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SPEAKER 1: The state commerce commissioner is pushing back against allegations that he didn't do enough to crack down on a Minneapolis nonprofit accused of misspending public money.

In September, state investigators closed down Community Action of Minneapolis after an audit found its CEO, Bill Davis, spent taxpayer money for his own travel, golf, and bonuses. NPR News has learned that problems within Community Action went unresolved for years. Tom Scheck reports on why.

TOM SCHECK: In December 2011, Minnesota Commerce Commissioner Mike Rothman stood with Community Action of Minneapolis CEO Bill Davis at a press conference in Minneapolis to urge more federal funding for heating aid for poor people.

Even as Rothman and Davis made their case, officials within the Commerce Department were trying to figure out how Davis's organization misspent more than $1 million on heating assistance.

The state's response led Davis to accuse Commerce Department staff of racism, and it led some Commerce Department employees to believe Rothman wasn't doing enough to crack down on Davis.

SPEAKER 2: Thank you for calling Community Action of Minneapolis, where we're dedicated to improving people's lives.

TOM SCHECK: Four years later, in 2014, state officials shut Community Action of Minneapolis's doors, Davis is suspended, and 41 people lost their jobs. Other agencies have now been hired to do the work of the Minneapolis nonprofit.

SPEAKER 2: If you're calling about the Energy Assistance Program, please press 1.

TOM SCHECK: The Commerce Department played a role in closing Community Action, but there's disagreement over whether the Department acted quickly enough or whether it took action only after the Star Tribune printed details of a scathing audit of the nonprofit that was conducted by another state Department.

FREDDA SCOBEY: It was sort of a secret within the agency, but people were aware. Managers were aware.

TOM SCHECK: Fredda Scobey worked for Community Action between 1993 and 2003. She said she and other employees complained to the State Department of Human Services, the media, and to Community Action board members about Davis. Those complaints went nowhere.

FREDDA SCOBEY: On a number of occasions, people went to board members to tell them what was going on. And what happened is the board members went to Bill Davis, and then the employee was punished.

TOM SCHECK: Scobey said she doesn't know why Davis avoided trouble for so long. But an examination of internal documents and interviews with people who worked with Davis show he relied on his political connections, his standing in the African-American community, and a heavy handed managerial style to ensure taxpayer money kept flowing to Community Action.

And even though Rothman said the Commerce Department took strong action against the nonprofit, career staffers say he didn't go far enough. Beginning in 2011, they pleaded with Rothman, Deputy Commissioner Bill Grant, and Energy Assistance Director John Harvanko to cancel state contracts with Community Action.

They say the problems included botched energy aid payments, shoddy construction work, and backlogged energy assistance claims. The staffers spoke on the condition of anonymity because they aren't authorized to speak by the Commerce Department. They say they were told in meetings there would be political ramifications to ending the contracts.

Rothman and Grant didn't deny discussing politics with staff, but Grant said the conversations focused on ensuring Minneapolis residents would continue to get aid. Grant also said any changes would have resulted in political pushback from Community Action's board, which included several high profile Democrats.

SPEAKER 3: Politics was in the context of the challenges that we would face in identifying and switching to a new service provider when, as the commissioner mentioned, there was a long-standing relationship between Community Action Minneapolis and the citizens of Minneapolis, and that there would likely be concerns raised about making such a switch.

TOM SCHECK: And Bill Davis has deep ties to many powerful Democrats. Community Action's board included Congressman Keith Ellison, State Senator Jeff Hayden, and Minneapolis City Council members. They all resigned after Davis's lavish spending came to light.

Davis also has ties to Rothman. They served together as officers with the state DFL party. And in 2010, Davis was a featured guest at a fundraiser at Rothman's Minnetonka home for Mark Dayton.

SPEAKER 4: Next, another great DFL leader and a longtime friend, another member of our Democratic National Committee, Bill Davis.

TOM SCHECK: When Dayton kicked off his campaign for governor at the State Capitol in 2010, Davis was one of the first to speak on his behalf.

BILL DAVIS: I'm Bill Davis, and I am a lifelong Democrat and a member of the DNC. I'm here this morning to introduce my friend, Mark Dayton, candidate for governor, and want to announce my unwavering support for my friend, Mark Dayton.

TOM SCHECK: Rothman said he's known Davis for years, although he says their relationship has been only professional since he became commerce commissioner in 2011.

Governor Dayton declined an interview request, but a spokesman said the governor never had any discussion with the Minnesota Department of Commerce or Community Action of Minneapolis about their contract.

Davis did not respond to interview requests. He spent his career building Community Action into an organization that relied on state and federal contracts to provide heating assistance, job training, and food stamps to low-income Minnesotans.

The organization reported revenues as high as $17 million in 2010. But those who worked for Davis said there were concerns over how he spent taxpayer money.

MURIEL DICKENSON: It was all about greed. The whole game was greed.

TOM SCHECK: Muriel Dickenson worked for Community Action of Minneapolis for 31 years. She left the organization in 2012 after Davis blamed her for misspending heating assistance money.

The legislative auditor and Commerce Department found $1.3 million went to people who weren't eligible for the aid. Dickenson said she and other staff members were following the directions of supervisors.

MURIEL DICKENSON: They were all about numbers, get higher numbers, get more money, get more rewards. Let's do what we have to do to make us look good.

TOM SCHECK: After the state discovered the misused funds in 2011, Rothman said the Department forced Community Action to pay back $100,000, and energy companies paid back 293,000 in unused credits.

Rothman emphasized they found no fraud or criminal activity. But Rothman said Davis balked at paying the money back and complained about the Department's plan to ensure Community Action didn't make any more mistakes.

MIKE ROTHMAN: He was very upset. And we just said, sorry, but you have to get this program back on track. And if you don't, we'll look at all alternatives.

TOM SCHECK: But those alternatives didn't take shape for years, and Davis lashed out at the Commerce Department. At a 2013 Commerce hearing, Davis accused the Department of, quote, "trafficking and prejudice and profiling people of color and low income people."

He suggested he take his concerns to the Department of Justice or a higher level to rectify the situation. Rothman also confirmed Davis accused a Commerce Department employee of racism, which prompted the Department to pay an outside investigator $6,600 in 2013.

MIKE ROTHMAN: So we looked into the situations that he had indicated and found that they were unfounded, in fact. And they primarily came out of the fact that he was upset that we took the corrective action and stopped the overspending of the 1 million or $1.3 million problem that he had.

TOM SCHECK: Publicly, Davis painted himself as someone who stood up for the poor. In letters to Commerce, he emphasized poor people, not his staff, benefited from the money. Davis made a similar claim in this 2009 appearance on an Eden Prairie public affairs program.

BILL DAVIS: And we like to think that we help people help themselves more than anything else.

TOM SCHECK: But Davis also helped himself during his time at Community Action. The state found he loaned himself money to buy a car and spent more than $10,000 to travel to several US cities and to the Bahamas.

Some of his employees complained about his $273,000 salary in 2011. They also filed complaints with the Minnesota Department of Human Rights and the National Labor Relations Board over his management style.

In 2012, Davis required employees to take competency tests that resulted in the firing of several longtime staffers. He replaced them with temporary workers.

PAT BEAGAN: There's probably a dozen grievances against the organization have been going on for two years now that have been totally ignored.

TOM SCHECK: Pat Beagan worked for Community Action from 2006 until it closed this year. He said his union's complaints against Davis are still outstanding. Beagan also said Davis and other senior managers struggled with increased state oversight.

PAT BEAGAN: I saw them getting away with things I don't think they should have gotten away with, so bending the rules. Get this done now, we'll fix it later, and then never getting around to fixing it. So no, they were not doing a good job and the state let them slide.

TOM SCHECK: When the state finally did crack down, it was the Department of Human Services, not the Commerce Department, that took the action. In August, DHS released a stinging audit that detailed Davis's lavish spending.

Despite those findings, documents show the Commerce Department was set to renew its contract with Community Action. Career staff within the Commerce Department's Energy Assistance Program protested.

They sent a memo to their director, John Harvanko, urging him to not renew the contract. It said continuing to send taxpayer money to Community Action, quote, "would not only be a disservice to the citizens of Minnesota, but would also be unethical for us as public servants."

10 days later, Harvanko notified Davis that the state was moving forward with a contract for the next fiscal year. Rothman denied that he and other senior commerce staff ignored the DHS audit. He said the contract letter to Community Action was standard process as they looked for another nonprofit to step in.

MIKE ROTHMAN: It may have gone out, but it was never executed nor finalized. Because while we were looking at all this, we had made arrangements to have a new community action program come in to take over.

TOM SCHECK: A court appointed receiver is now going through the nonprofit's books to see whether the state can recover any misused funds. Rothman said he isn't sure how long the investigation will take.

Pat Beagan said his new employer, Community Action of Suburban Hennepin County, is providing services for abandoned clients. But he said he and others who worked for Community Action of Minneapolis are embarrassed.

PAT BEAGAN: The vast majority of employees at Community Action Minneapolis had nothing to do with this, and it's a shame about what happened to the program in Minneapolis. It didn't have to go that way, and all those people didn't have to lose their jobs.

TOM SCHECK: Meanwhile, Davis may be entitled to one more payout. An auditor hired in 2013 by Community Action of Minneapolis said Davis has a severance package and is entitled to deferred compensation of $264,000. Tom Scheck, Minnesota Public Radio News.

SPEAKER 1: By the way, this story is now on our web site, mprnews.org.