Federal Financial Support for State and Local Governments

Federal assistance provided to states, local governments and Indian tribes can take the form of grants, loans, loan guarantees and tax subsidies. Such assistance is intended to provide these entities with the ability to address national objectives.

photo credit: CountyLemonade

One of the most common forms of financial support provided to states and localities is federal grants. Federal grants issued to states and localities cover a broad range of government sponsored and supported services and objectives. Grants may include health services, training for displaced workers, transportation, empowerment zones and enterprise zones for community development.

Grants can take the form of either categorical or block grants. As a result of federal legislation in the 1990s, financial assistance was provided to states and localities in the form of block grants. Existing categorical grants were combined for the specific purpose of providing block grants. Categorical grants provide spending that is targeted to specific purposes. Block grants offer a wider level of discretion to state and local governments for the purposes of identifying problems and then designing programs that will meet the goals of the block grants.

Some programs, such as Medicaid, may be classified as direct or mandatory spending. In such cases, an authorizing law provides the actual spending authority for those outlays. Grants provided for infrastructure, community development, education and other purposes are considered to be discretionary and are funded through the appropriations process.

Conditions are typically attached by Congress to spending programs. Furthermore, Congress may attach other conditions in law related to the spending under a program as an attempt to ensure the integrity of the program’s management. In some cases, further conditions may be attached by Congress as a way of achieving a national purpose. One of the most famous instances of this took place when Congress wished to encourage states to increase the legal drinking to 21. As a way of doing so, the receipt of the full allocation of federal highway funds by states was conditioned upon each state adopting age 21 as a legal drinking age.

Congress may also choose to attach financial participation or matching funds requirements to programs. These efforts are often intended to promote better program administration, since state and local government funds are also at risk.