Question

What does the U.S. Advisory Commission on Intergovernmental Relations say about Categorical Grants? Why are Categorical Grants important?

Answer 1

Definition of Categorical Grants

Imagine you are the governor of a state, and you need funding for state projects. How would you like to receive a boatload of money from the federal government? Sounds good, right? Not so quick… there's always a catch!

This is the basic idea of a categorical grant. A categorical grant is money granted by the federal government to state and local governments, with strict limitations on how it is to be spent. The money can only be received if the state or local government complies with certain regulations. However, the states do not have to take the money if they do not want to comply with the regulations.

Categorical Grants and the Federal System

Categorical grants are a result of the United States's federal system. With this system, the federal government has power in some areas, such as military spending, while the state and local governments have power over other areas, such as schooling, roads and law enforcement. But just because certain areas are the domain of local governments does not mean that the federal government can't influence them. Instead, the federal government uses money to convince the states to comply with national goals. This is where categorical grants come into play.

Take education, for example. Nowhere in the Constitution does it say that the federal government should provide for education. Yet, we have a Department of Education in Washington, D.C. Why is that? The simple answer is that the Department of Education does not provide schooling. Instead, it provides federal money to local states to oversee schooling. However, the money is contingent upon local governments meeting the requirements set by the Department of Education.

Categorical grants are the most common types of grants given by the federal government to state and local governments, but they are not the only type. There also exist block grants, which are given by the federal government directly to local governments with few strings attached. They are basically the opposite of categorical grants.

Categorical grants comprise the bulk of activity in the federal grant-in-aid system, both in terms of the number of programs and the amount of funding. Categorical grants derive their name from the fact that their uses are limited to a narrowly defined category of activities that generally are specified in the authorizing legislation.

There are four different types of categorical grants: formula grants, project grants, formula-project grants, and open-ended reimbursement grants. Formula grants are distributed to jurisdictions entitled to funds by the authorizing statute on the basis of a numeric formula that takes into account the relative need of the recipient jurisdiction compared to all other entitlement jurisdictions. Examples of formula elements include population, poverty, per capita income, unemployment, enrollment in public schools, and the like. The formula factors and the weight assigned to each are either prescribed in the authorizing legislation or determined by administrative officials.

Project grants are awarded on a competitive basis by the administering agency, generally following the review of a grant application. Formula-project categorical grants involve a two-stage grant distribution: first a formula grant is used to apportion funding among the states, and then project grants are awarded by state officials to state and local government agencies.

Under open-ended reimbursement grants, the federal government agrees to reimburse a certain percentage of state and local program costs for a prescribed activity or set of activities. Hence, the total amount of the federal grant is open-ended and dependent on the amount of spending incurred by state and local jurisdictions—the more a state spends, the larger its federal grant. Medicaid is an example of an open-ended reimbursement grant, with a state’s grant determined by its federal reimbursement rate (which varies from a minimum of 50 percent in several states to a maximum of 77 percent in Mississippi) and the amount of a state’s spending for Medicaid-eligible services.

The origins of federal categorical grants can be traced to the Morrill Act of 1862, in which Congress authorized the distribution of public lands to state governments and instructed the states to use the proceeds from the sale of that land to support institutions of higher education (i.e., the “land grant” universities). This aid also came with an additional requirement—the colleges and universities that received assistance were required to provide military instruction. States were also required to submit annual reports to Congress on program expenditures.

The Federal Aid Highway Act of 1916 was the next development milestone in the evolution of the federal grant system. This program was the federal government’s first large-scale assistance program and also expanded the federal role by establishing a number of conditions and controls (e.g., project applications, progress reports, expenditure audits, and project closeout) designed to insure that state governments adhered to federal goals and objectives in their use of grant funds.

The most expansive period of growth for categorical grants occurred during the 1960's in response to President Johnson’s call for a Great Society. By the end of the decade the number of grant programs had increased from about 150 to nearly 400, funding more than doubled, and the federal government became an important player in several policy areas where it had no previous involvement.

Though successive waves of New Federalism during the Nixon and Reagan administrations sought to consolidate dozens of categorical grant programs into a small number of block grants, the growth of categorical programs continued. Today, there are about 600 grant-in-aid programs, and categorical grants account for about 95 percent of the programs and more than 80 percent of total grant outlays.

The most important fact about categorical grants is their extensive variability. Though on the surface the design features of categorical grants may appear to be technical issues, the decisions made regarding the key design elements of a categorical grant program are political ones and reflect the relative balance of power and influence among federal, state, and local governments.