You will learn the purpose of federal grants, the processing of grants, and the responsibility of grantees.
Click on the PDF above. Within this document, you will learn:
- A short history of federal grant policy
- Policy formation
- How grants are made
- Key legislation
Why Does the Federal Government Make Grants to State and Local Governments?
Grants to State and Local Governments can promote economic efficiency in instances when those governments have localized knowledge that would permit them to implement a program more efficiently and effectively than the Federal Government could but when they have insufficient incentives or funding to provide a good or service—infrastructure, for example—whose benefits extend beyond their jurisdictions. In addition, some grants use the broad federal tax base to redistribute resources among communities and individuals, and certain intergovernmental grants can help stabilize the economy. In some cases, Federal Policymakers turn to intergovernmental grants to encourage state and local governments to adopt federal policy priorities. Finally, such grants may help foster policy experimentation at the state and local levels that would be difficult to achieve in a single national program.How Much Flexibility Do State and Local Governments Have When Spending Federal Grant Money? Federal grant programs off
Federal grant programs offer state and local governments varying degrees of flexibility over the use of grant funds. For instance, block grants provide only broad parameters for using those funds, leaving State and Local Governments considerable latitude when they make spending decisions. By comparison, state and local governments face more spending constraints on how they use categorical formula grants. For example, certain criteria govern the types of roads that State Governments may build or improve using federal highway grant funds. However, among all possible road projects that meet the established criteria, states are typically able to choose which ones to fund. Project grants provide state and local governments the least flexibility over spending, as the use of grant funds is typically limited to the specific project selected. Other grants may have more general spending rules, such as those requiring recipients to complete environmental assessments for many federally funded projects.How Does the Federal Government Distribute Grant Funds to State and Local Governments?
The Federal Government allocates grants to State and Local Governments on the basis of formulas established by law (for block grants and categorical formula grants) or through a competitive process (for project grants). Some formulas are based on historical distributions of grant funds, while others are based on a more complicated set of demographic or other factors relevant to the purpose of the grants. For project grants, Federal Policymakers set out a list of criteria that will form the basis for evaluating applications from State or Local Governments. Certain grants to implement education reforms and to construct transportation projects have recently been awarded through competitions.Federal Control Over State and Local Grants
The Federal Government makes decisions in three key areas when it distributes funds to State and Local Governments in the form of intergovernmental grants:It chooses the parameters that govern how recipients may spend federal grant funds;
It determines a method for allocating those funds among State and Local Government recipients, typically with a formula or through a competitive process based on specific criteria; and
It decides how much to spend on grants and how to set the rules that determine that spending.
Determining How Grant Recipients May Spend the Funds They Receive
Intergovernmental grants are frequently categorized as block grants, categorical formula grants, or project grants. They differ in the amount of control the Federal Government exerts over how State and Local Governments use the grant money and in the way the Federal Government allocates grant money to recipients. The boundaries between those groupings are not always clear, however, making it difficult to place many grant programs neatly into just one category. In addition, the Federal Government may place other conditions on spending grant funds, regardless of the type of grant involved.Block Grants
Block grants, though not widely used, afford State and Local Governments substantial control over spending decisions. Although that flexibility can encourage states and localities to seek innovative ways to meet the needs of their communities, it also leaves open the possibility that those funds may be spent in ways that Federal Policymakers would not have chosen. In addition, if block grants do not include requirements that State and Local Governments use a portion of their own revenues to supplement the grant funds they have received, those governments could use the flexibility afforded by block grants to replace money from local revenues with federal funds.Categorical Formula Grants
Categorical formula grants are typically allocated to all qualifying State or Local Governments on the basis of a formula set out in legislation or by Federal Administrators. Although those grant programs generally include rules or directions that specify the types of projects on which the funds can be spent, recipients usually determine the specific projects that receive funding. For example, the largest education grant program of this type—Title I funds for the education of disadvantaged children—leaves decisions about how best to spend those funds up to state and local agencies, within certain guidelines. That approach is consistent with the traditional practice in which state and local authorities set education policies and choose curriculums for public school systems, while the federal government ensures that each state has resources available to provide educational opportunities for disadvantaged families. Similarly, many federal highway grants allow states to choose which highway projects to undertake from among eligible roadways. Likewise, Medicaid programs also vary across state lines, with states having some flexibility to set their own eligibility rules, provider payments, and covered services, as long as they conform to federal eligibility requirements and coverage criteria.Project Grants
Project grants offer the Federal Government greater control and oversight of the way State and Local Governments spend the funds they receive. For example, grants for the Race to the Top program and the Transportation Investment Generating Economic Recovery (TIGER) grants are awarded through a competitive process in which Federal Administrators choose projects to fund from among the applications submitted. In those cases, the recipient State or Local Government agency is typically limited to implementing the project for which the grant was awarded.Conditions Attached to Various Grants
Whether structured as block grants, categorical formula grants, or project grants, many federal grant programs impose additional conditions on recipients to ensure the achievement of federal goals. Since the passage of the No Child Left Behind Act of 2001, for example, states and local education agencies must show that students are making adequate yearly progress to remain eligible for Title I education grants.Although grants may include conditions that are specific to the programs they fund, other spending rules accompany a variety of federal intergovernmental grants. For instance, the Davis-Bacon Act requires that employers pay prevailing local wages and benefits to workers on any federal or federally assisted public works project that costs $2,000 or more. Many federally funded projects also require an environmental assessment to comply with the National Environmental Policy Act. In addition, public works projects that use funds from ARRA and some other programs include “Buy America” provisions requiring that American products be used in state and local projects funded by federal grants, unless certain exemptions apply
In some instances, states apply for waivers that exempt them from particular conditions normally imposed on grants, thereby allowing them greater flexibility in the way they spend grant funds.
Methods of Allocating Federal Grants
The Federal Government uses either formulas or a competitive process to allocate money to State and Local Governments. Formulas are typically used to allocate funds for block grants and categorical formula grants, and the complexity of those formulas varies a great deal. In some cases, grants are allocated to states, which then distribute some or all of those funds to localities. Project grants are awarded through a competitive process, with federal officials selecting projects to receive funding on the basis of some measurable criteria.Formula-Based Allocation
Block grants and categorical formula grants are usually distributed on the basis of formulas or other criteria set by law. In some cases, the formulas are based on historical distributions of funds; in other cases, a variety of demographic and other factors determine how the money is allocated. Community Development Block Grant (CDBG) funds are distributed to state and local governments according to a formula that takes into account a community’s population, poverty levels, and housing conditions. The Social Services Block Grant program in 2012 is allocated to states according to the relative size of their population to support a wide variety of social services.Funding for many categorical grant programs is similarly allocated among states and localities by formula. Highway grant allocation formulas typically include factors such as a state’s highway lane miles and the number of vehicle miles traveled there. Title I funds for the education of disadvantaged children are distributed to local education agencies by the states on the basis of formulas that consider, among other factors, the concentration of students in a given school who come from low-income families.
Competition-Based Allocation
The Federal Government allocates money for project grants through a process in which State and Local Governments compete with one another for funds. Race to the Top, a competitive education grant introduced in 2009 and administered by the Department of Education, awards funds to state and local education agencies on the basis of demonstrated improvements in student achievement and plans that show that the applicants intend to implement further reforms. For example, the Department of Education laid out a list of criteria that it would consider in evaluating states’ applications for Race to the Top grants, including the relative weight it would place on each aspect.The TIGER grant program provides money for projects that are expected to have a significant impact on the nation, a metropolitan area, or a region. The selection criteria include a number of factors, such as a project’s anticipated contribution to economic competitiveness, its environmental sustainability, its safety, and its potential for creating jobs.
Mandatory Programs
Mandatory programs are generally funded outside of the annual appropriation process through authorizing legislation that may be in effect indefinitely or for a designated period. Funding for some programs, such as Medicaid, is provided on an open ended basis so that when the conditions described in the authorizing legislation are met, more federal funds flow to recipients of state and local grants and the program grows.By contrast, some mandatory programs are funded through grants that limit the amount spent by the Federal Government to a predetermined level. Each state determines the amount that it will spend and receives a grant that matches that amount up to the limit established by the Federal Government.
Discretionary Programs
Discretionary grant programs are funded through annual appropriation acts, which limit the total amount that the Federal Government can provide to State and Local Governments in a fiscal year. Therefore, those funding levels are limited, as specified in law. Most federal intergovernmental grant programs that are not related to health are classified as discretionary. The Community Development Block Grant program is an example. CDBG funds go to State and Local Governments to pay for projects in neighborhoods with concentrations of low- and moderate-income households. The grants support affordable housing and address other community needs. Title I grants for the education of disadvantaged children and many other education grants also are funded through discretionary appropriations.Federal Influence on Spending by State and Local Governments
In most cases, federal grants finance activities that State and Local Governments also fund out of their own revenues. Federal grants are typically intended to supplement those governments’ efforts rather than supplant them. To that end, many federal grants include matching requirements or State Maintenance of Effort provisions that necessitate some financial contribution by the recipient government. Those requirements can take on very different forms because they are tailored to a wide variety of intergovernmental grant programs. Despite the use of matching and MOE requirements, over time, State and Local Governments may change their spending decisions because of the funds that they receive from the Federal Government. However, the effect on State and Local Government spending of federal grants with such conditions has not been clearly established in the current body of economic literature.States’ contributions are typically financed with revenues generated by collecting fees, tolls, or taxes on sales, income, or property owned in a given jurisdiction or by borrowing funds through bond issues (which would be paid with future fees, tolls, or taxes).
Matching Requirements
State and Local Governments that receive federal grants with matching requirements must contribute a designated share of the cost of a program from their own resources. Those requirements can help ensure that State and Local Governments participate financially in programs that have local benefits and that the choices they make when administering grant programs align better with federal interests.For example, many federally funded highway grants require State or Local Governments to contribute 20 percent of a project’s cost, with the Federal Government reimbursing the State or Local Government for the remaining 80 percent. For Medicaid, the largest intergovernmental grant program, the matching rate varies by state.
Matching requirements may be seen as a way to ensure that State and Local Governments pay for the benefits of a program that accrue locally and that the Federal Government pays for benefits extending beyond the state or locality.
