Key Issues > Federal Grants to State and Local Governments
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Federal Grants to State and Local Governments

Federal grants help state and local governments finance a broad range of services including health care, education, social services, infrastructure, and public safety. Understanding the current and future fiscal condition of the state and local government sector can help policy makers identify the primary drivers of long-term fiscal challenges and determine how federal grant spending can best address those challenges.

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The federal government awards hundreds of billions of dollars in grants to state and local governments each year, according to the Office of Management and Budget (OMB).

Figure: Total Federal Outlays for Grants to State and Local Governments and Medicaid, in 2016 Constant Dollars, Fiscal Years 1980-2016
Figure: Total Federal Outlays for Grants to State and Local Governments and Medicaid, in 2016 Constant Dollars, Fiscal Years 1980-2016

Source: GAO analysis of OMB data. | modified from GAO-17-113

Administering grants on this scale is not easy. Here are some of the ways that grants management could be improved:

  • Streamlining overall processes. When grants management requirements are duplicative, unnecessarily burdensome, and conflicting, agencies must direct resources toward meeting them—which can make the agency’s programs and services less cost effective. Streamlining and simplifying grants management processes is critical to ensuring that federal funds are reaching the programs and services Congress intended.
  • Monitoring grantee performance. Effectively tracking and reporting on grant performance is critical for agencies to determine whether their program goals are being achieved and for ensuring transparency and accountability for federal grant spending. However, the lack of a consistent approach to verifying data could lead to collecting erroneous performance data.
  • Improving the timeliness of grant closeout. Federal grantmaking agencies must close out grants when they expire to ensure that grantees have met all financial requirements and have provided final reports as required. Closing out grants also allows agencies to identify and redirect unused funds to other projects and priorities as authorized or to return unspent balances to the Treasury. Expired grant accounts, and, in some cases, the undisbursed balances associated with these expired accounts, persisted as an issue for agencies when GAO examined the issue in 2015.
  • Improving federal grants management. GAO’s audit of the federal government’s financial statements identified a significant deficiency in internal control related to managing grants at certain federal entities. Primarily, there were deficiencies in monitoring grant activities and accounting for formula grants. These internal control deficiencies could adversely affect the federal government’s ability to provide reliable financial statements as well as reasonable assurance that grants are awarded properly, recipients are eligible, and federal grant funds are used as intended.
  • Using evidence to assess the effectiveness of federal grants.  In recent years, federal agencies have been encouraged to consider evidence-based practices in managing their grant programs. Pay for Success is one such practice whereby private investors provide up-front funding for programs and the federal government repays these investors when there are demonstrated results. Pay for Success offers potential benefits, but federal government involvement in such projects has been limited. OMB should establish a means for federal agencies to collaborate on Pay for Success with access to leading practices. Other evidence-based issues include tiered evidence grants and the capacity needed to use them and the benefits and challenges of using performance partnerships.  

How the state and local fiscal condition informs federal grantmaking

It is important to understand the fiscal conditions of the state and local sectors because providing public services requires partnerships and economic interrelationships across and among all levels of government.  

To provide a broader perspective on the nation's fiscal outlook, GAO has developed a model to simulate fiscal outcomes for the state and local government sector, based on the sector’s revenues and expenditures, including federal grants to state and local governments.

The state and local government sector continues to face short- and long-term fiscal challenges, driven primarily by the growth in health-related costs. Specifically, state and local Medicaid expenditures and the cost of health care compensation for state and local government employees and retirees generally grow at a rate that exceeds Gross Domestic Product (GDP). The simulations for health-related and other expenditures are shown in the figure below.

Figure: Health and Nonhealth Expenditures of State and Local Governments as a Percentage of Gross Domestic Product (GDP)

Figure: Health and Nonhealth Expenditures of State and Local Governments as a Percentage of Gross Domestic Product (GDP)

Notes: Historical data from 2007 to 2016 are from BEA’s NIPA. Our simulations are from 2017 to 2066, using many CBO projections and assumptions, particularly for the next 10 years.

While outlays for health-related grants experienced a relatively steady increase in the last three decades—more than doubling in 30 years—outlays for other types of grants generally decreased relative to the total of all federal grants to state and local governments during the same period. OMB and others have noted that the relative growth and contraction of grant outlays for different purposes reflect a broader shift in the focus of federal outlays for grant programs.
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