Taxonomy of Federal Aid Design Features

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The key features of federal aid programs include form of the grant, the limits on funding, and the formula for distribution of grants across the grant recipient jurisdictions. The federal grant forms considered in the U.S. can be classified as categorical, block, and shared revenues (Table 9.2). A categorical grant is one that is directed to a narrowly specified activity. Block grants provide a broader functional focus and greater

* Oates (2003) cautions that an excessive use of central government support of state and local expenditure on public services could undermine the effectiveness of local governments as providers of public services.

Table 9.2 Federal Intergovernmental Grants: Design




Design Non- Open- Closed- Cost Shared

Types matching Ended Ended Reimbursed Block Revenues

Matching None Yes Yesa None Noneb None required

Federal Yes None Yes None Yes Yes funding limitation

a Federal share of the matching funds stops once the appropriation limit on federal funding is reached.

b Most block grants have no requirement of statutory matching funds from the grant recipient.

Source: Gamkhar S. Federal Intergovernmental Grants and the States: Managing Devolution. Canterbury, MA: Edward Elgar Publishing Limited, 2002, p. 20.

discretion in the use of funds by the grant recipient. The distinction between categorical and block grants can be illustrated by considering separate federal grants for alcohol, drug abuse, and mental health (categorical) as opposed to a single grant for all three functions (federal block grant created in 1982). Finally, in the case of shared revenues, there is no specific function to which these grants are directed and their use is fully determined by the grant recipient. The U.S. revenue-sharing grant in 1973 to 1987 is the best example of a revenue-sharing grant.

Categorical grants are further divided into the following types: nonmatching, matching, and cost reimbursement grants. Matching grants require matching funds to be provided by the grant recipient. These grants are further subdivided as open-ended matching and closed-ended matching. In the case of open-ended matching grants, there is no maximum limit on the appropriation level at the federal level. The individual eligibility conditions for matching open-ended grants and the state matching requirements, as specified under federal law, determine the annual federal commitment of funds for these grant programs. Federal Medicaid grants for health insurance coverage of qualified lower income and unemployed individuals is an open-ended matching grant. Closed-ended matching grants have a stipulated maximum appropriation in a particular fiscal year and a specified statutory matching requirement. The federal highway safety grant is an illustration of a closed-ended matching grant. In the case of cost reimbursement grants, the federal government covers all the costs incurred by grant recipients on specific federal programs; federal unemployment compensation is funded by a cost reimbursement grant to states. Nonmatching grants have no requirement of matching funds to be provided by the grant recipient, but the federal government does stipulate a maximum appropriation level in a particular year for each non-matching grant program (the exceptions are the entitlement cost reimbursement programs). Federal education grants for economically disadvantaged youth (Title I grants) are an example of a categorical nonmatching grant.

Federal grants are distributed either on the basis of a legislative formula or on a project basis. The formula used to calculate a recipient's allotment, in the case of formula grants, is based on data such as population, population subgroups, program expenditure, and per capita income. Project grants are awarded on the merits of a project proposal submitted by the grant recipient. The federal government also uses a combination of the formula and project methods for distributing grants. In this case the federal grant allocations to a jurisdiction are determined by a formula and then allotted to a specific project. Consider wastewater treatment (construction) grants as an example of a federal program and attempt to classify it by the above taxonomy: These are closed-ended matching grants, distributed on a project and formula basis; the grant allocation formula includes both a measure of prior funding levels (used to determine a minimum allocation to a recipient) and the planned current expenditure levels. The funds are assigned to individual treatment plants in the grant recipient's jurisdiction if the project receives federal approval.

R B Units of X

Figure 9.3 Fiscal effects of an open-ended matching grant.

R B Units of X

Figure 9.3 Fiscal effects of an open-ended matching grant.

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