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Formula Grants

Last Updated: 2006

Formula grants, sometimes also called “state-administered grants,” are a method by which the federal government distributes more than $400 billion annually to state and local governments to implement federal policies. Formula grant programs include health care for the poor, health insurance for children, special needs and K–12 education, transportation improvement, law enforcement/homeland security, nutrition programs for children and pregnant women, and welfare (Temporary Assistance for Needy Families, or TANF). Combined, more than 175 different formula grants from fourteen different federal government departments total nearly 85 percent of all federal government grants-in-aid to state and local governments.

Unlike other federal grants, state and local governments are not required to compete against each other to receive formula grant funds. Each grant is based on a specific formula established by law or Congress that determines which funds a state or community may be qualified to receive. In the case of matching formula grants, formulas determine what proportion of the total funds the lower government will have to provide to get the federal (matching) funding. In many cases, states with high unemployment, poverty (for health care, education, and nutrition), or highway miles (for transportation); with poorly performing education systems; and so on can qualify to receive several times the state contribution in federal matching funds. Many of these matching formula grants also include minimum floor amounts awarded, giving a funding advantage to smaller, perhaps less affluent states.

The ten most expensive federal formula grant programs as of 2002 in order of decreasing cost are (1) Medicaid; (2) Highway Planning and Construction; (3) Welfare (Family Assistance Grants under TANF); (4) Title I Local Education Grants; (5) Special Needs Education Grants; (6) Head Start, early childhood education; (7) the National School Lunch Program; (8) Title IV-E Foster Care programs; (9) Women, Infant and Children’s nutrition program (for low-income pregnant women and infants); and (10) the State Children’s Health Insurance Program (SCHIP; Ransdell 2004).

Medicaid: The Most Expensive Federal Matching Grant

The Department of Health and Human Services (HHS) administers nearly two-thirds of all federal formula grant dollars, and four of the top ten funded programs. This includes the single most expensive federal formula grant program, Medicaid, which is more than five times larger than any other federal formula grant program. It provides long-term medical care for 50 million low-income Americans, including 22.6 million low-income children and 12 million elderly disabled. Passed in 1965 during Lyndon Johnson’s Great Society, Medicaid is a matching grant. The federal government pays from 50 to 83 percent of the cost, with the balance paid by the states. The poorest states are able to receive more than four federal dollars funding for each dollar of state funding they contribute. Federal government Medicaid expenditures increased by 149 percent during the 1990’s, from $53.3 billion (1991) to $132.7 billion in 2001. The National Governors’ Association found Medicaid costs increased on average 12 percent per year, and drug coverage 18 percent a year from 2000 to 2003, resulting in federal government expenditures of more than $275 billion for Medicaid and SCHIP (combined) in fiscal year 2003.

According to a 2001 Kaiser Commission report, Medicaid spending for the poor, for children, and for the disabled consumes an average of 15 percent of state budgets (Smith 2001). Increasing state Medicaid costs now rank second behind the costs of public education as a proportion of state budgets. Since 2001, governors and state legislatures have been forced to limit Medicaid coverage to help balance state budgets and close combined operating budget deficits of between $40 and $50 billion. According to a 2002 National Association of State Budget Officers report, “47 states took steps to reduce Medicaid expenditures in state fiscal years 2002 or 2003. Budget cutting policies included: implementing cost containment programs for pharmaceuticals, freezing or lowering payment rates to hospitals, physicians, HMOs and nursing homes, reducing or eliminating optional Medicaid benefits like dental or vision, increasing beneficiaries’ copayments, and scaling back eligibility” (Ku, Ross, and Nathanson 2002). The U.S. House Budget Committee’s proposed budget for fiscal year 2006 calls for a total of $15.1 billion to be cut from Medicaid and SCHIP over the next five years.

HHS also administers the third most expensive formula grant program, the Family Assistance Grants under the TANF program. They are part of the 1996 Personal Responsibility and Work Opportunities Act (Public Law 104-193), most commonly known as “welfare reform.” As of 2001, the federal government spent $16.5 billion on these grants to states, based on their poverty rates, joblessness rates, and prior AFDC (i.e., welfare grant expenses) from 1992 to 1995. Although “welfare” rolls have dropped by 40 percent since 1996, the federal expenditures for these fixed-sum grants have remained largely stable.

Since 1997, another huge and rapidly expanding HHS-administered formula grant program has been the State Children’s Health Insurance Program (SCHIP), also known as Title XXI of the Balanced Budget Act of 1997. The federal government has provided more than $40 billion in matching funds since 1997 for states to implement and administer health care services to its low-income children whose family income ranges up to 200 percent of the federal poverty level. The federal grant to states has a minimum floor, above which it funds based upon 50 percent of the number of low-income children in the state, adjusted for a state cost of living and a cost of health care factor.


The Department of Transportation administers the second most expensive formula grants, known as the TEA-21 grants, which totaled $27.6 billion in 2001. The Highway Planning and Construction Grants are part of the Transportation Efficiency Act for the Twenty-first Century. This grant is computed based on a complex formula involving highway lane miles (excluding interstate highways) and the average miles traveled per capita. This grant program grew by 91 percent in the past decade. These grants are of particular importance to local units of government.


The Department of Education (DOE) administers thirty-seven different formula grant programs, including the fourth (Title I Grants to Local Schools), fifth (Special Needs Education Grants), and sixth (Head Start early childhood education grants) most expensive federal formula grant programs. Title I Grants provide the single largest federal source of funding for local K–12 public education, to help poor disadvantaged children learn. Most of the federal Special Education grants to the states were originally part of the 1997 Individuals with Disabilities Education Act (IDEA, Public Law 101-476). These grants grew from $3 billion in 1997 to $7.4 billion in 2002 to provide assistance, early intervention services, and public education to nearly 6 million disabled children from ages 2 to 21. Head Start grants, started in the mid-1960’s, now include $390 million in funding for preschool learning readiness educational grants.


Although much smaller in dollar amounts, an area of significant fiscal strain for state (and particularly local) units of government law enforcement agencies are the formula grants administered by the Department of Homeland Security, which was established in 2002. Over $3.3 billion in formula grants were established as part of the Homeland Security provisions of the USA PATRIOT Act in 2001 authorized by Congress. Little of that funding has actually been appropriated (paid) to reimburse local governments for increased security and law enforcement expenses. According to the U.S. Conference of Mayors, as of September 2003 90 percent of local governments, and as of 2004 52 percent of local governments, had still received no funding under homeland security formula grant programs. Formula grants currently authorized to be administered by the Department of Homeland Security’s Office of Domestic Preparedness Grant Program include the Firefighter Grants Programs ($715 million in 2005), the State Homeland Security Grant Program (SHGP) at $1.1 billion in 2005, the Urban Area Security Initiative grants for terrorism prevention funded at $885 million, Law Enforcement Terrorism Prevention Program grants funded at $400 million, and various Citizen Corps and Emergency Management Planning Grants totaling less than $200 million in 2005.

SEE ALSO: EducationGreat SocietyMedicaidState LegislaturesTransportation PolicyUSA PATRIOT Act of 2001Welfare Policy


Leighton Ku, Donna Cohen Ross, and Melanie Nathanson, State Medicaid Cutbacks and the Federal Role in Providing Fiscal Relief to States (Washington, DC: Center on Budget and Policy Priorities, 2002); Tim Ransdell, ed., Federal Formula Grants and California (San Francisco: Public Policy Institute of California, 2004); and Vernon Smith, “Medicaid Budgets Under Stress: Survey Findings for State Fiscal Year 2000, 2001, and 2002” (Kaiser Commission on Medicaid and the Uninsured, October 2001).