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Conditional Grants

Last Updated: 2006

Conditional grants are monetary transfers from one level of government to another, either through competitive project grants or through more general block grants, which place conditions on the use of the transferred funds by the recipient government. The conditions may be either financial or substantive in nature. In other words, the grantor uses these grants to induce certain reactions on the part of the grantee in order to bring the lower-level government into line with the higher-level government’s policy objectives. The greater the conditions placed upon the grant, the less flexible is the program for the recipient government. Financial conditions usually entail matching requirements, and they are typically stated as a percentage of the grant amount or as a percentage of total project costs, and financial matching requirements must come from local revenues. On the other hand, substantive requirements reflect the nature of uses to which the recipient may apply the federal money. Many grant programs are for very specific uses, and therefore states may or may not elect to compete for them, based on their local needs and policy priorities.

As the federal grants-in-aid system evolved in the second half of the twentieth century, conditions on federal transfers grew in prominence. As James Sundquist (Sundquist and Davis 1969) noted, the grant conditions, matching requirements, and allocation formulas of early grants “reflected a good deal of federal deference” to state and local governments. But by the 1970’s, Martha Derthick (1996) commented that the national government had made state and local governments “agents of its purposes through aggressive use of grant-in-aid conditions and partial preemptions.” The shift from land grants to monetary grants in the nineteenth century gave way to a shift within monetary grants in the twentieth century toward greater specificity and, in particular, an increase in block grants (which were categorical in purpose) and project grants (which are specific in purpose). Given the inclusion of increased conditions on federal monies, intergovernmental transfers became less flexible for the recipient governments. While states are free to choose whether or not to compete for such grants, state reactions to fiscal pressure during times of recession and shrinking budgets include an increased dependence on the federal government for financial assistance. As a result, states often turned to federal programs to maintain programs and current service levels.

Through the combination of increased conditions on grants and the increased dependence by states on federal revenue, many came to fear that national policy objectives would displace state and local policy preferences. In other words, federal policy causes local discretionary revenue to be displaced from programs of local choice and expended on programs for which federal grant funds are available. The result is that state and local governments have established long-standing programs tailored to fit federal grant requirements. In most cases, the recipient government increases program spending by an amount less than that of the grant, but by more than would be expected from the same increase from local revenue; this response has been labeled the “flypaper effect.”

SEE ALSO: Block GrantsCategorical GrantsCrosscutting RequirementsCrossover SanctionsFormula GrantsGrants-in-AidProject GrantsRural PolicySupremacy Clause: Article VI, Clause 2Unfunded MandatesUrban Policy