Composition of Federal Aid by Form of the Grant

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In measuring the fiscal effects of intergovernmental grants on the grant recipient's spending and other budgetary decisions, the disaggregation of federal grants by form is of crucial importance (Wilde 1971; Oates, 1972; Gramlich, 1977; Inman and Rubinfeld, 1997). The data on federal intergovernmental grants published by the U.S. Census Bureau and U.S. Office of Management and Budget are organized along functional lines. This has always been a major obstacle for those doing empirical work on the U.S. grant system. The functional division of federal intergovernmental grants in the U.S. Census data is far more detailed than the four aggregate functional categories considered earlier in Table 9.1. Since the 1970s, there are on an average, annually, about 100 functional categories in the U.S. Census data on federal intergovernmental grants. Each of these functional categories needs to be reclassified by the form of the grant it received to empirically measure the economic effects of grant programs on the grant recipient's spending.

Transforming federal grants from a functional classification to one based on the form of the grant has two main complications. In many cases, grants classified by function include programs with both matching and nonmatching components. For example, U.S. federal highway grants are closed-ended matching grants with a few subprograms receiving nonmatching grants. In such cases the grants considered here are classified by the form of the subprograms with the largest dollar value; in the case of federal highway aid, the subprograms with the largest dollar value received closed-ended matching grants.

Another complication in the classification of grants by their form arises if the grant changes its form over the period under consideration. In these cases the grant's classification is changed when its form changes. For example, prior to 1982, a majority of social service grants were closed-ended matching grants and were classified accordingly, but in 1982 when these grants were consolidated into a block grant, their classification changed to nonmatching grants.*

Table 9.3 provides a division of grants by form for the period 1971 through 1990. The data indicate that during this period, matching grants (closed-ended and open-ended combined) have dominated as a preferred form of distribution of federal grants to states and localities in the U.S. Matching open-ended grants had the largest share of federal aid among the different forms of federal aid in 1971 (42%). The share of these grants declined during the mid- to late 1970s. However, during the 1980s their share grew, and by 1990 they were again reinstated to their dominant position in the structure of federal aid, with a 47% share of total federal aid. Open-ended matching intergovernmental grants in the U.S. were given almost entirely to the entitlement welfare programs during

* Parts of this section are excerpted from Gamkhar (2002). For a more detailed discussion on sources of data on intergovernmental grants and classification of federal grants in this data, see Gamkhar (2002, p. 18-21). This division of federal grants by form is only available for the years 1971 through 1990. Updating this data on federal intergovernmental grants organized by the form of the grant is a direction for future work.

Table 9.3 Percentage Distribution of Total Federal Grants to State and Local Governments by the Form of the Grant, 1971-1997

1971

1975

1980

1985

1990

Nonmatching

17.4

17.8

28.2

31.4

28.3

Matching open-ended

41.5

29.3

29.9

37.3

47.3

Matching closed-ended

40.9

39.5

33.4

25.8

23.8

Shared revenues

0.3

13.4

8.5

5.5

0.6

Total

100.0

100.0

100.0

100.0

100.0

Source: Gamkhar S. Federal Intergovernmental Grants and the States: Managing Devolution. Canterbury, MA: Edward Elgar Publishing Limited, 2002, p. 9.

Source: Gamkhar S. Federal Intergovernmental Grants and the States: Managing Devolution. Canterbury, MA: Edward Elgar Publishing Limited, 2002, p. 9.

this time period. Thus the reasons for the substantial increase in the share of open-ended matching programs since the late 1980s are similar to the reasons for the increase in welfare grants, described earlier.

Matching closed-ended grants accounted for about 41% of total federal aid in 1971. During the 1980s, however, some of these grants were converted to block grants (classified as nonmatching grants).* The latter along with the Reagan cutbacks in aid explain the decline in the share of closed-ended matching grants during the early 1980s; by 1990 their share in federal aid had stabilized at 24%.

The effects of the changes in federal matching closed-ended grants are mirrored in the nonmatching grants. These grants start with a relatively small share of federal aid in 1971 (17%), but their share of federal aid increased during the 1980s, due to the creation of block grants. However, between 1985 and 1990 nonmatching grants dropped in their share of federal aid. In the U.S., during the period under con

* President Reagan's 1981 budget proposal recommended the consolidation of 90 of the more than 300 categorical programs into block grants. Congress finally approved, for the 1982 fiscal year, the conversion of 57 categorical programs into nine block grants, which brought significant reductions in funding for the consolidated programs relative to their prior categorical federal expenditures (Peterson et al., 1986).

sideration, the major federal program included in this category was the revenue-sharing program from 1973 through 1987.

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