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The Historical Role of the Federal Government in Assisting State and Local Governments

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Richard Keevey
March 11, 2022

Federal grants to states and localities have undergone significant changes regarding the number of individual programs, the amount expended, the roles of the branches of government and the areas supported. Thus, it is timely to reflect on the historic role of the Federal government in assisting state and local governments, and the outlook.

Let’s review these grant programs, the role Congress plays, historic funding levels and program facts, and suggest what a possible future might hold.  

Types of Federal Grants and Funding Levels

The Federal government funds a wide range of programs, including transportation, income security, education, job training, environmental protection and healthcare. While Federal grants may be grouped into several categories, I prefer the following categorization reflecting the amount of discretion given to the recipient, how the funds are disbursed, the amount of funds allocated and cost-sharing arrangements:

1. Discretion: Unconditional grants (used at the recipient’s discretion) versus block grants (providing a wide flexibility for how funding can be used within broad parameters) versus categorical grants (which are used for specific programs and limited to defined activities).

2. Disbursement: Project grants (awarded on a competitive basis) versus formula grants (awarded on a legislative formula). 

3. Amount: Closed-ended (providing a set amount per recipient) or open-ended (providing grant amounts that reflect caseloads);

4. Matching Requirement: Reimbursement grants which provide funds based on a specified proportion of the recipient’s program costs. The classic program in this category is Medicaid.

In the fiscal year 2022, 14 percent of state spending came from Federal funds—59 percent was for health programs, principally for Medicaid. Beyond healthcare, 15 percent was for income security, 8 percent for transportation, 12 percent for education, training and social services and 6 percent for other functions.

Relative Roles of the Branches of Government—and Other Stakeholders

Congress plays a key role in devising the scope of grant programs. Much of its decision-making process is based on internal dynamics with decisions influenced by various external forces. For example, Congressional procedures, party leadership and political interests of key members have been factors in the origin and shaping of grant programs. Furthermore, key external organizations, such as the National Governors’ Association, frequently urge Congress to address emerging problems. Input from the executive branch often leads to new or expanded programs. Even the Supreme Court plays a role, as with their decision on the Affordable Care Act.

Also important is the role played by Federal administrators. These administrators significantly influence who receives a grant, and can enforce standards for planning, fiscal management and performance.  

A Very Short Fiscal History

The first Federal grant to states ($250,000) was adopted in 1879 to support education for the blind. Slowly, additional grants were introduced for disabled veterans and by 1905 total outlays reached $2 billion.

Beginning in 1913, Congress adopted new grant programs for highway construction and healthcare. A major expansion developed with President Johnson’s Great Society initiative as grants tripled, including the introduction of Medicaid. Total outlays increased to $24 billion by 1970, and the number of grants increased from 132 in 1960, to 350 in 1970.   

In the 1980’s, grants shifted from primarily categorical and project grants to block grants, as the argument was made that such grants provided more flexibility. By the fiscal year 2010, $608 billion was expended for grants; and in the fiscal year 2020, $829 billion was expended.

Recent trends are of particular interest. In 2020 and 2021, four laws were enacted that appropriated $2.6 billion to address the COVID-19 virus; and $1 trillion was appropriated for infrastructure. Much of these dollars go to state and local governments. It is not likely that this extraordinary Federal largesse will continue.

The focus of Federal grants has shifted from aiding places such as roads, public education and economic development, to individuals and families, through housing assistance, social services and healthcare benefits. Much of the shift is attributed to Medicaid.  

Observing broad trends in the 21st century, one concludes the number of Federal grants and funding levels have increased irrespective of which political party occupies the White House or has control of Congress. Furthermore, many programs were expanded, consolidated and centralized.

A Quick Look Into the Future

Some have argued that increasing Federal deficits and debt would lead to constrained Federal spending, and that grants to state and local government would be among the first to be trimmed. More aggressive “deficit hawks” have urged block grants for Medicaid rather than the current cost-sharing arrangement; the devolution of programs to state and local governments, and the elimination of “lower priority” programs such as the Community Development and Social Services Block Grants.

A more likely scenario is that any reduction in funding for state and local grants is not desirable or feasible. While the concerns about the size of annual deficits and the growing Federal debt should not be readily dismissed, I think that a more likely outcome is that Congress will realize how important the grant programs are to the welfare of the Nation, and that certain programs may very well be expanded, and total funding increased.   

Author: Richard F. Keevey was appointed as State Budget Director by two New Jersey governors, and by the president as the Deputy Under Secretary of Defense and then Chief Financial Officer at HUD. He is currently a visiting professor at the School of Public and International Relations, Princeton University.

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