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Ch10.1.pptxIntergovernmental Grants
Intergovernmental grants or grants-in-aid are transfers of funds from one government to another.
This is most often from a higher government in the federal system to a set of lower governments.
These grants are intended to improve the operation of a federal system of government finance.
Grants in the US Fiscal System
In 2011, the federal government transferred almost $646 billion in aid to state and local governments.
This represented about 25% of state/local government general revenue or about $0.33 for every dollar generated by their own sources.
Grants in the US Fiscal System
According to census data for 2010, state governments transferred almost $482 billion to local governments.
These grants represented about 1/3 of local revenue on average.
Grants in the US Fiscal System
The real value of federal grants generally has increased over the last 50 years.
The federal grants grew steadily in the 60s and 70s, but fell in the 80s.
The pattern of growth resumed in the 90s and 2000s until the recession that began in 2007.
Grants increased substantially in response to the recession.
Grants in the US Fiscal System
The American Recovery and Reinvestment Act (ARRA) was adopted in 2009 to provide macroeconomic stimulus to the economy.
A large portion of the ARRA was in the form of grants to states.
An estimated $260 billion was targeted just for education and Medicaid.
Federal aid increased to provide nearly 25% of state/local revenue in 2010 and 2011.
Grants in the US Fiscal System
The pattern of state grants to local governments is substantially different from that of federal grants.
The real magnitude of state grants increased until 2007 and then decreased as state revenue decreased.
The fiscal problems that the recession created for state governments spread to local governments through decreases in state grants.
Grants in the US Fiscal System
Intergovernmental grants are an important source of revenue for nearly all state/local governments.
Federal grants are mostly directed to state governments; 89%.
State aid is substantially more important than direct federal aid for all types of local governments, except local school districts.
Counties and school districts are the types of local governments most reliant on grants.
Municipalities and townships have become less reliant on grants.
Grants in the US Fiscal System
Federal aid to states and localities for the budget function of health, a large fraction of which is for Medicaid, accounts for more than half of all federal grants.
Other major categories are:
Public welfare or income security
Education
transportation
Grants in US Fiscal System
From 1990 to 2011, grants for health increased by 540% while all other grants increased by 190%.
The increase in grants for health or medical assistance was mainly the result of:
Rising healthcare costs
Decisions by the federal and state governments to expand healthcare programs.
Combining income security and health, the federal government finances more than half of public welfare expenditures even though the programs are operated directly by the states.
Grants in US Fiscal System
On-the-other-hand, education is the dominant category of state aid to localities.
School districts receive 55% of the total grants.
County governments receive 23% of the total.
Municipal and township governments receive 20% the total.
Some of the state aid to counties and municipalities also support education.
Grants in the US Fiscal System
Aid to counties is mainly distributed for:
Welfare (29%)
Education (24.6%)
Elementary and secondary schools operated by the counties (called dependent school districts) and for community colleges
Health and hospitals (13.1%)
Transportation (8%)
Grants in the US Fiscal System
Aid to municipalities and townships is similar to counties.
Education (32.4%)
State aid to dependent elementary and secondary schools
General support (25%)
Welfare (12%)
Highways (8%)
Purposes of Grants
Traditionally, there are four potential roles for intergovernmental grants in a federal fiscal system:
Improve the efficiency of fiscal decisions of subnational governments by correcting for externalities.
Explicit redistribution of resources among regions and localities.
Substitute one tax structure for another.
Act as a macroeconomic stabilizing mechanism.
Types of Grants
Intergovernmental grants are characterized by four factors:
Is the grant intended for a specific service or may be used generally?
Is the grant automatically generated by a formula or does it require an application associated with a specific project?
Must the grant funds be matched by recipient government funds?
Is the potential size of the grant limited?
Types of Grants
Figure 10.6
Types of Grants
Categorical or specific grants are intended to be used for a specific activity.
These types of grants are the dominant type.
Lump-sum or non-matching grants do not change as a recipient government changes taxes or expenditures.
Types of Grants
Matching grants require recipient government taxes or spending, with the size of the grant depending on the amount of those taxes or spending.
A matching aid program offers to match each dollar of recipient tax or spending on that specific service with R grant dollars intended to be spent on the service.
R is called the matching rate.
If R=1 then each dollar of local taxes or expenditures is matched by a dollar of grant funding
Types of Grants
The share of spending in the category financed by the grant (M) is given by
M = R/(1+R)
If R=1 then M=1/2
An important implication is that the grant reduces the price of additional amounts of the aided service to the recipient government.
P=1–M=1/(1+R)
Types of Grants
Both matching and non-matching categorical grants may be allocated either by formula or on a project-by-project basis and may be either open-ended or closed-ended.
Types of Grants
General grants have no use restrictions and are more common on the state level than the federal level.
These types of grants provide general fiscal assistance.
General grants typically are based on a formula.
If the formula is based on factors outside the control of the government, the grant is a lump-sum grant.
If the formula is based on factors the government can control, the grant becomes a matching grant.
Types of Grants
Block grants are specific grants in categories that are very broadly or loosely defined.
Community development block grants have a list of approved uses.
Block grants are a way of simplifying grant compliance without eliminating control by the granting government.
