Intergovernmental Relationships

GRANTS

The national government has used grants to influence state actions as far back as the Articles of Confederation when it provided states with land grants. In the first half of the 1800s, land grants were the primary means by which the federal government supported the states. Millions of acres of federal land were donated to support road, railroad, bridge, and canal construction projects, all of which were instrumental in piecing together a national transportation system to facilitate migration, interstate commerce, postal mail service, and movement of military people and equipment. Numerous universities and colleges across the country, such as Ohio State University and the University of Maine, are land-grant institutions because their campuses were built on land donated by the federal government. At the turn of the twentieth century, cash grants replaced land grants as the main form of federal intergovernmental transfers and have become a central part of modern federalism.Dilger, “Federal Grants to State and Local Governments.”

Federal cash grants do come with strings attached; the national government has an interest in seeing that public monies are used for policy activities that advance national objectives. Categorical grants are federal transfers formulated to limit recipients’ discretion in the use of funds and subject them to strict administrative criteria that guide project selection, performance, and financial oversight, among other things. These grants also often require some commitment of matching funds. Medicaid and the food stamp program are examples of categorical grants. Block grants come with less stringent federal administrative conditions and provide recipients more flexibility over how to spend grant funds. Examples of block grants include the Workforce Investment Act program, which provides state and local agencies money to help youths and adults obtain skill sets that will lead to better-paying jobs, and the Surface Transportation Program, which helps state and local governments maintain and improve highways, bridges, tunnels, sidewalks, and bicycle paths. Finally, recipients of general revenue sharing faced the least restrictions on the use of federal grants. From 1972 to 1986, when revenue sharing was abolished, upwards of $85 billion of federal money was distributed to states, cities, counties, towns, and villages.John Mikesell. 2014. Fiscal Administration, 9th ed. Boston: Wadsworth Publishing.

During the 1960s and 1970s, funding for federal grants grew significantly, as the trend line shows in Figure. Growth picked up again in the 1990s and 2000s. The upward slope since the 1990s is primarily due to the increase in federal grant money going to Medicaid. Federally funded health-care programs jumped from $43.8 billion in 1990 to $320 billion in 2014.Dilger, “Federal Grants to State and Local Governments,” 5. Health-related grant programs such as Medicaid and the Children’s Health Insurance Program (CHIP) represented more than half of total federal grant expenses.

These two graphs show the federal grants to the state and local government from 1960-2014. The first graph in the shape of a thermometer shows the increase of federal grants. In 1960, grants were around 7,019 dollars. In 1970, grants were around 24,065 dollars. In 1980, grants were around 91,385 dollars. In 1990, grants were around 135,325. In 2000, grants were around 285,874 dollars. In 2005, grants were around 428,018 dollars. In 2010, grants were around 544,569 dollars. In 2014, grants were around 608,390 dollars. The pie chart next to this graph shows the breakdown of the 2014 Federal grant of 608,390 dollars. Health received 55%, income security received 17%, transportation received 11%, Education, training, employment and social services received 11%, community and regional development received 2%. Other departments had received around 4%. At the bottom of the chart, a source is cited: “Congressional Research Service. Table 2 in Federal Grants to State and Local Governments: A Historic Perspective on Contemporary Issues. March 5, 2015.
As the thermometer shows, federal grants to state and local governments have steadily increased since the 1960s. The pie chart shows how federal grants are allocated among different functional categories today.
Link to learning graphic

The federal government uses grants and other tools to achieve its national policy priorities. Take a look at the National Priorities Project to find out more.

The national government has greatly preferred using categorical grants to transfer funds to state and local authorities because this type of grant gives them more control and discretion in how the money is spent. In 2014, the federal government distributed 1,099 grants, 1,078 of which were categorical, while only 21 were block grants.——, “Federal Grants to State and Local Governments,” Table 4. In response to the terrorist attack on the United States on September 11, 2001, more than a dozen new federal grant programs relating to homeland security were created, but as of 2011, only three were block grants.

There are a couple of reasons that categorical grants are more popular than block grants despite calls to decentralize public policy. One reason is that elected officials who sponsor these grants can take credit for their positive outcomes (e.g., clean rivers, better-performing schools, healthier children, a secure homeland) since elected officials, not state officials, formulate the administrative standards that lead to the results. Another reason is that categorical grants afford federal officials greater command over grant program performance. A common criticism leveled against block grants is that they lack mechanisms to hold state and local administrators accountable for outcomes, a reproach the Obama administration has made about the Community Services Block Grant program. Finally, once categorical grants have been established, vested interests in Congress and the federal bureaucracy seek to preserve them. The legislators who enact them and the federal agencies that implement them invest heavily in defending them, ensuring their continuation.Schick, The Federal Budget.

Reagan’s “devolution revolution” contributed to raising the number of block grants from six in 1981 to fourteen in 1989. Block grants increased to twenty-four in 1999 during the Clinton administration and to twenty-six during Obama’s presidency, but by 2014 the total had dropped to twenty-one, accounting for 10 percent of total federal grant outlay.Robert Jay Dilger and Eugene Boyd, “Block Grants: Perspectives and Controversies,” Congressional Research Service, Report R40486, 15 July 2014, 1–3.

In 1994, the Republican-controlled Congress passed legislation that called for block-granting Medicaid, which would have capped federal Medicaid spending. President Clinton vetoed the legislation. However, congressional efforts to convert Aid to Families with Dependent Children (AFDC) to a block grant succeeded. The Temporary Assistance for Needy Families (TANF) block grant replaced the AFDC in 1996, marking the first time the federal government transformed an entitlement program (which guarantees individual rights to benefits) into a block grant. Under the AFDC, the federal government had reimbursed states a portion of the costs they bore for running the program without placing a ceiling on the amount. In contrast, the TANF block grant caps annual federal funding at $16.489 billion and provides a yearly lump sum to each state, which it can use to manage its own program.

Block grants have been championed for their cost-cutting effects. By eliminating uncapped federal funding, as the TANF issue illustrates, the national government can reverse the escalating costs of federal grant programs. This point has not been lost on Speaker of the House Paul Ryan (R-WI), former chair of the House Budget Committee and current chair of the House Ways and Means Committee, who has tried multiple times but without success to convert Medicaid into a block grant, a reform he estimates could save the federal government upwards of $732 billion over ten years.Jonathan Weisman, “Ryan’s Budget Would Cut $5 trillion in Spending Over a Decade,” New York Times, 1 April 2014.

Another noteworthy characteristic of block grants is that their flexibility has been undermined over time as a result of creeping categorization, a process in which the national government places new administrative requirements on state and local governments or supplants block grants with new categorical grants.Kenneth Finegold, Laura Wherry, and Stephanie Schardin. 2014. “Block Grants: Historical Overview and Lessons Learned,” New Federalism: Issues and Options for States Series A, No A-63: 1–7. Among the more common measures used to restrict block grants’ programmatic flexibility are set-asides (i.e., requiring a certain share of grant funds to be designated for a specific purpose) and cost ceilings (i.e., placing a cap on funding other purposes).

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