Despite the nation’s own deficit problems, which parallel those of many state and local entities, the funding connection between the federal government and state and local governments remains strong.
According to a report just released by the Congressional Budget Office (CBO), the federal government provided $607 billion in grants to state and local governments in fiscal 2011, accounting for 17 percent of federal outlays and 4 percent of gross domestic product (GDP).
“Federal outlays for grants to state and local governments have grown as a share of the federal budget and the nation’s gross domestic product since the middle of the 20th century,” according to the CBO.
The report states that in 1960, federal grants accounted for 7.6 percent of all federal outlays and 1.4 percent of the GDP. In the 1960s and 1970s, “spending on grants generally increased after the creation of Medicaid and the introduction of other grant programs for low-income households during that period.”
Federal outlays for grants to state and local governments have fluctuated since 1980, but grants for health programs have continually increased, mostly as a result of mandatory programs.
Highlights of the report:
- Almost half – roughly 48 percent – of the federal grants to state and local governments in 2011 were for health programs, primarily Medicaid. According to the report, “Adjusted for inflation, the amount of federal grants for health programs in 2011 was about seven times the amount in 1980."
- Grants for other programs (e.g., income security, transportation, education) have also grown in the past 30 years, but at a much slower rate.
- Different types of grants offer state and local governments varying degrees of flexibility in terms of how they can spend grant money. Block grants, for example, offer a greater degree of leeway while categorical formula grants come with more restrictions. Project grants offer the least amount of flexibility since they are typically provided for that specific project.
- Grants to state and local governments are designed to foster economic efficiency. Putting certain programs in place at the state and local level draws upon “localized knowledge,” which, in many cases, allows for more effective implementation.