Grant programs can incorporate matching requirements specifying a minimum fiscal contribution required of grantees as a condition for receiving grant funds. These requirements serve several purposes: (1) to reflect the relative level of external versus internal benefits conferred by the grant program, (2) to prompt greater political and management interest in the grant program by elected and management officials of grantee organizations, and (3) to share the costs of the program and limit the fiscal commitment of the grantor government or entity by stimulating new investment by grantees in the program.
Studies done by the General Accounting Office (GAO) and the Advisory Commission on Intergovernmental Relations (ACIR) have found that federal grant-matching requirements often fall well short of these objectives. First, most matching requirements are not chosen by the Congress or agencies to reflect any analysis of external versus internal benefits. Little or no matching, for instance, has been required in the grants funding areas with high internal benefits such as community development or law. Moreover, the formal matching requirement does not frequently encompass all significant spending by nonfederal parties on federally assisted programs—the degree of “overmatch” by recipients is often extensive.
The second objective of promoting management interests is important because, absent a strong financial stake, grants can erode incentives for state and local managers and policy makers to ensure that the program is implemented in the most efficient and cost-effective manner. GAO and ACIR studies documented that federal grants with no state funding receive less real attention by legislative staff, reflecting both the lack of financial payoff and relatively limited discretion available for most categorical programs. If a program is largely or completely funded with federal funds, any savings achieved generally accrue to the federal government alone. For instance, while states’ management commitment is critical to reducing food stamp overpayments, states face a disincentive because savings from efforts to ferret out fraud and waste largely accrue to the federal government since the benefits are entirely federally financed.
Studies also suggest that the presence of high nonfederal matching rates requiring new cash investment by grantees in fact can call forth greater attention by state and local officials by providing them with a fiscal stake and managerial interest in the program. However, most federal matching requirements are not sufficiently stringent to call forth additional fiscal effort or to encourage stronger management involvement or commitment by grantees. There has been a secular trend over the years to reduce or drop matching grants from the federal arsenal. Before 1935, for instance, most grants had matching and nearly all had a 50 percent nonfederal match. By 1995, 50 percent of all grants had no matching requirement at all. Of the 87 largest programs comprising 95 percent of federal grant outlays in 1995, 46 programs had no match and only 3 had nonfederal matching requirements of 50 percent or greater. Even when matching is required, the nonfederal share can be provided by “in-kind” resources rather than the allocation of new cash investment. In-kind contributions may consist of noncash contributions such as charges for indirect costs, valuation of real property, equipment and services benefiting the grant program, as well as the value of volunteers. Many nonfederal officials contacted in a GAO study regarded in-kind matching grants to be “free.”
Finally, the third objective of controlling federal costs by stimulating nonfederal spending is not advanced through these kinds of low matching requirements found in most grant programs. Lacking a requirement to invest new resources, as noted above, satisfying most matching requirements entails more of an accounting exercise than a reallocation of resources toward federal program goals. Moreover, matching is not necessary to control federal grant outlays, since the vast majority of grants are allocated through closed-ended formulas where the funding for each grantee is predetermined by law and a fixed federal appropriation. Matching is only relevant to control federal costs when federal funds are provided on an open-ended basis through reimbursement of all claims—in few programs that use open-ended funding, such as Medicaid, the nonfederal match plays the vital role of providing the only incentive to limit the outlays of federal funds.
As the foregoing suggests, strong matching requirements are the exception rather than the rule in federal grant programs. In fact, strong matching requirements present a tradeoff to federal policy-making officials. Many grants have the objective of providing a minimum floor of services across the nation and across all states or localities. From this perspective, strong matching requirements—although prompting greater deliberation and oversight by state and local officials—may also serve to discourage participation by these governments, thereby frustrating the provision of uniform minimum services throughout the country. The impacts of matching on grant participation can be particularly severe for fiscally hard-pressed entities for whom raising the nonfederal share constitutes a greater burden than for wealthier jurisdictions. Federal policy makers can adjust matching rates to reflect the differential fiscal capacity across the nation by varying the matching formula or by waiving matching for certain governments. Indeed, the federal Medicaid program allocates federal funds through a matching formula that provides a higher federal share to states with lower per capita incomes, as a proxy for fiscal capacity. However, for most programs, the matching rate is either lowered or eliminated, recognizing the importance that federal policy makers place on ensuring maximum participation in grant programs.
Advisory Commission on Intergovernmental Relations, Categorical Grants: Their Role and Design (Washington, DC: ACIR, 1978); U.S. General Accounting Office, Federal Grants: Design Improvements Could Help Federal Resources Go Further, AIMD-97-7 (Washington, DC: GAO, 1996); U.S. General Accounting Office, Proposed Changes in Matching and Maintenance of Effort Requirements (Washington, DC: GAO, 1980), 18; and U.S. General Accounting Office, Proposed Changes in Federal Matching and Maintenance of Effort Requirements for State and Local Governments, GGD-81-7 (Washington, DC: GAO, 1980).