Influence on State and Local Government Activities
Federal grant programs provide a mechanism for federal policymakers to promote their priorities at the state and local levels by influencing the amount of money spent by state and local governments and the types of activities on which those governments spend their money. Many federal grants require that state and local governments provide partial funding from nonfederal sources for the programs paid for by those grants. Matching requirements are one way to ensure that local beneficiaries share in a portion of the cost of a program that is funded by a federal grant. A number of federal grant programs also require that state and local governments maintain a certain level of spending for an activity. The purpose of such
MOE provisions is to ensure that federal grants do not replace state and local funds for a program.
Box 2.
Administrative Costs of Federal Grants
Because federal grant programs involve two or three levels of government, they engender administrative costs at multiple levels of government. However, the magnitude of such costs—and, in particular, how much bigger or smaller the costs would be if the programs were structured in different ways—is unclear.
In many cases, the federal government’s responsibility for a given grant program and the state or local government’s responsibilities are sufficiently different that extensive duplication is unlikely. For example, funds from Title I grants for the education of disadvantaged children reach local education agencies by way of state education agencies. The U.S. Department of Education allocates funds to states, which then reallocate them to local education agencies, in both cases according to formulas specified in authorizing legislation. The local agencies that ultimately receive such grants spend the funds on educational activities, and the states choose methods to assess students’ progress and ensure that teachers are qualified. Federal administrative expenses for education are limited; for instance, about 3 percent of the Department of Education’s budget authority in 2012 was devoted to national activities, management, and research, with the rest of the agency’s budget authority split about evenly between student financial aid and grants to state and local governments and schools. With different responsibilities, each level of government is also likely to have different administrative needs.
Administrative costs of grant programs vary considerably depending on the features of the programs. For instance, programs such as Medicaid and Temporary Assistance for Needy Families, which provide benefits to individuals who must be identified and assisted on an individual basis, tend to be more expensive to administer than programs that include only state or
local governments as recipients. Unfortunately, it is difficult to measure the total administrative cost of a federal grant program for all levels of government:
Different programs allow state and local governments to account for their administrative costs in different ways, and the federal government’s expenses for administering a particular grant program are difficult to estimate reliably because those costs often cannot be separated from the costs of administering other grant programs or running the sponsoring agency.
In some cases, state and local governments receive reimbursement from the federal government for the costs of administering a grant program. The authorizing legislation or other rules for a program often outline the eligible expenses that recipient governments can categorize as administrative expenditures when they seek federal reimbursement; but permissible expenses and the nature of the reimbursement vary by program. [Government Accountability Office, “Administrative Expenditures and Federal Matching Rates of Selected Support Programs,” letter to the Honorable Wally Herger (June 30, 2005), www.gao.gov/assets/100/93367.pdf.] For programs such as Medicaid, the federal government reimburses a portion of the states’ actual administrative costs; reimbursement for some other programs is determined by formula, which sets the portion of grant funding that can be used for administrative purposes. The federal government pays at least half of most state administrative costs for Medicaid. In 2010, the federal government paid $9.8 billion out of a total of $17.9 billion in costs that states incurred for administering Medicaid. (Those federal payments were less than 4 percent of total federal Medicaid outlays to states that year.) By comparison, for costs related to the administration of child nutrition programs, a state’s reimbursable administrative expenses are limited to 1.5 percent of the amount that state spent providing meals to children two years before. For Title I education grants, states may generally spend no more than 1 percent of their grant funding on administration, but local education agencies face no similar constraints and vary widely in the amount of grant funding they direct to administration. [Government Accountability Office, Disadvantaged Students: School Districts Have Used Title I Funds Primarily to Support Instruction, GAO-11-595 (July 2011), www.gao.gov/ new.items/d11595.pdf.]
When federally funded programs are implemented at the state and local level rather than directly by the federal government, additional compliance and auditing costs may result because more agencies and actors are involved. The amount that the federal government spends to monitor grant programs—to prevent or uncover waste, fraud, and abuse—must be weighed against how much those problems cost the federal government. The Government Accountability Office (GAO) has found deficiencies in the oversight of federal grants to state and local governments and to nongovernmental organizations throughout the grant cycle (which begins when the availability of funding is announced, continues as the applications are reviewed and grants are awarded, and concludes when funding ceases or the program closes). [See statement of Jeanette M. Franzel, Managing Director, Financial Management and Assurance, Government Accountability Office, GAO-11-773T, Federal Grants: Improvements Needed in Oversight and Accountability Processes, before the Subcommittee on Technology, Information Policy, Intergovernmental Relations and Procurement Reform, House of Representatives, June 23, 2011.] According to GAO’s analysis, some agencies did not perform thorough reviews of a recipient’s capacity to carry out programs before awarding a grant. GAO also found that, in some cases, grant programs lacked sufficient oversight and monitoring while programs were in process, contributing to improper payments in a number of programs that awarded grants to state and local governments.
In an effort to win competitive federal grants, such as Race to the Top grants for education reforms or Transportation Investment Generating Economic Recovery (TIGER) grants for transportation projects, state and local governments sometimes expend considerable effort and money preparing an application with no guarantee of success. For instance, over three funding rounds, TIGER grants were awarded for 172 projects totaling $2.6 billion, but the Department of Transportation received applications for more than 3,000 projects seeking more than $95 billion in total funding. [U.S. Department of Transportation, “U.S. Transportation Secretary LaHood Announces Fourth Round of Funding under Highly Successful TIGER Program” (press release, January 31, 2012), www.dot.gov/briefing-room/ us-transportation-secretary-lahood-announces-fourth -round-funding-under-highly.] As of December 2012, 24 states and the District of Columbia had received Race to the Top grants; but as part of the competitive process, all 47 states that applied for the grants had to demonstrate that they planned to implement substantial reforms to their education programs.
Although preparing applications for competitive grants can be costly for state and local governments, the practice of identifying projects that are valuable to the local community could prove useful to state and local policymakers as they consider how to spend their own funds. In addition, even attempting to satisfy the requirements for receiving a particular grant—such as instituting the reforms necessary just to apply for Race to the Top funding—could serve federal policy objectives.
The federal government attaches conditions to many intergovernmental grants requiring recipient state and local governments to take certain prescribed actions. [Paul Posner, “The Politics of Coercive Federalism in the Bush Era,” Publius: The Journal of Federalism, vol. 37, no. 3 (Summer 2007).] Those conditions may be central to the program at hand, such as the requirements that school districts must meet to qualify for federal grants under No Child Left Behind; or they may have little direct bearing on the grant program, such as the requirement that, in order to receive highway funding, a state must set a minimum drinking age of 21.
The constitutionality of the federal government’s imposing conditions on the receipt of intergovernmental grants gained prominence recently when the Supreme Court considered the expansion of Medicaid under the ACA. Although the Court rejected the requirement that states expand Medicaid or risk losing all Medicaid grant funds, it maintained the ability of the federal government to place conditions on grant funding as long as those conditions were not coercive and could be reasonably anticipated by recipients. The Court noted that certain conditions of other grant programs, such as the requirement that states adopt a minimum drinking age of 21 in order to continue receiving federal highway grants, do not rise to the level of coercion and would not be subject to similar questions about their constitutionality.
Instead of grants, federal policymakers also use mandates to require state and local governments to adopt federal policy priorities. As required by the Unfunded Mandates Reform Act of 1995, CBO reviews bills to assess whether they contain mandates or provisions that, if enacted, would impose an enforceable duty on state, local, or tribal governments or on private-sector entities. [Mandates also include provisions that reduce or eliminate funding authorized to cover the costs of complying with existing mandates; provisions that increase the stringency of conditions that apply to the distribution of funds to state, local, and tribal governments through certain mandatory programs; and provisions that make cuts in federal funding for those programs. For more information, see Congressional Budget Office, A Review of CBO’s Activities in 2011 Under the Unfunded Mandates Reform Act (March 2012), www.cbo.gov/publication/43140.] Of the 81 public laws enacted in 2011, 12 contained at least one unfunded intergovernmental mandate.
Policy Experimentation
A further objective of federal grants to state and local governments is to encourage experimentation and innovation that cannot be achieved in programs that are uniformly implemented by the federal government. Many federal grants leave decisions about design and implementation to the state or local government receiving the grant, which can result in a variety of different approaches to a given policy issue. Block grants in particular tend to give state and local grant recipients broad latitude in designing and implementing programs. Other grant programs place more restrictions on the way state and local recipients spend grant funds, but some of those programs have mechanisms in place that afford states additional flexibility to experiment with alternative approaches to meeting a goal or to choose the amount or type of services they provide. For example, states may seek waivers that exempt them from meeting certain education performance requirements under No Child Left Behind in exchange for implementing other reforms they identify themselves. In addition, federal legislation governing Medicaid provides states several different options for conducting demonstrations or waiving certain program rules, giving them some flexibility over the design of programs. State and local governments can then learn from one another about which aspects of their programs are more or less successful. [Pierre Salmon, “Horizontal Competition Among Governments,” in Ehtisham Ahmad and Giorgio Brosio, eds., Handbook of Fiscal Federalism (Cheltenham, England: Elgar, 2008), pp. 61–85.]