Categorical grants comprise the bulk of activity in the federal grant-in-aid system, both in terms of the number of programs and the amount of funding. Categorical grants derive their name from the fact that their uses are limited to a narrowly defined category of activities that generally are specified in the authorizing legislation.
There are four different types of categorical grants: formula grants, project grants, formula-project grants, and open-ended reimbursement grants. Formula grants are distributed to jurisdictions entitled to funds by the authorizing statute on the basis of a numeric formula that takes into account the relative need of the recipient jurisdiction compared to all other entitlement jurisdictions. Examples of formula elements include population, poverty, per capita income, unemployment, enrollment in public schools, and the like. The formula factors and the weight assigned to each are either prescribed in the authorizing legislation or determined by administrative officials.
Project grants are awarded on a competitive basis by the administering agency, generally following the review of a grant application. Formula-project categorical grants involve a two-stage grant distribution: first a formula grant is used to apportion funding among the states, and then project grants are awarded by state officials to state and local government agencies.
Under open-ended reimbursement grants, the federal government agrees to reimburse a certain percentage of state and local program costs for a prescribed activity or set of activities. Hence, the total amount of the federal grant is open-ended and dependent on the amount of spending incurred by state and local jurisdictions—the more a state spends, the larger its federal grant. Medicaid is an example of an open-ended reimbursement grant, with a state’s grant determined by its federal reimbursement rate (which varies from a minimum of 50 percent in several states to a maximum of 77 percent in Mississippi) and the amount of a state’s spending for Medicaid-eligible services.
The origins of federal categorical grants can be traced to the Morrill Act of 1862, in which Congress authorized the distribution of public lands to state governments and instructed the states to use the proceeds from the sale of that land to support institutions of higher education (i.e., the “land grant” universities). This aid also came with an additional requirement—the colleges and universities that received assistance were required to provide military instruction. States were also required to submit annual reports to Congress on program expenditures.
The Federal Aid Highway Act of 1916 was the next development milestone in the evolution of the federal grant system. This program was the federal government’s first large-scale assistance program and also expanded the federal role by establishing a number of conditions and controls (e.g., project applications, progress reports, expenditure audits, and project closeout) designed to insure that state governments adhered to federal goals and objectives in their use of grant funds.
The most expansive period of growth for categorical grants occurred during the 1960s in response to President Johnson’s call for a Great Society. By the end of the decade the number of grant programs had increased from about 150 to nearly 400, funding more than doubled, and the federal government became an important player in several policy areas where it had no previous involvement.
Though successive waves of New Federalism during the Nixon and Reagan administrations sought to consolidate dozens of categorical grant programs into a small number of block grants, the growth of categorical programs continued. Today, there are about 600 grant-in-aid programs, and categorical grants account for about 95 percent of the programs and more than 80 percent of total grant outlays.
The most important fact about categorical grants is their extensive variability. Though on the surface the design features of categorical grants may appear to be technical issues, the decisions made regarding the key design elements of a categorical grant program are political ones and reflect the relative balance of power and influence among federal, state, and local governments.
Lawrence D. Brown, James W. Fossett, and Kenneth T. Palmer, The Changing Politics of Federal Grants (Washington, DC: Brookings Institution, 1984); Martha Derthick, The Influence of Federal Grants (Cambridge, MA: MIT Press, 1970); Robert Jay Dilger, National Intergovernmental Programs (Englewood Cliffs, NJ: Prentice Hall, 1989); and U.S. Advisory Commission on Intergovernmental Relations, Categorical Grants: Their Role and Design, ACIR Report A-52 (Washington, DC: U.S. Government Printing Office, 1977).
Michael J. Rich
Last updated: 2006
SEE ALSO: Block Grants; Categorical Grants; Crosscutting Requirements; Crossover Sanctions; Fiscal Federalism; Formula Grants; Grants-in-Aid; Project Grants; Rural Policy; Supremacy Clause: Article VI, Clause 2; Unfunded Mandates; Urban Policy