Payments Frozen: Inside the Federal Probe Rocking Minnesota’s Child-Care System

The Phone Call That Stopped Millions

It was just past 9 a.m. last Tuesday when the e-mail landed in Commissioner Diedre Schmidt’s inbox: “Effective immediately, all federal child-care funds to Minnesota are suspended.”

Inside the state’s Human Services building in St. Paul, phones began to light up. Within minutes, governors’ offices, day-care centers, and anxious parents were asking the same question—how did a handful of TikTok videos bring a $100-million-a-year subsidy program to its knees?

From Viral Clip to Federal Freeze

The clips, posted by an anonymous Twin Cities account in late April, appear to show stacks of cash changing hands inside a Minneapolis day-care center while children nap in the background. The footage—viewed 6.8 million times in 48 hours—was stitched to voice-overs alleging “millions siphoned through fake attendance logs.”

“We received more than 400 tips overnight,” said Special Agent Laura Kim of the Department of Health and Human Services’ Office of Inspector General. “When the public becomes this engaged, we move fast.”

By Friday, HHS had frozen Minnesota’s Child Care and Development Fund payments, citing “credible evidence of systemic fraud.”

What the Feds Are Examining

• Duplicate billing for the same child across multiple sites
• Enrollment rosters listing children who, according to school districts, were never registered
• Wire transfers from several day-care accounts to shell companies in North Dakota and Wisconsin
• Purchase orders for playground equipment and baby cribs that were never delivered

Parents Caught in the Middle

At the New Horizons Learning Center in Rochester, director Carla Menendez has already trimmed her after-school program from 120 kids to 40. “We rely on federal dollars to subsidize low-income families,” she said. “Without it, tuition triples. Parents are choosing between rent and day care.”

State officials estimate 2,300 providers could lose funding if the freeze lasts through summer school break.

A Pattern Under the Prairie

Minnesota isn’t the first Midwest state to face scrutiny. Iowa’s similar program lost $70 million to alleged fraud in 2022; Wisconsin paused payments for three months the same year. Critics say fragmented databases make cross-checking enrollment nearly impossible.

“We’ve warned for years that paper attendance sheets and Excel spreadsheets are an open door to abuse,” noted Senator Tina Morrison, ranking member of the Senate’s early-education subcommittee.

What Happens Next

Investigators must complete their audit within 90 days or request an extension. Meanwhile, HHS has offered Minnesota a conditional lifeline: restore a digital time-stamp verification system—scrapped in 2020 to “reduce provider paperwork”—and the money could flow again.

Governor Tim Walz has called a special session for June 12 to vote on reinstating the tech upgrade, estimated to cost $14 million. “We’re committed to getting parents the help they need,” Walz said, “but we have to prove to Washington we’re good stewards of taxpayer dollars.”

The Human Cost

Back in Rochester, Carla Menendez watches children stream into a half-empty gym. “These kids don’t understand budgets or investigations,” she said. “They just know their friends aren’t here anymore.”

Whether those friends return depends on what federal auditors find—and how quickly Minnesota can convince Washington that its child-care system is no longer a story of fraud, but one of reform.