Introduction

Each year, state and local governments collectively receive and spend billions in federal funds, which accounted for 40.5% of all state spending in 2021, to provide important services to the public. Federal law and regulation establish some restrictions on the use of federal grants to varying degrees, but state lawmakers have considerable power to leverage federal funds in support of the public services that guarantee all families the opportunity to thrive.

This publication offers a blueprint to state legislators for a values-based approach to managing federal funds from the planning, policymaking, and implementation stages. By working together with advocates and communities, state lawmakers can ensure that we have the resources to deliver quality schools, affordable healthcare, and public services that make communities stronger.

An Overview of Federal Grants to States

Federal grants to state governments are subject to two different federal budget processes. Discretionary funds are a part of the annual federal appropriations process; Congress has the discretion to set funding levels each year for discretionary programs. Discretionary spending includes funding for certain programs or activities, and often includes administrative costs for federal agencies. If Congress fails to provide funding for discretionary spending through an appropriations bill by the start of the fiscal year on October 1, lawmakers can enact a continuing resolution to provide temporary funding and avoid a government shutdown until an appropriations bill is passed. While this avoids an economic catastrophe, continuing resolutions are not a long-term solution, and as the Congressional Progressive Caucus Center (CPCC) explains, locking in federal funding to prior spending levels can result in underfunded programs, with serious consequences to helping low-income children or combating climate change or protecting public health, just to name a few. Examples of discretionary spending include the Child Care and Development Block Grant (CCDBG), Head Start, and hospital and medical care for veterans. Another important component of the federal appropriations process is the ability of members to “earmark” funding for priority projects in their congressional district. Earmarks are also referred to as congressionally directed spending or community project funding (see the CPCC explainer, Understanding Capitol Hill Jargon, for more).

Mandatory funds, by contrast, are not a part of the annual appropriations process, but are spending priorities set by federal law; spending levels for mandatory programs remain the same absent a change to the underlying law that authorized the program. Mandatory spending includes outlays for federal benefit programs and other payments to individuals, businesses, nonprofits, and state and local governments. Examples of mandatory spending include some of the nation’s largest entitlement programs: Social Security, Medicare, and Medicaid.

State legislators should be aware of the federal budget distinctions in planning the use of federal grants: funding levels for discretionary programs may be subject to annual changes as a part of the federal budget process, whereas changes to mandatory programs require statutory changes outside of the annual federal appropriations process.

Federal Grants and Administrative Requirements for State Governments

Federal grants to state governments also fall into two categories based on their spending requirements and allocation processes. Block grants are provided to fund specific programs and outcomes. However, allowable activities are generally broadly defined, leaving state governments with some flexibility in appropriating funds. Categorical grants can only be used for specific programs with narrowly defined activities. There are additionally four types of categorical grants that differ in how funding is disbursed to state governments and other eligible entities. The degree of federal control and restrictions in the use of grants varies significantly, with important implications for state lawmakers’ discretion in setting the policy and activities attached to a particular federal grant (see Table 1).

Table 1. Block Grants and Categorical Grants

States of Inequality: A Brief History of Federalism and Federal Grants

The nation’s federalist system has long produced a dynamic and ever-changing relationship between states and the federal government. Historically, federalism has been selectively used as a political tool to rig the system in favor of corporations and the wealthy. However, state lawmakers have the opportunity to chart a new path for an era of progressive federalism that secures the future of all people, especially communities that have been historically excluded from federally-funded programs, by broadly employing their discretion to maximize the use of federal grants.

The passage of major federal social policies in the form of the New Deal during the 1930s ushered in an era of cooperative federalism, in which the federal and state governments share power and have overlapping responsibilities. While the New Deal created much-needed social insurance programs and protections for the working class, it also left a lasting legacy of racist public policy. Domestic workers and farmworkers, mostly Black and brown workers, were carved out of the Social Security Act and labor protections—a policy rooted in slavery that remains on the books today. Meanwhile, the exclusion of Black people and other people of color from government-sponsored homeownership programs created under the New Deal cemented the racial wealth divide and racial segregation across the country.

Corporate interests mobilized in the following decades to beat back policies that strengthened the middle class, and in tandem with major political shifts in the wake of the Civil Rights movement, the country transitioned into a period of uncooperative or coercive federalism. During this time, industry lobbyists schemed behind the scenes to take over American democracy in the name of pro-enterprise, conservative ideology by way of public policy, media, civic and educational institutions, and the judiciary.

In a few short decades, this powerful group of white wealthy elites won major corporate tax cuts, deregulated industries, and suppressed the right of workers to join together in union, systematically enshrining economic inequality across the nation. The budgetary impacts of advancing a corporate special interest agenda at the federal level have had negative impacts on states and localities. For example, the Reagan tax cuts led to a ballooning deficit and an end of federal revenue-sharing with states and localities, which then led to an overreliance on court fees and fines to help fund local governments, which in turn has contributed to racially discriminatory mass incarceration. 

This broader crusade to maintain the status quo and entrench conservatism in every sphere of the political economy also came with dire consequences for those who could stand to benefit from billions in federal funding each year. Today, there are extreme variations in policy from state to state, producing highly racialized patterns of who can access federally funded programs, and the quality of those services. For example:

• States with larger Black populations were less likely to accept millions in federal funds to expand Medicaid to individuals with incomes below 138 percent of the federal poverty level;

• States with larger Black populations have more restrictive policies for cash assistance programs for children living in poverty funded by the Temporary Assistance for Needy Families (TANF) block grant;

• States with more Black workers have less generous unemployment insurance benefits, and Black workers are less likely to receive unemployment benefits when compared to white workers with similar education or job tenure; and

• Black students receive almost $400 less per pupil in education funding than white students, and Hispanic students receive over $1,000 less per pupil across the country.

These patterns follow other regional and demographic disparities produced by generations of anti-Black voter suppression and gerrymandering. These patterns follow other regional and demographic disparities produced by generations of anti-Black voter suppression and gerrymandering. In the same way that racism continues to distort our democracy by restricting our freedom to vote, unequal access to public services is the direct result of anti-Blackness wielded as a political strategy.