This report offers a general review of primary data elements used to determine federal formula grant allocations by state.


Formula Factors
Some federal formulas distribute funds according to simple census figures for all or certain persons, while other formulas employ more complex factors. Following is a brief discussion of some of the most common factors contained in federal funding formulas and how the factors operate, specifically with respect to California.2
Population -- As a benchmark for examining alternate formula allocations and federal funds distributions generally, it is worth remembering that California's population currently represents approximately 12.1% of the U.S. population. A few formulas distribute funds based purely on overall state population, though most are somewhat more complex.
Poverty Rates -- Poverty rates are used to calculate distributions for a number of grant programs, including the Title One (formerly Chapter One) federal education grant, which is based largely on the number of children aged 5-17 living in poverty in a particular county. While national and state-level poverty figures are updated every year, sub-state poverty figures are only updated decennially (every 10 years), thereby making the figures rapidly outdated, and slowing the appropriate shift of federal dollars from slow-growth to high-growth states and localities.3 In 1994, 17.9% of Californians were below the poverty line -- well above the national rate of 14.5% -- giving California the 7th highest poverty rate among the states. In 1992, California housed 4.9 million or 13.35% of the nation's 36.8 million persons in poverty. California's above-average poverty rate in the 1990s is a marked shift from its below-average rate during the 1980s.
Because poverty is calculated as a particular level, formulas may be designed to calculate eligible populations precisely at the official poverty level, or they may use a specified percentage of that level (such as 125%, 150% or 200% of poverty). According the 1990 Census, California's share of persons living at each of these percentage levels is similar to its share of persons below the actual poverty line.
Per Capita Income -- Some formulas use a measure of "fiscal capacity," or the ability of a state or locality to raise revenues internally through state or local taxes, to adjust funding toward poorer states away from richer ones. Per capita income is a common measure. For example, a state's federal match for Medicaid is based on that state's per capita income compared to the national average. While California's relative wealth has declined somewhat during the last several years, California still has the 12th highest per capita income among states (down from 3rd in 1980).4 Use of per capita income figures in determining the Federal Medicaid Assistance Percentage (FMAP) to reimburse states for Medicaid spending disadvantages California, as the formula reimburses poorer states at higher rates than richer ones.5 Per capita income usage also reduces California's share of vocational education program.
Per capita income is an imperfect formula factor at best. According to the General Accounting Office, PCI was first used in the 1950s as an indicator of a state's ability to finance programs as well as of a state's poverty level, assuming that low-income states would have higher poverty rates.6 Since that time, a formal poverty definition has been created, and better measures of fiscal capacity now exist. It is important to note that California has a high per capita income, but also a high poverty rate. Thus, formulas originally drafted to help poor people by assuming they reside in low-income states actually shortchange California's large poor population.
An alternative fiscal capacity factor would be to use a state's taxable resources. A 1990 GAO study7 (using 1989 data) determined that California's per capita taxable resources were about 10% above the national average -- so use of a fiscal capacity factor would produce results roughly similar to use of per capita income.
Fiscal Effort -- Some programs incorporate in their formulas a factor to represent a state's or localities' sacrifice made or effort exerted to support the program's goals. For example, a factor might reward a state for high per-eligible revenues, thereby creating an incentive for a state to raise taxes to pay for the federal goal in question. A typical factor might be a ratio of the state's revenue in a certain category to that state's per capita income.
Cost Factors -- An alternative to an income factors (which tend to help lower-income states) would be to recognize the higher cost of providing services in one state versus another. (See also the discussion of cost of living factors below.)
One such example can be found in the Title One (formerly Chapter One) education program, which is the fourth largest federal formula grant. While technically neither an effort factor nor a cost factor, the state-per-pupil-expenditure factor in the Title One formula was drafted to be a rough proxy for both. The use of this factor works strongly against California in funding distribution. California has the highest average class size of any state, and thus has a very low per-pupil expenditure.8 This factor therefore reduces California's Title One receipts more than any other state's. During the 103rd Congress' revision of the Title One program, California advocates suggested use of a more accurate proxy for the cost of providing education services -- average state teacher salaries. The proposal never gained much momentum, in part because incorporating such a factor would have redistributed funding greatly, and would have resulted in a large increase for California.
Cost of Living -- While the technique has not been used, use of relative income figures could actually benefit California if a formula were to compensate for higher cost of living in one state versus another. However, cost of living / consumer price index figures are not collected on a state-by-state basis by the Bureau of Labor Statistics. BLS produces a CPI figure for the U.S. and for 29 major metropolitan areas. The CPI for the three California metro areas listed are above the national city average, and thus a state-level CPI, should one ever be produced, would likely show an above average CPI for the state. State per capita income could be used as a rough proxy.
Employment and Unemployment -- The Department of Labor calculates unemployment rates monthly. Unemployment rates can fluctuate significantly from month to month. California's unemployment rate fell recently from 7.7% in March 1996 to 7.5% in April and 7.2% in May. These figures contrast with national rates of 5.6% in March, 5.4% in April and 5.6% in May. Until May, California's rate had exceeded the national rate by at least 2 points nearly every month for three straight years. The unemployment rate is used to calculate grants under the Job Training Partnership Act, which is based 2/3 on the number of unemployed individuals in a state and 1/3 on the number of poor persons.
Urban vs. Rural Populations -- Many federal transportation/highway and agriculture dollars are allocated according to urban versus rural populations. California's population is much more concentrated in urban areas than the national average. In 1992, 96.7% of California's residents lived in what the Census Bureau defined as an urban area, compared to 79.7% nationwide. Only New Jersey, all of whose residents are in considered to live in an urban area, has a higher urban share than California.
Age-Range Populations -- Some programs are based on populations of certain ages (such as school-age population or residents over age 65). California has a high proportion of school-age and younger children compared to the nation at large. A particularly high and fast-growing concentration is in the younger age ranges, where enrollment in grades K-8 has grown 8.1% compared to only 5% nationwide -- the 8th fastest among the states. In contrast, 10.6% of Californians in 1994 were age 65 or older, compared to a 12.7% national average. This level ranked California 45th among the states.
Number of Immigrants -- California is home to roughly 40% of the nation's legal immigrants, according to the Census Bureau. The Immigration and Naturalization Service estimates that 43% of the nation's undocumented immigrants reside in California, though precise figures are difficult to pinpoint. Any formula which accounts for immigrants strongly benefits California. For example, California received more than half of U.S. allocations under the recently-expired State Legalization Impact Assistance Grants (SLIAG) program. However, because immigrants tend to be concentrated in relatively few states, it may be difficult to build a broad base of support for inclusion of immigrant factors in formulas. As a very rough proxy for some formulas, such as in education, it may be appropriate to use the Census Bureau's calculations of households in which a language other than English is spoken. In 1990, California was home to 6.46 million (or approximately one-third) of the nation's 19.77 million foreign-born persons.
Percent of Population Receiving Benefits -- On occasion, one program's benefit levels will be tied to the number of individuals receiving or eligible for another. Thus, it can be helpful to track the share of funds. For example, while nationwide 7.7% of the nation's 1993 population received AFDC and/or SSI payments, 11.2% of Californians did in that year (making California the second highest percentage state). In contrast, 12.5% of Californians receive Social Security payments compared to 16% nationwide -- ranking our state 48th.
Crime Rates -- Crime rates are sometimes used to distribute formula grant programs from the Department of Justice. California's crime rates tend to exceed the national average. In 1993, California had the second highest violent crime rate among the states, at 1,078 per 100,000 persons, compared to 746 per 100,000 nationwide.
Other Factors -- Several factors have been introduced in a handful of laws which work strongly against California. Among these programs are the Low Income Home Energy Assistance Program which favors "heating days" over "cooling days" and skews funding toward colder northeastern states away from warmer southwestern states. Some housing programs allocate funds based on the stock of "pre-1940 housing," which tends to favor older Northeastern and Midwestern states over the South, the West, and California.
Census Data vs. Reported Counts -- Most formula distributions are based on objective data provided by the Census Bureau or other unbiased sources. However, some funds are distributed based in whole or in part on counts of eligible individuals reported to the federal government by the entities who will ultimately receive the funds. Such situations can sometimes lead to charges of abuse of the system. For example, when Congress considered reauthorizing the Individuals with Disabilities Education Act (IDEA) in 1996, the House Committee proposed to replace the existing formula, whereby states report the number of handicapped children they serve and receive funds according to that count, with a formula based simply on state-level census figures for population age 3-21. The shift to census figures would have raised California's share of IDEA funds from 10% to 12%. (The reauthorization process was not completed.)
Formula Grant Program Special Provisions
A number of specific factors are commonly contained in or added to federal formulas to alter the distribution. Many work to the detriment of California. A few examples follow.
Phase-In Periods -- Similar to hold harmless provisions (below), phase-in periods are used to delay the impacts of formula changes and new data. Such phase-ins may appear as an averaging of several periods' data (using a three-year average of per capita income rather than the most current data to distribute Medicaid funding) or as a specified delay (implementing a new formula _ in one year and _ in the next).
Hold Harmless provisions -- Hold harmless provisions tend to work against change and for the status quo by ensuring that a state (or other jurisdiction's) allocation will not decline at all or by more than a specified percentage in any given year. Historically, hold harmless provisions have been used to prop up funds for slow-growth states which should otherwise decline and prevent proper growth for fast-growing states such as California. A hold harmless provision might state, for example, that all funding up to the current year's level shall be distributed under the old formula, and only money above that level shall be distributed under the new formula.9 While the relative rate of growth of California's population versus that of other states has slowed considerably in recent years,10 California population change is likely to be above average for the foreseeable future. California's population is expected to grow from 12.1% of the U.S. population in 1995, to 13.7% by 2010.11 Hold harmless provisions are thus likely to continue to work against California's interests.
Small-State Minimums -- Many formulas include minimum floor levels of allocations to states, counties, territories, or other jurisdictional levels. These naturally work to shift funding away from larger states and toward smaller ones.
Growth Caps -- Limiting the amount that benefits, eligible populations, or other factors may grow in any given period work against faster-growing regions in favor of slower-growing and declining regions. However, regions can experience growth in some factors at the same time that others are stable or declining. The number of unemployed persons may decline as population growth accelerates, for example, or the school age population can be inversely proportional to the population over age 65. In addition, a growth cap which limits overall growth in U.S. spending on a given program tends to be preferable for growing states such as California to a growth cap placed on each individual state's or jurisdiction's expenditures.
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The California Institute is a bipartisan nonprofit based in Washington D.C. which advises the California congressional delegation regarding issues of economic importance to the state. The California Institute for Federal Policy Research, 419 New Jersey Avenue, SE, Washington, DC 20003. Phone: 202-546-3700. Fax: 202-546-2390. E-mail: ransdell@calinst.org.


1 This report is updated for 1996.
2 For additional statistics comparing California with other states, a useful new resource is How Does California Compare?, July 1996, by the Sacramento-based California Budget Project.
3 Opponents of intercensal updating, typically from slow-growth states in the Northeast and Midwest, argue that because poverty data is only collected from one in every 20 census respondents, attempts to estimate persons in poverty at small geographic levels (such as county or school district) would have too great a margin for error. Updating supporters counter that such errors would not likely be worse than ignoring growth shifts -- which are sometimes great -- for as much as a decade.
In 1993, Congress directed the Census Bureau to fund a project aimed at producing poverty data at least every two years. The first set of intercensal poverty figures, measuring 1993 poverty rates, is scheduled for release in fall of 1996. The Census Bureau reportedly intends to update poverty figures every other year. However, there is no requirement that they do so. Also in 1993, as part of a major education bill, Congress directed the Education Department to use the latest Census Bureau estimates of poor children to distribute Chapter 1 education funds. A provision in the bill states, however, that the Department is only required to use the data if it is determined to be of sufficient quality. To this end, a National Academy of Sciences panel has been created to evaluate the statistics. Consequently, none of the federal formula programs using poverty statistics are specifically required to use the intercensal data currently being developed. For further information, refer to the Institute's publication entitled California Implications of Poverty Data Usage in Federal Formula Grant Programs, prepared in May 1996.
4 California's per capita income in 1993 was $21,348; the national level was $20,817. The state with the highest per capita income that year was Connecticut at $22,099, while the lowest was Mississippi at $11,709. Interestingly, and somewhat alarmingly, California's income ranking plummeted during the recent recession. Between 1990 and 1994, disposable personal income per person grew only 10.8% in the state compared to 17.3% nationwide, giving California the distinction of having the lowest percentage growth in the country. Source: U.S. Census Bureau.
5 For further information, see the Institute's report The Distribution of Federal Medicaid Dollars:California Fiscal Implications of Block Granting and Other Approaches, 1995.
6 See Medicaid Formula: Fairness Could Be Improved, U.S. General Accounting Office (testimony), GAO/T-HRD-91-5, December 7, 1990, p. 2.
7 Ibid, p.11.
8 In 1994-95, California spent $4,724 on elementary/secondary education per pupil compared to $5,894 nationwide. This level ranked California 42nd, down from 34th in 1990-91, and from 26th in 1983-84.
9 If substantial increases in program funding do not materialize, the new formula or new data will be little used, which exacerbates funding inequities. See, e.g., Substance Abuse and Mental Health: Hold-harmless Provisions Prevent More Equitable Distribution of Federal Assistance Among States, GAO/T-HRD-90-3, U.S. General Accounting Office, testimony before the House Subcommittee on Health and the Environment, October 30, 1989.
10 From 1992 to 1993, for the first time in recent memory, California's population grew at a slightly slower pace (1.0%) than did the rest of the nation (1.1%), and that trend has continued through 1994 and 1995. Source: Census Bureau.
11 Even by its most conservative estimate, the Census Bureau's Current Population Reports, series P25-111, shows California growing to 12.6% of the nation's population in 2000 and 13.7% in 2010. California's population was estimated to have increased by 5.6% from 1990 to 1994 (the nation's 19th fastest rate) compared to a 4.7% increase nationwide. California's population increase is expected to more rapidly outpace the nation's from 1990 to 2010, when the state's 38.1% increase will be 8th fastest among the states, and will compare to only a 20.8% increase nationwide.