Management of Federal Grants to State and Local Governments
The federal government uses grants to achieve many national objectives by providing program funding to state and local governments. Especially in a time of fiscal constraints, it is critical to prevent or remedy problems in federal grant processes that affect their efficiency and effectiveness.
To achieve national objectives, the federal government relies on complex networks and partnerships across federal, state, and local governments. Issues involving these intergovernmental relationships include the management of federal grants to state and local governments and the fiscal outlook of the state and local government sector.
Federal Grants to State & Local Governments
Grants are an important tool used by the federal government to provide program funding to state and local governments. According to the Office of Management and Budget, federal outlays for grants to state and local governments increased from $91 billion in fiscal year 1980 (about $225 billion in 2012 constant dollars) to about $545 billion in fiscal year 2012. See figure 1.
Figure 1: Total Federal Outlays for Grants to State and Local Governments, in 2012 Constant Dollars, Fiscal Years 1980-2012
Source: GAO analysis of OMB data.
Federal grants fund a wide range of programs and activities across state and local governments, including those related to social services, housing, education, transportation, health care, and man-made and natural disasters. Over time, growth in both the numbers of grant programs and levels of funding has created greater diversity and complexity in federal grants management processes. GAO has identified various strategies intended to address challenges to grants management effectiveness, oversight, and accountability. Strategies include:
- Tracking and evaluating performance, to include increasing transparency of grants spending.
- Streamlining grants management processes.
- Enhancing collaboration among intergovernmental participants and nonprofit entities.
- Improving oversight by strengthening internal controls and improving the single audit process.
- Recognizing that building sufficient capacity may involve significant costs or tradeoffs.
State and Local Government Sector's Fiscal Outlook
Fiscal sustainability presents a national challenge shared by all levels of government. Given the nature of the partnership among levels of government in providing services to Americans and the economic interrelationships among levels of government, understanding potential future fiscal conditions of the state and local government sector is important for federal policymaking. To provide a broader perspective on our nation's fiscal outlook, GAO has developed a unique model to simulate fiscal outcomes for the entire state and local government sector for several decades into the future. GAO's simulation shows that the state and local government sector continues to face short- and long-term fiscal challenges, adding to the nation's overall fiscal challenges. The fiscal position of the sector will steadily decline through 2060 absent any policy changes. As shown in figure 2, state and local government expenditures rise considerably as a percentage of Gross Domestic Product over the simulation's time frame.
Figure 2: State and Local Government Action Required to Maintain Balance (Expenditures, as a Percentage of Gross Domestic Product)
Note: This figure was excerpted from GAO-13-546SP.
The primary driver of fiscal challenges for the state and local sector in the long term continues to be the projected growth in health-related costs, specifically state and local expenditures on Medicaid and the cost of health care compensation for state and local government employees and retirees. Declines in state and local pension asset values stemming from the 2007 to 2009 economic recession could also affect the sector's long-term fiscal position.