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There's a federal law that says Native American children who are removed from their homes should be placed with their relatives or tribes. The idea is to stay close to their culture. But this week, an NPR News investigation finds that in South Dakota's foster care system, that's not happening. Hundreds of Native children are placed instead in private group homes. The homes get paid millions of dollars to care for the kids.

BLOCK: The largest is a place called the Children's Home Society. South Dakota's governor used to run Children's Home, and he was on its payroll while he was lieutenant governor. As NPR's Laura Sullivan reports, that arrangement highlights the influence of South Dakota's powerful child-welfare system.

UNIDENTIFIED CHILD #1: Get ready. Set. Who's on first?

UNIDENTIFIED MAN: Let's go, dude.

LAURA SULLIVAN, BYLINE: On a small crest deep in South Dakota's Black Hills, a dozen children jump on sleds and float across the snow. These kids are wards of the state. This is their home, the western campus of the Children's Home Society.

UNIDENTIFIED MAN: Hey, watch out, Russell.

SULLIVAN: There are rolling hills, a babbling brook, even a new school. On a visit last winter, Children's Home Director Bill Colson says it's a place to help children who can't make it in regular foster care.

BILL COLSON: We want to solve the problems. And sometimes, it just seems like you're beating your head against the wall. But the reality is, we are making progress. And I feel great about it, and our agency feels good about it.

SULLIVAN: State officials say Children's Home, and other organizations like it, are necessary. But Native American tribes say the homes are overused on kids who don't need to be there - kids who should be placed with relatives or their tribes.

That's what Congress mandated 30 years ago, when it passed the Indian Child Welfare Act. But a 2005 government audit found 32 states are failing, in one way or another, to abide by it. One of those states is South Dakota, where 90 percent of Indian children in foster care are placed in non-Native homes or privately run group homes - a generation of children torn from their traditions, cultures and tribes.

Many wind up here, at Children's Home. Director Bill Colson says he's heard the tribe's complaints. And he says returning children to their relatives is a top priority

COLSON: It's hard. It's frustrating for us, too, because we want to see children be successful. Our goal is to have kids be in a family, and be successful.

SULLIVAN: Children's Home provides services for almost 2,000 kids. It's one of the largest nonprofits in the state. But it wasn't always. Ten years ago, this group was in trouble. Tax records show it was losing money. Then in 2002, a former banker named Dennis Daugaard took over as chief operating officer. A year later, he was promoted to executive director, and things began to change.

Money from the state doubled under his leadership. Children's Home grew seven times its size financially. It added two facilities. It seized on a big opportunity when the state began outsourcing much of its work, like training foster parents and examining potential foster homes. Children's Home got almost every one of those contracts. The group paid Daugaard $115,000 a year. But that wasn't his only job.

(SOUNDBITE OF A POLITICAL AD)

GOV. DENNIS DAUGAARD: I'm Dennis Daugaard, and I want to be your next governor.

SULLIVAN: At the same time he was getting paid to be director of Children's Home, Daugaard was also the state's lieutenant governor - and a rising star in state politics. He had just taken office as lieutenant governor when Children's Home promoted him to its top post. The years he spent running the place, and his ability to turn it around, were prominent features of his 2010 bid for governor.

(SOUNDBITE OF A POLITICAL AD)

DAUGAARD: I left the bank then and joined Children's Home Society, a home for abused and neglected children, and became their executive director.

SULLIVAN: He won. He is now South Dakota's governor. It could be that Children's Home was the best organization for the job, at the best price, for all of those contracts it got. But it would be difficult for taxpayers to know. That's because in just about every case, the group did not compete for the contracts. They didn't have to bid against anyone else. For almost seven years, until this year, Daugaard's colleagues in state government just chose his organization, and sent it money - more than $50 million.

MELANIE SLOAN: It's a massive conflict of interest.

SULLIVAN: Melanie Sloan is the executive director of a government watchdog group, called Citizens for Responsible Ethics in Washington. She says any private organization run by a lieutenant governor would have a lot of power in that state.

SLOAN: When you're the lieutenant governor, people are anxious to curry favor with you.

SULLIVAN: Daugaard declined NPR's repeated requests for an interview. In a statement, his office said Children's Home was the only viable organization that could have done the work, and that Daugaard never used his influence as lieutenant governor to secure the contracts.

Tribal leaders, though, say the unusual relationship provides a window into the role money and politics plays in South Dakota's foster-care system. They say Children's Home's dominance in this area is but one more example of the interests of the state trumping the interests of Native children.

JUANITA SHERICK: They make a living off of our children.

SULLIVAN: In a basement office on the Pine Ridge Reservation, Juanita Sherick manages foster care cases for her tribe.

(SOUNDBITE OF TELEPHONE RINGING)

SHERICK: Hello. May I help you?

SULLIVAN: She says the state pushes aggressively to place kids in Children's Home - kids, she says, would be better off with their own grandmothers, aunts and uncles.

SHERICK: Give the children back, you know, to their relatives. The Creator gave those children to those families.

SULLIVAN: In recent years, Children's Home has become a powerhouse. It examines potential foster families and homes; houses the most kids; trains the state's social workers; holds all of the state's training classes; does all examines of children who may have been abused.

Children's Home gets paid millions of dollars every year for this work, and Rose Mendoza says that's ridiculous. She runs social services for the Standing Rock Sioux, and she says her group would do it for free - especially the home studies, the job of examining tribes' potential foster homes.

ROSE MENDOZA: Why send a private agency onto our reservation? We can send our worker, our licensing worker out to go do a home study.

SULLIVAN: In a state where the majority of foster children are Native, Mendoza and many other tribal officials say home study, social worker training and family placements should be done by people who know and understand the children's culture.

MENDOZA: Everybody says, well, it's cultural difference. Cultural difference - but it's a way of life. Our way of life is different.

SULLIVAN: Native tribes weren't the only ones left out. Troy Hoppes ran a similar group, called Canyon Hills Center, at the time. He says he didn't know about contracts until after they were doled out.

TROY HOPPES: I just remember in the news - that there were some grants that they were awarded, and I was envious. We wanted to get some grants for our stuff as well.

SULLIVAN: Hoppes says his organization would have jumped at the chance.

HOPPES: Facilities love the opportunity to branch out with things like that.

SULLIVAN: In its statement, Governor Daugaard's office says any group home with a license can care for kids. But Hoppes says Canyon Hills had a license yet it struggled to fill its beds, while at the same time, Children's Home had a waiting list.

The statement also emphasizes that lieutenant governor was a part-time job, and that Governor Daugaard never supervised any of the people who approved government contracts. Social service officials, in their statement, said Children's Home was treated the same way as every other organization.

UNIDENTIFIED CHILD #2: Guess what? I'm so excited. On Saturday, it's my grandmother's birthday.

SULLIVAN: On Children's Home's campus, kids walk through the hallways to get to their next class. This place has won many state accolades for its work with these kids. But none of that means much to Suzy Crow or her granddaughter, Brianna.

SUZY CROW: She was over there most of three years.

SULLIVAN: Suzy Crow was taken from her family and forced into boarding school - like thousands of other Native American children over the past century.

CROW: Every night, me and my sister would meet at her bed and would say, let's run away tomorrow - just to comfort ourselves that we're still there. This foster system reminds me of that.

SULLIVAN: Crow didn't want Brianna to grow up like she did, not knowing who she was or where she belonged. It took a court order for the state to finally send Brianna home.

CROW: I didn't care what it took. I battled with them.

SULLIVAN: State records show South Dakota paid Children's Home almost $50,000 over three years, to care for Brianna. And all across the state, grandmothers, aunts and uncles, family and tribal members would have cared for Brianna - and hundreds of other Native American children like her - for free; close to their tribes and culture, like federal law intended.

Laura Sullivan, NPR News.

(SOUNDBITE OF MUSIC)

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