $25,000
from the Minnesota Correctional Education Foundation.
•	 The department should ensure Minnesota Correctional Industries
funds are expended in compliance with statutory requirements.

17 


Special Review - Department of Corrections
• MINNCOR Industries
• Minnesota Correctional Education Foundation

8. 	 The Department of Corrections inappropriately transferred $35,500 from
MINNCOR to the foundation to pay for services contracted for by the
department.
In February 2006, MINNCOR paid the foundation $35,500 for it to pay a private college
for vocational training the college provided to inmates. Department of Corrections had
negotiated a contract with a private college to provide this training. Although the
department negotiated the fee with the college, the contract did not specify the fee nor did
it require that the department pay the college. While the money was used for an
authorized purpose, MINNCOR inappropriately paid the foundation rather than paying
the private college directly for the vocational training. The department should not send
state funds to the foundation to make payments on its contracts.
Recommendation
•

The department should directly pay vendors for contracted services.

18 


OFFICE OF THE COMMISSIONER

Contributing to a Safer Minnesota

July 19, 2006

James R. Nobles, Legislative Auditor
Office of the Legislative Auditor
Room 140 Centennial Building
658 Cedar Street
St. Paul, MN 55155-1603
Dear Mr. Nobles:
Thank you for the opportunity to discuss and comment on the recommendations arising from the
special review of MINNCOR Industries. The efforts of your office are appreciated in
conjunction with completing this special review. Below please find a response for each finding
in the report.
Recommendation
The DOC should ensure the three MINNCOR employees reimburse the company the full
value of attending the football game.
Response
The Department of Corrections attempted to adequately resolve the conflict of interest
allegation through investigation, follow-up action, and training. MINNCOR believed staff
paying for the face value of the ticket was adequate. The Department will comply with the
Auditor’s recommendation and the employees will reimburse the company for the full value
of attending the football game.
Person Responsible:
Chris Pizinger

Estimated Completion Date:
August 2006

Recommendation
The DOC should reimburse the company for any travel costs paid on behalf of its employees.

www.doc.state.mn.us
1450 Energy Park Drive, Suite 200 St. Paul, Minnesota 55108 PH 651.642.0282 FAX 651.642.0414 TTY 651.643.3589
EQUAL OPPORTUNITY EMPLOYER

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Response
The Department of Corrections will comply with this recommendation. MINNCOR
understood that travel costs were to be paid by the company as part of the training agreed
upon in contractual agreement absent of language specifying otherwise. MINNCOR will
reimburse the vendor for the travel costs as recommended.
Person Responsible:
Chris Pizinger

Estimated Completion Date:
August 2006

Recommendation
The DOC should ensure its employees are aware of and comply with legal provisions
regarding conflicts of interest.
Response
The Department of Corrections agrees with this recommendation. An agency-wide code of
conduct training, developed by the Department of Finance, will be mandatory for all
managers. This training will be delivered this fiscal year and annual refresher courses will be
provided thereafter.
Person Responsible:
Lisa Cornelius

Estimated Completion Date:
July 2007

Recommendation
The DOC should ensure MINNCOR complies with Minnesota statutes regarding the
disposition of surplus property.
Response
The Department of Corrections agrees with this recommendation. As highlighted in the
Auditor’s report, an ambiguity exists in the definition of state surplus property and its
application to MINNCOR. MINNCOR believes products and material used in, and held for
resale, in the normal course of business do not fall under the definition of state surplus
property. MINNCOR defines the material it uses and products derived from such material as
surplus product – not surplus property. MINNCOR has never produced products to be sold
by the Department of Administration. Statutory language will be drafted to clarify the
definition of surplus property and surplus product for MINNCOR. This change will be
presented to the Legislature for consideration during the next legislative session.
Person Responsible:
Rich Schoenthaler

Estimated Completion Date:
June 2007

Recommendation
The DOC should ensure its policies coincide with statutory requirements concerning surplus
property and that MINNCOR follows these policies.

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Response
The Department of Corrections agrees with this recommendation. Policies will be reviewed
annually to ensure compliance with statutory language.
Person Responsible:
Rich Schoenthaler

Estimated Completion Date:
Completed

Recommendation
The DOC should ensure MINNCOR inventory records are accurately maintained.
Response
The Department of Corrections agrees with this recommendation. Two years ago,
MINNCOR began an extensive physical audit of fixed assets and inventory at each facility.
Inventory procedures, methods, and training were redesigned and are being completed
monthly and annually. Adjustments to reflect the true inventory and assets of MINNCOR
were completed and written to the books as each facility’s inventory and fixed assets were
counted and reconciled. In addition, procedures were put in place in fiscal year 2006 to write
off the cost of non-moving inventory, in excess of four years, on the MINNCOR books.
These procedures resulted in the write-off of the farm machinery inventory, which had an
average life with no turns on the books of greater than 25 years. These types of adjustments
and procedures would be in accordance with sound business practices and generally accepted
accounting principles.
Person Responsible:
Rich Schoenthaler

Estimated Completion Date:
Completed

Recommendation
The DOC should ensure MINNCOR complies with its policies and procedures concerning the
approval of business partnership agreements and pricing of products and services.
Response
The Department of Corrections agrees with this recommendation. Policies and procedures for
MINNCOR will be revised to reflect current practice in regards to the approval of business
partnership agreements and pricing of products and services. These practices will be in
accordance with generally accepted accounting principles. Contract training will also be
required for appropriate MINNCOR staff by the agency contract coordinator during the
current fiscal year.
Person Responsible:
Rich Schoenthaler

Estimated Completion Date:
December 2006

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Recommendation
The DOC should ensure all invoices are paid in accordance with statutory prompt payment
requirements.
Response
The Department of Corrections agrees with this recommendation. Corrective action was
taken immediately when the Department received the monthly prompt payment report
reflecting non-compliance in this area. The Department will make every effort to pay all
invoices within 30 days.
Person Responsible:
Lisa Cornelius

Estimated Completion Date:
Completed

Recommendation
The Department of corrections should obtain statutory authority during the 2007 Legislature
to provide administrative or financial support to the Minnesota Correctional Education
Foundation. If the authority is obtained, the department should enter into a detailed
agreement with the foundation that clearly defines their respective roles, responsibilities, and
liabilities. If the statutory authority is not obtained, the department should stop providing
administrative and financial support to the foundation.
Response
Research has shown that offenders earning higher education degrees are significantly less
likely to re-offend and create new victims. The Minnesota Correctional Education
Foundation (MCEF) is a private, non-profit organization developed as an innovative, cost
effective way for offenders to continue their education without using taxpayer funds. Outside
legal counsel was involved in researching the authority to establish a foundation and
referenced Minnesota Statute 465.717 for guidance. This statute does not specify state
agencies are required to have statutory authority to create a corporation. Thus, the
Department did not realize that legislative authority was needed. Presentations were made to
the legislature in 2006 informing members of the new foundation but no authority was
requested.
The Department of Corrections will comply with this finding. Statutory language will be
developed to bring forward during the 2007 legislative session to obtain authority for the
department to provide administrative and financial support to the MCEF. If approval is
received the Department will enter into a detailed agreement with MCEF to make more
clearly define roles, responsibilities, and liabilities.
Person Responsible:
Marcie Koetke

Estimated Completion Date:
June 2007

22

Response
If the foundation continues, the Department of Corrections should ensure that public
employees serving on the foundation board comply with the Minnesota Statutes 2005, 43A.38.
Response
The Department of Corrections staff serving on the MCEF Board immediately resigned when
informed that the auditor viewed their participation as a possible conflict of interest.
Foundation Board members requested Department representatives maintain an ex-officio
status with no voting rights. The foundation believes it is critical to have the expertise of the
department and strong support of the MCEF mission. This mission is to provide eligible
offenders with appropriate academic and vocational opportunities to prepare them for release
as productive and contributing citizens. The Board is also expecting Department
representatives to identify and ensure that best correctional practices are maintained as the
board makes decisions regarding educational offerings.
The president of Inver Hills Community College was actively recruited to serve on the MCEF
Board because of her valuable expertise in higher education and experience with successful
foundations. Neither she nor other state employees realized voluntary service on the board
could be perceived as a conflict of interest. She was advised on July 13, 2006 of the conflict
of interest concerns raised by the legislative auditor and immediately submitted her
resignation from the board.
Person Responsible:
Marcie Koetke

Estimated Completion Date:
Completed

Recommendation
The Department of Corrections should work with the U.S. Department of Education to
determine whether the use of federal grant funds to pay the executive director’s salary,
benefits, and travel costs is allowable.
The department should only charge the federal grant for the portion if the executive director’s
salary, benefits and travel costs that relates to its support of eligible inmates.
Response
The Department of Corrections requested and received approval from the U.S. Department of
Education for the use of federal grant dollars prior to entering into an agreement with Inver
Hills Community College to establish a position to research and establish a foundation. There
was no limitation set on the percent of federal funds that could be used to apply towards the
director’s salary, benefits, and travel.
The department will work with the US Department of Education to obtain a more clearly
stated approval.

23

Person Responsible:
Marcie Koetke

Estimated Completion Date:
September 2006

Recommendation
The Department of Corrections should obtain repayment of $25,000 from the Minnesota
Correctional Education foundation.
The department should ensure Minnesota Correctional Industries funds are expended in
compliance with statutory requirements.
Response
In the past, prison industries operated with full state funding. The legislature eliminated this
funding and required MINNCOR to become self-sufficient. The Department is relatively new
at operating a business-like program and believed it was appropriate to market MINNCOR at
this event as an opportunity to attract new business.
The Department of Corrections will comply with this finding and repayment of $25,000 will
be made from MCEF to MINNCOR. Contracts will be developed between the Department of
Corrections and vendors directly when MINNCOR funds educational expenses. The practice
of routing this funding through MCEF will discontinue. The Department will seek statutory
language next legislative session to allow MINNCOR to fund educational activities other than
direct vocational education expenses.
Person Responsible:
Marcie Koetke

Estimated Completion Date:
June 2007

It is the goal of the department to have corrected all of the report findings no later than June
2007. Thank you again for the efforts of your staff.
Sincerely,

Joan Fabian
Commissioner
Copy: Dennis Benson, Deputy Commissioner
Harley Nelson, Deputy Commissioner
Lisa Cornelius, Assistant Commissioner/Agency Chief Financial Officer

24