Formula Grants - Federalism in America (2023)

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.

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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).


    • 1.1 Medicaid: The Most Expensive Federal Matching Grant
    • 4.1 Elizabeth G. Williams
(Video) What Is A Formula Grant?


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.

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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.

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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.


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).

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Elizabeth G. Williams

Last updated: 2006

SEE ALSO: Education; Great Society; Medicaid; State Legislatures; Transportation Policy; USA PATRIOT Act of 2001; Welfare Policy

(Video) The Constitution, the Articles, and Federalism: Crash Course US History #8


What are formula grants in the US? ›

The Children's Bureau administers formula grants to support states and tribes in operating their child welfare systems, including child maltreatment prevention, foster care, adoption, and the information systems necessary to support these programs. States and tribes do not compete for these funds.

What is an example of a federal formula grant? ›

Examples of formula grants include the federal governments' contributions to state and local governments for programs like Medicaid health insurance, public education, and transportation infrastructure. Many new programs created through the Infrastructure Investment and Jobs Act are formulaic grants.

What are the 4 types of federal grants? ›

Four Types of Federal Grant Funding to Achieve Your Mission and Reach Your Goals
  • Competitive Grant – Based on the Merits. ...
  • Formula Grant – Based on Predetermined Award. ...
  • Continuation – Renewal Grants. ...
  • Pass-Through Grants – Issued by a Federal Agency.
Oct 6, 2020

What are the 3 types of federal grants? ›

ED offers three kinds of grants:
  • Discretionary grants: awarded using a competitive process.
  • Student loans or grants: to help students attend college.
  • Formula grants: uses formulas determined by Congress and has no application process.

What is a formula grant quizlet? ›

formula grants. a category of categorical grants; allocated to state and local governments with specific requirements listed in the state or in the administrative agencies regulations.

Who funds formula grants? ›

Juvenile Justice Specialists in each state administer the funding through subgrants to units of local government, local private agencies, and Indian Tribes for programs in accordance with legislative requirements. Only state agencies, designated by the Governor, are eligible to apply.

What are federal grants in simple terms? ›

A Short Summary of Federal Grants

A grant is a way the government funds your ideas and projects to provide public services and stimulate the economy. Grants support critical recovery initiatives, innovative research, and many other programs listed in the Catalog of Federal Domestic Assistance (CFDA).

What are two examples of grant? ›

A grant is a gift to an individual or company that does not need to be paid back. Research money, education loans, and stock options are some examples of grants.

What is the most common type of federal grant? ›

Programmatic or project grants are the most common category, and they are intended to realize special projects or support programming. Grants can be used to fund supplies or materials necessary for the program.

What are the most common grants? ›

Program/project grants

This is the most common type of grant. Program/project grants specify that funding may only be used to support the program or project referenced in your proposal.

Is the US government giving out grants? ›

The government does not offer "free money" for individuals. Federal grants are typically only for states and organizations. But you may be able to get a federal loan for education, a small business, and more. If you need help with food, health care, or utilities, visit's benefits page.

Is a grant a loan? ›

Loans. The main difference between a grant and a loan is repayment. A loan requires you to repay the money you borrow, whereas a grant does not. Grants are, essentially, a gift.

What is the difference between competitive and formula grants? ›

Competitive grants are discretionary, which means they don't have to be awarded. If the granting agency doesn't like any of the proposals, it is not legally obligated to award a grant at all. Formula grants are awarded to support larger programs. Think Medicaid or TANF.

What is the difference between a formula grant and a project grant? ›

What is the difference between a formula grant and a project grant? Formula grants are governed by demographic formulas in a given area. By contrast, project grants allow the national government greater discretion in deciding how much aid will be given to a project.

What are formula and project grants? ›

Project grants are a type of categorical grant. Projects are grants given by the federal government to state and local governments on the basis of merit. The other type of categorical grant is a formula grant. These grants, rather than being based on merit, are distributed to all states according to a formula.

Are formula grants categorical? ›

There are officially four types of categorical grants: project grants, formula grants, formula-project grants, and open-ended reimbursement grants.

What are the different types of federal grants to states? ›

The three general types of federal grants to state and local governments are categorical grants, block grants, and general revenue sharing (see Table 1).

How are formula grants distributed? ›

Formula grants are distributed at the state level, and are typically calculated based on such factors as the proportion of the population that is unemployed or below poverty level; the rate of infant mortality; and state population or density of housing.

Where did grants come from? ›

Federal grants are funded by Congress through the annual appropriations process.

What are the two main sources of funding for grants? ›

The two primary sources of grant money are public and private funds. Public funds are obtained from governmental units, such as federal, state, and local agencies.

What are federal grants based on? ›

The amount depends on your financial need, costs to attend school, status as a full-time or part-time student, and plans to attend school for a full academic year or less. Learn more about Pell grants.

What is the advantage of federal grants? ›

Non-Repayable: The biggest benefit of government grants is that they are not expected to be repaid — consider them as a donation from the government.

Is a federal grant income? ›

Generally, you report any portion of a scholarship, a fellowship grant, or other grant that you must include in gross income as follows: If filing Form 1040 or Form 1040-SR, include the taxable portion in the total amount reported on Line 1a of your tax return.

What are formula grants used for? ›

Formula grants are funding programs that you do not compete for, even though you must submit an application and meet other specified requirements. They ensure that designated recipients will receive funds, and are usually administered and managed by State Administering Agencies.

How many grants are there in the United States? ›

Centralizing more than 1,000 different grant programs across federal grant-making agencies awarding more than $500 billion annually.

How will grant funds be used answers? ›

Grant funds are usually used to finance the investigation of a business concept, provide working capital for ramping-up a business or other purpose. Grant funds can be used to supplement existing funds which may include funds provided by the farm group itself.

What is the largest federal grant to states? ›

Medicaid is not only the largest of all grants to states; it is also the largest category of grants in all but one state.

What are the pros and cons of a federal grant? ›

Financial Aid Grants for College
Pros of College GrantsCons of College Grants
Grants don't need to be repaid, assuming the requirements are met (maintaining a certain GPA, completing the program, etc.).There are fewer grant options compared to scholarships because grants are mostly based on financial-need.
3 more rows

What is the grants Common Rule? ›

Common Rule? On March 12, 1987, the President directed the Federal grantmaking agencies to issue a grants management common rule to adopt governmentwide terms and conditions for grants to States and local governments.

What is the largest grant program in the nation? ›

The Pell Grant program is America's largest student aid program that provides grants to the nation neediest students to attend college.

What are 3 cons about grants? ›

In reality, grants can often become a source of frustration and stress for a non-profit.
  • Grants Cannot Help You Start Off. ...
  • Grants Come with a Lot of Strings Attached. ...
  • Grants Take a Long Time to be Approved. ...
  • Grants Have Complex Reporting Requirements. ...
  • Grants are Short-Termed.

What percentage of grants get funded? ›

There is no standardized scoring entity, but, depending on where you do your research, you'll find sources stating that 1 in 10 applications are approved for funding, 20% of federal grants are approved, or up to 30% of grant requests receive a favorable response.

Does the US government grant rights? ›

The Bill of Rights is the first 10 Amendments to the Constitution. It spells out Americans' rights in relation to their government. It guarantees civil rights and liberties to the individual—like freedom of speech, press, and religion.

What is the easiest government loan to get? ›

Common loan programs include: Stafford Loans: These are easy to qualify for, and you might receive interest subsidies. PLUS Loans: Parents can borrow substantial amounts, but that means parents will have to repay. 2.

Are grants treated as income? ›

A good general rule to keep in mind is that all income, regardless of its source, is considered taxable income unless the tax law specifically states an exception. Since a grant is considered income, it is considered taxable unless the law has provisions that state otherwise.

What is the difference between grant and money? ›

Summary: Loans are borrowed from a person or financial institution and must be repaid with interest. Grants do not have to be repaid and can be considered free money. There are pros and cons to both, and it comes down to what your business needs funding for.

What type of income is a grant? ›

In most instances, grant funds are counted as taxable income on your federal tax return. This means that you will be required to pay taxes on these funds. The financial impact of a grant come tax time depends on multiple factors, including your business structure.

What is the difference between funding and grant? ›

The main difference between grants and funding is that grants don't need to be paid back. This results in stiff competition and an involved application process for grants. Funding, which can come from a traditional loan or an alternative method, is more accessible to some businesses.

What are 3 pros and 3 cons about grants? ›

8 Advantages and Disadvantages of Business Grants
  • Pros of Business Grants.
  • Free Money. The number one advantage of business grants is that they are essentially free money. ...
  • Accessible Info. ...
  • Waterfall Effect. ...
  • Gain Credibility. ...
  • Cons of Business Grants.
  • Time-Consuming. ...
  • Difficult to Receive.

What is an f1 grant? ›

F-1 Classification

F-1 nonimmigrant classification is granted to students to pursue a full course of study to achieve specific educational or professional objective(s) at an approved U.S. academic institution. F-1 students are sponsored by an academic institution, often a university.

What is a hard match in federal grants? ›

Cash match (hard) includes cash spent for project-related costs. An allowable cash match must include costs which are allowable with Federal funds, except acquisition of land, when applicable.

What is a grant funding strategy? ›

Grantmaking strategy is the mission-driven plan funders use to guide, execute, and evaluate giving programs. It includes the type of initiatives your grants will support, your desired outcomes, the extent of your investment (total and per award), and how you'll execute your program.

What is formula based funding? ›

Definition. Formula funding is the result of applying a mathematical formula to decide on the allocation of resources to higher education institutions. The formula normally includes criteria that relate to institutional size (e.g., number of enrolments) as well as unit costs (e.g., a normative allocation per student).

What are the two types of categorical grants and aid? ›

The way categorical grants are distributed is either through project grants or formula grants.

How do I know if a grant is legitimate? ›

Here are five ways to spot a grant scam:
  1. Did you apply for a grant? ...
  2. Is a fee involved? ...
  3. Is the grant for business or personal use? ...
  4. What agency does the issuer represent? ...
  5. Were you asked for either your personal or your company's ID or your bank account information?

What are formula based grants? ›

Formula grants are funding programs that you do not compete for, even though you must submit an application and meet other specified requirements. They ensure that designated recipients will receive funds, and are usually administered and managed by State Administering Agencies.

What is the difference between project and formula grants? ›

Project grants are a competitive process wherein different states or localities apply for a specific grant. Formula grants, however, are distributed by the federal government by calculating each state's share of the funds based on a mathematical formula, often involving demographics of the state, income, and education.

What are the two main types of grants? ›

When considering grants, these programs can be broadly categorized as those awarded by the federal government and those awarded by non-federal entities. Within these two categories are a variety of funding sources and program types.

What are examples of grants? ›

A grant is a gift to an individual or company that does not need to be paid back. Research money, education loans, and stock options are some examples of grants. Companies sometimes offer stock options as a way to incentivize performance.

What is the purpose of grant funding? ›

A grant is a way the government funds your ideas and projects to provide public services and stimulate the economy. Grants support critical recovery initiatives, innovative research, and many other programs listed in the Catalog of Federal Domestic Assistance (CFDA).

Are funds and grants the same? ›

Simply, a contribution is a gift of funds, typically with no stipulations (though more on that later), frequently given by individuals. A grant is funds awarded as part of an application process, usually given by a foundation that sets specific rules for allocating money.

What is the most common type of grant? ›

Program/project grants

This is the most common type of grant. Program/project grants specify that funding may only be used to support the program or project referenced in your proposal.

What is a categorical formula grant? ›

Categorical grants are funds the federal government gives to state and local governments to spend on specific activities within specific programs. The federal government usually requires localities and states to apply for categorical grants for specific purposes.

What is a project based grant? ›

A “project-based” grant request is an application for funding for a specific project, program or purchase.

What are the 5 types of grant proposals? ›

Common Types of Grant Proposals
  • Capital Grants. It is challenging to build in capital expenditures to a nonprofit budget. ...
  • Program / Project Grants. The most common grant proposal is one requesting support for a program or project. ...
  • General Operating Grants. ...
  • Matching / In-Kind Grants.
Apr 11, 2023

What is the difference between a grant and? ›

A loan requires you to repay the money you borrow, whereas a grant does not. Grants are, essentially, a gift. In other words, they're non-repayable. Grants may be awarded by government departments, trusts, or corporations and given to individuals, businesses, educational institutions, or non-profits.


1. The Constitution, the Articles, and Federalism: Crash Course US History #8
2. Categorical, Block, and Project Grants Explained
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3. Federalism and Power in the United States
(Professor Leckrone)
4. Categrorical Grants
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5. Chapter 03: American Federalism
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6. AP Gov Review: Federalism, Devolution, Grants, Unfunded Mandates - Chapter 3, Part 3
(Kelsey Falkowski)


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