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SPECIAL REPORT: Federal Formula Grants and California -- A Collaboration Between the Public Policy Institute of California (PPIC) and the California Institute

At the request of the bipartisan leadership of California's congressional delegation, the Public Policy Institute of California (PPIC) and the California Institute for Federal Policy Research have developed a new and unique research product, Federal Formula Grants and California. This ongoing series will analyze the state's share of federal grants and the mechanics by which grant funds are distributed.

Formula grants (sometimes block or categorical grants) differ from other federal grants in that they employ a predetermined mathematical construct to accomplish distributive goals. Unlike discretionary or project grants (which are allotted on a competitive basis by a federal agency) and congressional earmarks (through which a specific recipient or program receives funding), formulas are generally employed to allocate funds on an ongoing basis.

The project's first components include two overview pieces - one examining California's share of formula funding and the other reviewing factors used in the formulas - as well as the first of our in-depth formula grant studies TANF and Welfare Programs. The full reports are available at http// and at http// .

We are currently preparing an analysis of the formulas that distribute federal highway transportation funds in anticipation of next year's renewal of the Transportation Efficiency Act for the 21st Century (TEA-21). These reports will be followed over the next two years by numerous additional reports, briefings, fact sheets, a web database, and other products.

For reference, the "top ten" federal formula grant programs (ranked by total federal expenditures in fiscal year 2001) are:

1. Grants to States for Medicaid
2. Highway Planning and Construction
3. Temporary Assistance for Needy Families--Family Assistance Grants
4. Title I Grants to Local Educational Agencies
5. Head Start
6. National School Lunch Program
7. Special Education--Grants to States
8. Foster Care--Title IV-E
9. State Children's Health Insurance Program (SCHIP)
10. Special Supplemental Nutrition Program for Women, Infants, and Children (WIC)

"Factors Determining California's Share of Federal Formula Grants"


To accomplish most of its policy objectives, Congress mandates that federal government agencies undertake specific functions, from national defense to trade negotiations. However, Congress also enlists the assistance of other entities through formula grants when programs are best administered at the state or local level. Through these grants, state and local governments are currently funded to implement federal policies in such areas as health, transportation, housing, agriculture, education, and law enforcement.

In fiscal year 2001, the federal government distributed $284 billion through 158 formula grant programs; California received $34 billion or roughly 12 percent of those funds. In the first of an ongoing series of reports examining federal funding formulas and California, this report describes the major factors used by federal formula grant programs to allocate funds and describes how California's share of programs varies by the factors employed. A companion document illustrates California's current and historical shares of roughly 160 major federal grants. Future reports will provide objective, in-depth information on the mechanics and operation of funding formulas within individual programs, beginning with welfare funding through the Temporary Assistance for Needy Families (TANF) program. Ultimately, this series is intended to add depth and detail to our understanding of federal funding formulas - which allocate one-sixth of the federal budget -- and their effect on policymaking in California.

"California's Share of Federal Formula Grants 1991-2001"


The federal government's $284 billion in formula grant spending in fiscal year 2001 constituted nearly 17 percent of its total expenditures that year, which came to nearly $2 trillion. As shown in Figure 2.1, half of federal spending in 2001 went toward retirement, disability, and other direct payments to individuals and service providers. Another 12 percent was directed toward procurement contracts spending, most of which flows through the Department of Defense. About 9 percent went to salaries and wages for civilian and military federal employees, and the remaining 11 percent was dedicated to interest on the national debt and miscellaneous international ventures.

The significance of formula program expenditures in the federal budget has risen steadily over the past decade. These expenditures represented just 11.7 percent of federal spending in 1991, rose slightly to 12.9 percent in 1996, and then increased sharply to 16.9 percent in 2001. Rising mandatory formula spending on entitlement programs such as Medicaid, which alone represents more than half of formula grant expenditures, helped to fuel the growth. The mandatory nature of Social Security and Medicare expenditures also boosted the direct payments budget category from 42.1 percent of the budget in 1991 to 50.2 percent in 2001, whereas the other budget categories declined, as can be seen in Figure 2.1. Procurement slipped from 14.4 percent of the federal budget to 12.4 percent; wages fell nearly one-fourth, from 12.2 percent to 9.4 percent; and debt interest plunged by nearly half, from more than 20 percent to 11.2 percent. When combined, direct payments and formula grant categories rose from about half of federal spending in 1991 to more than two-thirds in 2001.

"TANF and Welfare Programs"


This report--the first in a series of in-depth examinations of individual federal formula grants--reviews the Temporary Assistance for Needy Families (TANF) program, pending reauthorization issues, and a number of formula-related aspects of federal welfare laws, with a specific focus on California outcomes.

Congress set September 30, 2002, as the expiration date for the law creating the TANF block grant, and both the House and Senate have initiated and moved reauthorization bills in 2002. Six years after the 1996 enactment of the landmark Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) welfare reform legislation (Public Law 104-193), the law is widely proclaimed a success in helping welfare recipients achieve independence and self-sustenance through work. In a sharp reversal from record-high recipient counts immediately before PRWORA's implementation, states on average reduced caseloads by 40 percent between 1996 and 2001. Child poverty rates simultaneously declined by 4 percentage points to their lowest level in 20 years. Some critics view these statistics with skepticism, doubting the adequacy of indicators to assess recipients' quality of life after moving off cash assistance and worrying that an inadequate cushion will leave governments unable to provide sufficient assistance in the event of a severe economic downturn. Moreover, many aver that the encouraging statistics are primarily a product of an improving and vibrant economy during these years. At any rate, PRWORA's success may be attributed in part to its rigorous requirements. It established a five-year lifetime limit on the amount of assistance allowed per person and requires that recipients engage in a minimum number of work or work-related hours per week after two years of assistance. The law also expanded the role of the states in designing their own welfare laws.


Whether policy goals are better served or whether California's target populations fare better under one approach than under another remain questions that need to be answered on a case-by-case, ongoing basis. This project will continue to present objective information to better inform the public debate in this critical area of California policy. In early 2003, you will see our next product - an examination of formulas used in the Federal-Aid Highway Program, which is scheduled for review during the next Congress' reauthorization of the Transportation Efficiency Act for the 21st Century (TEA-21).

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