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.
Those decisions entail certain tradeoffs. For example, policymakers can structure grant programs in a way that limits federal spending, but such an approach will also limit the responsiveness of grants to economic downturns. Restricting the control that state and local governments have over spending decisions may better promote some federal goals, but such an approach may also limit the ability of state or local governments to respond to specific conditions in their jurisdictions or to experiment with different program designs.
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.
Funding for project grants is generally very small in comparison to that for categorical formula grants. For instance, during the 2011 round of funding for TIGER grants, $511 million was awarded to state and local governments. By contrast, all federal budget authority for transportation grants that are allocated by formulas to state and local governments in 2011 totaled $54 billion. Project grants tend to be very specifically defined. During the most recent round of TIGER funding, grants were awarded for bridge replacement projects, intermodal transfer facilities, and rail projects. Similarly, when applying for Race to the Top grants, states generally submit lists of projects, benchmarks, and timelines that describe the scope of the work to be implemented.
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 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. As of February 2013, 34 states and the District of Columbia had received, and another 10 states, Puerto Rico, and the Bureau of Indian Education had requested, waivers from the federal government granting them flexibility in meeting education performance targets while maintaining their Title I funding. [For more details, see Department of Education, “ESEA Flexibility” (February 20, 2013), www.ed.gov/esea/flexibility.] States can also apply for Medicaid waivers that allow them to experiment with new options for financing or delivering services, to require beneficiaries to enroll in managed care plans, and to provide long-term care in homes and communities rather than institutions. As of February 2013, more than 300 state Medicaid waivers were in effect. [For more details, see Department of Health and Human Services, “Waivers” (accessed March 1, 2013), www.medicaid.gov/ Medicaid-CHIP-Program-Information/By-Topics/Waivers/ Waivers.html.]
However, the flexibility afforded by waivers is limited by federal administrators, and it sometimes comes at a substantial cost to states. To receive federal approval for Medicaid or education waivers, states typically have to prepare applications that describe how they plan to make use of the expanded flexibility, negotiate with the federal agency that administers the grant program, solicit public comments, and set out plans for federal monitoring of the agreed-upon waiver. That waiver process can be time-consuming and expensive. For example, states’ applications for flexibility in meeting educational performance requirements average nearly 400 pages.
In other cases, instead of seeking waivers, several states have begun to offer local governments the opportunity to exchange some federal transportation grant funds that would have come with conditions for a smaller amount of state funds (typically 80 cents to 90 cents on the dollar) that come without such conditions. For instance, local agencies that participate in the Kansas Department of Transportation’s federal funds exchange can choose from a broader set of projects than federal grants would permit; in addition, those agencies need only comply with state rather than federal regulations. [Kansas Department of Transportation, Bureau of Local Projects, Federal Fund Exchange Program Guidelines (November 22, 2010), www.ksdot.org/burlocalproj.]
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. The basic TANF block grant program distributes funds to states according to the share each state received under its predecessor program, Aid to Families with Dependent Children (AFDC), in the mid-1990s. In addition to that basic grant, some states also received supplemental grants for a number of years on the basis of their high population growth or their historically low welfare grants per low-income person. 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 $1.7 billion appropriated for 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. Medicaid’s open-ended funding means that the federal government does not allocate fixed grant amounts to states. However, a formula based on a state’s per capita income determines the Federal Medicaid Assistance Percentage, the share that the federal government contributes toward a state’s Medicaid expenditures.
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. 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. In 2012, lawmakers appropriated $549 million for the program. As of December 2012, 24 states and the District of Columbia had received Race to the Top Grants.
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. The 2012 program awarded nearly $500 million in grants to 47 projects in 34 states and the District of Columbia.