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.
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).
Total Federal Outlays for Grants to State and Local Governments and Medicaid, in 2013 Constant Dollars, Fiscal Years 1980-2015
Source: GAO analysis of OMB data. | modified from GAO-12-1016
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.
Health and Nonhealth Expenditures of State and Local Governments, as a Percentage of GDP
Notes: Historical data from 2005 to 2014 are from BEA’s NIPA. Our simulations are from 2015 to 2064, using many CBO projections and assumptions, particularly for the next 10 years.
Note: This figure was excerpted from GAO-16-260SP.
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.
GAO-16-818: Published: Sep 21, 2016. Publicly Released: Sep 21, 2016.
Tiered evidence grants are a new policy tool federal agencies are using to incorporate evidence of effectiveness into grantmaking. Under this approach, agencies establish tiers of grant funding based on the level of evidence grantees provide on their models for providing social, educational, health, or other services. Smaller awards are used to test new and innovative service models; larger awards...
GAO-16-362: Published: Apr 14, 2016. Publicly Released: Apr 14, 2016.
GAO found approximately $994 million in funding remained in expired grant accounts in the Payment Management System (PMS), operated by the Department of Health and Human Services (HHS), at the end of fiscal year 2015. PMS identifies expired grant accounts for users as those accounts more than 3 months past their grant end date that have not had payment activity for 9 months. PMS makes payments for...
GAO-16-357R: Published: Feb 25, 2016. Publicly Released: Feb 25, 2016.
To operate as effectively and efficiently as possible and to make difficult decisions to address the federal government’s fiscal challenges, Congress, the administration, and federal managers must have ready access to reliable and complete financial and performance information—both for individual federal entities and for the federal government as a whole. Overall, significant progress has been...
GAO-16-260SP: Published: Dec 16, 2015. Publicly Released: Dec 16, 2015.
GAO’s State and Local Fiscal SimulationsFiscal sustainability presents a national challenge shared by all levels of government. GAO simulations of long-term fiscal trends in the state and local government sector—published since 2007—have consistently shown that state and local governments face long-term fiscal pressures. Absent any policy changes, the state and local government sector faces...
GAO-15-646: Published: Sep 9, 2015. Publicly Released: Sep 9, 2015.
Pay for Success (PFS), also known as Social Impact Bonds, is a new contracting mechanism to fund prevention programs, where investors provide capital to implement a social service— for example, to reduce recidivism by former prisoners. If the service provider achieves agreed upon outcomes, the government pays the investor, usually with a rate of return, based on savings from decreased use of mor...
GAO-17-159: Published: Feb 16, 2017. Publicly Released: Feb 16, 2017.
Federal agencies have oversight responsibilities for the funds that they award to nonfederal entities and can assign these responsibilities to their subagencies (i.e., operating units or divisions). Nonfederal entities are required to undergo a single audit if their expenditures of federal awards in a fiscal year exceed a certain threshold. A single audit is an audit of the award recipient's expen...
GAO-17-120: Published: Feb 7, 2017. Publicly Released: Feb 7, 2017.
The Office of National Drug Control Policy (ONDCP) and the U.S. Department of Health and Human Services' Substance Abuse and Mental Health Services Administration (SAMHSA) employ leading collaboration practices to administer the Drug Free Communities (DFC) Support Program and have funded a range of drug prevention activities. Both agencies have improved their collaboration since GAO last reported...
GAO-16-775R: Published: Sep 14, 2016. Publicly Released: Oct 14, 2016.
State officials and local providers of early care and education programs that GAO interviewed identified benefits associated with integrating funding from multiple sources as well as partnering with other providers. They also cited factors that adversely impacted their ability to do so. The benefits most often cited by state officials and providers included access to additional funding sources, op...
GAO-16-530: Published: Jul 14, 2016. Publicly Released: Aug 15, 2016.
The Environmental Protection Agency (EPA) generally awards three different categories of grants: formula, categorical, and discretionary. According to EPA data, in fiscal year 2015, EPA awarded the majority of its grant funds— $2.25 billion of $3.95 billion (57 percent)—as formula grants, primarily to states to support water infrastructure based on funding formulas prescribed by law. EPA award...
GAO-16-560T: Published: Apr 12, 2016. Publicly Released: Apr 12, 2016.
GAO's recent work highlights both the progress and challenges in the Department of Homeland Security's (DHS) Federal Emergency Management Agency's (FEMA) efforts to strengthen federal preparedness.In December 2014, GAO reported that the federal departments responsible for coordinating emergency support functions (ESF) in preparation for national disaster response carry out their responsibilities i...
GAO-16-108: Published: Feb 5, 2016. Publicly Released: Mar 7, 2016.
Not all selected hospitals in the four states GAO reviewed tracked their use of revenues from the large supplemental payments they received and tracking of revenues is generally not required. Based on information obtained from hospital officials and a review of demonstration approval documents, GAO determined that the revenues were used for a broad range of purposes. For example,Officials from nin...
GAO-16-2: Published: Oct 19, 2015. Publicly Released: Oct 19, 2015.
States reported that nearly all school districts generally met the local maintenance of effort (MOE) spending requirement for special education, but some districts faced challenges for various reasons. Under the Individuals with Disabilities Education Act (IDEA), MOE requires districts to spend at least the same amount on special education services for students with disabilities that they spent in...
GAO-15-190: Published: May 20, 2015. Publicly Released: May 20, 2015.
Five federal agencies within four departments fund home and community-based services and supports that older adults often require to continue living independently in their own homes and communities. The Administration on Aging (AoA) and Centers for Medicare & Medicaid Services (CMS) in the Department of Health and Human Services (HHS), and the Departments of Housing and Urban Development (HUD), Tr...
GAO-15-298: Published: Apr 16, 2015. Publicly Released: Apr 16, 2015.
The extent to which persons with human immunodeficiency virus (HIV) need housing assistance is not known, in part because the Department of Housing and Urban Development's (HUD) estimate of the housing needs of persons with HIV, including those with Acquired Immune Deficiency Syndrome (AIDS), is not reliable. HUD does not require Housing Opportunities for Persons with AIDS (HOPWA) grantees to use...
GAO-15-295: Published: Apr 13, 2015. Publicly Released: Apr 13, 2015.
The Department of Education's (Education) Race to the Top (RTT) program encouraged states to reform their K-12 educational systems, but states and districts faced various capacity challenges in implementing the reforms. RTT accelerated education reforms underway and spurred new reforms in all 19 RTT states and in an estimated 81 percent of districts, according to GAO's surveys of RTT grantees and...