Federal authorities announced Friday they were pulling funding from a Chicago psychiatric hospital under investigation following numerous allegations of sexual abuse, assault and patient safety violations, a move that raises questions about the future of the hospital and of the hundreds of children in state care who are treated there.

The Department of Children and Family Services relies on Aurora Chicago Lakeshore Hospital to treat children with severe mental illness, some of whom have been turned away from other facilities.

Separately, a federal judge said Friday that he will take the rare step of appointing a “special master,” or monitor, to resolve disputes between DCFS and the American Civil Liberties Union of Illinois, which has taken the state’s child welfare agency to court over the problems at Lakeshore.

The move by U.S. District Court Judge Jorge Alonso marks the first time a judge has agreed to appoint such a ‘special master’ since the ACLU began monitoring the state’s child welfare agency decades ago.

State inspectors found that Lakeshore failed to ensure patients were free from sexual and physical abuse, did not report abuse allegations to the state Department of Public Health and did not conduct complete investigations of abuse, records show. The hospital’s Medicare agreement is scheduled to terminate on Dec. 15, federal officials said.

The deficiencies at the hospital constituted an immediate threat to patients’ health and safety, federal officials wrote in a letter Thursday to the hospital’s CEO. The hospital issued a statement late Friday vowing to continue its work to comply with federal regulations and provide uninterrupted care to its vulnerable patients.

“We are deeply disappointed that some outside forces seem determined to shutter this facility with little regard for what will become of the children we serve,” Lakeshore CEO David Fletcher-Janzen said.

“Chicago Lakeshore Hospital,” he added, “knows improvements can be made and we will continue to steadfastly make those improvements, but shutting us down is tantamount to throwing out the baby with the bathwater.”

DCFS sends hundreds of children to Lakeshore, including some who remain at the hospital after they have been cleared for release because DCFS cannot find more appropriate homes for them. DCFS officials have acknowledged the problem, which is not unique to Lakeshore, and said they are working to find a solution.

Dr. Peter Nierman, Lakeshore’s chief medical officer, has spoken out on the challenges facing children in DCFS care who languish at psychiatric hospitals beyond what is considered medically necessary.

“Many of the children we serve have no place else to go and we offer the best hope for their stabilization and return to society,” Nierman said in a statement Friday. “Frankly, this is a population that virtually no other facility wants to take and I believe that without Lakeshore, the already tragic story of some of these children will only be further exacerbated.”

ProPublica Illinois revealed the troubles at Lakeshore in late October. Lawmakers and the ACLU, which monitors DCFS as part of a decades-old consent decree, immediately responded by demanding an independent review of children in state care at the hospital as well as the more than a dozen allegations of abuse and neglect since January. The Chicago Tribune also reported on the troubles at Lakeshore.

In addition, the ACLU called on DCFS to stop sending children to Lakeshore and to remove all DCFS patients from the hospital. It told the agency to prioritize children who were hospitalized even after being cleared for release. The hold on sending patients to Lakeshore remains in place.

On Friday, the last two children were discharged from the hospital, according to DCFS, which said it is following up with the children at their new placements. Two teens who had run away in the last two weeks after they had been discharged into DCFS care have been found, according to DCFS officials.

Alonso, who has ruled on DCFS issues for the past few years — and in recent weeks on issues tied to Lakeshore — said Friday he will appoint a “special master.” The ACLU had asked Alonso in June to make the appointment after ProPublica Illinois reported on the hundreds of children in DCFS care who languished at psychiatric hospitals after they already had been cleared for discharge.

Alonso acknowledged he had been loath to take what he called an extraordinary action, but he said he believes the appointment of someone to mediate and resolve major disagreements between DCFS and the ACLU was necessary.

“The stakes cannot be higher,” the judge said.

DCFS attorneys had previously resisted the appointment of a monitor, but said in court they will work with either of two retired judges recommended by the ACLU, Wayne Andersen or Geraldine Soat Brown.

“If the special master can help resolve disputes between the people who know child welfare and the people who do advocacy, that is a good thing,” DCFS Acting Director Beverly “B.J.” Walker said in a statement. “At the end of the day, this is about vulnerable children and families in Illinois and the need for consistency and sustained improvement in the performance of DCFS. That is our focus as leaders of this agency.”

One reason so many children remain unnecessarily hospitalized is that DCFS does not have enough beds for them in foster homes, residential treatment centers or other settings. The special master can ensure DCFS works to identify and create those placements, ACLU attorneys said.

Lawmakers and advocates applauded the news of the monitor, the first of its kind in more than two decades.

“I’m delighted,” said state Sen. Julie Morrison, a Democrat from Deerfield. “Unfortunately, there weren’t a lot of options left for an agency that has not been in compliance for years.”

Morrison, who held a legislative hearing in August on children locked in psychiatric hospitals after they had been cleared for discharge, was one of four lawmakers who wrote letters demanding an independent review of Lakeshore.

Andrea Durbin, CEO of the Illinois Collaboration on Youth, a nonprofit that represents child welfare facilities and groups across the state, said in a statement that 20 years of divestment in the state’s child welfare system has led to the current crisis.

“The situation is not sustainable,” Durbin said. “Illinois has a legal responsibility to address the complex needs of children who have suffered trauma, abuse, and neglect, and today the Court recognized that extreme measures are needed to ensure that children and youth receive the services they deserve.”

On Friday, Alonso also named the University of Illinois at Chicago’s psychiatry department as the independent reviewer after previously hearing from DCFS and the ACLU on the matter. Lakeshore’s Fletcher-Janzen, who acknowledged that “mistakes can be made,” said he welcomes the review as well as the expertise and constructive feedback UIC can provide.

“Nobody wins if Lakeshore closes,” said Alpa Jayanti Patel, chief deputy at the Cook County Public Guardian’s Office, which represent some 6,000 children in DCFS care. “Our clients don’t. The hospital and its staff doesn’t. The reality is what we need is safety and well-being of these children at the forefront. In my mind, a review by experts at UIC will do that.”

The decision to pull Lakeshore’s funding underscores the need for the independent review, said Heidi Dalenberg, the ACLU’s general counsel, who added that she hopes Lakeshore will make the needed changes. Dalenberg said she recognizes the shortage of facilities available to treat children who need psychiatric care, especially those in state care.

“That does not mean we tolerate the admission of DCFS youth to a facility where we have significant questions regarding whether children will be abused or neglected while hospitalized,” she said.