The Federal Government in a

Federal System:

Current Intergovernmental Programs and

Options for Change

A CBO Study

August 1983

Congress of the United States

Congressional Budget Office

as

THE FEDERAL GOVERNMENT IN A FEDERAL SYSTEM:

CURRENT INTERGOVERNMENTAL PROGRAMS AND

OPTIONS FOR CHANGE

The Congress of the United States

Congressional Budget Office

For sale by the Superintendent of Documents, U.S. Government Printing Office (Washington, D.C. 20402
All years are fiscal years unless otherwise indicated. Budget data for

1983 include all appropriations authorized up to August 15, 1983. In

particular, they include supplemental appropriations under Public Law 98-8

and Public Law 98-63.
PREFACE

As federal involvement in the activities of state and local governments has grown, so has criticism of the intergovernmental system. Problems have developed, in part, because there are no generally accepted

criteria to define and limit the federal role. This study, undertaken at the

request of the Subcommittee on Intergovernmental Relations of the Senate

Committee on Governmental Affairs, develops guidelines that could be used

to identify activities for which some federal role is important, and applies

them to current intergovernmental programs. In keeping with CBO's

mandate to provide objective analysis, the study offers no recommendations.

The study was prepared by Sandra Christensen, Roberta Drews (who

wrote the community and economic development sections), Patricia Ruggles

(income security and health), and Suzanne Schneider (public works infrastructure). Sandra Christensen, Roberta Drews, and Patricia Ruggles are in

CBO's Human Resources and Community Development Division under the

direction of Nancy Gordon and Martin Levine. Suzanne Schneider is in

CBO's Natural Resources and Commerce Division under the direction of

David Bodde.

Many other people at CBO contributed to the paper. Special thanks

are due to Richard Mudge, David Lewis, and Kenneth Rubin of CBO's

Natural Resources and Commerce Division. Others who helped substantially

include Thomas Buchberger, Daniel Koretz, Reuben Snipper, and Bruce

Vavrichek of the Human Resources and Community Development Division;

Robert Lucke, Pearl Richardson, and 3ames Verdier of the Tax Analysis

Division; Priscilla Aycock, Richard Emery, Charles Richardson, Charles

Seagrave, and Robert Sunshine of the Budget Analysis Division, and Damian

Kulash, now with the National Academy of Sciences. Marie Korn and

Rebecca Schmidt assisted by compiling program information during their

internships at CBO.

The paper was edited by Francis Pierce, assisted by Nancy Brooks.

Mary Braxton, Nor ma Leake, and Kathryn Quattrone typed numerous drafts

of the paper. The authors are especially appreciative of the work of Mary

Braxton, who prepared the paper for publication.

Alice M. Rivlin

Director

August 1983

111

CONTENTS

PAGE

SUMMARY xi

CHAPTER I. INTRODUCTION 1

The Problem—How to Define An

Appropriate Federal Role • 2

Plan of the Study 2

CHAPTER II. FRAMEWORK FOR ANALYSIS 5

Reasons for Federal Involvement 5

Forms of Federal Involvement 7

Some Problems Cited in Current

Programs 9

Ways to Modify Current Programs 11

CHAPTER III. THE CURRENT INTERGOVERNMENTAL

STRUCTURE 13

The Present Grants System • 17

The Evolution of the Grants System 20

CHAPTER IV. PUBLIC WORKS INFRASTRUCTURE AND

DEVELOPMENT PROGRAMS 29

Basis for Federal Involvement 30

The Current Federal Role 31

Options for Change ^7

CHAPTER V. EDUCATION, EMPLOYMENT, AND

SOCIAL SERVICE PROGRAMS 59

Basis for Federal Involvement 59

The Current Federal Role 61

Options for Change 70
CONTENTS

PAGE

CHAPTER VI. INCOME SECURITY AND HEALTH

PROGRAMS 81

The Current Federal Role 82

Options for Modifying the

Federal Role 90

CHAPTER VII. FEDERAL AID FOR GENERAL PURPOSES 99

Basis for Federal Involvement 99

The Current Federal Role 101

Options for Modifying the General

Revenue Sharing Program 104

Relinquishing Federal Tax Bases HI

APPENDIX A. BACKGROUND FOR PUBLIC WORKS

INFRASTRUCTURE AND DEVELOPMENT

PROGRAMS 119

APPENDIX B. BACKGROUND FOR EDUCATION,

EMPLOYMENT, AND SOCIAL SERVICE

PROGRAMS 139

APPENDIX C. BACKGROUND FOR INCOME SECURITY

AND HEALTH PROGRAMS 171

VI
TABLES

PAGE

TABLE 1. PERCENTAGE DISTRIBUTION OF FEDERAL

GRANT-IN-AID OUTLAYS BY FUNCTION,

SELECTED YEARS 18

TABLE 2. OUTLAYS FOR GENERAL-PURPOSE, BROADBASED, AND OTHER GRANTS, SELECTED

YEARS 25

TABLE 3. GRANT OUTLAYS BY PROGRAM AREA:

1981, 1982, AND 1983 27

TABLE 4. FEDERAL FUNDING FOR SELECTED PUBLIC

WORKS INFRASTRUCTURE AND DEVELOPMENT PROGRAMS 33

TABLE 5. FEDERAL FINANCING AND PRO3ECT

RESPONSIBILITY FOR SELECTED PUBLIC

WORKS INFRASTRUCTURE AND DEVELOPMENT PROGRAMS 34

TABLE 6. ESTIMATED BUDGETARY IMPACT OF

SELECTED FEDERALISM OPTIONS FOR

PUBLIC WORKS INFRASTRUCTURE, 1984 49

TABLE 7. FEDERAL FUNDING FOR EDUCATION,

EMPLOYMENT, AND SOCIAL SERVICE

PROGRAMS 62

TABLE 8. SUMMARY DESCRIPTION OF FEDERAL

GRANT PROGRAMS FOR EDUCATION,

EMPLOYMENT, AND SOCIAL SERVICES • 63

TABLE 9. FEDERAL EXPENDITURES FOR INCOME

SECURITY AND HEALTH PROGRAMS THAT

PROVIDE BENEFITS FOR INDIVIDUALS 84

TABLE 10. POPULATIONS SERVED AND JURISDICTIONS RESPONSIBLE FOR MAJOR

PUBLIC ASSISTANCE PROGRAMS 86

vu
TABLES (Continued)

PAGE

TABLE 11. FEDERAL GRANTS FOR GENERAL PURPOSE

FISCAL ASSISTANCE 102

TABLE 12. TAX EXPENDITURES FOR GENERAL

PURPOSE FISCAL ASSISTANCE 112

TABLE 13. TAX REVENUES BY SOURCE AND LEVEL

OF GOVERNMENT, 1981 115

TABLE A-l. FEDERAL FUNDING FOR HIGHWAYS,

1982 AND 1983 120

TABLE A-2. FEDERAL FUNDING FOR PUBLIC

TRANSIT, 1982 AND 1983 123

TABLE A-3. FEDERAL FUNDING FOR AIRPORTS,

1982 AND 1983 126

TABLE A-4. FEDERAL FUNDING FOR WATER

RESOURCES, 1982 AND 1983 • 128

TABLE A-5. FEDERAL FUNDING FOR WASTEWATER

TREATMENT, 1982 AND 1983 • • • 130

TABLE A-6. FEDERAL FUNDING FOR THE COMMUNITY DEVELOPMENT BLOCK GRANT

PROGRAM, 1982 AND 1983 132

TABLE A-7. FEDERAL FUNDING FOR ECONOMIC

DEVELOPMENT, 1982 AND 1983 137

TABLE B-l. GRANTS FOR THE EDUCATION OF

STUDENTS WITH SPECIAL NEEDS,

1982 AND 1983 •

TABLE B-2. GRANTS FOR GENERAL EDUCATION

AND RELATED PROGRAMS, 1982

AND 1983

via
TABLES (Continued)

TABLE B-3.

TABLE B-4.

TABLE C-l.

TABLE C-2.

TABLE C-3.

TABLE C-<f.

TABLE C-5.

TABLE C-6.

GRANTS FOR EMPLOYMENT ASSISTANIPF PROGRAMS 1 9X? ANH 195O

GRANTS FOR SOCIAL SERVICE

PROGRAMS 19X? A1SIH 19X3

FEDERAL OUTLAYS FOR INCOME SECURITY

FEDERAL OUTLAYS FOR HOUSING ASSISTANPF PROGRAMS 19X9 ANIH 19X1

FEDERAL OBLIGATIONS FOR CHILD

MI ITRTTTONI PROGRAMS 19X2 A1SJH 19X3 ......

FEDERAL OUTLAYS FOR OTHER INCOME

FEDERAL OUTLAYS FOR SELECTED HEALTH

nARP PROPRAMS 1 9X? ANIH 19X3

FEDERAL APPROPRIATIONS FOR HEALTH

l~ADP r.OAWT PROrtPAM*; IQX9 ANIH 1<5X^

PAGE

... 1 59

... 160

... 17?

... 179

... ig3

... 1 X6

... 1 90

IX
FIGURES

PAGE

FIGURE 1. GOVERNMENT SPENDING AS A PERCENT OF

GROSS NATIONAL PRODUCT, 1929-1982

FIGURE 2. TOTAL FEDERAL SPENDING AND DIRECT

FEDERAL SPENDING AS A PERCENT OF

SPENDING BY ALL GOVERNMENTS,

1929-1982 15

FIGURE 3. FEDERAL GRANTS AS A PERCENT OF

STATE AND LOCAL EXPENDITURES,

1929-1982 16

FIGURE 4. FEDERAL GRANTS IN CONSTANT

DOLLARS, 1940-1982 21
SUMMARY

The federal government currently funds almost 300 different programs

that provide grants to state and local governments. These grants cover a

wide variety of government activities, and will cost nearly $100 billion in

1983--more than 10 percent of the total federal budget. In spite of this

myriad of federal programs and the large federal financial commitment, no

clear set of principles is used to determine the need for federal

participation, nor are there any generally accepted rules for deciding the

form that federal participation should take. As a result, the current grants

system is often perceived as disorganized and wasteful. In addition, if the

federal government intervenes in areas where there is no clear national

purpose, it may inappropriately limit state and local choices, leading to a

misallocation of resources and to unnecessary administrative costs.

In an attempt to deal with these perceived problems, in 1982 the

Administration proposed a massive realignment of responsibilities between

the federal government and the states. Under this proposal, the federal

government would have turned over to the states primary responsibility for

current programs in areas such as cash public assistance, education, social

services, and transportation, while assuming greater responsibility for some

health services for the poor. In order to help states fund their expanded

responsibilities, some federal tax bases would have been relinquished to

them. In large part, the rationale for this proposal was that state and local

governments are generally closer to the groups served, and therefore would

be able to design and run more efficient and responsive programs. The

proposal met with opposition, however, both from members of Congress who

felt that such a major realignment would leave important national interests

unmet, and from state and local governments that doubted their ability,

even with the additional revenue sources, to pay for the new responsibilities

proposed for them.

Although the Administration's proposal was not enacted, it did help to

focus attention on the need for some reorganization of the intergovernmental structure. Under the federal system, states and localities are

primarily responsible for the provision of local public services—police

protection, for example. The primary role of the federal government is to

coordinate activities between states and to provide services with morethan-local benefits, such as national defense. In general, federal

participation is necessary only if there is an important national purpose that

would not be served without federal involvement. Identification of such

XI
areas can be difficult and controversial, however. The aim of this paper is

to propose some guidelines to aid in this identification, and then to apply

them to options for modifying federal responsibilities in four major areas of

the budget. \J

HISTORY AND CURRENT STATUS OF THE GRANTS SYSTEM

Federal grants to states and localities grew very rapidly in the 1960s

and 1970s, largely in response to changing perceptions of the appropriateness of government intervention in solving a wide variety of social and

environmental problems. Funding through the intergovernmental grants

system developed because, although states and localities had the administrative structure needed to address these problems, they often lacked the

ability or the willingness to finance programs in these areas.

By the start of 1981 there were four times as many grant programs as

there had been in 1960, and real spending levels—that is, spending adjusted

for inflation—had increased more than four times (see Summary Table). The

scope of areas in which grants were funded had also increased considerably—in 1960, the bulk of federal grant money went to programs for

income security and transportation, while by 1981 there were also large

programs for education, training, social services, health care, environmental

management, and general government. In percentage terms, the largest

growth was in health care programs (principally Medicaid) and energy

spending; the health care area now has the second highest funding level

overall, after income security.

In recent years, however, attention has turned from developing new

programs toward improving existing ones. In part, this new focus has been a

response to the haphazard growth of the previous years—a desire to step

back and evaluate the results of that growth. It was also, in part, a response

to economic and fiscal conditions that pressed the Congress to reduce

federal spending in general. As a result, spending for grants has declined in

real terms since 1978, and in 1982 outlays fell below the 1981 level in

nominal terms. The number of grants has also dropped--from more than 400

in 1980 to under 300 in 1982--through consolidation into block grants in

some areas and elimination of funding in others.

1. Most programs discussed in this paper are grants, but some non-grant

programs have also been included because they provide services

similar to those available through grants or because they have other

intergovernmental ramifications.

Xll
SUMMARY TABLE. GROWTH IN FEDERAL OUTLAYS FOR GRANTS, BY FUNCTION (In billions of current dollars)

Program Areas

Infrastructure and Development

Energy

National Resources and

Environment

Transportation

Community and Regional

Development

Education, Training, and

Social Services

Income Security and Health

Income Security

Health

General Purpose Fiscal Assistance

Other a/

Total Outlays for Grants

1960

6

108

2,999

109

526

2,635

214

159

264

7,020

Outlays

1970

25

429

4,538

1,780

6,390

5,819

3,850

430

753

24,014

1980

499

5,362

13,087

6,486

21,862

18,495

15,758

8,478

1,445

91,472

Percentage

Growth in

Real Terms

1960-1980

2,420

1,404

32

1,703

1,101

186

1,819

1,441

58

334

1982

Outlays

509

4,871

12,171

5,379

16,589

21,930

18,839

6,347

1,559

88,194

Percentage

Change in

Real Terms

1980-1982 a/

-7

-17

-15

-24

-36

+2

-3

-37

-9

-17

SOURCE: Office of Management and Budget for outlays. Specialized deflators for each spending category were

used.

a. Includes grants for national defense, agriculture, commerce, veterans' programs, administration of justice, and

general government.
In a period of budget cutbacks, the effective use of federal fundsincluding the elimination of unnecessary or duplicative efforts—becomes

especially important. Although the committee structure of the Congress

makes it difficult to coordinate program changes in different areas, a

consistent set of guiding principles to determine the need for federal

involvement in each area could help to develop a better-organized grants

system in the coming years.

REASSESSING THE FEDERAL ROLE

There are two basic questions to consider in evaluating federal

involvement in particular state or local activities. First, is federal

involvement necessary? Second, if it is, what form should that involvement

take? These can be difficult and controversial questions, and there are few

programs for which the answers are clear. Nevertheless, the aim of this

paper is to set out some criteria to use as guidelines.

Before deciding if the federal government should intervene, it is

necessary to decide if a response is needed from any level of government.

Three major concerns that may justify government intervention are:

o Spillovers or external effects—that is, costs or benefits from

particular activities that cross jurisdictional borders;

o Benefits from centralized coordination—efficiency or other gains

from centralized planning and coordination of services; and

o Poor distribution of resources—that is, inequities or hardships that

are unusually severe for certain groups or regions in the country.

Once a need for some governmental role has been established, the

justification for federal—rather than state or local—involvement depends on

the extent to which the problem is non-local in nature; that is, the extent to

which there are important national interests that would not be met without

federal involvement. The existence of interstate spillovers, the need for

administrative coordination between states, or the desire for redistribution

among states, for example, would all constitute such national interests.

If federal involvement seems to be necessary, the form this involvement should take also depends to some extent on the reason for federal

intervention. If the rationale for federal participation stems from the

existence of spillovers, for example, federal subsidies designed to curtail

xiv
activities with external costs or to expand activities with external benefits

are appropriate. Where the basis for federal activity is the need for

centralized administration, direct federal provision may be most effective.

When the federal interest involves the distribution of resources, direct

federal provision or a narrowly focused categorical program would be necessary if the major consideration was the supply of particular public goods or

services or the welfare of particular recipients within jurisdictions, while

more broadly defined grants programs or general revenue sharing may be

appropriate if the concern is instead the general level of resources available

to states and localities for providing large classes of public services.

This paper applies these criteria for government involvement to programs in three major sectors of the budget: infrastructure and development; education, employment, and social services; and income security and

health. In each of these areas, the current program structure is analyzed,

and options for realignment are examined. In addition, a final chapter

discusses general revenue sharing and the relinquishing of federal tax bases.

OPTIONS FOR MODIFYING GRANTS PROGRAMS

Some broad categories of options for modifying the federal role in

current programs can be identified. The major approaches examined in this

study are:

o Eliminating federal funding;

o Changing funding provisions; and

o Changing program rules.

Eliminating Federal Funding

Eliminating federal funding might be appropriate for programs where

there is not now a strong interjurisdictional basis for involvement—that is,

where there are no interstate spillovers, efficiency gains, or distributional

issues. In some cases, there may originally have been such a basis, which

has now become outdated or unnecessary as circumstances have changed. In

others, the basis for federal involvement may have been limited from the

start.

An example of an area where the elimination of federal funding might

be appropriate is the support provided for roads of predominantly local

importance under Federal-Aid Highway programs. Such roads include

xv
Secondary System (rural) and Urban System routes—roads that are probably

not essential to a national, interconnected system of highways. Elimination

of federal funding for them, on the other hand, would impose additional

financial burdens on state governments, although these could be offset, if

desired, by reducing the federal tax on motor fuels (which would allow

higher state taxes) or by allocating part of the revenues from the federal

fuel tax to the states.

Elimination of funding might also be appropriate in a number of other

grant programs. Examples include operating subsidies for mass transit,

general education grants, and some child nutrition programs. The

advantages and drawbacks of eliminating these programs are discussed in

the relevant chapters of this study.

Changing Funding Provisions

Changes in the funding provisions for federal grants could take several

different forms. For example, in some programs it might be appropriate to

change from a project-based allocation of funds to a formula-based

approach. In others, an alteration in the allocation formula might improve

the effectiveness of a program. Finally, in some cases it might be beneficial to alter the cost-sharing arrangements between recipient governments

and the federal government. Such changes could help to redistribute federal

resources toward groups with greater needs, take better account of spillover

costs or benefits, or increase administrative efficiency.

Changing from project funding to formula funding in the bilingual

education program might be desirable, for example, in order to compensate

localities facing higher education costs as a result of federal immigration

policy and civil rights laws, which require schools to provide special

language services for non-English-speaking students. Currently, less than 20

percent of students requiring services are in federally funded programs. A

formula-based federal program could distribute funds to all school districts

based on the number of non-English-speaking students and the average

additional costs of serving such children. This option would increase federal

spending, however, and would change the current program's purpose from

capacity-building to continuing support.

General revenue sharing is an example of a program where changing

the allocation formulas might be appropriate. The formulas for allocating

funds to local governments, both among and within states, are based on

population, tax effort, and per capita income. Per capita income is included

to measure fiscal capacity but does so poorly, because income is only one of

several important components of state and local tax bases. In addition,

xvi
because severance taxes are included in the tax effort calculation,

substantial GRS payments are allocated to local governments in energy-rich

states. The interstate allocation would be better targeted if tax effort was

eliminated from the formula altogether and a more comprehensive measure

of fiscal capacity was used, such as the Representative Tax System (RTS)

compiled by the Advisory Commission on Intergovernmental Relations. 21

On the other hand, the data required for updating the RTS depend in part on

nongovernment sources, so that new government data series might have to

be developed to implement this option.

An area where changing the cost-sharing ratio might be desirable is

capital grants for transit programs. The high federal share under current

law means that in most urban areas the availability of federal funds strongly

influences local transit priorities and encourages capital-intensive solutions

to transit problems. While the federal share of costs for these programs will

be reduced in 1984 from 80 to 75 percent, a further reduction to 60 percent

would double the local share from what it has been, thereby encouraging

localities to commit funds only to projects they really need and to focus on

the most cost-effective ways of moving people. On the other hand, such a

reduction could increase financial burdens for state and local governments,

and might cause particular hardship for some urban areas with limited

resources.

Changes in funding provisions might also be appropriate in a number of

other areas, such as highway aid, vocational education, some social service

programs, and some income security programs such as Aid to Families with

Dependent Children (AFDC). These and other examples are discussed at

greater length in the body of this study.

Changing Program Rules

Changes in program rules could be implemented in two major ways.

They could be designed either to consolidate diverse and possibly overlapping programs in a given area, or to change the degree of discretion allowed

to recipient governments in using funds. Where there is no overriding

national interest that calls for close federal control over the allocation of

program funds, greater state and local discretion can increase program

efficiency without jeopardizing federal goals.

2. Changes might also be beneficial in the intrastate allocation of GRS

payments. These are discussed in Chapter VII.

xvn

24-083 0-83- 2
Consolidating Existing Programs. A great deal of program consolidation has already taken place within the last two years. In the area of health

care, for example, more than 20 different programs were combined into four

block grants under the Omnibus Budget Reconciliation Act of 1981. The

addition of three smaller health care programs—family planning, migrant

health services, and black lung clinics—to the Primary Care Block Grant has

been proposed by the Administration but has not been enacted by the

Congress. Combining these categorical programs with the existing block

grant might reduce administrative costs somewhat and would give local

agencies—in many cases, the same agencies that already receive funds under

the Primary Care Block Grant—greater flexibility. On the other hand, if

agencies used their increased discretion to reduce the funds available for

the specific purposes of the existing categorical programs, significant

spillover benefits might be lost—for example, the prevention of unwanted

births to teenage mothers, which tend to increase federal welfare costs.

Consolidation might be beneficial in a number of other areas, such as

vocational education, some social services, and child nutrition. In addition,

some analysts have argued that a comprehensive restructuring and consolidation of the federal public assistance system could lead to both greater

efficiency and better targeting of federal resources.

Making Federal Regulations More Flexible. Relaxing federal regulations could be beneficial in a number of areas, including wastewater

treatment, mass transit, and highways. In most cases these changes would

logically complement the withdrawal or reduction of federal funds by giving

state and local governments more freedom in how they use their funds. For

example, if federal highway dollars for local roads were withdrawn, state

governments could be freed to apply their own road standards based on local

traffic characteristics. In the area of wastewater treatment, current

regulations embodied in the Clean Water Act could be interpreted more

flexibly in cases where there is little economic justification for requiring

the upgrading of wastewater treatment facilities. One example is coastal

systems in which natural currents are sufficient to prevent environmental

degradation from wastewater discharge. To handle such situations, sitespecific coastal waivers might be issued to allow less intensive treatment of

wastewater where warranted by local conditions.

XVlll
CHAPTER L INTRODUCTION

The federal government shares with states and localities the responsibility for carrying out a wide range of public activities, primarily through

grants-in-aid. In 1983, the Congress will channel about $100 billion to

nonfederal governments through nearly 300 grant programs. These federal

grants touch virtually every state and local activity, including programs that

provide cash or in-kind benefits for individuals (such as Aid to Families with

Dependent Children and Medicaid) and programs that finance government

services (such as education and road construction).

The extent of federal involvement in state and local affairs increased

substantially over the last two decades, in response to expanding perceptions

of the proper role of government and concerns about the capacity of

nonfederal governments to meet perceived needs. At the beginning of 1981,

the number of grant programs was four times what it had been in 1960, and

grants spending (in constant dollars) was more than four times the 1960

level, y During this time federal involvement also expanded greatly in

scope; in 1960 it supported primarily income security and transportation

programs, but by 1981 it included subsidies for environmental quality,

education, training, social services, health care, and general government

services as well.

As the ways in which the federal government interacts with state and

local governments increased in number and complexity, so did public

dissatisfaction with the intergovernmental system. Criticism of the system

is now widespread, including complaints that it contributes to waste through

programs that are ineffective, outdated, duplicative, and unnecessarily

inflexible. The criticism gathers force from the fact that, in some

instances, the rationale for federal involvement in any form is unclear,

while in others the form of federal involvement seems poorly designed to

address federal goals.

1. According to estimates by the Advisory Commission on Intergovernmental Relations (ACIR), 539 grant programs were authorized in 1981.

The Office of Management and Budget, which uses a different method

of counting separate programs, estimates that 360 intergovernmental

grants were funded in 1981. See ACIR, Significant Features of Fiscal

Federalism, 1981-82 Edition, p. 66.
The Administration sparked renewed interest in identifying the considerations underlying federal involvement by its 1982 proposal for a

massive realignment of responsibilities in current programs. If this proposal

had been enacted, the federal government would have assumed greater

responsibility for some health services for the poor, but lesser responsibility

in a number of other areas including cash assistance, education, social

services, and transportation. The proposal was not enacted, however,

because of disagreements about what role the federal government should

play in these areas.

THE PROBLEM-HOW TO DEFINE AN APPROPRIATE

FEDERAL ROLE

A major factor behind the development of the current wide-ranging

grants * system is the lack of generally accepted guidelines to identify

activities for which some federal role is important. Without such guidelines,

virtually any social problem left unattended by some state or local governments may lead to federal involvement, unless constrained by budgetary

concerns.

The problems of determining whether federal involvement is appropriate in a given program area, and if so what form it should take, are

perennial. The Congress makes such a determination, implicitly if not

explicitly, each time it authorizes a new program or modifies or eliminates

an existing program. The current grants system is the result of numerous

decisions of this sort made piecemeal by various committees of the

Congress as individual programs were considered. The fragmented nature of

this legislative process makes it difficult to eliminate poor coordination and

duplication among programs entirely, but the grants system might be

considerably improved if guidelines for federal involvement were developed

and used by the Congress.

PLAN OF THE STUDY

This study suggests guidelines the Congress could use to isolate areas

in which federal involvement is appropriate and to determine the form it

should take. In later chapters, it applies these guidelines to specific

programs.

The guidelines are developed in Chapter II as a framework for analysis.

Following Chapter III, which gives an overview of the current grants system,

the remainder of the study examines specific program areas more

thoroughly. Infrastructure and development programs are analyzed in
Chapter IV. Chapter V covers education, employment, and social service

programs. Chapter VI discusses income security and health programs, with

an emphasis on public assistance. Finally, revenue-sharing and other means

by which the resources of state and local governments might be increased

for general purposes are considered in Chapter VII.

CHAPTER IL FRAMEWORK FOR ANALYSIS

This chapter presents some general principles that could be used to

determine where there is an appropriate federal role and what might better

be left to nonfederal governments or to the private sector. It also describes

the forms of federal involvement now in use, some problems with them, and

general approaches for modifying current programs. This framework is the

basis for analysis of specific programs in later chapters.

REASONS FOR FEDERAL INVOLVEMENT

Concerns that might justify involvement by some level of government

are described first in this section, followed by discussion of the considerations that could help to determine whether federal involvement was required

or whether state or local government involvement would be sufficient.

A strong governmental role is most clearly justified by concern with

one or more of the following:

o Spillovers or external effects—costs or benefits from particular

activities that cross jurisdictional borders;

o The advantages of centralized coordination—efficiency or other

gains from centralized planning to insure coordinated services;

and

o Poor distribution of resources—inequities or hardships that are

unusually severe for certain groups or regions.

The relative importance of these concerns varies among programs. Spillovers and administrative efficiency are the dominant considerations underlying infrastructure programs, for example, while modifying the distribution

of resources is the dominant concern in public assistance programs.

Spillovers or External Effects

Some activities generate costs or benefits that spill over to other

communities. As an example, improper wastewater disposal may have little
effect on the community creating the problem, but impose substantial costs

on downriver communities because of the health, aesthetic, or cleanup costs

they must bear. The residents of the community causing the pollution may

lack the incentive to build sufficient wastewater treatment capacity unless

they receive a subsidy to cover the costs of the necessary equipment, or are

subject to pollution penalties more costly than the equipment. In general,

government intervention—through penalties or subsidies that reflect the

value of external effects—can result in the curtailment of activities with

spillover costs and the expansion of activities with spillover benefits.

Centralized Coordination

Government intervention is also appropriate when it makes possible

substantial efficiency or other gains from centralized control or administration. The Social Security system provides an example of gains from federal

administration, because it permits a uniform retirement plan based on

detailed records of individual contributions over a working lifetime that may

include employment with a number of employers in different states.

Development of the Interstate Highway System is another example, in which

federal coordination ensured that routes planned and standards used within

each state were consistent nationwide.

Distribution of Resources

The desire to relieve hardship or inequity has fostered numerous

government programs—at both the federal and state levels—intended to

redistribute resources among people or communities. The largest federal

redistributive programs provide benefits for individuals, either cash assistance as in the Aid to Families with Dependent Children (AFDC) program,

or in-kind assistance as in health care and nutrition programs. Other

redistributive programs increase public services available to disadvantaged

groups, such as compensatory education for the poor and special education

for handicapped children. Finally, community development programs and

revenue-sharing redistribute resources among political jurisdictions, in order

to promote economic development or to assure some basic level of public

services.

Additional Considerations

In many instances the scope of the problem is limited enough so that

intervention by state, or even local, governments would be sufficient if they

were willing to undertake it. If the scope of the problem crosses state
boundaries, however, federal (or multi-state regional) intervention may be

necessary. For example, spillover effects from municipal wastewater

pollution may not be limited to downriver communities within a state, but

may affect communities in neighboring states as well. Similarly, benefits

from centralized coordination may be limited to a metropolitan region in

the case of ground transportation, but be nationwide for national defense

and the air traffic control system. Redistribution of resources among states

requires federal intervention, although redistribution among regions within a

state need not.

In some instances more than one consideration may be involved, and

these sometimes conflict. Regulations to reduce spillover costs—pollution

from industrial production in a depressed region, for example—might impose

hardship on people in the region by raising production costs and thereby

reducing employment and income. Or benefits from programs to deal with

spillover effects might be swamped by their administrative costs, especially

if the external effects are limited.

FORMS OF FEDERAL INVOLVEMENT

Federal involvement can take a number of forms. In many instances,

the federal government pursues its goals directly, with program funding,

policy control, and administration independent of nonfederal governments—

as in the air traffic control system and Social Security. In other areas,

responsibilities are shared through grants-in-aid. In grant programs, administrative responsibilities are delegated to nonfederal governments, and some

responsibility for funding and policy control may be delegated as well. I/

Policy Choices in Shared Programs

Program responsibilities are shared in a variety of ways, as the result

of choices made about:

o How to allocate federal funds;

o Whether and how to require cost sharing by grant recipients; and

1. The Supplemental Security Income program is one exception to the

delegation of administration for intergovernmental programs. In this

program, administration may be either state or federal, whether or not

the federal minimum standard is supplemented by the state.
o How much policy control to delegate to grant recipients—that is,

how restrictive to make federal program rules.

Allocation of funds* Most programs providing benefits for individuals

are entitlements—where the program rules determine eligibility for benefits, but spending is a consequence of the number of eligible individuals who

apply. Federal funds for the major entitlements that are grants—AFDC and

Medicaid—are allocated among the states in accordance with state spending

under the programs. In nonentitlement programs—where the Congress sets

spending totals—funds may be allocated to selected applicants on a project

basis, or they may be allocated among states or localities according to

formulas that assure some payment to all qualifying areas. These formulas

generally include some measure of program need—such as road miles for

highway programs, and population for social service programs—and they may

include a measure of fiscal capacity as well. 2J

The method by which program funds are allocated has implications for

the way program benefits are distributed among the population. For entitlements, all individuals who satisfy the program's eligibility conditions and

who apply receive benefits. The federal government can control spending

for entitlements only by altering the program rules. For non-entitlements,

by contrast, the federal government controls spending by appropriation

limits, but total spending is often inadequate to provide services to all who

may qualify. When non-entitlement grants are allocated by project, the

federal government plays a large part in determining how services will be

distributed among all those who qualify for them, but it has no such

discretion when non-entitlement grants are allocated by formula.

Cost Sharing, In current entitlement programs, cost sharing—if any—

takes one of two forms. The federal government may pay 100 percent of a

minimum benefit standard, as in the Supplemental Security Income (SSI)

program, permitting states to provide supplemental benefits entirely at

their own expense. Alternatively, as in the AFDC and Medicaid programs,

the federal government may reimburse states for some share of total

benefits paid. Cost-sharing provisions, if any, in non-entitlement programs

generally require that recipients match federal grant dollars in some

specified proportion as a condition of receiving the grant.

Cost sharing is typically justified on one of the following bases. For

one, it is used to increase service levels when there are sufficient local

benefits that nonfederal governments would undertake the activity without

2. The fiscal capacity of a government is its ability to raise revenues of

its own. It depends primarily on the value of the tax bases the

government may assess.
federal funding, but at a level the Congress would consider inadequate

because, for example, of spillover benefits. Cost sharing is also used to

increase incentives for recipients to use program dollars efficiently, since

they may be less tolerant of waste when their own dollars are involved.

Finally, cost-sharing rates may be based on a concern with the unequal

distribution of resources—the rates varying inversely with the fiscal

capacity of the recipient so as to reduce differences in the tax effort that

nonfederal governments must make to fund their share of program costs.

Policy Control. The extent of policy control delegated to grant

recipients, by definition, varies inversely with the restrictiveness of federal

program rules. In entitlement programs, eligibility and benefit levels may

be determined entirely by the federal government—as in the Food Stamp

program—or jointly by federal and recipient governments—as in the AFDC

and Medicaid programs. 3J Non-entitlements may specify a narrow set of

allowable uses for federal funds—as in bilingual education—or may support a

variety of services within a broad functional area—as with the Social

Services Block Grant. Revenue sharing is a grant for which allowable local

discretion is virtually unrestricted.

Very restrictive program rules are appropriate when the Congress

wants to control exactly how grant funds are used, whether or not this would

conflict with local interests. When, however, the Congressional interest is

in encouraging more activity in a broad functional area, or in targeting more

services on certain population groups, greater allowance for local interests

and differences—through more flexible rules—might be made without jeopardizing federal goals. A portion of grants that support services already

provided by recipient governments will likely be used to replace nonfederal

funding rather than to further expand services, however, unless maintenance

of effort requirements are imposed.

SOME PROBLEMS CITED IN CURRENT PROGRAMS

The need for federal involvement is in some cases unclear, while in

others its form may be inappropriate. In either instance, programs might be

modified to achieve a more effective use of federal dollars.

3. In the AFDC program, categorical requirements for eligibility are

determined by the federal government, but benefit levels—and hence

income limits for eligibility—are set entirely at the states1 discretion.

In the Medicaid program, the federal government sets minimum

requirements for groups covered and services provided, but states may

cover certain additional groups and provide certain additional services,

with the federal government sharing the additional costs.
Federal dollars may be poorly used in some water resource programs—

for example, those that were originally intended to hasten the development

of the West—because development has been largely completed. Federal

support may not be necessary for some other programs because their

benefits are primarily local, without significant spillovers. Critics cite

federal grant programs for secondary highways and for rural roads as

examples, as well as federal subsidies for general education programs.

In other areas, changes in the form of federal involvement might

result in programs that could better address current concerns. For example,

cost-sharing provisions are frequently criticized, for a variety of reasons.

Critics suggest that the structure of matching rates in Interstate Highway

programs might be altered to favor repair and maintenance over new

construction, since the sections of the Interstate System that remain unbuilt

are predominantly of local importance, while deterioration of the existing

national network is of growing concern. Cost-sharing provisions for most

education and social service grants that subsidize traditional state and local

activities serve little purpose at present, although they may increase

administrative costs, because the federal grants are so small relative to

spending by recipient governments that the matching requirements are

irrelevant. Finally, cost-sharing provisions in the AFDC program—requiring

federal reimbursement to states for a portion of the benefits they paydirect as much or more federal aid per capita to high-income states as to

other states that the Congress might prefer to favor. 4/

Other criticisms of current federal programs concern the way in which

federal funds are allocated, the desirability of certain program rules, and

the benefits of multiple programs that provide similar services. For

example, federal programs that subsidize education and social services

might more effectively address concerns for spillovers and hardship if

federal funds were targeted more toward disadvantaged groups or poor

jurisdictions. Even programs that are allocated by a formula that includes a

measure of fiscal capacity might be more effectively targeted, since the

measure of fiscal capacity typically used—per capita income—is not suffiThis occurs despite the use of matching rates that vary inversely with

a state's per capita income. It is due, in part, to the minimum value

set in current legislation that restricts variation in matching rates to a

narrow range (between 50 and 78 percent). In addition, it reflects the

fact that rich states tend to have more generous public assistance

programs than poor states. See Albert Davis and Robert Lucke, "The

Rich-State Poor-State Problem in a Federal System," National Tax

Journal, vol. 35, no. 3 (September 1982), p. 351.

10
ciently comprehensive to serve this purpose well. 5J In addition, some

programs that are intended to induce localities to provide special services

for disadvantaged groups may be too inflexible, while others may allow too

much discretion to local agencies to accomplish the purposes the Congress

intended. Finally, consolidation of related programs in some areas—such as

infrastructure or social services—might benefit recipient governments by

reducing administrative costs and increasing flexibility, while still adequately addressing problems of concern to the Congress.

WAYS TO MODIFY CURRENT PROGRAMS

Specific options for modifying current federal programs discussed in

later chapters are of three general types. The federal government could

eliminate (or assume) program responsibility, change funding provisions, or

change program rules.

Eliminate or Assume Program Responsibility

Under this approach, the program would no longer be intergovernmental. Either it would be left to nonfederal governments to continue at their

own expense, if they chose to do so; or it would be a federal program with

federal funding, policy control, and administration. In either case, activities

might be managed more effectively because a single government would be

held fully accountable. Complete elimination of federal responsibility would

be inappropriate for programs that address significant federal concerns

about spillovers, administrative efficiency, or the distribution of resources,

however, while assumption of full federal responsibility for such programs

might be undesirable if the services provided depended on local conditions.

Change Funding Provisions

This approach could include altering the process by which federal

funds are allocated among recipient governments, changing the cost-sharing

provisions, or both. The allocation process could be used to target federal

funds more effectively by, for example, modifying the measures of program

need or fiscal capacity used in the distribution formulas for some programs.

5. A more comprehensive alternative often suggested is the fiscal

capacity measure currently compiled by the Advisory Commission on

Intergovernmental Relations, based on the Representative Tax System.

See Chapter VII for further discussion of this measure.

11
Changing cost-sharing provisions by altering matching rates might mean

that the federal share of costs would better reflect the extent of spillovers

from program activities. Another way of changing cost-sharing provisionsrelevant to some public assistance entitlements, for example—would be to

fund a minimum federal benefit, rather than to reimburse states for part of

total benefits they set. This approach might better ensure that federal aid

for public assistance was distributed according to need, and could make

public assistance benefits more uniform nationwide. Implementing it could

increase federal costs substantially, however, depending on how high a

minimum was chosen.

Change Program Rules

This approach could entail redefining the population to be served,

changing the activities allowed or the benefits provided, or modifying

administrative requirements. Recipient governments might be given either

more or less discretion over the groups served and the kind of services

provided with program funds. Relaxation of requirements or consolidation

of related programs—ways in which more discretion could be allowed—might

be appropriate in areas where federal restrictions distort local priorities but

not in any way clearly related to federal goals. In other areas, where

recipient governments seem not to be serving the groups the Congress

wished to aid or to be using program funds for broader purposes than the

Congress intended, requirements might more appropriately be strengthened.

12
CHAPTER IIL THE CURRENT INTERGOVERNMENTAL STRUCTURE

The size of the public sector relative to the economy has increased

substantially over the last 50 years. In 1929, just before the Depression,

spending by all levels of government was 10 percent of GNP, with spending

by state and local governments about three times as large as federal

expenditures (see Figure 1). By 1939, total government spending had almost

doubled—to 19 percent of GNP—and the federal share had grown to equal

the nonfederal share. Although government spending grew to nearly 50

percent of GNP during the war years, by 1950 it was not much larger

relative to GNP than it had been in 1939. Between 1950 and 1982, spending

by all levels of government increased from 21 percent to 35 percent of GNP.

Direct spending by the federal government grew from 13 percent to 22

percent of GNP, and federal grants-in-aid to other governments rose from

less than 1 percent to 3 percent of GNP. Spending by states and localities

from their own sources rose from 7 percent of GNP in 1950 to 11.5 percent

in 1975, before dropping to 10.5 percent in 1982.

In calendar year 1982, combined spending by governments at all levels

in the United States was $1.1 trillion—35 percent of the gross national

product (GNP). I/ Federal expenditures accounted for nearly $800 billion

(or 25 percent of GNP), including nearly $700 billion spent directly by the

federal government and about $85 billion in grants channeled to nonfederal

governments. States and localities spent more than $300 billion from their

own sources (or about 10 percent of GNP) to finance public services. 2)

1. This rate is among the lowest among western industrialized nations.

As of 1980, total government expenditures in the United States

amounted to about one-third of the gross domestic product (GDP)— a

concept that measures production within the borders of a country. As

of the same year, total government expenditures as a percent of GDP

were half a percentage point less in Japan and one percentage point

more in Australia. In ten other industrialized nations, however, the

public sector was far larger, ranging from 41 percent of GDP in

Canada to nearly two-thirds of GDP in Sweden. See Organization for

Economic Cooperation and Development, Economic Outlook, vol. 31

(July 1982), p.

2. Economic Report of the President, 1983, Appendix B. All figures for

spending by different levels of government are for calendar years on a

National Income and Product Accounts basis, and thus differ somewhat

from those reported in most federal budget documents.

13
Figure 1.

Government Spending as a Percent of Gross National Product,

1929-1982

Total Government Spending

fTSpending' by State and Local Governments:'::':

:

;:'.:.

from Their Own Sources

 :xfex-:-x-:

Direct Federal Spending

Total Federal Spending

Federal Grants to State

and Local Governments

1930 1935 1940 1945

SOURCE: Economic Report of the President (1983).

1950 1955 1960

Calendar Years

1965 1970 1975 1980

The Growth of Intergovernmental Grants

While the federal share of all government spending has remained fairly

constant since 1950—between 65 and 70 percent, except for the Korean War

period—an increasing proportion of federal spending has been through

intergovernmental grants (see Figure 2). In 1950, federal grants to

nonfederal governments were about 6 percent of all federal spending; by

1978, intergovernmental grants had risen to 17 percent of all federal

spending, before declining to 11 percent in 1982.
Figure 2.

Total Federal Spending and Direct Federal Spending

as a Percent of Spending by All Governments, 1929-1982

1930 1935 1940 1945 1950 1955 1960

Calendar Years

1965 1970 1975 1980

SOURCE: Economic Report of the President (1983).

As a result of the rapid growth in federal grants, coupled with the

slower rise in spending by states and localities from their own sources,

nonfederal governments rely much more on the federal government for

financial support than previously. Federal grants as a percent of all state

and local expenditures rose from 10 percent in 1950 to a peak of 26 percent

in 1978, before dropping to 21 percent in 1982 (see Figure 3). It is estimated

that 25 percent of federal aid goes directly to local governments, and that

another 20 percent goes to local governments indirectly after passing

through state governments first. 3/ To some extent, the growth in grants

3. See Advisory Commission on Intergovernmental Relations, Recent

Trends in Federal and State Aid to Local Governments (July 1980),

Table 5, p. 8.

15

0-83- 3
Figure 3.

Federal Grants as a Percent of State and Local

Expenditures, 1929-1982

30

25

8

i 20

15

10

1930 1935 1940 1945 1950 1955 1960

Calendar Years

1965 1970 1975 1980

SOURCE: Economic Report of the President (1983).

has allowed the federal government to use nonfederal governments as

administrative agents. This is reflected in government employment figures,

which show that state and local government employment grew by 218

percent from 1950 to 1982, while federal employment grew by only 42

percent. 4/

The Broadening Scope of Federal Aid

Along with the growth in grants has come a broadening in the scope of

state and local activities supported by the federal government. In 1950, 80

Economic Report of the President, 1983, Table B-37, p. 205.

16
percent of federal grants were in two areas—income security (principally

AFDC), which accounted for 59 percent of grants; and transportation, which

accounted for 21 percent of grants (see Table 1). In 1960, these two areas

still accounted for more than 80 percent of all grants, but the proportion of

grants going for transportation had more than doubled—to 43 percent—as a

result of the Interstate Highway program begun during the 1950s, and the

proportion for income security had shrunk to 38 percent. The introduction

of new grant programs in community development, education, employment,

social services, and health during the 1960s, however, reduced the share of

income security and transportation programs to 43 percent of all grants by

1970, and to only 34 percent by 1980. 5/

The remainder of this chapter provides an overview of the present

grants system and traces its evolution from the Depression years to the

present.

THE PRESENT GRANTS SYSTEM

In fiscal year 1982, the federal government gave $88.2 billion to states

and localities through 280 grant programs. About 46 percent of these

outlays provided benefits for individuals, almost entirely through income

security and health programs. (>] The remaining outlays supported state or

local public services. It is estimated that 27 percent of spending for all

grants was for infrastructure programs (energy, natural resources, and

transportation) or for economic development; 19 percent was for education,

employment, and social service programs; and 7 percent was for general

purpose fiscal assistance.

5. Part of the decline in the share of grants going to transportation was

due to the near completion of the Interstate Highway System. Transportation grants are expected to increase for 1983 and later years due

to the increase in the federal motor fuels tax which is to be used for

major repairs on the Interstate System and for mass transit.

6. In 1982, more than 99 percent of grant outlays providing benefit

payments for individuals were for income security and health, and

more than 99 percent of grant outlays for income security and health

programs provided benefit payments for individuals. There is

substantial non-grant spending both for income security and health and

for programs providing benefits for individuals.

17
TABLE 1. PERCENTAGE DISTRIBUTION OF FEDERAL GRANT-IN-AID

OUTLAYS BY FUNCTION, SELECTED YEARS

Budget Function 1940 1950 1960 1970 1980 1981 1982

Energy

Natural Resources and

Environment

Agriculture

Transportation

Community and Regional

Development

Education, Training,

Employment, and Social

Services

Health

Income Security

General Purpose Fiscal

Assistance

Other

Total

*

3

19

32

3

2

39

1

1

5

21

7

5

59

2

3

43

7

3

38

2

4

19

27

16

2

1

6

1

24

17

20

9

1

1

5

1

14

22

20

23

7

1

1

6

1

14

100 100 100 100 100 100

19

21

25

7

1

100

SOURCE: Office of Management and Budget.

* = 0.5 or less.

Grants for Infrastructure and Development

In 1982, $22.9 billion in grants to states and localities were to provide

for transportation needs, to protect the environment, and to promote

community and regional development. The largest transportation program is

the Federal-Aid Highway program, which supports construction and major

repairs on the Interstate Highway System and on non-Interstate intercity

routes. This aid is provided principally through grants allocated by formula

and funded by federal motor fuels taxes. In addition, the federal government provides both project and formula grants for capital and operating

assistance for mass transit. The principal environmental grant program

provides project grants for the construction of wastewater treatment

18
facilities. The Community Development Block Grant (CDBG) program is the

largest program for development assistance. Under this program, most

funds are provided to large cities and urban counties on a formula basis to

be spent on community improvements such as housing rehabilitation, streets

and roads, waterworks, and other public facilities.

Grants for Education, Employment, and Social Services

Spending for these human service grant programs was $16.6 billion in

1982, providing support for elementary, secondary, and vocational education; for employment and training; and for social services. Within each of

these program areas, a few large formula-distributed grants accounted for

the bulk of all spending, with three programs alone accounting for about 40

percent in 1982. 7J More than 100 narrower-purpose grants—many distributed on a project basis—together accounted for the other 60 percent of

human service grants spending.

Some of these programs are intended to expand the overall level of

services that states and localities might be expected to provide in any

event. Others are intended to fund services that states and localities might

not otherwise provide or to assure that some specific target group receives

a higher level of services than would otherwise be available. Although more

than half of these human service grants require that recipient governments

contribute from their own funds as a condition of receiving federal

assistance, no state-local contribution is required under the three largest

programs. When a state or local contribution is required, it is typically

quite low—generally 10 to 25 percent of total spending under the grant—

although in some instances it is as large as 67 percent.

Grants for Income Security and Health

In 1982, the federal government spent $40.8 billion in state and local

grants to finance income security and health programs, almost all of which

provided benefits for individuals. The largest of these individual assistance

grant programs are AFDC and Medicaid—state-administered entitlement

programs that are jointly financed by the federal government and the states.

7. The three programs were for grants to local educational agencies

under Chapter I of the Education Consolidation and Improvement Act

(ECIA), Title II B-C programs under the Comprehensive Employment

and Training Act (GETA), and the Social Services Block Grant under

Title XX of the Social Security Act.

19
In both instances, the federal government sets certain categorical criteria

for eligibility, while the states determine the income limits for eligibility.

The federal government contributes a little more than half of all program

costs, on average, although the federal share varies by the state's per capita

income from a floor of 50 percent to 78 percent.

Other grants fund child nutrition programs; various specialized health

care programs, such as the maternal and child health block grant and

community health centers; housing assistance; and cash and in-kind energy

assistance for low-income households. Some of the child nutrition programs

are entitlements, but most of these programs are non-entitlement formula

grants.

General-purpose Grants

The federal government distributed $6.3 billion to states and localities

in 1982 in the form of general-purpose fiscal assistance—funding that

jurisdictions could use for virtually any purpose. The largest of these

programs—General Revenue Sharing—distributed $4.6 billion to more than

39,000 general purpose local governments on the basis of each jurisdiction's

population, per capita income, and tax effort. Other general-purpose fiscal

assistance grants included the distribution of revenues collected by the

Forest Service and the Bureau of Land Management, and federal payments

in lieu of taxes to the District of Columbia and other federally affected

communities.

THE EVOLUTION OF THE GRANTS SYSTEM

The present system of intergovernmental grants reflects Congressional

decisions made over many years in response to changing concerns regarding

the proper role of government and the level of government at which services

should be designed, administered, and financed. Federal expansion into

areas that had once been outside the public domain or left to state or local

governments was especially pronounced during the Depression and again

during the 1960s and early 1970s.

Federal spending for grants grew continuously from the 1950s until

1981, but dropped in 1982. Grants spending in real terms—after adjustment

for inflation—has been dropping since 1978, due to slow growth in benefit

payments for individuals and a substantial decline in spending for other

grant programs (see Figure 4).

20
Figure 4.

Federal Grants, 1940-1982

1940 1945 1950 1955 1960 1965

Fiscal Years

1970 1975 1980

SOURCE: Office of Management and Budget.

The Depression Years—Growth of the Federal Government

The first major increase in the role of the federal government relative

to nonfederal governments occurred during the 1930s, as the result of the

Depression. The doubling in the size of government from 1929 to 1939—with

spending by all levels of government increasing from 10 to nearly 20 percent

of GNP—was due largely to increased spending by the federal government.

During this time, the federal government channeled relief not only directly

to individuals, but also to state and local governments that were affected by

a combination of Depression-shattered revenue systems, statutory limits on

borrowing, and mass unemployment. Spending for federal grants-in-aid grew

ninefold from the start of the Depression to 1940, funding public works and

general assistance. Many of these grant programs were temporary

21
measures, however, that were discontinued when World War II and economic

recovery began. The principal permanent legacies of the Depression were

Social Security and the Unemployment Insurance system—both financed

through trust funds rather than grants. 8/

The Postwar Years—Growth of Nonfederal Governments

Funded by Federal Aid

By contrast, the years between 1950 and the mid-1970s were characterized by growth of government at all levels with a more extensive

increase in the role of the federal government in financing state and local

public services. Several factors contributed to this expansion. First, an

extended period of rapid economic growth greatly expanded the resources

available to governments and helped fuel a growing concern for aiding those

persons who were benefiting least from the general prosperity. The range of

human services for which governments assumed responsibility expanded in

the 1960s from a primary emphasis on income support for certain lowincome families and the elderly to include some degree of assistance for all

low-income persons (through the Food Stamp program), as well as such other

services as education and training for the disadvantaged, medical care for

the elderly and the poor, and housing assistance for lower-income families.

In addition, entirely new policy goals were adopted by the federal

government, including the development of an interstate transportation

network in the 1950s and the reduction and control of environmental

pollution in the 1970s. As a result, spending by all levels of government

increased by about 60 percent, relative to the economy, between 1950 and

1975, growing from 21 percent to 35 percent of GNP.

Concurrent with this broadening in the scope of government, a number

of concerns developed regarding the ability and willingness of states and

localities to provide certain services. For one thing, it was recognized that

different jurisdictions had seriously unequal resources with which to finance

services. Further, not all states and localities were viewed as equally

responsive to the needs of their citizens—particularly the poor and minorities. In addition, it was widely felt that many governments lacked the

administrative capacity to assume full responsibility for providing certain

types of services. Finally, it was recognized that individual states lacked

the incentive to address certain of the newly adopted national policy

8. See George Break, "Fiscal Federalism in the United States: The First

200 Years, Evolution and Outlook," Chapter 3 in The Future of

Federalism in the 1980s (Advisory Commission on Intergovernmental

Relations, July 1981), pp. 44-45.

22
objectives, such as developing a nationwide transportation network or

dealing with interstate air and water pollution.

Financing services through federal rather than state and local revenues appeared to have several advantages. Since the federal taxes imposed

to pay for the services would be uniform across states, the reluctance that

state and local governments might feel about raising taxes to expand public

services—for fear that businesses and high-income taxpayers might relocate

to other areas with low-tax economic climates—would be reduced. In

addition, some redistribution of revenue resources, from states with high

fiscal capacity to those with low capacity, would be possible, depending on

how spending allocations were determined. Finally, the tax burden would be

shifted toward higher-income persons by substituting the federal income tax

for the sales and property taxes that states and localities relied on heavily

during this period, and that were generally less progressive than the income

tax.

These factors—the emergence of new national objectives, concerns

about the capacity of nonfederal governments to address those objectives,

and the perceived advantages of federal financing—led to expansion in the

federal system of grants-in-aid. During the period from 1950 until the

middle 1970s, new grants providing payments for individuals were created—

including Medicaid—while spending was increased sharply for previously

existing programs. In addition, a number of new categorical human service

grants were enacted, typically to provide services not previously available—

such as job training for the disadvantaged—or to increase the level of

services available to some disadvantaged group—as in the case of compensatory education. Finally, these years saw the creation or expansion of grant

programs designed to address the newly adopted policy objectives in the

transportation and environmental areas.

The 1970s—Growing Dissatisfaction with the Grants System

By the early 1970s, the policy focus had begun to shift. For one thing,

while some of the concerns that gave rise to the growth in grants persisted—

such as the inequality of resources among states and their lack of incentive

to address certain national policy objectives—other concerns had lessened,

particularly regarding the administrative capacity of states and their

reliance on nonprogressive taxes.

In addition, the grants system was itself increasingly viewed as a

problem. Some thought that the federal government was overcommitted,

with poorly coordinated programs in too many areas at too great expense.

There was dissatisfaction with badly managed, ineffective programs that

23
were thought to result from the sharing of responsibilities among levels of

government, so that no level of government could be held accountable.

There was dislike of federal intrusion on state and local prerogatives,

effected through program regulations and the threat of withdrawal of

federal funding from recipient governments that did not comply. Finally,

there was unhappiness with the instability of federal funding, which made it

difficult for recipient governments to plan for continuing programs, and

which subjected them to pressure by affected interest groups to continue

activities after federal funding was terminated or substantially reduced. 9/

Dissatisfaction with the grants system prompted a number of changes

beginning in the 1970s. First, in 1972 the Congress authorized the General

Revenue Sharing (GRS) program, which provided states and local units of

government with federal grant dollars to be used for any purposes they

chose, subject only to federal requirements that there be public participation in the decisions and that the activities supported be nondiscriminatory. 10/ In addition, some existing narrow-purpose categorical grants

were consolidated into less restrictive block grants. Examples include the

Title II-B and C programs of the Comprehensive Employment and Training

Act (enacted in 1973), the Community Development Block Grants program

(1974), and the Grants to States for Services (now the Social Services Block

Grant) under Title XX of the Social Security Act (1975). These actions

expanded the discretion available to states and localities to design suitable

approaches to their problems, while reducing the control the Congress could

exercise over program activities.

As a result of these initiatives, the share of federal grant outlays that

were general-purpose or broad-based rose from 10 percent in 1972 to 23

percent in 1976. By 1981, however, general-purpose and broad-based grants

had fallen to only 18 percent of all grant funding due to the decline in

funding for GRS, the slow growth in funding for broad-based grants, and the

somewhat faster growth of narrow-purpose categorical grants (see Table 2).

The 1980s—Renewed Efforts to Change the Grants System

Since taking office, the Administration has made a number of proposals intended not only to reduce federal spending for domestic purposes

9. Many of these concerns were first raised in the 1950s, when the

Kestnbaum Commission, appointed by President Eisenhower, recommended separating revenue sources and sorting out functions among

the levels of government.

10. After 1980, the state share of GRS was eliminated.
TABLE 2. OUTLAYS FOR GENERAL-PURPOSE, BROAD-BASED, AND

OTHER GRANTS, SELECTED YEARS

1972 1976 1980 1981 1982

Billions of Dollars

General-purpose Grants:

General revenue sharing

Other

Broad-based Grants a/

Other Grants

Total

General-purpose Grants

General revenue sharing

Other

Broad-based Grants a/

Other Grants

Total

0.5

(0.0)

(0.5)

2.9

31.0

34.4

1.5

(0.0)

(1.5)

8.3

90.2

100.0

7.2

(6.2)

(0.9)

6.2

45.8

59.1

Percent

12.1

(10.6)

(1.5)

10.4

77.5

100.0

8.6

(6.8)

(1.8)

10.3

72.5

91.5

6.8

(5.1)

(1.7)

10.0

77.9

94.8

6.5

(4.6)

(1.9)

11.5

70.2

88.2

Distribution

9.4

(7.5)

(1.9)

11.3

79.3

100.0

7.2

(5.4)

(1.8)

10.6

82.2

100.0

7.4

(5.2)

(2.2)

13.0

79.6

100.0

Office of Management and Budget. The category of broad-based

grants, as defined by the Office of Management and Budget, includes

Community Development Block Grants, various health block grants,

Title H-B,C of the Comprehensive Employment and Training Act, the

Social Services Block Grant, the Community Services Block Grant,

Low-Income Home Energy Assistance, the State Education Block

Grant, and Impact Aid.
relative to spending for defense, but also to restructure the system of

federal grants-in-aid. In 1981, the Administration proposed consolidation of

a large number of categorical grants, and substantial consolidation was

achieved. In 1982, the Administration proposed a major realignment of

programs in which the federal government would assume full financial

responsibility for some Medicaid services, while AFDC and some grant

programs in education, health, social services, transportation, and

community development would be "turned back" to the states which would

have to assume full financial responsibility for them—or terminate them—

after a transitional period, ll/ Negotiations with the states over this

proposal failed to reach agreement, in part because of an inability to agree

on how to federalize Medicaid. The Administration's proposals in 1983 were

far more modest, calling for more grant consolidation.

Although few of the Administration's 1982 and 1983 proposals for the

grants system have been enacted, many of its 1981 proposals were—at least

in modified form. In 1981, in addition to reducing the funding for numerous

non-entitlement grants and eliminating some others, the Congress created

nine new block grants from 57 previously existing categorical programs.

Four of the new block grants were for health care, while one each was for

education, community services, community development, social services,

and energy assistance. Under the new block grants, federal requirements in

the previously existing grants for targeting the use of funds and for

reporting were weakened. In all, the number of grant programs was reduced

by 22 percent, from 360 in 1981 to 280 in 1982. 12/ In addition, changes

were made in the largest entitlement grant programs—AFDC and Medicaid—

that slowed spending increases by tightening eligibility and shifting more

costs to the states.

In 1982, two new block grants were created—one to replace previous

job training programs and another for mass transit that replaced an

antecedent four-tiered program. Spending for most non-entitlement grants

was frozen at the level set for the previous year. No substantial changes

were made in entitlement grant programs, so that funding for them

generally increased with the growth in the number of recipients and with

cost-of-living adjustments in a few of them.

11. In its original proposal, the Administration suggested assigning full

financial responsibility for the Food Stamp program to the states as

well, but this was later eliminated from the proposal in the process of

negotiations with the states.

12. Estimates by the Office of Management and Budget.

26
TABLE 3. GRANT OUTLAYS BY PROGRAM AREA:

1981, 1982 AND 1983 (In billions of dollars)

Program Area

Actual

1981

Actual

1982

Percent

Change

in Real

Estimated Terms

1983 1981-1983

Infrastructure

and Development

Education, Employment, and

25.1 22.9 23.3 -15

Social Services

Income Security and Health

General-purpose Fiscal

Assistance

Other a/

Total

21.1

40.2

6.7

1.7

94.8

16.6

40.8

6.3

1.6

88.2

17.3

45.5

6.3

2.3

94.7

-29

-2

-18

+18

-12

SOURCE: Congressional Budget Office.

a. Includes grants for national defense, agriculture, commerce, veterans1

programs, administration of justice, and general government.

As a result of these actions, estimated outlays for grants in 1983 are

about equal to the 1981 level in nominal terms, but are 12 percent less in

real terms, after adjustment for inflation (see Table 3). By program area,

real spending was reduced by 15 percent for infrastructure and development

grants; by 29 percent for education, employment, and social service grants;

and by 2 percent for income security and health grants.

The real decline in funding for federal grant programs has added to the

already serious budgetary problems in many states, which are due principally

to the recent recession and to spending or taxing restrictions recently

27
imposed by the voters in some states. JJ/ One study of state and local

responses to federal grant reductions in 1982 indicates that willingness to

replace lost federal aid varied by type of program, with redistributive

programs faring poorly and capital programs for local infrastructure doing

well. Cuts in entitlement programs—AFDC and Medicaid—were generally

ratified, or passed on to benefit recipients. Some cuts in human service

programs were ratified, while others were replaced, at least partly.

Replacement was more likely in programs that were not focused only on the

poor, and in programs that had lobbying support from organized groups of

beneficiaries or providers. States replaced some funding for day care, home

care for the elderly, and health services (under the new block grants)

because of these factors, apparently. Capital programs for infrastructure

also benefited from generalized political support—because they typically

affect all income groups—as well as from lobbying efforts by builders and

their suppliers. Ifr/

13. A fiscal survey of the states released by the National Governors1

Association and the National Association of State Budget Officers in

May 1983 shows that aggregate balances for states are expected to be

only 0.2 percent of expenditures at the end of fiscal year 1983, down

from 9.0 percent at the end of 1980. Fifteen states are expecting zero

or negative balances by the end of fiscal year 1983, and only four

states are predicting balances in excess of 5 percent of expenditures,

which is considered to be the minimum prudent level.

14. Richard P. Nathan, and Fred C. Doolittle, The Consequences of Cuts;

The Effects of the Reagan Domestic Program on State and Local

Governments (Princeton Urban and Regional Research Center, 1983).

28
CHAPTER IV. PUBLIC WORKS INFRASTRUCTURE

AND DEVELOPMENT PROGRAMS

Over the years, the federal government has assumed a major role in

supporting public works infrastructure such as dams and highways, and in

financing capital improvements to assist community and economic

development. \j In many cases, however, investment priorities have shifted

since these programs were first framed, and some of the original rationales

for extensive federal involvement may no longer apply. A number of

infrastructure programs were designed to achieve important development

goals that have now largely been met—such as building a national network

of highways, fostering the growth of western agriculture, and constructing a

system of locks and dams. Today, as federal policies are being revised to

reflect shifting needs, it may be useful to consider a realignment of existing

federal, state, and local roles. Such a review is especially timely now,

when tight, budgetary constraints are forcing all levels of government to

reevaluate their priorities in light of the need for more effective spending.

All levels of government have been involved in financing, building, and

managing infrastructure facilities, and in supporting community and economic development programs. Historically, the federal government has

strongly influenced the pattern of state and local investment, both by

providing significant financial incentives (such as a high federal share of

matching grants) for certain types of investments and by establishing

regulatory standards. The federal role has been based on concern with one

or more of the following, as discussed in Chapter II:

o Spillovers or external effects;

o The advantages of centralized coordination; and

o The development and more equitable distribution of resources.

A reduced federal role may be warranted in areas where there are no

significant spillovers (since there would be relatively small nationwide

1. For detailed analysis of the adequacy of current federal public works

infrastructure programs, see Congressional Budget Office, Public

Works Infrastructure; Policy Considerations for the 1980s (April

1983).

29
benefits) or where there is no need for central coordination. A continued

federal role may be justified in areas where capital financing needs are so

large as to require federal backing, or if there are major inequities or

hardships to be addressed.

This chapter contains three major parts. The first describes the basis

for federal involvement in infrastructure and development programs, and

the second examines the current federal role in light of these basic

rationales. 2J Part three develops a number of specific options the Congress

might consider that would realign the financing and management responsibilities of federal, state, and local governments in these areas.

BASIS FOR FEDERAL INVOLVEMENT

The three basic criteria for federal involvement are reviewed briefly

below, and in the following section are applied to current federal programs

for highways, transit, airports, water resources, wastewater treatment, and

community and economic development.

Spillovers or External Effects

Where the costs or benefits of public activities flow across state

borders, individual states may lack the incentive to deal with them

adequately. For example, states may build wastewater treatment plants

that efficiently serve their own needs but discharge harmful pollutants

downriver to neighboring states. By offering substantial financing aid for

wastewater treatment works, the federal government induces states to build

sufficient capacity to prevent harmful spillovers, thereby reducing costs to

the economy as a whole.

Centralized Coordination

In some cases, centralized planning and management of public works

facilities are needed to improve economic efficiency and ensure a coordinated national network. Notable examples are the Interstate Highway

System and the air traffic control system. In the early days of aviation,

local governments operated their own air traffic control towers; today, the

federal government equips and operates the entire system, reducing administrative costs and ensuring safe air travel.

2. Additional background on these programs is provided in Appendix A.

30
Development and Distribution of Resources

Historically, a major goal of federal investment in infrastructure has

been to encourage regional development, and thus foster the growth of the

economy as a whole. For example, federal provision of irrigation facilities

at the turn of the century was designed to accelerate the development of

the West. More recent federal programs have sought to help regions meet

severe local financing problems. These include federal programs that assist

urban areas in financing infrastructure projects with large initial costs, such

as the construction of new subways, as well as community and economic

development programs intended to help distressed areas develop the

resources required for sustained economic growth.

In recent years, the federal government has also subsidized activities

that benefit disadvantaged groups such as the poor and the handicapped.

Thus federal subsidies for urban public transit are often seen as (among

other things) a means of helping the poor, the elderly, and the disabled.

Federal aid for community development is often limited to projects

benefiting low-income households.

THE CURRENT FEDERAL ROLE

Federal programs supporting public works infrastructure--defined here

as highways, mass transit systems, airports, water resources (ports and

harbors, inland waterways, and multipurpose dams), and wastewater treatment plants—have helped build and maintain the physical framework

necessary for the nation's continued economic growth and stability. 3J

Today, this framework is largely in place, and investment priorities are

shifting from new construction to the repair, rehabilitation, and

replacement of existing facilities. In addition, the federal government

provides specialized aid for community and economic development:

programs intended to foster improved living environments, especially for the

urban poor, by financing a wide range of capital improvements; and projects

aimed to encourage development in distressed areas, such as inner city

neighborhoods and Appalachia.

3. Two additional systems—air traffic control and water supply—are not

discussed in detail in this chapter, because either a dominant federal

role appears to be required (air traffic control) or local interests

predominate (municipal water supply).

31

24-083 0-83- 4
Capital spending by all levels of government for public works infrastructure was about 1.3 percent of gross national product (GNP) in 1980, as

compared to 2.2 percent in 1960. 4/ The federal share of this spending has

increased, however—from more than one-third in 1960 to over one-half in

1982. Most of this growth resulted from two new federal grant programs,

for wastewater treatment and mass transit. The increased federal role in

these areas offset a real decline in federal spending for highways, which was

recently reversed with passage of the Surface Transportation Assistance Act

of 1982.

In 1982, $19.3 billion in federal funding—including grants to states and

localities and direct expenditures—was authorized for the five infrastructure systems considered here (see Table 4). With the increased authorizations for highways and mass transit enacted in the Surface Transportation

Assistance Act of 1982, federal funding will rise to $25.4 billion in 1983.

The scope of federal participation in the different infrastructure programs

varies markedly (see Table 5). For example, the federal government's share

of total capital spending ranges from about 20 percent for construction at

commercial airports to 100 percent for the dredging of ports and inland

waterways. For programs that provide matching grants to states and

localities, the federal government covers anywhere from 50 to 95 percent of

individual project costs. Funding mechanisms are equally diverse, including

user fees, appropriations from general funds, and various forms of interest

subsidies. The extent to which infrastructure programs recover federal

costs through fees charged to direct users of these facilities ranges from

about 6 percent for inland waterways to about 95 percent for highways; in

many programs, including ports, mass transit, and wastewater treatment, no

federal costs are recovered through user fees.

Federal spending for community and economic development in 1982

totaled $4.1 billion (see Table 4), and is scheduled to rise to $5.2 billion

largely as a result of additional commitments included in the 1983 Emergency Jobs Appropriation Act (P.L. 98-8). Much community development

funding is provided on a formula basis to large cities and urban areas, for

capital improvements such as housing rehabilitation and water and sewer

repair. The federal government does not require that localities directly

match the community development funds they receive. Economic

development aid has historically been targeted to areas with low incomes

such as communities in the South and Appalachia, but in more recent years

Including air traffic control and water supply. If these two systems

are excluded, capital spending by all levels of government similarly

represents a declining percentage of GNP, and the federal share of

this spending increases.

32
TABLE 4. FEDERAL FUNDING FOR SELECTED PUBLIC WORKS INFRASTRUCTURE AND DEVELOPMENT PROGRAMS

(In billions of dollars of budget authority)

Program Area

Predominant

Type of Spending 1982 1983

Public Works Infrastructure

Highways

Public transit

Airports

Water resources

Wastewater treatment

Total

Community and Economic

Development

Community development

Economic development a/

Total

Grants to states

Grants to localities

Grants to localities

Direct expenditures

Grants to localities

Grants to localities

Grants to localities

19.3

3.5

0.6

4.5

0.7

5.2

SOURCE: Congressional Budget Office.

NOTE: This table does not include federal tax expenditures or credit

support programs. In 1982, the federal government spent an

estimated $8.5 billion in tax expenditures for public works

infrastructure and development (largely tax revenues forgone

on tax-exempt infrastructure bonds and small issue industrial

revenue bonds). New loan and loan guarantee obligations

totaled about $0.6 billion and $0.3 billion, respectively.

a. This excludes specialized economic development aid, such as grants to

Indian Tribes, and the Tennessee Valley Authority.

has expanded to include places undergoing shifts in their economic bases, as

in some parts of the Northeast and Midwest. Although in the past much

assistance was given directly to private firms, aid is now generally focused

on states and localities to help provide the public services necessary for

33
TABLE 5. FEDERAL FINANCING AND PROJECT RESPONSIBILITY FOR SELECTED PUBLIC

WORKS INFRASTRUCTURE AND DEVELOPMENT PROGRAMS

Program

Area

Highways

Public

Transit

Airports

Federal Share

of Total

Capital

Spending

About 30 percent

of total spending on roads,

including maintenance; 50 percent for construction and

major repairs

on Federal-Aid

System

About 75 percent

About 20 percent

for construction

at commercial

airports; about

85 percent for

general aviation

airports

Source and

Type of

Federal

Funds

Trust fund

(95 percent);

general fund

(5 percent);

formula and

discretionary

grants

Trust fund

(25 percent)

general fund

(75 percent);

discretionary

and formula

grants

Trust" fund;

formula and

discretionary

grants

Federal Share

of Matching

Grants

75-95 percent

for capital

grants (new

construction

and major

repairs)

75-85 percent

for capital

grants; 50 percent for operating assistance grants

50-94 percent

Project

Selection

State and local

governments

(subject to

FHWA regulations); Interstate routes

chosen by

federal government in consultation with

states

Transit

authorities

(subject to

UMTA approval)

Airport authorities, in conjunction with

airlines

Project Construction and

Management

State and

local governments; some

toll roads

Transit

authorities

Airport

authorities

(Continued)
TABLE 5. (Continued)

Program

Area

Water

Resources

Wastewater

Treatment

Community

Development

Economic

Development

Federal Share

of Total

Capital

Spending

About 75 percent

for dams;

100 percent for

dredging of

ports and inland

waterways

About 70 percent

k/

k/

Source and

Type of

Federal

Funds

General fund;

direct expenditures

General fund;

project grants

General fund;

formula and

discretionary

grants

General fund;

discretionary

grants

Federal Share

of Matching

Grants

Not applicable

75 to 85

percent <*/

Not applicable

Not applicable

Project

Selection

States and

federal government (ports);

federal government, with

state and local

input (waterways and dams)

Local agencies

with state or

EPA assistance

Local and

state governments

Federal

government

Project Construction and

Management

Federal

government

(waterways,

dredging of

ports, dam

construction);

federal and

state agencies

(dam management)

Localities

Localities

Localities

a. For fiscal year 1985 and thereafter, the federal match will be 55 percent for conventional systems

and 75 percent for "innovative" systems.

b. The federal government pays 100 percent of the community development projects it assists and

from 13 to 90 percent of selected economic development projects. Federally aided projects are

only a share, however, of total community and economic development investment.
economic growth. The federal government generally provides from 13 to

90 percent of economic development project costs, with state and local

governments or the private sector providing the balance (see Table 5).

Highways

The federal government spends more on highways and bridges than on

any other component of the nation's infrastructure. For 1983, federal

funding will be about $13.5 billion, or roughly half of the federal

government's total spending for public works infrastructure. Federal funds

come from the Highway Trust Fund, which is supported by a series of user

taxes, most importantly the nine-cent-per-gallon federal tax on motor

fuels. 5/

Since 1923, the Federal-Aid System of highways has grown from

169,000 miles or 5 percent of the nation's roads to 820,000 miles and over

20 percent of the route-miles. The Federal-Aid System now includes 40,000

miles of Interstate routes, 260,000 miles of major Primary System arterials,

400,000 miles of collector routes in rural areas (the Secondary System),

125,000 miles in the Urban System, and 260,000 bridges. The Interstate

System, which represents only 1 percent of the nation's roads, alone carries

about one-fifth of all traffic, and is now over 95 percent complete. In

contrast to the rest of the nation's highway system, where states have basic

responsibility for selecting routes to be built, the federal government

approves which routes are eligible to be parts of the Interstate program and

provides the funds to build these routes on unusually attractive terms—at

least 90 percent of costs paid for by the federal government. 6/

Over the years, the definition of the Interstate System has expanded

to include many roads that are of greater interest to states and localities

than to the federal government. This is largely because the financial

advantages conferred on states by the 90 percent federal match for Interstate highway construction encouraged states to build many highway projects that are unnecessary from a national perspective. Today, over

70 percent of the cost of completing the Interstate is for routes of

predominantly local importance—routes that are not part of the network

5. See Congressional Budget Office, Financial Options for the Highway

Trust Fund (December 1982).

6. The federal matching share for most non-Interstate highway programs

is now 75 percent.

36
necessary to link principal cities together, but that link facilities of regional

importance or improve traffic circulation in urban areas. 7J

In addition to the Interstate System, federal funds also support the

Primary, Secondary, and Urban systems, the Bridge Replacement and

Rehabilitation program, and a variety of safety and other specially targeted

programs. Federal grants account for about 70 percent of capital spending

for the Primary System, which is composed largely of significant intercity

arteries in rural areas, carrying twice as much interstate traffic as the

Interstate System. By contrast, federal spending represents only about

20 percent of total government capital spending on the Secondary and Urban

systems. Federal aid has relatively little influence on the total amounts

spent for these locally oriented systems. States and localities carry most of

the burden for these systems, for roads that are not included in any of the

various federally assisted programs, and for routine maintenance—such as

grass mowing and pothole filling—on all road systems.

Effects of Current Programs. The most basic rationale for federal

involvement in highways rests on the need for a coordinated national

network of roads to facilitate interstate commerce. Because the benefits

from such a system extend beyond individual states, federal financial aid is

required to ensure that an adequate interconnected network is built.

Although some parts could be self-supporting as toll roads, the network as a

whole requires government support.

The extent of national interest in the different highway programs

varies considerably, however. The major federal interest is centered on the

Interstate and Primary systems, and on related bridges—roads that link

activities in different states and contribute to interstate commerce. Aid

for the rest of the Federal-Aid System can be considered a form of

intergovernmental subsidy.

Although the size of the current federal commitment is roughly in line

with the needs for highway infrastructure, federal programs could be better

targeted to promote effective investment. £/ For instance, the most significant national highway problem appears to be the deteriorating condition of

the Interstate System and certain other important parts of the Federal-Aid

network. Repairing these key commercial routes is of higher national

7. See Congressional Budget Office, The Interstate Highway System;

Issues and Options (June 1982).

8. See Congressional Budget Office, Public Works Infrastructure; Policy

Considerations for the 1980s, Chapter II.

37
priority than building remaining Interstate routes that are primarily of local

or regional importance. Under current policies, however, the federal

government continues to spend large sums—about $4.5 billion was authorized

in 1983~for Interstate completion, even though less than half of the

remaining cost of the Interstate network is related to constructing an

interconnected system of intercity roads. In addition, over $2 billion in

federal funds is devoted annually to the locally oriented Secondary and

Urban systems and to programs representing a mix of safety, economic

development, and special regional concerns of particular interest to state

and local governments, which are in the best position to make effective

project choices.

Public Transit

Federal funding of mass transit began in the early 1960s, mainly to

help localities purchase failing private bus lines and upgrade their

equipment. Then, during the early 1970s, federal capital aid increased

rapidly, permitting greater use of funds for existing and new rail systems.

In many cities, fares were held down to encourage ridership; and, as transit

systems expanded, labor and other costs rose dramatically. As a result,

operating deficits grew until most systems were relying on the farebox for

less than half their operating costs. As this burden increased, operating

subsidies were added to the federal program in 1975.

With the dedication to transit of one cent of the new five-cent-pergallon tax on motor fuel, the federal government will provide about $3.4

billion in capital grants for public transit in 1983, and an additional $0.9

billion in operating assistance grants. With the exception of some projects

in a few large cities, almost every transit capital project uses federal aid,

with a 20 percent nonfederal match (25 percent beginning in fiscal year

1984). Capital grants are used for four basic purposes: new bus purchases

and bus maintenance facilities; modernization of existing rail transit

systems; extension of existing rail transit systems; and construction of new

rail systems. Federal operating grants cover about 13 percent of transit

operating costs nationwide.

In contrast to most other federal infrastructure programs, virtually all

federal transit grants are made to local rather than state governments, and

local governments are largely responsible for project selection and management. Grants administered by the Urban Mass Transportation Administration (UMTA) are of two types—project grants for rail- and bus-related

capital projects, made at the discretion of the UMTA Administrator; and

formula grants for operating assistance and routine capital investments such

as bus replacement. Capital funds are also provided by "Interstate substitu38
tion" grants for cities that have decided not to build specific segments of

the Interstate Highway System. 9/

The Surface Transportation Assistance Act of 1982 created a modified

transit block grant program that will go into effect in fiscal year 198*. The

new transit block grant will replace UMTA's existing urban formula grant

program, which provides funds for operating assistance (the bulk of the

program) and for capital uses such as routine bus replacement. Block grant

funds can be used for capital or operating purposes, with the annual amount

available for operating assistance in 1984-1986 limited to a specified

percentage of each urbanized area's 1982 operating apportionment.

Effects of Current Programs. In contrast to most other federally

assisted infrastructure programs, the benefits from mass transit are predominantly local. Therefore, federal assistance to transit rests on a federal

decision to assist urban areas and on the perception that, without such help,

localities could not afford all the capital investment necessary to build and

maintain public transportation systems. In response to this perception, the

federal government has provided high federal capital grants—covering

80 percent of project costs through fiscal year 1983, and 75 percent

thereafter. 10/ This generous federal share, usually augmented by state

money, gives local authorities an incentive to start new capital-intensive

transit systems and to buy new equipment rather than invest in the

continued maintenance and repair of existing facilities. After federal and

state contributions, local governments may pay only 10 percent of total

project costs.

Federal aid to mass transit, including operating assistance, has also

been justified on grounds that transit can help attain several important

social and economic objectives. These include easing urban road traffic

congestion, saving energy, reducing pollution, and providing people without

cars access to jobs. But recent studies indicate that many of these

objectives are not realized. For example, reductions in public transit fares

appear to have little effect on traffic levels in urban areas, even though the

9. If the Federal Highway Administration agrees with a city's contention

that a certain planned Interstate route is not of national significance,

the city has the option of using these funds, subject to appropriations,

for either transit or other highway projects. In contrast to the rest of

the transit program, the federal government has relatively little

influence over how or where these grants are used.

10. The federal share for all projects covered by existing Letters of Intent

and Full Funding contracts will remain 80 percent.

39
justification for the transit subsidies required to lower fares includes

expected benefits from reduced auto congestion and air pollution. And

although a major benefit commonly attributed to new rail lines is reduced

road congestion, evidence suggests that new rail systems tend to attract

chiefly bus and carpool passengers and thus do not significantly reduce the

number of automobiles on the roads, ll/ Similarly, mass transit's benefits

to disadvantaged groups, such as the poor, the elderly, and the disabled, are

often taken for granted. While this assumption appears valid for such highly

specialized services as "dial-a-ride" vans, most forms of mass transit serve

predominantly higher-income persons of working age. 12/ In general, it

appears that federal transit subsidies have not been very effective in

reducing external costs such as road congestion or in alleviating personal

hardship.

Airports

The Federal-Aid Airport Program was initiated in 1946 as a means of

accelerating the development of a commercially viable aviation system.

Today, the Federal Aviation Administration (FAA) manages the usersupported Airport and Airway Improvement Program, through which the

federal government makes 50 to 94 percent matching grants for construction and rehabilitation of the nation's airports. For 1983, the federal

government has authorized $800 million for capital improvements to airports, and an additional $4 billion has been authorized over the next four

years. 13/

Under current policy, virtually every publicly owned airport in the

country is eligible to receive federal assistance, including the 780 commercial airports, which are served by scheduled commercial air carriers or

by commuters and air taxi operators, and the 2,379 general aviation

11. See, for example, Institute of Public Administration, Financing Transit: Alternatives for Local Government, prepared for U. S. Department of Transportation (July 1979), pp. 9-10.

12. See Robert B. Cervero and others, Efficiency and Equity Implications

of Alternative Transit Fare Policies, prepared for U.S. Department of

Transportation (September 1980), and Congressional Budget Office,

Urban Transportatio spoi n for Handicapped Persons: Alternative Federal

Approaches (Novembe (Nc r 1979).

13. The Congress has imposed obligation ceilings of $750 million for 1983

and $800 million for 1984.
airports, used exclusively by small planes owned by individuals and private

corporations for recreational or business use. Of the 780 commercial

airports, the 66 largest serve about 90 percent of all air passenger traffic.

And only 155 general aviation airports—designated as "reliever" airports--

are needed to help reduce congestion at major commercial airports. The

remaining 2,224 general aviation airports serve predominantly local

needs.

Effects of Current Programs. Historically, the federal government

helped stimulate the commercial aviation system by making capital grants

for airport development. Today, every major city has an airport, and the

dependence on federal aid varies greatly. Direct federal funds now appear

to account for 20 percent or less of total investment monies at large

airports, the balance being drawn from the issuance of tax-exempt bonds,

retained earnings, and other nonfederal sources. With major airports rated

in the municipal bond market as premium investments, these airports might

easily finance further improvements without federal aid. By contrast, many

small airports, especially general aviation airports, earn insufficient revenues to cover debt service, and these tend to rely much more heavily on

federal funding. A sizable number of general aviation airports currently do

not charge landing fees, and have only minimal charges for the use of

parking tie-downs and other facilities; many could substitute such fees for

existing federal grant assistance. Except in the case of reliever airports

that help reduce congestion at major commercial airport facilities, there

appears to be little economic justification for the extensive federal support

of general aviation airports, given their limited contribution to a national

transportation system and their substantial, untapped revenue-raising potential.

Water Resources

Since the early years of the nation's history, the federal government

has been involved in financing, constructing, and operating a variety of

water resource projects, including inland waterways (locks, dams, and

14. These are included in the National Airport System Plan and eligible for

federal aid based on the FAA's broad definition of national significance. According to this definition, a general aviation airport has

national significance if it is publicly owned, has at least 10 based

aircraft, and serves a community located 30 minutes or more from

another existing or proposed airport in the National Airport System

Plan.
channel dredging), ports and harbors, and multipurpose dams. 1_5/ For 1983,

$4.3 billion in direct federal expenditures have been authorized in these

areas, including construction, operation, and maintenance.

The federal government, largely under the auspices of the U. S. Army

Corps of Engineers, plays a dominant role in building and maintaining the

nation's water resources public works. For most types of projects, the

federal government finances all capital costs but ultimately pays somewhat

less because of reimbursements from users and other nonfederal

contributions. For the average inland waterway project, the federal

government pays about 94 percent of combined capital and operating costs

over the project's life. For multipurpose dam projects, the federal share

averages 70 percent of combined costs, but may range anywhere from about

36 percent for a single-purpose hydroelectric project to 89 percent for an

irrigation project. The federal government's share of costs for a typical

commercial harbor project is approximately 84 percent. 16/

Effects of Current Programs. Historically, the federal government's

role in water resources has been based extensively on the goal of promoting

regional economic development. For example, the federal government built

the system of inland waterways when no other transportation mode existed

to serve growing industry and agriculture in the South and Midwest. With

the maturing of regional economies and the completion of most water

projects necessary to achieve regional development goals, some of the major

concerns motivating federal subsidization of water resources infrastructure

no longer apply. Nevertheless, large federal subsidies have continued, even

in areas where there are significant opportunities for user fee financing.

For instance, under current policy, local sponsors pay only 11 percent of the

cost to construct dams for irrigation purposes, and the federal government

continues to provide heavily subsidized irrigation water to western farmers—a subsidy that has outlived its original purpose of hastening the

development of the West. Similarly, although freight shipping on inland

waterways has become a mature business, federal subsidies today cover

more than one-fourth of the costs of the barge industry—more than ten

times the share of federal subsidies for other modes of transport. Continuation of federal subsidies for water transport encourages the use of barges

15. Multipurpose dams serve several functions, including flood control,

irrigation, navigation, hydroelectric power generation, municipal and

industrial water supply, and recreation.

16. For further details, see Congressional Budget Office, Current CostSharing and Financing Policies for Federal and State Water Resources

Development (July 1983).
rather than railroads, and this in turn stimulates demand to build more locks

and dams with federal dollars.

Several other concerns have provided a basis for federal involvement

in certain water resource projects: national defense and security (ports and

harbors); the benefits of centralized coordination (inland waterways, multistate reservoir systems); and the presence of external costs and benefits, as

in water quality or flood control. Most of the federally important water

projects have already been built, however; future water resource needs will

be concentrated on the management and rehabilitation of existing facilities,

with smaller intrastate projects likely to dominate new construction.

Wastewater Treatment

While the federal government has provided some grants for wastewater treatment facilities since the late 1950s, the extensive federal role in

wastewater treatment grew out of the awakened national concern for

preserving and improving environmental quality in the 1960s and 1970s. The

1972 Water Pollution Control Act sought to achieve "fishable and swimmable" waters by 1983 and to eliminate pollution of navigable U.S. waters

by 1985. The Construction Grants program administered by the Environmental Protection Agency (EPA) was designed to achieve specific, federally

mandated pollution abatement goals nationwide, within a strictly limited

time-frame. To attain these goals, the federal government undertook to pay

75 percent of the capital costs of constructing or improving publicly owned

wastewater collection, treatment, and disposal works.

Since peaking in the late 1970s, annual authorizations for this program

have dropped to $2.4 billion in 1983. The federal matching share will

decrease from 75 percent to 55 percent of project costs beginning in fiscal

year 1985. In addition to their matching share of EPA grants for capital

improvements, localities pay all costs of operating and maintaining these

systems. Recently, many states have initiated grant and loan programs to

help local jurisdictions meet their capital requirements for wastewater

treatment.

Effects of Current Programs. The rationale for federal involvement in

wastewater treatment rests largely on the presence of significant external

costs and benefits. The benefits of wastewater collection and treatment

systems accrue both to primary users and to downstream communities.

Building adequate facilities solves local wastewater collection and water

quality problems, but clean water also benefits others downstream who pay

nothing for it. Consequently, no single community would be willing to

charge its residents the full cost of wastewater treatment. Thus the
responsibility for maintaining clean rivers, lakes, and streams is shared both

by direct users and by all levels of government.

Beginning in fiscal year 1985, financing responsibility will be divided

more evenly than at present as the federal share on EPA grants will drop to

55 percent. A drawback of existing federal policy, however, remains its

inflexibility in certain situations. In effect, wastewater treatment equipment must be installed to achieve cleaner bodies of water regardless of

local water quality or hydrological conditions. In some situations, however,

water quality is more directly linked to sources of pollutants other than

wastewater, and in others natural processes can make extensive treatment

unnecessary. In these cases, capital-intensive wastewater treatment may

not achieve higher water quality. More flexible federal standards would

allow localities to implement more cost-effective solutions.

Community Development

Federal community development programs support a wide range of

local improvements to public and private facilities. Most aid is channeled

through the Community Development Block Grant (CDBG) program

administered by the Department of Housing and Urban Development (HUD).

The rest is provided through the Farmers Home Administration (FmHA)

within the Department of Agriculture.

The CDBG program, begun in 1974, was a major federalism initiative

of the Nixon Administration, under which seven categorical programs for

community development were consolidated into a block grant. 17/ These

earlier programs were considered ineffective because their specialized

nature prevented local governments from tailoring uses to respond to local

conditions and because the federal government could not weigh the

advantages of different approaches in distributing funds. The consolidation

of these programs into a block grant was intended to allow communities

considerable flexibility in designing strategies to meet local development

needs.

Funding for the current CDBG program is set at $4.5 billion, including

$1.0 billion from the supplemental jobs bill. About 70 percent of funds are

provided by formula to urban cities and counties, and the remaining funds

17. The programs included the urban renewal, neighborhood development,

Model Cities, water and sewer facilities, neighborhood facilities,

public facilities, and urban beaut if icat ion programs administered by

HUD.

44
are distributed through project grants to smaller communities. Cities with

populations over 50,000, the designated central cities of metropolitan areas,

and urban counties are entitled to funds, with the amount received

depending on a community's need (measured by such factors as the extent of

poverty and the age of its housing stock) relative to the needs of other

eligible communities. Funds for smaller communities are allocated to state

governments, which design and manage mechanisms for allocating funds. 18/

Recipients of CDBG funds are allowed wide latitude in determining

the use of funds. In general, CDBG funds must be used for development

activities that either eliminate slums and blight, conserve the housing stock,

or meet other urgent needs, and that provide benefits primarily for low- and

moderate-income households. Of formula grants provided to larger

communities, about one-third is used for housing rehabilitation, usually

through grants or reduced-interest loans to low- and moderate-income

homeowners to make needed repairs. About one-quarter of the money is

used for public facilities projects, including: street and sewer repair; solid

waste disposal; flood and drainage facilities; and neighborhood facilities

such as senior citizens1 centers and parks. The remaining funds are used for

widely varying activities, such as social services and economic development

activities. Although smaller, nonentitlement communities undertake the

same types of activities, over 40 percent of their funds are used for public

facilities, while housing assistance represents only one-tenth of the total.

Some community development assistance is also provided by the

Farmers Home Administration (FmHA), which makes loans for the development of community facilities. Loans may finance a variety of facilities,

such as fire stations, hospitals and nursing homes, city halls, and schools.

The interest rate charged on loans is determined by the income of a

community's residents and currently varies from 5.0 to 9.125 percent. This

assistance is limited to rural areas, with funds allocated by the FmHA on a

discretionary basis. Funding for community facility loans is set at

$130 million in 1983.

Effects of Current Programs. While the CDBG program provides

fiscal relief for large urban governments, its primary role is as a means of

fostering better living environments, especially for the urban poor. CDBG is

the largest source of federal aid that many cities receive, representing

18. The participation of state governments in the CDBG program is

optional; if a state decides not to participate, HUD awards funds to

local governments in the state. In 1983, 49 states are participating in

the program.
nearly one-third of all federal grants made to city governments in 1981.

Because funds may be used for activities that are generally local

responsibilities—repairing roads and sewer lines, developing parks and

recreational facilities, improving sidewalks and open areas—they allow

recipients to shift local funds that would otherwise have been needed for

these activities to other locally determined priorities. But a majority of

activities financed by CDBG are functions not generally undertaken by local

governments—particularly the rehabilitation of low-income housing and, to

a lesser extent, economic development activities. Further, CDBG funds are

primarily used for activities that benefit low- and moderate-income households. Thus, the program is seen as a means to increase the resources

available to less affluent urban residents and to improve the quality of their

neighborhoods.

Economic Development

A small portion of federal development aid is limited to areas

experiencing economic distress. Funds for these areas are provided principally by HUD's Urban Development Action Grant (UDAG) program and

through the Economic Development Administration (EDA) within the Department of Commerce.

Current economic development programs provide grants to local

governments for projects facilitating business expansion. Through the

UDAG program, the federal government makes grants for commercial,

industrial, and neighborhood development projects that applicants certify

could not proceed in the absence of such aid. Federal funds contribute an

average of 13 percent of total project costs, with localities contributing an

additional 6 percent and the private sector supplying the balance. Local

governments receiving action grants generally use them to help acquire

sites, to develop needed infrastructure such as access roads or sewer lines,

or to provide low-interest loans for project construction. Projects are

selected on a competitive basis by HUD, with applicants restricted to local

governments judged to be experiencing economic distress. Funding is set at

million in 1983.

Some economic development assistance is also provided through the

EDA. EDA activity reached a peak in 1979, when the agency administered

over $1 billion in aid, including credit assistance, much of it directed to

private firms. In 1983, funding for EDA has been reduced to $298 million

for grants (including $100 million from the jobs bill) and $150 million in loan

guarantee authority. Grants are made to state and local governments to

undertake public works projects, such as the development of industrial sites

or the provision of water and sewer facilities, and to provide technical
assistance. Loan guarantees are made to private firms, covering up to

90 percent of the principal and interest of loans made by private lenders for

the purchase of fixed assets or for working capital. A share of EDA

assistance is used for short-term, labor-intensive construction projects such

as renovation or rehabilitation of existing buildings. EDA may provide

assistance only for projects located in areas meeting specific standards for

distress, which for regular EDA projects are set loosely enough to encompass 80 percent of the nationf

s population, but which are more restrictive

for short-term projects.

Effects of Current Programs. Federal support for distressed areas is

designed to provide employment opportunities and foster economic activity

where these are lacking, thereby stimulating overall productivity and

generating growth. This growth is intended to serve as a catalyst in

distressed areas, prompting additional private investment and employment

growth, increasing local revenues, and eventually decreasing federal costs

such as unemployment compensation and income support payments.

An important issue concerning federal economic development activities is the extent to which federal investment substitutes for spending,

either by the private sector or by state or local governments, that would

have occurred in its absence. Although substitution is difficult to measure,

studies have estimated that, in as many as one-third of all projects financed

by UDAG, federal funds may have substituted in part or in whole for other

spending. One study of EDA public works projects found that as much as

half of the private investment in project areas, if not on the project site

itself, would have occurred without the EDA-financed project. 19/ Further,

even when federal funds create net additional economic activity, it is

difficult to ensure that the resulting benefits, such as increased employment, accrue to those most in need of assistance.

OPTIONS FOR CHANGE

To reflect the shifting priorities and objectives of national infrastructure investment and to encourage better investment decisions, the Congress

may wish to consider a number of options that would modify the existing

19. For a further discussion of federal funds substituting for other

investment, see: Department of Housing and Urban Development, An

Impact Evaluation of the Urban Development Action Grant Program

(1982); and Abt Associates, Inc., Employment and Investment Impacts

of EDA Public Works Investments and Implications for Future

Evaluation Methodology, Draft Final Report (November 26, 1980).

24-083 0-83- 5
federal role in public works and development programs. The principal

candidates for such revision are programs in which there are no significant

external costs and benefits, in which there is no need for centralized

coordination, or which are financially sustainable at the state or local level.

The realignment approaches examined here include:

o Eliminating federal funding of projects with primarily local benefits;

o Changing funding provisions to reduce the federal share of costs

for federally assisted projects;

o Changing program rules by making federal regulations more flexible;

o Changing both funding provisions and program rules by consolidating existing programs into block grants; and

o Encouraging creation of cross-cutting financing mechanisms, such

as infrastructure banks.

For the most part, these approaches are independent but not mutually

exclusive; some would be most effective if put in place in a complementary

fashion. The first two would significantly reduce the federal role in existing

programs, while the remaining three would provide increased flexibility and

financing resources for states and localities, to enable them to assume

greater responsibility for these programs. Each of these approaches is

discussed in detail below.

The budgetary impact of the specific realignment options would

depend on several factors (see Table 6). In programs presently supported by

federal user taxes, a turnback of revenues from existing taxes could

eliminate or greatly reduce the financial burden placed on states and local

governments. Any turnback of revenues or reduction in federal taxes would,

of course, reduce the federal budgetary savings. For states and localities,

the increase in financial burden would depend on the institution of state and

local user fees, the level of offsetting federal aid, and the demand for

infrastructure services.

Eliminate Federal Funding

Limiting federal aid to national needs and shifting decision making and

financial responsibility for projects with primarily local benefits to states

and localities would be most applicable to four program areas: highways,
TABLE 6. ESTIMATED BUDGETARY IMPACT OF SELECTED FEDERALISM OPTIONS FOR PUBLIC WORKS INFRASTRUCTURE, 1984

(In billions of dollars)

Option

Reduction

in Federal

Obligations

Increase in

Non federal

Financial Burden a/

Eliminate Federal Funding

Secondary, urban, and nonFederal-Aid roads and bridges 3.0 b/ 0

Transit operating aid 0.9 0.9

Grants for airport development 0.5 b/ 0

Intrastate water resource projects 1.5 0-1.5

Reduce Federal Share of Costs

Reduced federal share on

transit capital grants

(75 to 60 percent) 0.5-1,5 c/ 0.5

Reduced federal share on

Interstate Highway

reconstruction projects

(90 to 25 percent) 0.8 0

Federal loan program for

intrastate water

resource projects 0 d/ 0

SOURCE: Congressional Budget Office.

a. Assumes offsetting federal aid and/or state/local user fees. The exact

size of the nonfederal burden would depend on the extent of demand

for infrastructure services. Without offsetting federal aid and local

user fees, the nonfederal financial burden could increase by as much as

federal obligations are reduced, if states chose to continue the same

level of commitment.

b. Turnback of existing federal user taxes would eliminate the federal

budgetary savings.

c. Federal obligations could be reduced by as much as $1.5 billion if the

higher local match resulted in a reduction in the number of projects

undertaken.

d. Because of initial capitalization costs, there would be no federal

budgetary savings in the early years of such a program. Once the

program became self-sustaining, however, federal savings could total

as much as $1.5 billion a year, with a corresponding increase in the

nonfederal burden.
transit, airports, and water resources. In most cases, a relaxation of federal

standards and regulations would logically complement such a turnback of

responsibility.

Highways. To concentrate federal highway resources exclusively on

the roads of greatest national importance, federal aid for all but the

Interstate and Primary systems and related bridge programs could be

dropped and full financing responsibility for Secondary and Urban systems

transferred to state and local governments. Such a shift in federal and state

highway roles could place a substantial burden on state governments, since

they would be forced either to see less spent on their highways or to

increase taxes. This burden might be eased, however, by reducing the

federal tax on motor fuel by 2.7 cents per gallon, thereby permitting the

states to raise their taxes by $3.0 billion a year—enough to offset fully the

reduction in federal aid (see Table 6). A potential problem, however, is

that, as the states increased their own user fees, there is no assurance that

the resulting distribution of cost recovery would be uniform among states or

applied in such a way that each vehicle class paid its share of highway costs.

An alternative would be to keep the federal tax and turn back to the states

the appropriate portion of federal fuel tax revenues.

Federal funding of the Interstate Highway System might also be more

closely aligned with federal priorities if funds were concentrated exclusively

on unbuilt routes that are essential to a national, interconnected system of

highways. Routes serving predominantly state or regional needs could be

excluded from the Interstate System plan, with the exception of those

already under construction and those that have received federal approval of

their design. Any such attempt to refocus the Interstate program on

national needs would probably affect the states unevenly, given the diversity

of approaches that states have taken in building their Interstate routes. 20/

Public Transit. The federal government could eliminate operating

assistance to local transit authorities. Public transit operations are

essentially of local rather than national interest, involving local decisionmaking concerning such matters as wages, routes, and levels of service.

Moreover, as discussed earlier, indiscriminate operating subsidies are not

particularly well suited to reducing congestion or increasing transportation

access for the disadvantaged--goals that are frequently cited in justification of such subsidies.

20. For further details, see Congressional Budget Office, The Interstate

Highway System: Issues and Options.

50
Federal operating assistance grants presently cover about $900 million

in operating costs—13 percent of transit operating costs nationwide, and a

smaller fraction in large cities. Eliminating this aid would place a

significant burden on cities that currently receive federal operating subsidies. This burden could be met in four ways: higher state and local

government subsidies, higher fares, reduced service, or improved

management. If the difference was made up entirely at the farebox, transit

fares, presently averaging 53 cents, would have to rise by about a third. To

alleviate hardship, federal operating assistance could be phased out

gradually. In addition, since maintenance is considered an operating expense

and thus ineligible for capital grant funding, terminating federal operating

subsidies could aggravate existing problems of deferred maintenance on

many transit systems, unless certain major types of maintenance, such as

overhauling an engine, were made eligible for capital grant funding.

The Administration has called for the elimination of federal operating

subsidies for mass transit by 1985. Under the Administration's proposal,

fiscal year 1984 would be a transition year, with $275 million for operating

assistance, down from the 1983 appropriation of $875 million. 21/ However,

the proposal to restrict operating assistance to $275 million in 1984 has been

rejected by both the House and Senate Appropriations Committees.

Airports. The federal government could eliminate a large part of its

direct financial role in airport development. The major commercial

airports, in which the principal federal interest is centered, tend to be

financially self-sufficient, and have in the past relied on federal aid only to

a small degree. Under current policy, federal grants are also made

available to a large number of general aviation airports that serve primarily

local needs and that appear to have considerable unused revenue-raising

potential. If the primary beneficiaries, the users of these airports, do not

find it worthwhile to finance further development through user fees, it is

unclear why the taxpayers at large should do so. To avoid the risk of

regional imbalances in airport development, however, some federal grant

assistance could be maintained, and targeted exclusively to large- and

medium-sized airports that face difficulties in obtaining nonfederal

21. The Surface Transportation Assistance Act of 1982 limited the amount

of operating assistance available to localities for 1984-1986. For each

of these years, urbanized areas with populations greater than 1 million

are limited to 80 percent of their 1982 operating assistance apportionment, urbanized areas with 200,000 to 1 million people are restricted

to 90 percent of their 1982 apportionment, and urbanized areas with

populations of less than 200,000 can use up to 95 percent of their 1982

share.

51
financing; to small rural airports; and to general aviation reliever airports.

Selective federal aid to upgrade the nation's 155 reliever airports might help

divert general aviation users from the congested major air carrier facilities,

especially if implemented in conjunction with congestion fees such as peak

hour surcharges.

Withdrawal of the bulk of federal aid would provide the necessary

incentive to airport managers—or states, which often own general aviation

airports—to levy appropriate user fees. The possibility of imposing peak

hour surcharges, together with other forms of local pricing, would help

provide airport authorities with the means to substitute local for federal

user fees. On the other hand, there could be considerable practical

problems in administering such pricing mechanisms. 22/

Under this option, direct grants to airports might total roughly $300

million a year, or about 30 percent of currently authorized annual federal

funding. Elimination of the remaining federal aid would permit about a 20

percent reduction in federal aviation taxes, which presently support airport

development and air traffic control services. Alternatively, these revenues

could be turned back to the states on a temporary basis, to help ease the

transition to fuller nonfederal responsibility for financing airport development.

Water Resources. Under this option, all new intrastate water resources projects would be financed, planned, constructed, and operated at

the state or local level. Operation and maintenance of existing intrastate

projects could be transferred to the states over a period of ten years. This

would shift a considerable financing burden—equivalent to $1.5 billion in

1982 federal spending--to the states (see Table 6), which accordingly would

have a strong incentive to implement user fee financing of water resource

projects where applicable. As a result of this increased financial responsibility for intrastate projects, states and user groups would be more likely to

promote only the most efficient water projects—those that would return

benefits in excess of their costs. Less well endowed states could, however,

be put at a relative disadvantage compared to states with a stronger fiscal

position. Specifically, energy-exporting states and states with a growing

industrial and population base could probably expand their financial, technical, and management roles in water resources development much more

readily than could states with shrinking populations and industrial bases.

22. For futher details, see the forthcoming Congressional Budget Office

study of airport financing.

52
Change Funding Provisions to Reduce the Federal Share of Costs

In several areas, including public transit, highways, water resources,

and community development, eliminating federal assistance for projects

with predominantly local benefits may not be practicable or desirable

because localities could not sustain the costs of these programs alone, or

because there are significant inequities or hardships involved. In these

cases, the currently high federal share of capital costs could be reduced to

improve investment decisions and reflect changes in" the priority of

investment needs.

Public Transit. The high federal matching share for transit capital

grants means that, for most urban areas, the availability of federal funds

strongly influences local transit priorities. While the Surface Transportation

Assistance Act of 1982 reduced the federal share from 80 to 75 percent, a

further reduction to 60 percent would double the local share from what it

has been, thereby encouraging localities to commit funds only to projects

they really need and to make better decisions as to the tradeoff between

improved service and reduced fares. In general, localities would be

encouraged to serve basic objectives such as cost effectiveness in moving

large numbers of people, rather than build capital-intensive projects made

attractive by generous federal funding. There are likely to be adjustment

problems for some urban areas, however, because of the increased financial

burden, which would amount to at least an additional $500 million in local

funding for 1984 (see Table 6).

Highways. While federal funding of Interstate System repairs has

increased significantly in recent years, a large portion of these funds is

eligible for use by states not for repairs but for "reconstruction" projects.

These are mostly locally oriented projects that do not entail repair of

existing highway capacity, but rather involve construction of routes dropped

from the Interstate System plan and special types of new construction, such

as added lanes and interchanges, that have considerably lower federal

priority than repairing the existing system. Under the existing Interstate 4R

program (Resurfacing, Restoration, Rehabilitation, and Reconstruction),

states select their own combinations of repair and reconstruction projects,

all eligible for 90 percent federal funding. Thus a significant reduction in

the federal matching ratio for reconstruction projects--say to 25 or

50 percent--would encourage states to channel more of their 4R funds into

repair of existing Interstate routes. A 25 percent federal match would

reduce federal obligations, and could increase the states1 financial burden,

by as much as $800 million in 1984 (see Table 6).

Water Resources. Instead of eliminating the federal role in intrastate

water resource projects, a federal loan program could be established that

would limit the federal role to that of financing partner for intrastate

53
projects. This would reduce the federal share of costs while recognizing the

federal government's competitive advantage over state and local governments in financing capital-intensive water projects. The fund would require

an initial federal investment, but would eventually become self-sustaining as

states paid back their loans. States, possibly with local assistance, would

select and manage these projects, design and implement user fee systems to

recover appropriate project costs, and accept legal responsibility for repaying the costs of providing all vendible benefits as well as an appropriate

share of non-vendible benefits. 23/

A possible disadvantage of the program is that high demand for federal

loans could deplete the loan fund rapidly, especially early on, before state

payments began to replenish the balance. If loan demand was high,

distribution of available funds among competing states could pose problems.

In addition, defaulting on a loan could prove burdensome and costly for the

federal government and the states, possibly resulting in water rights

conflicts if the federal government took over a project to recover its

investment.

Community Development. Another area in which federal costs could

be reduced is the Community Development Block Grant (CDBG) program.

Large cities and urban counties are currently entitled to funds regardless of

their needs or their ability to finance projects locally, and recipients may

use funds to pay the full costs of selected projects.

Federal costs could be reduced by requiring that jurisdictions with

local capacity to fund community development projects be required to pay

some or all of project costs. Terminating aid to such communities would

provide the largest savings, but would also end some services to low- and

moderate-income households if jurisdictions chose not to continue current

activities. Lowering the share that the federal government pays of projects

selected by these communities would probably reduce but not eliminate

their activities in this area.

23. Vendible benefits are those received directly by users, the costs of

which can be recovered through some sort of user fee. Non-vendible

benefits are benefits to the general public—non-marketable public

services that the private market would not otherwise provide, such as

maintaining fish and wildlife habitats.

24. For further details, see the forthcoming Congressional Budget Office

study of options for more efficient water resources investments.
Change Program Rules by Making Federal Regulations More Flexible

Relaxing federal regulations may make sense in several areas, in order

to better match federal programs to local needs. In particular, some

changes would make it easier for state and local governments to implement

more cost-effective projects. Some federal regulations also could be lifted

in areas where federal financing of nonfederal projects is eliminated.

Indeed, the benefits from returning responsibility to state and local

governments would likely be wasted if the federal rules for spending these

funds were not modified as well. For example, federal bridge standards

could be waived in the case of bridge programs that are turned back to the

states, thereby permitting states to specify their own standards based on

local traffic conditions. State highway officials have complained that using

federal standards for local bridges can increase construction costs by as

much as a third—an expense they incur only because of the 75 percent

federal matching share. Modifications could also be made in federal

highway standards.

Wastewater Treatment. The Clean Water Act, as interpreted by the

Environmental Protection Agency, requires capital expenditures to upgrade

wastewater treatment and conveyance facilities with little provision for

estimating the benefits of such expenditures. In a number of cases,

following the guidelines makes little economic sense because of the specific

characteristics of local water quality or hydrological conditions. In some

coastal systems, for instance, natural currents can cause mixing, biological

degradation, and dilution of wastewater, so that environmental degradation

does not result and healthy biological communities thrive in the discharge

area. To handle such situations, EPA or the states could issue site-specific

coastal waivers allowing less than secondary treatment where justified by

local conditions. The savings could be substantial—General Accounting

Office estimates are as high as $10 billion in a total of 800

communities. 25/ Wastewater treatment regulations could also be modified

where the water is naturally polluted. In rural communities, for example,

river water may be so degraded by causes unrelated to wastewater

discharges—soil erosion, phosphorus and nitrogen runoff from fertilizers, or

chemical contamination from pesticides—that treated wastewater is in fact

much cleaner than the natural waterways it empties into.

Public Transit. In other areas, more flexible federal regulations could

allow states and localities to assume a larger role in financing their own

infrastructure facilities and in developing strategies to best serve local

25. See U. S. General Accounting Office, "Billions Could Be Saved Through

Waivers for Coastal Wastewater Treatment Plants" (May 22, 1981).

55
needs. In public transit, federal and local regulations governing various

aspects of local transit operations could be eased to allow transit operators

to take advantage of innovative and potentially more efficient transit

alternatives, such as the contracting-out of certain routes and operations to

private taxicabs or jitneys (small buses). For example, the cost effectiveness of private taxicabs under contract to transit operators is based on the

fact that most taxicab personnel are not unionized. But, under current

federal law, unions exert considerable influence and can even restrict the

use of federal dollars for these purposes, and transit authorities can be made

to pay union-level wage rates in contracting with such companies. 26/ Relaxing these and other regulations would encourage transit operators to

implement readily available transit innovations that could reduce costs and

better serve the needs of urban and suburban dwellers.

Change Both Funding Provisions and Program Rules by

Instituting Block Grants

In several areas, consolidation of existing programs into block grants

could reduce federal administrative costs and provide increased flexibility

for states and localities to set their own spending priorities.

Highways. The Administration recently proposed a Transportation

Block Grant that would consolidate six categorical highway programs and

fund them as a unified block grant for 1984-1988 at the funding levels

enacted for fiscal year 1984. The six programs are: Urban System,

Secondary System, Non-Primary Bridges, Highway Safety (FHWA 402

Grants), Hazard Elimination, and Rail-Highway Crossing. The Administration proposal would increase states1

 flexibility in spending in these areas, but

could pose problems for some by its restriction of funding to 1984 levels.

Nevertheless, it could provide a transition from the existing alignment of

roles to the states1 assumption of full financing responsibility for these six

locally oriented highway programs sometime in the future.

Wastewater Treatment. Block grants could also be applied to wastewater treatment. The federal government could consolidate the existing

500 to 700 project grants made annually under the EPA program into block

grants for each state. 27'/ Although some of the cost of disbursing and

auditing project funds would be shifted to the states, this consolidation

26. Section 13(c) of the Urban Mass Transportation Act of 1964.

27. The Administration included EPA wastewater grants in a very different block grant proposal that is part of its 1983 Federalism

56
would significantly reduce federal administrative costs, and would also allow

the states greater discretion in spending their allotted funds. It also might

encourage the use of state infrastructure banks, as discussed later.

Community Development. Another strategy for program consolidation, included by the Administration in its 1984 budget submission, would be

to combine the CDBG program and the General Revenue Sharing (GRS)

program—which provides unrestricted aid to localities—into a single unrestricted block grant for local governments. Because jurisdictions currently

entitled to CDBG funds would be assured that their funding levels would not

be reduced under this plan, the proposal would have the effect of converting

CDBG into an unrestricted grant. The merits of this consolidation would

depend on the value that the Congress placed on community development

projects relative to other state and local activities. Since CDBG recipients

can currently use funds for a wide range of development activities, lifting

restrictions on CDBG would probably lead to some increased spending for

non-community development activities, rather than to additional spending

for community development needs.

Encourage Cross-Cutting Financing Mechanisms

To help states and localities assume a larger share of the responsibility

for financing public works programs, the federal government could encourage the creation of state infrastructure banks and other cross-cutting

financing mechanisms. The state of New Jersey is currently moving ahead

with a state infrastructure bank proposal, and recently introduced federal

legislation would authorize substantial new federal funds to capitalize state

infrastructure banks and other comparable financing mechanisms. An

alternative source of funding would be from federal programs that are

candidates to be turned back to the states. This might be an effective way

to integrate federal financial help with increased state and local responsibilities. Another possibility would be to establish a federal infrastructure

bank instead of individual state banks. 28/

27. (Continued)

Initiative—a State "Mega-block" Grant that would consolidate more

than 20 existing categorical and block grants, mainly supporting a

variety of human service programs.

28. Bills introduced in this session of the Congress that would authorize

new federal funds for state or federal infrastructure banks or

comparable financing mechanisms include S. 532, S. 1330, S. 1619,

H.R. 1480, and H.R. 2419.

57
State infrastructure banks would function essentially as revolving loan

funds for public works projects. They could be capitalized with both federal

and state appropriations as well as proceeds of state bond issues, user fees,

and other state revenues, private capital, and the banks1 own earnings on

equity capital. The banks would serve as the states1 vehicles for issuing

revenue-backed infrastructure bonds, and a portion of their capital could

also help enhance the creditworthiness of localities that might otherwise

have more limited access to public credit markets.

In New Jersey, for example, federal capital grants would be combined

with state bond proceeds to make low or no-interest loans to municipalities

through the new state infrastructure bank. Under this plan, the state of

New Jersey estimates that some 200 wastewater systems could be upgraded,

instead of 11 if funded directly by EPA project grants. While one result of

this could be that the municipalities receiving loans would pay substantially

higher user fees than they would under direct project grants from the EPA,

the likelihood of higher fees should encourage localities to choose the most

cost-effective solutions to their wastewater treatment needs.

Federal encouragement of such state financing mechanisms could take

the form of initial capitalization, technical assistance, and legislation to

permit federal grant monies (such as EPA Construction Grants for Wastewater Treatment) to be used for loan purposes.

58
CHAPTER V. EDUCATION, EMPLOYMENT,

AND SOCIAL SERVICE PROGRAMS

The federal role in education, employment, and social services grew

substantially during the 1960s and early 1970s, with an increased emphasis

on activities targeted to groups with special needs. Many new programs

were introduced during this period, and existing programs were modified

with the intent of inducing nonfederal governments to direct more resources

toward meeting the needs of disadvantaged groups in their communities.

While this federal effort was often successful, it was not without its

problems. Some programs were criticized as misdirected, duplicative, or

unnecessary. Although recent legislation has responded to critics in some

areas—for example, changes in employment programs authorized by the Job

Training Partnership Act, and elimination or consolidation of numerous

small education programs under the Education Consolidation and

Improvement Act—it appears that there are still other modifications that

might promote more effective federal spending.

This chapter has three major sections. The first outlines the basis for

federal involvement in these human services. The second briefly describes

the current federal programs and their effects. J7 The third section

summarizes problems and discusses options the Congress might consider to

modify the federal role in these areas.

BASIS FOR FEDERAL INVOLVEMENT

The primary rationale for current human service programs is concern

for the distribution of resources—a desire to relieve hardship and inequity—

although some activities may have spillover benefits as well, and a few

activities can only be justified on the basis of spillovers. One activity—the

Employment Service—is based in part on the advantages of centralized

coordination.

1. A more detailed description of current programs is contained in

Appendix B.
Distribution of Resources

Current activities whose primary purpose is to relieve hardship or

inequity may be identified with more specific goals. These include a desire

to provide more equal opportunities to disadvantaged groups, including the

poor and the handicapped; to defray the costs of federally mandated

activities; to compensate localities for the effects of federal activities that

impose costs on them unevenly; or to ensure that caretaker services are

available to dependent persons.

Programs that address the goal of providing more equal opportunities

for advancement are those that target educational or employment services

on disadvantaged groups. They include compensatory, special, and bilingual

education programs, as well as employment assistance programs. Special

and bilingual education programs help to defray the costs of ensuring the

educational rights of handicapped and non-English-speaking children, in

addition to enhancing their opportunities.

Impact aid is a program wholly intended to compensate localities for

the effect of federal installations that reduce local tax bases. Some other

programs might also be justified, in part, on this basis. One example is

bilingual education, since the influx of non-English-speaking immigrants is

controlled by federal immigration policy and the preferences of immigrants,

both of which are beyond the control of affected communities. Employment

assistance programs are another example, since federal macroeconomic and

trade policies can have very uneven regional effects on employment.

Programs providing caretaker services include child welfare programs

and community- and home-based services for elderly and disabled persons.

These exist partly for humanitarian reasons, but in some instances they may

also serve to reduce federal and state welfare costs by enabling certain

elderly and disabled persons to do without institutional care.

Spillovers or External Effects

When state or local activities have external benefits that spill over to

other parts of the nation, federal support for those activities may be

appropriate in order to induce expansion. Federal support for both

education and employment programs might in part be justified on this basis,

because of the national advantages of a literate and trained population.

Spillover benefits also arise from state and local activities that help to

make people more self-sufficient and thereby reduce welfare costs.

Spillovers occur because the federal government reimburses states for more

60
than half of their welfare costs, on average, so that taxpayers throughout

the nation benefit from welfare savings in any state. Two major groups of

programs may, as already noted, help to reduce welfare costs: those that

target educational or employment services on disadvantaged persons; and

those that provide caretaker and other social services to dependent persons.

Centralized Coordination

Centralized coordination of information about job openings and

persons available for work can improve the efficiency of the labor market

by facilitating labor exchange. Employment Service offices in each state

maintain statewide lists of available jobs and applicants. In addition, states

have access to a list of job orders nationwide through an interstate

clearance system.

THE CURRENT FEDERAL ROLE

In 1983, the federal government authorized $28.1 billion for education,

employment, and social services (see Table 7). 2/ Of this, 62 percent funded

grants to state and local governments for the provision of services. This

chapter focuses primarily on grant programs since there is little controversy

over the federal role in its direct activities. ^/

The federal role in state and local activities is significant, even though

the federal government is rarely involved in the direct provision of these

services. Both the availability of federal funding—through more than 100

grant programs—and the accompanying program regulations influence state

and local activities. Financially, the federal role is least significant for

education, where federal dollars make up less than 10 percent of all public

spending for elementary, secondary, and vocational education (see Table 8).

But federal dollars provide nearly 100 percent of public support for

employment assistance programs, and about 60 percent of public support for

social services. The largest grants are distributed by formula with no

requirement for cost sharing by recipient governments. The cost-sharing

2. Additional federal support occurs through tax expenditures and loans

or loan guarantees.

3. Direct (non-grant) federal spending in 1983 provided educational

services for Indians and migrants ($0.3 billion), financial aid to

individuals and institutions for postsecondary education ($7.3 billion),

support for research and cultural activities ($1.0 billion), and national

job training programs for selected disadvantaged groups ($0.9).

61
TABLE 7. FEDERAL FUNDING FOR EDUCATION, EMPLOYMENT,

AND SOCIAL SERVICE PROGRAMS (In billions of dollars of

budget authority)

Total Federal

Funding

Grants to State

and Local

Governments

1982 1983 1982 1983

Education and Related Programs:

Elementary, secondary,

and vocational education

Postsecondary education

Research and general

education aids

Employment Programs

Social Service Programs

Total a/

14.8

(6.4)

(7.4)

(1.0)

5.0

6.1

25.9

15.4

(6.8)

(7.4)

(1.3)

6.2

6.6

28.1

6.3

(6.0)

(0.1)

(0.3)

3.4

5.8

15.6

6.8

(6.4)

(0.1)

(0.3)

4.4

6.3

17.5

SOURCE: Congressional Budget Office.

a. This does not include tax expenditures ($14.8 billion in 1982) or new

federal loans ($1.2 billion) and loan guarantees ($6.2 billion). Tax

expenditures occur in all of the above areas, while federal loans and

loan guarantees are generally for postsecondary education.

requirements under other formula grants are often irrelevant, since

recipient governments typically spend more than is required under grants

that subsidize traditional state and local activities. But cost-sharing

requirements under formula grants that support nontraditional activities,

and for project grants, may be useful in promoting efficient practices.

62
TABLE 8. SUMMARY DESCRIPTION OF FEDERAL GRANT PROGRAMS FOR EDUCATION, EMPLOYMENT,

AND SOCIAL SERVICES

O

I

Program Area

Description of

Programs Funded

Distribution

Mechanisms

Matching

Requirements

Federal Share

of all

Public Spending

Education

Employment

Social Services

Special services for students

disadvantaged by poverty,

handicaps, or limited

English-speaking ability.

Also support for general

education programs, and

libraries

Training programs for

disadvantaged and dislocated workers. Also the

Employment Service

Child welfare; nutrition

and homemaker services

for the elderly and disabled; vocational rehabilitation; counseling and

advocacy; family planning

Mostly formula grants

based on the population

eligible for services.

Bilingual programs

supported by project

grants

Mostly formula grants

based on unemployment

and sometimes the

relative number of

economically disadvantaged persons or

labor force size

Mostly formula grants

based on population

and sometimes income

No recipient match

required for most

programs. Fifty

percent match required for some

general vocational

programs

About 10 percent

overall, although

the share is much

higher for programs targeted on

the economically

disadvantaged

No recipient match Close to 100

required for largest percent

programs. Recipient

cost-sharing (10 percent or variable)

required for smaller

programs

No recipient match

required for largest programs. Recipient cost-sharing

(typically 15 to 25

percent) required

for some smaller

programs

About 60 percent

overall, although

the share varies

by type of service
Education and Related Programs

In 1983, the federal government spent $15.4 billion for education,

educational aids, or cultural activities. Nearly half of this provided

financial aid to students for postsecondary education through student loans,

grants, and college work-study programs. The goal of federal student aid is

to improve access to higher education for low- and middle-income

individuals who might not otherwise attend college, based on concerns for

equity and productivity. The federal role in postsecondary education poses

no significant problems in intergovernmental relations since most aid is

provided directly to students. 4/ Consequently, it is not discussed in this

chapter.

Most of the remaining federal funding—$6.8 billion out of $8.6 billionwas distributed through grants to state and local governments. 5/ Ninetyfive percent of these grant funds supported elementary, secondary, and

vocational education, while the remaining 5 percent was used primarily to

improve library services and to support the Corporation for Public Broadcasting. More than 70 percent of federal grant dollars for elementary,

secondary, and vocational education funded programs for students with

special needs—compensatory education for low-income underachieving

students, special education for handicapped students, and bilingual education

for students with limited proficiency in English. The remaining 30 percent

subsidized general education and vocational education programs.

With the exception of bilingual programs, virtually all grants for

elementary, secondary, and vocational education are allocated by formula,

generally on the basis of the relative number of students eligible for

services. Funds for bilingual programs are allocated on a project basis and

are intended as short-term capacity-building grants rather than as continuing subsidies.

Rules have generally been quite restrictive in programs that serve

students with special needs, but this may be changing. In 1981, Chapter I of

4. There are complaints, though, about possible denial of aid to persons

enrolled in colleges or universities that are not in compliance with

federal antidiscrimination laws.

5. Funds not distributed as intergovernmental grants were used to

support Indian and migrant education, research, and cultural activities

(including the National Endowments for the Arts and Humanities, the

Smithsonian Institution, the National Gallery of Art, and the Institute

of Museum Services).
the Education Consolidation and Improvement Act (ECIA) altered provisions

of the antecedent Title I program for compensatory education to provide

greater flexibility to local agencies in the selection of schools and students

participating in the program. Further, the Administration has proposed

amending the Bilingual Education Act to allow greater local discretion in

how the needs of non-English-speaking students are to be met. Some

relaxation of the regulations governing education programs for handicapped

children was proposed, but later withdrawn. Finally, the Administration

proposed consolidating various programs for vocational and adult education,

which would eliminate federal vocational programs targeted specifically on

the disadvantaged.

Effects of Current Programs. Federal grant programs for students

with special needs have had considerable influence on certain aspects of

education at the local level. Federal dollars are the primary source of

funding for compensatory services for the disadvantaged. It is likely that

such services would be substantially reduced or eliminated in the absence of

federal funding, although compensatory programs—at least at the pre-school

and elementary school levels—have been successful in improving the

performance of disadvantaged children relative to other children. 6/ In

contrast, services for handicapped students and students with limited

proficiency in English would continue without current federal programs,

because federal courts have ruled that special services for these students

6. Both federal funding and restrictions on the use of funds appear to be

important to the continuation of compensatory education programs

targeted on disadvantaged groups. In most states there were no school

programs for the disadvantaged prior to federal involvement, and

evidence from the Title I District Practices Study indicates that

schools faced with cuts in federal spending for Title I generally cut

back the number of students served in direct proportion. There are

also preliminary indications, based on the expressed intentions of

school officials, that relaxation of the targeting requirements for

compensatory programs—such as occurred with passage of the ECIA in

1981—will result in a reduction or dilution of services to current

program participants in favor of more general educational services.

See Richard Apling, The Influence of Title I Budget Cuts on Local

Allocation Decisions; Some Patterns from Past and Current Practices,

and Michael J. Gaffney and Daniel M. Schember, Current Title I

School and Student Selection Procedures and Implications for Implementing Chapter I, ECIA, both from Advanced Technology (September

1982).

65
are required by law. 7J Although federal programs pay only a fraction of

the cost of these special services, they have nevertheless affected the kinds

of services that are provided. In the absence of federal programs and

associated regulations, the services required might be less well defined.

Federal grant programs that support general education or educational

aids include impact aid, untargeted programs under the Vocational Education Act (VEA), the state block grant under Chapter II of the ECIA, and

subsidies to libraries. Impact aid has a clear rationale as compensation to

school districts that are adversely affected by federal installations, although

the payments are typically too low to compensate them fully, as determined

either by their school expenditures for federally connected children or

reduced property tax collections. 8/

Federal support for other general education programs might be justified on the basis of the general benefits of a literate and trained population,

but this argument depends on spillover benefits from additional services

induced by federal support. Federal dollars provide about 10 percent of all

public spending for vocational education; although services may increase by

up to this amount, it is more likely that some proportion of federal support

is used to replace state and local funding that would otherwise be provided.

Moreover, spillover benefits from any induced increase in vocational

education are unlikely in any event, because there is no apparent long-term

advantage to be derived by vocational education students relative to general

curriculum students—at least at the secondary level, which receives 80

percent of federal funds. Spillover benefits from Chapter II of the ECIA are

negligible too, since this grant—which is essentially equivalent to

unrestricted aid to education—represents less than 0.5 percent of all

spending for elementary and secondary education. Spillovers are also

probably small from federal support for libraries, which is less than 5

percent of all public spending for this purpose.

7. Strictly, state and local education agencies that accept federal dollars

for any purpose must provide special services to facilitate access to

mainstream public education for handicapped and non-English-speaking

students.

8. Although federal installations may generate other kinds of revenue—

from sales and income taxes, for example—these will more likely

accrue to state governments than to the affected localities. In

addition, if federal installations were not there, many sites would be

put to some other use that could also generate sales and income tax

revenues, as well as property taxes.

66
Employment Programs

In 1983, the federal government spent $6.2 billion for employment

programs. About Ik percent of this—$4.6 billion—supported training and

other employment services for disadvantaged and dislocated workers, partly

through grants to state or local agencies ($3.7 billion) and partly through

federally administered programs ($0.9 billion). 9/ About 13 percent of

federal spending provided grants to states for the Employment Service, and

the remainder was for federal administrative expenses. 10/

Most federal funding for training is now authorized under the Job

Training Partnership Act (JTPA), which will be fully implemented by

October 1983, replacing the Comprehensive Employment and Training Act

(GETA). Under the JTPA, programs for disadvantaged workers are 100

percent federally funded, with grant funds allocated among the states by

formula based on the relative number of unemployed and low-income

persons. Funds for dislocated worker programs are allocated some on a

project basis and some by formula based on unemployment; a state match

that varies from 0 to 50 percent is required, depending on the state's

unemployment rate.

Welfare recipients, who are among those eligible for services under

JTPA programs for the disadvantaged, can obtain similar services through

the Work Incentive (WIN) program. In addition to training and other

employment services, however, participants in WIN are provided with a

variety of supportive services—such as child care—that are limited under

JTPA. Registration for WIN or an alternative work-welfare program is

mandatory for certain family members receiving Aid to Families with

Dependent Children, although about half of those who register for WIN are

unassigned—that is, receive no services—because of insufficient funding.

The Employment Service is a federal activity—with 100 percent

federal funding and control—that is administered by the states. Federal

funds are allocated among the states by formula, based on labor force size

and the number unemployed. Labor exchange services are provided free of

charge both to job applicants and to prospective employers. In addition, the

Employment Service has a number of supplementary responsibilities includ9. The federal government administers the Job Corps as well as special

programs for migrants and Indians.

10. Administrative expenses include the costs of enforcing minimum wage

and child labor laws, as well as laws governing management and union

practices.

67
ing recruiting for federal training programs and certifying eligibility for

certain other federal programs.

Effects of Current Programs* Although there is as yet no experience

under the JTPA, evidence from previous programs under CETA and WIN

indicates that training and other employment services can be effective at

improving the employment prospects of disadvantaged workers and increasing their future earnings. Low-cost intensive job search programs have been

shown to increase employment rates substantially for new entrants or reentrants to the labor market who have adequate work skills. For those for

whom job search assistance is not enough, the results of various more costly

alternatives vary. Disadvantaged youth apparently require intensive programs combining remedial education, training, and work experience. Women

entering the labor force for the first time, or reentering after a number of

years, benefit equally from work experience, classroom instruction, or onthe-job training. None of these approaches appears to enhance the

employability or wage rates of men with a history of low-wage or unstable

employment, although more intensive remedial programs—which have not

been available for adults—might be more successful. Some programs for the

disadvantaged—especially for women in WIN—appear to be cost-effective, in

that future savings in federal welfare costs due to increased earnings by

participants exceed federal program costs, ll/

For dislocated workers, evidence from pilot projects offering reemployment services to workers in Michigan indicates that program participants were reemployed faster, and at higher wage rates, than similar

workers who did not receive services. Further, it appears that training plus

job search assistance had no greater impact on reemployment than intensive

job search alone, so that programs for dislocated workers might be very

cost-effective by emphasizing low-cost job search assistance.

The Employment Service is an important placement resource for

disadvantaged workers. Youth, women, minorities, the physically handicapped, and other disadvantaged groups are all served in numbers disproportionate to their representation in the labor force. This is partly the result

of a deliberate emphasis begun during the 1960s, but it is also the result of a

natural selection process in that workers with more experience and specialized work skills often have good job search alternatives—through personal

contacts, labor organizations, and professional associations. Complaints

have been made that the various ancillary responsibilities given to the

Employment Service have reduced the resources available for its basic labor

exchange functions—counseling and placement services. The adverse

11. Congressional Budget Office estimates.

68
effects of this conflict between its labor exchange and supplementary

responsibilities may be lessened, however, by provisions contained in the

JTPA, which establish separate funding for the two kinds of activities.

Social Service Programs

Federal funding for social services in 1983 was $6.6 billion. About 95

percent of this—or $6.3 billion—funded grants to state and local governments, with more than 40 percent channeled through the Social Services

Block Grant (SSBG). This grant supports a broad set of services, including

day care for children and dependent adults, homemaker and other in-home

services, and child welfare services. Other more restrictive categorical

programs support Head Start (a compensatory program for pre-school

children), community services, child welfare services, social and nutrition

programs for the elderly, rehabilitation programs for the disabled, services

for individuals with developmental disabilities, and volunteer activities in

low-income areas. Most of these grants are allocated by formulas based on

population, or some subset of population, and sometimes state per capita

income.

Effects of Current Programs. Federal social service programs have

sometimes induced new activities by nonfederal governments that subsequently continued to grow independently of federal support—for example,

public child welfare services initiated by the Social Security Act of 1935,

and services for the elderly initiated by the Older Americans Act of 1965.

Currently, however, most federal spending for social service programs is

very close to revenue sharing earmarked for social services. Although

funding is provided through a number of separate categorical programs,

recipient governments have substantial flexibility in allocating the total

dollars available to them for social services. This is because spending by

state and local governments is so much in excess of what is required under

most current grants, and because such a large proportion of federal aid is

through the very loosely targeted Social Services Block Grant.

Federal matching requirements are generally binding only for Head

Start, vocational rehabilitation services, and perhaps for developmental

disabilities programs. These services might be reduced substantially in the

absence of earmarked federal funding, despite the evidence that Head Start

and vocational rehabilitation programs are successful. Head Start provides

social, educational, and health services to disadvantaged pre-school

children. It is generally effective at increasing the cognitive skills, social

development, and health of participants, enabling them to begin their

regular school careers on a more equal footing with other children.

According to estimates by the Rehabilitation Services Administration,

69
vocational rehabilitation services create savings for both federal and state

governments because the future earnings of rehabilitated persons generate

enough tax collections and reduce public assistance sufficiently to more

than cover program costs.

OPTIONS FOR CHANGE

Federal support for education, employment, and social service programs has dropped in the last few years, and the Administration has

proposed that many of these programs be terminated or "turned back" to the

states. Whether or not it is important to continue a federal role in these

human service programs, and what dimensions and forms that role should

take, are value-laden questions whose resolution can ultimately be determined only by the Congress. The purpose of this section is to outline the

advantages and disadvantages of modifying some current programs, either

by eliminating federal program responsibility, changing the funding provisions, or changing the program rules. The options discussed here are

illustrative, and include only a sampling of the modifications that might be

made.

Programs that do not effectively address concerns about the distribution of resources, and for which there are no significant external effects and

no need for centralized coordination, are candidates for termination. Other

options discussed here include changing the funding allocation process to

address local needs more effectively, modifying cost-sharing provisions that

may be inappropriate, consolidating related programs when that would not

defeat Congressional intent, and altering program rules to provide the

greatest possible flexibility to recipient governments without sacrificing

Congressional goals.

Eliminate Federal Support

This approach is most frequently suggested in connection with general

education programs, but may be applicable to some employment programs

and to social services as well.

Education Programs. Federal aid for general education—through

Chapter II of the ECIA and basic vocational programs under the VEA—has no

strong rationale, since these programs do not target resources very effectively on special needs nor are they likely to generate significant external

benefits. Termination of Chapter II of the ECIA would have little impact on

most school districts since the grant is such a small proportion of total

school expenditures, although the impact would be relatively greater in

70
school districts with large numbers of high-cost students with special

needs—since this factor is considered in addition to the total number of

students for allocation of grant funds within (but not among) states.

Termination of federal funding for basic vocational education programs could be a little more disruptive, since it amounts to nearly 10

percent of total public spending for vocational education. Further, school

districts with relatively high concentrations of disadvantaged and handicapped students might be affected more adversely than other school

districts, because the requirement that 30 percent of funds for basic

programs be targeted on disadvantaged or handicapped students tends to

result in somewhat higher VEA expenditures in districts with high concentrations of disadvantaged and handicapped students. 12/ An alternative to

eliminating VEA programs would be to target all funds, as discussed later.

Federal support for library services has also been criticized. Both past

and present Administrations have sought to eliminate federal support for

library services by arguing that this is a low-priority item for scarce federal

dollars, since there is little indication that the public (as distinct from the

providers of the services) perceives any serious inadequacy in the availability of library services.

Employment Programs. The federal role is dominant in the funding of

public training and employment programs, and is probably necessary to their

continuation in most geographic areas. Reduction or termination of federal

support for training, especially for disadvantaged workers, would weaken the

federal commitment to improving equality of opportunity and might

increase welfare costs as well. Since federal programs have just been

substantially modified by the Job Training Partnership Act in an attempt to

improve the effectiveness both of public training programs and of the

Employment Service, it would probably be counterproductive to suggest

revisions at this time. It is generally believed that one of the major

problems with CETA—the predecessor of JTPA—was that requirements

under the act were modified so frequently that programs never had an

opportunity to become effective.

One change proposed by the Administration, however, is elimination of

the separately authorized WIN program and its replacement with a mandatory workfare program for employable welfare recipients. 13/ While WIN

12. National Institute of Education, The Vocational Education Study; The

Final Report (September 1981), p. IH-34.

13. Workfare programs are optional in states now, either as replacements

for or in addition to WIN. The federal government reimburses states

71
provides job search assistance, training, and work experience, workfare

would provide only work experience, by requiring that unemployed recipients

work off the value of their welfare benefits in public service agencies.

Since evidence from WIN programs indicates that work experience is as

effective at improving employability as more costly training programs for

women without severe disadvantages, workfare might not only provide

public service benefits to the community but also improve some participants1

 prospects of finding paid employment. \M_I Women who are less jobready, however, require training or remedial education to improve their

employment prospects, and may have such poor job skills that there would

be no public benefit from placing them in workfare. Further, even women

who are job-ready could benefit from job search assistance to help them find

paid employment. These employment services would still be available to

welfare recipients under the JTPA if WIN was eliminated, and employmentrelated support services currently available through WIN could be provided

through the SSBG. It would probably be more difficult, however, to obtain a

well-coordinated package of services through these separate programs than

through WIN.

Social Service Programs. Federal support is not essential to the

continuation of most social services, but it is nevertheless important to

state and local governments because it is a large proportion of aggregate

public funding for them. In the absence of federal funding, overall service

levels would decline and some services—Head Start, for example—might not

be provided at all. There is evidence that nonfederal governments are more

likely to step in to cushion federal funding losses for social services than for

some other human service programs—such as education or training for the

disadvantaged—but full replacement would be unlikely. 13/ If so, the needs

of disadvantaged groups would be addressed less adequately, and welfare

costs might increase as well.

13. (Continued)

for expenses under workfare programs on the same basis as for AFDC

expenses. See Appendix C.

14. Severe disadvantages include the lack of a high school degree, poor

health, and poor English, among others. In evaluation studies of WIN

programs, the sample size for men is too small to yield reliable

results.

15. John L. Palmer and Isabel V. Sawhill, ed, The Reagan Experiment (The

Urban Institute, 1982), p. 179. Also, Richard P. Nathan and Fred

C. Doolittle, The Consequences of Cuts; The Effects of the Reagan

Domestic Program on State and Local Governments (Princeton Urban

and Regional Research Center, 1983).

72
Some separately funded programs might be eliminated by consolidation

with the comprehensive Social Services Block Grant, however, without much

consequence except to simplify administration for both federal and recipient

governments. Candidates for elimination through consolidation might

include the Community Services Block Grant, some child welfare programs,

and programs for the elderly. The advantages and disadvantages of this

approach are discussed in a later option.

Change Funding Provisions by Using a Full Cost Formula

In some education programs, it might be appropriate for the federal

government to assume the full costs that are imposed on local school

districts because of federal laws, regulations, or installations. This would

better address local needs, but would also increase federal spending substantially.

Special Education. Contradictory views exist about federal funding

for special education. Some argue that the federal government should fund

all the extra costs of educating handicapped children, since special services

are required as the result of federal law. Others contend that the federal

government has no special responsibility in this area, since public education

is a basic right for which state and local governments are responsible and

since no activity of the federal government affects the incidence of

handicaps in the local school population. Acceptance of the first view would

increase federal spending in 1984 tenfold, to perhaps $12 or $13 billion,

while acceptance of the second view would lead to elimination of federal

programs for education of the handicapped thereby reducing federal

spending by about $1.3 billion. An alternative that need not involve any

change in overall federal spending would be to revise the formula used to

allocate grant dollars to include a measure of fiscal capacity as well as the

number of handicapped students, so that federal funds would be concentrated where assistance was most needed. The use of fiscal capacity as a

factor in allocation formulas is discussed in the following option.

Bilingual Education. Federal funds for bilingual education could be

allocated by a formula based on the number of school children with limited

proficiency in English and the average additional costs of serving such

children. Full federal funding for bilingual education would be a way of

distributing the costs of national immigration policy across the nation as a

whole, rather than concentrating them on the localities where immigrants

choose to settle. It could also enhance the opportunities and potential

productivity of the students served. Currently, federal funds for bilingual

education are allocated on a project basis and serve only 10 to 20 percent of

73
all school children who require services. 16/ Full federal funding would

increase federal spending for bilingual education by five to ten times the

current level, however, to as much as $1.5 billion in 1984. Further, it would

represent a redirection in purpose for federal bilingual programs, from

capacity-building to continuing support.

Impact Aid. The current impact aid program (and other aid programs

to federally affected localities) could be replaced by a uniform system of

payments in lieu of taxes (PILOT) based on full tax equivalency. Currently,

payments to compensate localities that are adversely affected by federal

installations are based on a variety of ad hoc criteria, rarely related to the

value of property removed from the local tax base because of federal

ownership. The result is a system of sometimes overlapping payments to

federally affected localities that is not consistently related to, and is

generally far below, the lost property tax revenues. A PILOT program

would improve tax equity, in that all local "residents" (including the federal

government) would be treated equally; it would discourage the wasteful use

of property by the federal government; and it would eliminate a subsidy—

with uneven incidence—of the federal sector by the (mostly) local sector. 17/ These benefits would not be costless, however. Estimates for 1978

indicate that the gross property tax liability of the federal government on

its non-open-use land would have been about $3.7 billion, and that payments

in that year under current compensation programs were approximately $1.0

billion. 18/ Hence, the cost of replacing current programs with PILOT in

1978 might have been as high as $2.7 billion, although this is probably an

overestimate for 1978 because local tax rates in affected areas would

presumably have fallen in consequence of the expanded tax base. 19/

16. Congressional Research Service, "Impact of Budget Changes on Major

Education Programs, Both Enacted and Proposed, During the 97th

Congress," February 25, 1982, p. 15.

17. Advisory Commission on Intergovernmental Relations, Payments in

Lieu of Taxes on Federal Real Property: In Brief (October 1981),

p. 29.

18. Federal installations on non-open-space areas appear to require the

same level of local services as private enterprises would on average.

A nationwide payment system for federal open-space areas is already

in effect and is not subject to the same criticisms as are being given

here.

19. Advisory Commission on Intergovernmental Relations, Payments in

Lieu of Taxes, p. 15.
It is uncertain whether the cost in 1984 would be higher or lower than the

estimate given for 1978, since federal property holdings, property values,

and tax rates have all changed.

An alternative that would not require additional federal spending at

this time would be to redistribute current payments to federally affected

localities in proportion to what PILOT payments based on full tax equivalency would have been. At current funding levels, PILOT payments might

cover only 25 percent of the implicit federal tax liability, but the proportion

paid might be increased in future years as federal revenues increased. This

change in the allocation of current payment levels could be temporarily

disruptive for localities that would receive less aid, however. In addition,

once payments were linked clearly to federal property values there would

likely be pressure from affected localities to move rapidly to 100 percent

funding, thereby hampering attempts to reduce the size of future federal

deficits.

Change Funding Provisions by Including Fiscal Capacity

in the Allocation Formula

Allocation formulas for service grants all use measures of service

need, but some education and social service grants use per capita income—

as a measure of fiscal capacity—to modify need factors so that areas with

low fiscal capacity receive more per need unit than richer areas. 2Q/ There

are both advantages and disadvantages to the continuation or expansion of

this practice.

Using fiscal capacity as a formula factor can help to ensure that

federal subsidies for designated state or local services are concentrated in

areas least able to support them from their own revenues, thereby addressing hardship and spillovers more effectively than if funds were more

uniformly distributed. In addition, since general revenue sharing payments

are currently made only to local governments, the use of fiscal capacity in

the allocation of service grants to states is an alternative way to achieve

some fiscal equalization among state governments.

On the other hand, the accumulation of a number of service grants

allocated in part on the basis of fiscal capacity could have arbitrary and

20. Current human service programs that use per capita income to modify

need factors in their allocation formulas include vocational education,

child welfare services, rehabilitation services, and developmental

disabilities programs.

75
unintended distributional effects in the aggregate, unless the various grants

were carefully coordinated. For one thing, some nonfederal governments

could receive more federal funding overall than full equalization would

require. For another, the commonly used criterion of per capita income is a

poor indicator of fiscal capacity because income is only one of several

important tax bases used by nonfederal governments. More comprehensive

measures—such as the Representative Tax System discussed in Chapter VII—

could measure fiscal capacity more accurately, but would also be more

difficult to construct, especially for local governments.

An alternative way in which to achieve better targeting in the

allocation of service grants might be to use more narrowly defined measures

of service need. The measures used in current grants are sometimes very

broad—general population for social services, or age-weighted population for

vocational education, for example. More restrictive needs measures based

on groups that would likely require more, or more costly, services than the

average population might be used instead. In particular, the low-income or

elderly population, or a weighted combination of the two, might be used to

allocate social service grants. 21/ The distribution of vocational education

funds might be based on age-weighted counts of low-income, handicapped,

and non-English-speaking populations. Agreement on the appropriate weight

to give various high-cost population groups in the needs measure might be

difficult to achieve, however.

Change Funding Provisions by Altering Cost-Sharing Requirements

Cost-sharing requirements can be used to induce a higher level of

spending by state or local governments from their own sources than they

would otherwise choose. Cost-sharing might also promote more efficient

use of federal funds in grant programs supporting services not usually

provided by recipient governments, since recipient governments would have

more incentive to monitor program activities if some of their own resources

were involved. In activities funded on a project basis—such as Head Start—

cost-sharing requirements may also help to eliminate less committed

applicants.

In current education and social service programs, however, there are

instances in which cost-sharing requirements may be serving no useful

purpose, while in some employment programs higher cost-sharing by recip21. Elderly population is the needs measure currently used in grants under

the Older Americans Act. The allocation of employment assistance

grants is also already based on narrowly defined needs measures.

76
ient governments might be appropriate based on measurable local benefits

resulting from program activities.

Education and Social Service Programs. Current cost-sharing requirements could be eliminated in formula grant programs where recipient

governments generally spend more than their required match, including

grants for adult education, vocational education, child welfare services

under Title IV-B of the Social Security Act, and services for the elderly

under the Older Americans Act. Although the matching requirements in

these programs may once have been effective in inducing greater nonfederal

support for these activities, now most states voluntarily choose to spend

more than is required. Eliminating the matching requirements would

simplify program administration somewhat, with no other effect in most

states. In a few states, however, the matching requirements may be binding

for some programs, so that their elimination would reduce own-source

spending for activities under those programs. For example, some states

might set aside less for supplementary services to disadvantaged and

handicapped students in basic vocational education programs in the absence

of current matching requirements. 22/

Employment Programs. Cost-sharing requirements in WIN—currently

10 percent—could be increased to equal the (variable) state share of AFDC

payments. Under this option, states would share in WIN program costs to

the same extent they share in the primary measurable benefit from WIN,

which is the reduction in welfare costs due to the increased earnings of

participants. More registrants could be served under WIN, without additional federal spending. Further, states would pay the same share of costs

for WIN as they do for the optional workfare programs they may provide as

an alternative. As a result, decisions about which program to assign

registrants to could be based on which set of services would be most

effective for each registrant, with no distortion arising from the different

cost-sharing requirements under the two alternatives, at least up to the

limit of funding provided for WIN. 23/ This would impose additional costs on

states, however.

Cost-sharing requirements in other training programs for the disadvantaged—under the JTPA—might also be imposed. This could increase

22. U.S. Department of Education, Annual Evaluation Report, Volume II,

Fiscal Year 1981, p. 313.

23. Federal funding for WIN is limited to the amount appropriated, while

federal funding for workfare programs is open-ended reimbursement

for a portion of virtually all expenses.

77
total funding for training the disadvantaged, and induce recipient governments to use federal training funds more efficiently. To reflect the extent

of benefits that accrue locally, primarily through reductions in public

assistance payments and increased tax collections, the cost-sharing requirement could be variable. It would be difficult to get a reasonable measure

for benefits that accrue locally, however, since—unlike the WIN programnot all JTPA participants would be AFDC recipients. A large proportion of

participants would be youth, for whom immediate program benefits might

take the form of improved school performance rather than increased

earnings that would reduce welfare costs. If the share was set higher than

perceived local benefits, however, federal grants would not be accepted and

there might be no training programs provided for the disadvantaged.

Change Program Rules

The flexibility allowed grant recipients in some education programs

might be reduced for some programs—compensatory education, for example

—and increased for others, such as bilingual programs, in order to ensure

that federal funds are used effectively.

Compensatory Education. The requirements for targeting funds for

compensatory education under Chapter I of the ECIA might be tightened,

perhaps reinstituting the requirements of the antecedent Title I legislation.

Preliminary indications are that the more relaxed targeting requirements of

Chapter I will result in a reduction or dilution of services to current

program participants in favor of more general educational services, thereby

probably reducing the efficacy of compensatory education programs. On the

other hand, it may be better to wait for clearer evidence that compensatory

services have been adversely affected by revisions under the ECIA, since

frequent revisions are disruptive and can, in themselves, threaten program

effectiveness.

Bilingual Education. Allowable activities under federal bilingual

programs could be expanded to include alternatives to bilingual education,

as proposed by the Administration. Currently, federal funding under the

Bilingual Education Act is provided only for bilingual programs—where some

instruction must be in the students1 native language—and not for Englishonly alternatives. Civil rights enforcement has also emphasized bilingual

education as the only acceptable way in which to guarantee the educational

rights of non-English-speaking students. There is no evidence, however, that

bilingual education is always superior to certain alternatives. Further, bilingual education is impractical in schools where instruction in many foreign

languages would have to be provided. Allowing local educational agencies

greater discretion in how they choose to address the needs of their non78
English-speaking students might enable them to serve these students more

effectively, although some schools might take advantage of this flexibility

to provide less adequate services.

Change Both Funding Provisions and Program Rules by Grant Consolidation

Consolidation of related programs may be applicable to vocational

education and to some social service programs. Allowable activities under a

single grant would be increased by consolidation, and provisions for allocating grant funds and for targeting services could be changed as well.

Vocational Education. All federal funds for vocational education—

currently channeled through ten separate programs—could be consolidated

and concentrated on students with special needs. Targeting could be

accomplished by allocating funds, both among and within states, by formula

based on the low-income, handicapped, and non-English-speaking population,

weighted by age as in the current formula. Increased resources in districts

with high concentrations of special needs students would likely result in

improved services for them in any case, but special services for them might

also be required by grant regulations. Although some school districts might

receive substantially less federal funding than they do under current

programs, districts with relatively large numbers of high-cost students

would receive more. Even in districts that lost funding, basic programs

might not be seriously affected since vocational education is strongly

supported at the local level.

Social Service Programs. Some social service programs—the Community Services Block Grant, child welfare services (under Title IV-B), and

services for the aging (under the Older Americans Act)—might be consolidated with the Social Services Block Grant (SSBG). The SSBG allocation

formula might also be modified to target funds more on areas with

concentrations of poor and elderly populations, or on areas with low fiscal

capacity, as discussed in an earlier option. Currently, the SSBG is allocated

on the basis of population.

Consolidation of these programs would reduce administrative costs for

both federal and recipient governments without having much effect on the

way spending is allocated among allowable activities, since states already

have substantial flexibility under the current grants. This is because

spending by state and local governments is so much in excess of what is

required under current grants for child welfare and elderly services, and

because such a large proportion of federal aid (nearly 50 percent) is through

the very unrestrictive Social Services and Community Services block grants.

79

24-083 0-83- 7
On the other hand, while substantial support for child welfare services

and for services to the elderly would likely continue in the absence of

separate programs, folding current programs into the SSBG could weaken

the ability of the Congress to influence the way in which these services are

provided. In particular, incentives to local agencies to find permanent

placements for children in foster care, introduced in 1980 by modifications

to federal child welfare programs, might be reduced or eliminated. In

addition, Congressional discretion in the allocation of resources among

nutrition and other services provided under the Older Americans Act would

be eliminated by consolidation with the SSBG. Further, it might be even

more difficult to induce recipient governments to seek out the most needy

among the aged population who because of disability, poverty, or lack of

education might not be aware of the services available to them.

80
CHAPTER VI. INCOME SECURITY AND HEALTH PROGRAMS

This chapter discusses the federal role in providing income security

and health benefits for individuals, and outlines some options that have been

proposed to realign responsibilities between the federal government and the

states in these areas. Although the chapter briefly summarizes the current

federal role in all areas of federal individual-benefit provision, its emphasis

is on programs providing cash assistance and health-care benefits for lowincome persons and families. I/ The public assistance programs include

most of the individual benefit programs in which responsibilities are now

shared between different levels of government, although some, such as food

stamps, are currently funded directly by the federal government rather than

through grants to states and localities. 2/

These programs differ from those discussed in the last two chapters in

that in most instances they provide benefits to all qualified persons or

families that apply, so that spending levels depend on the

number of qualifying individuals, rather than on Congressional appropriations. Although many of these programs are classified as grants to

states, almost all of them actually provide benefits directly to persons who

qualify; in effect, federal spending is simply passed through by the states to

those individuals entitled to benefits. Details on the operation of the

specific programs covered in this chapter are given in Appendix C.

Because these programs are effectively transfers of resources that go

directly to individuals, questions of effectiveness do not arise in the same

way as for most other programs discussed in this paper. Transfers clearly

increase the resources of their recipients by approximately the amount

1. Only programs providing benefit payments directly to individuals—as

opposed to programs that provide indirect benefits such as access to

services—are considered in this chapter. Most income security and

health programs fall into this category, but a few health programs,

such as the Occupational Safety and Health Administration (OSHA)

programs, do not and have therefore been excluded.

2. A small grant is made to states to cover part of the administrative

costs for food stamps.

81
spent for benefits. 3/ The arguments for and against the provision of such

transfers, and the characteristics of the groups that should be allowed to

receive them, have been much debated, and many proposals have been

advanced to reform the goals and operation of the welfare system as a

whole. This chapter, however, focuses on only the small part of this debate

that relates directly to the federalism issue—that is, questions concerning

the jurisdiction best able and most appropriate to control and to pay for

public assistance programs.

THE CURRENT FEDERAL ROLE

Programs providing income security and health benefits may be

divided into two general categories: social insurance programs like Social

Security, Unemployment Insurance, and Medicare, that provide benefits

contingent upon previous contributions or premium payments; and public

assistance programs like Aid to Families with Dependent Children (AFDC)

and Supplemental Security Income (SSI), that provide means-tested benefits

to qualifying low-income families. In addition, a small proportion of

benefits for individuals (about 2 percent) are provided through programs that

are not really in either category. These programs provide benefits that are

neither insurance-related nor restricted to low-income households, although

benefits for those with higher incomes are generally limited.

Of these three groups, the first is by far the largest: social insurance

programs account for about four-fifths of total benefit payments for

individuals, and Social Security and Medicare alone account for almost

three-fourths. Most social insurance programs, including both Social

Security and Medicare, are funded entirely through the federal budget, and

responsibility for determining eligibility and administering them is for the

most part exclusively federal. ^/ Contributions from individuals and

3. Because some transfers, such as food stamps and Medicaid, take the

form of payments for goods and services provided to individuals rather

than cash, their value to recipients may not exactly equal their cost of

provision. For further discussion of this point see Timothy M.

Smeeding, Alternative Methods for Valuing Selected In-Kind Transfer

Benefits and Measuring Their Impact on Poverty, U.S. Bureau of the

Census, Technical Paper 50 (1982).

4. One exception is the Unemployment Insurance (UI) system which,

while it is funded by both state and federal taxes, is financed primarily

by state taxes on employers. Unemployment Insurance is a joint

federal-state responsibility: the federal government provides general

82
employers are generally collected by the federal government, which maintains the records needed to determine benefits. Most social insurance

programs are partially or entirely financed on a pay-as-you-go basis, in the

sense that current benefits are largely funded through revenues from

current contributions. Because responsibility for these programs is not now

shared among levels of government, and because there are clear efficiency

gains from a centralized system of record-keeping and benefit calculation in

many of these programs, there have been few proposals to realign responsibilities in these areas. These programs, therefore, are not discussed further

in this chapter.

Funds for most public assistance programs, on the other hand, are

provided both by the federal government and by state and local governments; depending on the program, the rules that determine benefit levels

and eligibility may be set at either level (see Table 9). These programs

provide benefits, either in cash or in the form of goods and services, to

families and individuals who meet some defined standard of need. Unlike

social insurance programs, no contribution record is necessary in order to

establish eligibility for benefits. Instead, public assistance programs are

means-tested—that is, eligibility for benefits is limited to households with

resources below some defined level. In addition, other household characteristics are generally considered in determining eligibility for benefits; most

of these programs are targeted on groups that are believed to face special

risks, such as children, the elderly, and the disabled.

Public assistance programs vary considerably, both in the groups

served and in the way responsibilities are divided between the federal

government and the states. The federal share of funding for programs such

as AFDC and Medicaid is provided through grants to states, while other

public assistance programs, such as food stamps and SSI, are funded directly

(Continued)

guidelines and some restrictions in the operation of the state programs; it also funds benefits to certain unemployed workers and has

financial responsibility for administration of the entire system. Within

the constraints of federal law, states operate their own programs,

establishing eligibility requirements and the duration and amount of

benefits. Most proposals for change in this program have not involved

a major realignment of federal and state responsibilities, but have

concentrated on changes within the present structure of the program.

For a description of the UI system and possible modifications, see

CBO, Unemployment Insurance: Financial Condition and Options for

Change (June 1983).

83
TABLE 9. FEDERAL EXPENDITURES FOR INCOME SECURITY AND

HEALTH PROGRAMS THAT PROVIDE BENEFITS FOR INDIVIDUALS (In billions of dollars)

1982

Actual

1983

Estimated

Percent

of Total

Federal

Budget

in 1982

Percent

of Total

Expenditures

for This

Purpose

in 1982 a/

Social Insurance Programs

Social Security Cash

Benefits and Other

Retirement and Disability

Programs b/ 181

Medicare c/ 50

Unemployment Insurance d/ 24

Subtotal 255

Public Assistance Programs

Aid to Families with

Dependent Children 8

Supplemental Security Income 8

Food Stamps 11

Medicaid 17

Housing Assistance 8

Other e/ 4

Subtotal 56

Other Benefits for Individuals

Child Nutrition Programs if 4

Health Block Grants and

Other Health Care

196

57

33

286

8

9

13

19

9

4

62

25

7

_3

35

1

1

2

2

1

1

100

100

100

100

70

60

Services g/

Subtotal

Total, All Benefits

for Individuals

1

5

316

2

6 1

354 43

N/A

60 h

90 h/

SOURCE: Congressional Budget Office,

totals because of rounding.

Components may not add to
TABLE 9. (Continued)

a. This column shows federal program expenditures as a percentage of all

expenditures—federal, state, and local—for this purpose. In many

areas, percentages shown are approximations.

b. Includes Old Age, Survivors and Disability Insurance, Railroad Retirement, benefits for disabled coal miners, and federal employee retirement and disability programs.

c. Does not include offsetting receipts from premium payments of $3.9

billion in 1982 and $4.3 billion in 1983.

d. All Unemployment Insurance funds are channeled through the federal

Unemployment Trust Fund, and are shown here, but most benefits—

about 80 percent—are actually paid through state payroll taxes assessed on employers.

e. Includes Low Income Home Energy Assistance (LIHEA), Earned Income

Tax Credit, and Refugee Assistance.

f. Includes Special Supplemental Food Program for Women, Infants and

Children (WIC), National School Lunch Program, National School

Breakfast Program, Childcare Feeding Program, Special Milk Program,

and Summer Feeding Program. The federal government provides all of

the funding for WIC, and about half of the funds for other child

nutrition programs.

g. Appropriations, not outlays. Includes Preventive Health Care Block

Grant, Substance Abuse and Mental Health Block Grant, Maternal and

Child Health Block Grant, Primary Care Block Grant, Family Planning

Program, Migrant Health Services, and Black Lung Clinics. Data on

state spending since the block grants were created are not available

for some of these areas.

h. Does not include health block grants.

by the federal government. 5/ The populations served and the division of

responsibilities for the major public assistance programs are summarized in

Table 10 and outlined in more detail in Appendix C.

5. States may also provide supplementary benefits in SSI if they choose.
TABLE 10. POPULATIONS SERVED AND JURISDICTIONS RESPONSIBLE

FOR MA3OR PUBLIC ASSISTANCE PROGRAMS

Population

Program Served

AFDC Low -income

single-parent

families and

some lowincome twoparent

families

with an

unemployed

head

SSI Low -income

persons who

are disabled

or are aged

65 or over

AdminisFunding tration

Federal- State and

state local

cost

sharing,

based on

a matching

formula

Federal, Federal

with and

state- state

funded

supplements in

M states

and the

District

of

Columbia

Benefit

Levels Eligibility

State determined. CategorWide variation

among states

Federal minimum

benefit level,

with varying

levels of state

supp le men tat ion

ical requirements

largely

federally

determined. Income

standards

set by

states

Categorical requirements

federally

determined. Income

standards

set by

states,

subject

to federal minimum

Basis for Federal Involvement in Public Assistance Provision

Federal involvement in public assistance programs is largely motivated

by a concern for the distribution of resources, both among states and

localities and among low-income people in different areas of the country.

86
TABLE 10. (Continued)

Program

Food

Stamps

Population

Served Funding

Low-income Federal

households

Administration

State

Benefit

Levels

Federally determined.

Uniform

nationwide

Eligibility

Federally

determined

Medicaid

Housing

Assistance

AFDC and

SSI recipients, and

some other

low-income

households

at states1

discretion

Federal- State and

state local

cost

sharing,

based on

a matching

formula

Basic services

federally determined. States

may add some

other services

at their option

Minimum

categorical requirements

federally

determined. States

may

choose to

cover

some

additional

lowincome

households

Low-income

households

Federal Federal,

state, and

local

Tenant rent

payments set

according to

federally determined

formula

Determined according to

federal

guidelines.

Varies

among

localities

Federal participation in these programs has generally aimed to improve the

adequacy of resources available to low-income people in certain categories,

and to relieve hardships that might result from very low income levels. In

addition, federal involvement may also reduce some spillover costs resulting

from state and local activities, and, in some programs, may result in

increased administrative efficiency.

87
Distribution of Resources* The major reason for federal participation

in public assistance programs is a concern for the distribution of resources

in general, and a desire to reduce hardships that could otherwise face

persons in certain groups perceived to be particularly at risk. These groups

include elderly persons, single-parent families with children, and disabled

persons, all of whom are relatively likely to have reduced incomes. In

general, means-tested income security and health programs provide cash

benefits and services to low-income members of these groups, in order to

help ensure their access to necessary goods and services.

Many public assistance benefits are provided at the state and local

levels rather than by the federal government. Like individuals, however,

states and localities have very different levels of resources available to

them, and may also have different proportions of their populations in need

of benefits. Thus, providing a given level of benefits for low-income persons

in one of the above categories might impose much greater hardships on some

states than on others, depending on states1 fiscal capabilities and on the size

and other characteristics of their low-income populations. In addition,

states may have different views on the appropriate minimum level for

benefits of various types, leading to very different treatment of similar

individuals in different states. Federal participation in public assistance

programs has, therefore, been justified both on the ground that some

redistribution of resources across states may be necessary if major hardships

are not to be imposed on some states, and on the ground that there is a

national interest in certain types of support for low-income persons, which

some states may not provide without federal intervention.

Under the current system of public assistance provision, states continue to have considerable discretion both over the types of low-income

persons receiving benefits and, even more, over the level of benefits they

receive. Although benefits are probably more uniform than they would be in

the absence of any federal role, the current system guarantees neither a

minimum level of benefits for all states, nor a uniform federal contribution

to benefits for recipients in different states. Federal participation in this

area partially offsets differences in state resources, however, since in some

programs the federal share of expenditures for benefits varies inversely with

state per-capita income. In addition, because the level of federal food

stamp benefits depends in part on a family's income from other sources,

including cash public assistance, families in states with low cash-benefit

levels will be eligible to receive relatively high food stamp benefits. As a

result, federal aid through the Food Stamp program partially offsets

differences in the provision of cash benefits among states.

Spillovers and External Effects. To the extent that federal participation reduces the disparities between state public assistance programs, it

88
may also reduce spillover costs across states. Large disparities in public

assistance provision may induce potential recipients to migrate to the areas

with the highest benefits and most liberal program rules, which could result

in an inefficient allocation of resources and in additional costs for relatively

generous states and localities. In addition, the potential for such migration

might encourage states to hold their benefit payments below the level that

their residents would otherwise consider appropriate, in the hope of inducing

eligible beneficiaries to live elsewhere. If several states pursued such

policies, the costs would be borne not only by other more generous

jurisdictions, but also by those low-income persons who were relatively less

mobile. Thus, to the extent that there is a government interest in

maintaining minimum living standards for low-income persons, the existence

of such spillover effects argues for some federal involvement.

Centralized Coordination. Most public assistance programs are currently administered by state and local governments. Unlike social insurance

programs such as Social Security, public assistance programs do not generally require that records be maintained over a long period of time in order to

calculate benefits. Therefore, efficiency gains from more centralized

administration would not, in most cases, be large. Since the populations

served by the various programs often overlap, however, it is possible that

some efficiency gains would result from better coordination between

programs. This might be achieved through program consolidation at the

state level, or through changes in federal program rules designed to

facilitate better coordination.

Income Security and Health Programs: Current Policy and Effects

Existing public assistance programs address some of the federal

interests outlined above, but benefit levels, and to some extent eligibility

standards, are still largely controlled at the state level. There are major

differences among programs, however. Some, such as the Food Stamp

program, are fully funded by the federal government and also have their

benefit levels and eligibility standards set at the federal level. Others, such

as Aid to Families with Dependent Children and Medicaid, are partially

funded by the federal government and partially funded by states. In these

programs, eligibility criteria (other than income) are largely set at the

federal level. Benefit levels in AFDC, and to some extent services available

under Medicaid, are largely state-determined, however.

A third possible pattern is represented by the Supplemental Security

Income program. In SSI, the federal government provides a minimum

guaranteed income level for eligible participants, which the states may

supplement. The federal government pays for benefits up to the minimum

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income level, and states pay for any additional amounts. As in the AFDC

and Medicaid programs, categorical eligibility standards for SSI are federally determined.

In general, there is a tradeoff in these programs between the similar

treatment of similar individuals who live in different jurisdictions, and the

freedom of local agencies to respond to local conditions. Thus, in a program

like food stamps, all individuals across the country with similar incomes and

circumstances receive the same benefits. In a program like AFDC, on the

other hand, a family that is eligible in a high-benefit state might receive

lower benefits or might not be eligible in a low-benefit state. Also, because

benefits are determined at the state level, the range of benefits in AFDC is

very large. An eligible family with three members and no other income in

Connecticut or California, for example, receives AFDC benefits more than

four times as high as a similar family in Mississippi or Texas. The

difference in total benefits is much smaller if both families receive food

stamps, since food stamp benefit levels depend to some extent on total

income including cash benefits from other programs, but the Connecticut

and California families still receive about twice as much in combined

benefits as similar families in Mississippi or Texas.

Such differences in benefit levels may be justified by differences in

costs of living among the states. For example, if the cost of living in

California is higher than in Mississippi, a given quantity of benefits will buy

more in Mississippi than in California. On the other hand, the cost of living

probably does not vary by as much as total benefits do, and a family with

dependent children and no income in California will probably be better off in

terms of the buying power of its combined AFDC and food stamp benefits

than a similar family in Mississippi.

OPTIONS FOR MODIFYING THE FEDERAL ROLE

Many analysts have charged that the large number of separate public

assistance programs, each with different income standards and eligibility

criteria, has resulted in a system that is confusing and difficult to

administer. Realignment of these responsibilities among jurisdictions,

however, would require some tradeoffs between federal interests on the one

hand and state and local interests on the other. This section outlines some

options for realignment in the income support programs, in the health care

programs, and in other programs providing non-insurance-related benefits

for individuals.

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Income Support Programs

As outlined above, the major means-tested programs providing income

support to low-income individuals and families are the AFDC, SSI, and Food

Stamp programs. Although the aim of all these programs is to provide

support to eligible low-income persons, they differ considerably in their

approaches. This section examines three major options for restructuring the

income support system as a whole: complete elimination of federal

involvement, a restructuring of the system of sharing costs, and assumption

of full responsibility for these programs by the federal government.

Eliminate Federal Involvement. Under this option, the individual

states would assume responsibility both for program funding and for setting

eligibility criteria and payment standards for those public assistance programs that are now fully or partially funded and controlled at the federal

level. Thus, for example, the Food Stamp program could be turned over to

the states, as was suggested by the Administration in its 1982 federalism

proposal. Similarly, the AFDC program could be entirely state funded,

instead of partially funded by the federal government as under current law.

Under such a plan, states would be better able to tailor eligibility

criteria and program rules to those groups who are locally considered to be

the most in need. Further, concentrating control over public assistance

programs at one level could lead to greater administrative efficiency,

perhaps allowing states to combine some programs—for example, by providing additional cash payments instead of food stamps to AFDC recipients.

There would also be some drawbacks to a plan of this type, however.

First, requiring state provision of all public assistance benefits could impose

substantial financial burdens on state and local jurisdictions. If no additional funds or revenue sources were turned over to the states, such a plan

could result in large tax increases to support these programs or in substantial cuts in benefits. Financing difficulties could be especially serious

for states with large low-income populations and relatively small tax bases.

Even if some federal revenues were also turned over to the states to

help pay for income support, some problems would remain. For example, if

full responsibility for public assistance programs was given to individual

states and localities, it would further increase the difficulty of ensuring

minimum levels of public assistance provision for groups such as the

disabled, the elderly, and dependent children. In addition, such a plan could

increase differences in benefit levels for similar individuals in different

jurisdictions, and might lead to some spillover of costs across state

boundaries if potential recipients were led to move to states with higher

benefit levels.

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Change to a Consistent Set of Shared-Funding Rules in All Programs*

This option, which would involve restructuring the income support programs

to achieve greater consistency in the federal role among programs, could be

implemented in several different ways. For example, funding could be

carried out through a matching formula like that used in the AFDC program,

which splits the costs of benefit provision between individual states and the

federal government on the basis of state per-capita income. A similar

formula, or one based on a broader set of measures that might include each

state's total tax base and number of potential recipients, could be used in all

of the income support programs. A state-federal matching program

probably results in more spending for income support than would occur in

the absence of federal funding, which may be appropriate given the spillover

problems discussed earlier. A matching formula based on each state's tax

base and needs would also help to reduce inequities in benefit levels

resulting from differences in state fiscal capacities, while allowing states

considerable local control over benefit levels and eligibility standards.

On the other hand, such a system would probably result in considerable

variation in benefits among jurisdictions, as now occurs, for example, in the

AFDC program. Under this option, not only would total benefits received by

similar individuals in different areas vary, but so would the federal

contribution to those benefits. Although there may be a strong argument

for state control over state benefit payments, it is more difficult to argue

that federal benefit payments should differ by jurisdiction. In addition,

funding benefits exclusively through federal-state matching grants, with no

minimum benefit level, could lead states to lower their benefits to induce

out-migration of welfare recipients with the attendant spillover costs

discussed above.

A second method of sharing responsibility for income support programs

between the states and the federal government would be to provide benefits

at a minimum level guaranteed and funded by the federal government—as is

now done in the SSI program—and to allow states to supplement those

benefits if they feel it necessary and if they have the resources to do so.

This would provide a uniform federal contribution to benefits in all states,

and would also ensure that a minimum standard of living was guaranteed to

those considered needy no matter where they lived. At the same time, such

a plan would provide states and localities with some flexibility in determining benefits. If states were allowed to cover additional beneficiaries at

their option, this approach would also provide them with some control over

the types of beneficiaries eligible for assistance. On the other hand, it

could increase federal costs, and would still leave some differences in

benefit levels among jurisdictions. In addition, federal funding of a

minimum benefit, without a required state match, could reduce state

incentives for administrative efficiency, since some states would no longer

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pay a share of the costs. Such incentives could be retained, however, either

by requiring states to fund some portion of benefits at the minimum

guarantee level or by penalizing states for high error rates as is now done in

Medicaid.

Transfer Full Responsibility to the Federal Government. Under this

option, benefit levels and eligibility criteria would be federally determined,

and would presumably be uniform nationwide as they now are, for example,

in the Food Stamp program. Centralized administration of income support

programs might allow for better coordination among them, and between

these programs and other federal activities that affect the distribution of

resources among households in different income brackets. On the other

hand, federal expenditures in this area would rise substantially if current

benefit levels were, on average, maintained, and states were no longer

required to contribute to their costs. In addition, this option would substantially lessen local control over benefit levels and program rules, and might

result in programs that were less responsive to local needs and preferences.

Health Care Programs

Medicaid is the major non-social-insurance program providing health

care benefits. Funding for this program is shared by the states and the

federal government under a matching formula similar to the AFDC formula.

The population served by the Medicaid program is very similar to the

population receiving AFDC and SSI—in fact, receipt of AFDC or SSI

benefits automatically confers eligibility for Medicaid, 6/ and beneficiaries

under those two programs make up about three-fourths of Medicaid recipients. Thus, a change to a more uniform set of eligibility rules in those

programs would also increase the uniformity of eligibility for Medicaid in

different states.

As with the income support programs, the major tradeoffs involved in

any change in the current system of determining Medicaid benefits would be

between a desire to maintain or increase local control over the program and

a desire for more uniform eligibility criteria and benefits across jurisdictions. Options for Medicaid, therefore, other than maintaining the current

6. States have the option of limiting Medicaid coverage of SSI recipients

by requiring them to meet any more restrictive eligibility criterion

that was in effect before the implementation of SSI. States choosing

the more restrictive criteria must allow applicants to deduct medical

expenses from income for determining eligibility. Fifteen states

currently employ more restrictive criteria.

93
system, would be to shift program responsibility to the states or to change

program rules to achieve more uniformity among states, possibly increasing

the federal role.

In addition to Medicaid, there are some small discretionary health

programs that also provide benefits to individuals. The last part of this

section examines some options for consolidating these programs.

Eliminate Federal Involvement in Medicaid. This plan would have

many of the same advantages in Medicaid as in the income support

programs. For example, local agencies may have greater knowledge of the

needs and resources of local recipients and health care providers, and

requiring more funding from state and local sources might increase the

incentives of local administrators to control waste and fraud in the program.

In addition, states may be more able to control health care costs than the

federal government—for example, by restricting hospital expansion—and

requiring states to pay more of Medicaid costs would increase their

incentives to restrict cost increases.

On the other hand, increased local control in Medicaid, as in the

income support programs, could lead to greater disparity in eligibility

standards and benefits among jurisdictions, while increases in state and local

responsibility for funding Medicaid could impose severe burdens on jurisdictions with low fiscal capacity and large eligible populations. Indeed, unless

some federal revenue source was also turned over to the states, or state

responsibilities were sharply reduced in other areas, assuming full responsibility for funding Medicaid would impose a great deal of strain on most state

budgets.

Increase Uniformity of Medicaid Benefit Provisions. To some extent,

as discussed above, greater uniformity of benefits in AFDC and SSI would

automatically result in more uniform eligibility standards for Medicaid

without any changes in the current program, since a large proportion of

Medicaid recipients are categorically eligible for the program because they

receive AFDC or SSI benefits. More uniform standards for AFDC and SSI, if

they raised benefit levels in some states, could also increase Medicaid costs

for those states, since more families would be eligible for cash benefits and

hence for Medicaid. This could impose some hardships on poorer states.

Further, some of those now eligible for benefits in high-benefit states would

lose eligibility for Medicaid if they no longer received AFDC or SSI.

Another way to increase the uniformity of benefit provisions among

jurisdictions, without necessarily increasing federal costs, would be to

provide matching federal funds only for a consistent set of benefits and

beneficiaries in all jurisdictions. Under current law, benefits that are
subject to the federal match may be extended at the discretion of each

state to low-income persons who meet only some of the categorical

eligibility criteria, and states may choose to cover some medical services in

addition to those required under federal program rules. The groups covered

and the services provided vary considerably from state to state. If, under

this option, states were still able to provide additional benefits at their own

expense, they would maintain some control over the types and amounts of

benefits and recipients. On the other hand, this plan would result in

increased costs or a reduced range of beneficiaries and covered services in

many states.

Increasing federal responsibility for Medicaid would be another way to

increase the uniformity of benefits among states, and could also help to

equalize the impact of rising health care costs on states with differing fiscal

capacities. Health care costs are growing rapidly; even with no changes in

the current method of funding benefits, growing Medicaid costs may strain

some state budgets, especially in states with relatively low fiscal capacity

and large eligible populations. On the other hand, federal assumption of all

Medicaid funding woud be very costly, and may not be feasible in a period of

rising deficits without reductions in other areas of the budget.

In the Administration's original federalism proposal, a swap was

outlined under which the federal government would have assumed full

responsibility for most Medicaid benefits in exchange for a state takeover of

the AFDC and Food Stamp programs. This proposal met with opposition

from the Congress and the states, however, both because it could have

lowered income support levels in some areas, and because it could have

proved costly to some states. More recently, it has been suggested that the

federal government assume responsibility for the acute-care portion of

Medicaid, leaving the long-term-care portion, which funds nursing home

care, to the states. Such a plan would give the federal government

responsibility for a large share of all acute-care payments, since acute care

for non-poor elderly persons is already largely funded through the Medicare

program, and this might allow greater federal control over the growth in

hospital and physician costs. On the other hand, the costs of long-term care

are also rising rapidly, and shifting all responsibility for these benefits to

the states could result both in large financial burdens for some states and in

large differences in eligibility for and costs of this type of care among

states.

Consolidate Some Non-entitlement Health Programs. Many smaller

health programs have already been combined into block grants to states and

localities in the last two years, in an effort to increase local discretion with

regard to the use of the funds and to decrease federal costs. In its 198*

budget, the Administration proposed that three more of these programs—the

family planning program, migrant health services, and black lung clinics—be

95

24-083 0-83- 8
added to the Primary Care Block Grant created in 1981. Elimination of

these categorical programs, it is argued, would further reduce

administrative costs and complexity and would give local agencies~in many

cases, the same agencies that already receive funds under the Primary Care

Block Grant—more discretion in allocating their funds.

On the other hand, although some funding for these programs comes

from states and from private sources, the federal government provides at

least 80 percent of the funds in each of these three areas, and elimination of

specific federal funds for these programs could threaten their existence.

Folding them into the Primary Care Block Grant would allow jurisdictions to

use the funds to provide services other than those now funded under these

programs. Because these programs may have significant spillover benefits

not reaped by a particular jurisdiction--improvements in the health status

of migrant workers, or the prevention of unwanted births that may increase

future public assistance and health care costs in other states, for example—

or because the costs of providing such services would fall very unevenly

across jurisdictions, there may be a substantial federal interest in guaranteeing the continuance of these benefits. In addition, federal funding in

these areas tends to be more closely targeted on certain sub-populations

than are funds from other sources, and reducing or eliminating federally

provided funds would therefore probably reduce the benefits available for

these groups.

Other Benefit Programs

Finally, in addition to the income support and health care programs,

there are several smaller non-insurance-related benefit programs for individuals. These include the child nutrition programs and a few public

assistance programs, such as low-income energy assistance, that do not

provide direct income support. Of these, the major area in which some

realignment has been discussed is the set of programs providing child

nutrition benefits. Options in this area include program consolidation and

the retargeting of federal funds.

Most child nutrition programs provide subsidized meals for children in

schools, child care facilities, and other institutionalized settings. The

federal government now provides roughly half of the funds in this area; the

remainder comes from states and localities and from student fees. In its

1984 budget, the Administration proposed combining three of these programs—the School Breakfast program, the Summer Feeding program, and

the Child Care Feeding program—into a block grant funded at $535 million,

or about 35 percent less than 1983 funding levels for these programs. The

argument for this consolidation is that it would reduce costly and complex

federal regulations and would increase state flexibility in providing nutrition

assistance in other-than-school settings.

96
On the other hand, while reducing federal regulation might lower the

costs of providing meals somewhat, the savings would probably be considerably less than 35 percent. This proposal could therefore result in decreased

funding for these programs, unless the states were willing to allocate some

of their own funds to these purposes. Reductions in subsidies might cause

some schools and other groups to drop out of the program—especially those

with relatively large proportions of higher-income students, whose subsidies

are already small. Removal of federal regulations might also reduce

program targeting on children from low-income households.

A second option for these programs would be to reduce the subsidy to

higher-income students--with, possibly, a reallocation of federal funds to

other nutrition programs. (One candidate for additional funding under such

a reallocation would be the Special Feeding Program for Women, Infants and

Children (WIC), which, because it reduces birth defects and other health

problems for low-income children, has proved very cost-effective.) Reduction in the subsidy for middle-income children, whose families presumably

would be able to pay the full cost of their meals, could result in better

program targeting. On the other hand, it might cause many schools and

other institutions to drop out of the program, thus reducing the availability

of school meals for poor children.

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CHAPTER VII. FEDERAL AID FOR GENERAL PURPOSES

In the 1960s, expanded federal aid was provided primarily in the form

of categorical grants for specific purposes. In 1973, however, the proportion

of federal aid provided for general purposes increased substantially—from

1.5 to 16.7 percent—by implementation of the General Revenue Sharing

(GRS) program. That share has been declining ever since, though, as

categorical aid continued to increase and GRS did not. More recently, the

Administration has proposed to reduce federal grants-in-aid, and to enhance

the fiscal resources of nonfederal governments by relinquishing part or all of

certain federal tax bases instead.

If the basis of federal concern is that provision of certain specific

public services is inadequate, categorical aid would be preferable to general

purpose aid. When, however, the concern is about the general ability of

nonfederal governments to provide public services, rather than about the

availability of particular services, general purpose aid would be better since

using categorical aid to accomplish general resource realignment would

impose needless and costly constraints on recipient governments.

This chapter examines the advantages and disadvantages of alternative

forms of federal aid for general purposes. The next section explores the

rationale for general purpose aid to nonfederal governments. Then, the GRS

program is described, followed by a section that examines options for

modifying it. The last section discusses relinquishing federal tax bases.

BASIS FOR FEDERAL INVOLVEMENT

The rationale for general purpose aid to nonfederal governments is

concern that some may lack the resources to maintain adequate levels of

public services. In changing the distribution of resources among governments, the Congress might seek to accomplish either or both of two

objectives:

o A vertical realignment of resources, from the federal to nonfederal governments;

o A horizontal realignment of resources among state or local

governments.

99
Vertical Realignment of Resources* Some, including the current

Administration, have argued that the federal government has usurped the

most productive tax bases, thereby weakening state and local governments

in the federal system. Vertical realignment of resources—relinquishing

federal revenues or revenue sources to state or local governments—is seen

as a way of reversing the trend toward growing dominance of the federal

government, thus returning decision making authority about local public

services to state and local governments.

In principle, vertical realignment could be accomplished either by

sharing federally collected revenues with nonfederal governments as general

purpose fiscal assistance, or by relinquishing certain federal tax bases so

that nonfederal governments could pick them up if they chose. The latter

would promote greater public accountability to state and local taxpayers,

since nonfederal governments would have to raise taxes in order to increase

spending.

In practice, however, sharing federal tax revenues is generally more

effective for vertical realignment than relinquishing federal tax bases

because taxpayers can more easily avoid a nonfederal tax by moving to

another jurisdiction—a concern that tends to limit the extent to which one

state will raise its tax rates relative to its neighbors, and that is still more

limiting for local governments. The greater a government's jurisdictional

tax reach, the less vulnerable it is to interjurisdictional tax competition and

the higher it can set its top rate. The limiting effects of tax competition

are likely to be greater when state or local taxes must be raised to support

redistributive programs than when they would provide broad-based public

services since the latter would generate benefits that might compensate

residents for a higher tax burden.

Horizontal Realignment of Resources. Despite a reduction in per

capita income differences across states in recent years, fiscal disparities

among the states have increased. \J Fiscal disparities among localities are

1. In 1981, the richest state (Alaska) had 4.5 times the tax capacity of

the poorest state (Mississippi), while in 1975 Alaska's tax capacity was

only twice that of Mississippi. Dispersion in tax capacity around the

national average has increased by more than 75 percent since 1975.

This is due in part to the dramatic increase in taxable wealth in a few

energy-rich states. The measure of tax capacity used—here and

elsewhere in the chapter—is that developed by the Advisory Commission on Intergovernmental Relations, based on the Representative Tax

System (RTS). The RTS shows how much tax revenue state and local

governments could raise if they taxed all their tax bases at the

100
even greater than disparities among states. Although broad measures of tax

capacity are not available for localities, taxable property value can be used

as a measure, since three-quarters of local government tax revenues are

from the property tax. In 1976 (the latest year for which data are

available), dispersion in tax capacity among local school districts within a

state was, on average, more than four times the dispersion in tax capacity

among states. 2/

The existence of disparities in fiscal capacity among state or local

governments generates concern because such disparities result either in

different levels of public services across jurisdictions, or in different tax

burdens that must be borne to provide the same public services. The

resulting differences in public service levels or tax burdens can cause people

to migrate and businesses to locate in ways that do not reflect "real"

economic differences in markets and costs. Such distorted choices reduce

economic efficiency and can result in the self-perpetuating decline of

depressed regions.

Reducing fiscal disparities among nonfederal governments requires a

redistribution of resources from high-capacity areas to low-capacity areas.

Only revenue sharing based on a redistributive formula can accomplish this,

since relinquishing federal tax bases would merely augment fiscal resources

at their point of origin.

THE CURRENT FEDERAL ROLE

In 1983, the federal government spent $6.3 billion for general purpose

assistance to state or local governments, of which $4.6 billion provided

General Revenue Sharing payments to local governments (see Table 11).

The remainder provided payments in lieu of taxes to the District of

Columbia and other federally affected localities, and payments to states and

counties from federal land and forest management activities. This section

discusses only the GRS program, since all other general purpose payments

are forms of compensation rather than aid.

1. (Continued)

average tax rates for the nation as a whole. See Robert B. Lucke,

"Rich States—Poor States: Inequalities in our Federal System,"

Intergovernmental Perspective, vol. 8, no. 2 (Spring 1982), Table 1.

2. See Eugene P. McLoone, Mary A. Golladay, and William Sonnenbert,

Public School Finance: Profiles of the States, 1979 Edition (National

Center for Education Statistics, 1981), Table 4.7.Property values

were equalized to full market value in this study.

101
TABLE 11. FEDERAL GRANTS FOR GENERAL PURPOSE FISCAL

ASSISTANCE (In billions of dollars in budget authority)

1982 1983

General Revenue Sharing

(local governments only) 4.6 4.6

Other a/ 1.7 1.7

Total b/ 6.3 6.3

SOURCE: Congressional Budget Office.

a. Includes payments in lieu of taxes to federally affected localities, and

payments to states from federal land and forest management

activities.

b. This does not include tax expenditures ($36 billion in 1982) or new

loans ($0.3 billion). Tax expenditures include deductions for state and

local taxes and the exclusion of interest on general purpose state and

local debt from taxable incomes. The District of Columbia was the

only recipient of federal loans in 1982.

The General Revenue Sharing Program

The GRS program distributes virtually unrestricted aid to all local

governments that fit the Census definition of general purpose governments—about 39,900 in all. Originally, GRS payments were made to both

state and local governments, with state governments receiving one-third and

local governments two-thirds of the total funds distributed to each state

area. In the 1980 reauthorization, however, state eligibility for payments

was made conditional on appropriations specifically for that purpose, and no

funds for states have been appropriated since then. The amount authorized

for payments to local governments has remained unchanged since 1978, at

$4.6 billion.

Funds are distributed to recipient governments by a three-step process. Funds are first allocated among the 50 states and the District of

Columbia using the more favorable of either the Senate-designated threefactor formula based on population, relative income, and tax effort, or the

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House-designated five-factor formula that adds factors for urbanized population and state income tax collections. 3/

Within each state, GRS funds are allocated through an elaborate tiering

process designed to acknowledge the overlap that exists among local

governments. The intrastate distribution system is meant to ensure that

county areas with similar characteristics receive the same GRS aid, when

payments to all jurisdictions in the county area are aggregated. Thus, a

state's allocation is first divided among county areas on the basis of

population, relative income, and tax effort. */ County-area funds are then

divided into three pots, one each for county, city, and township governments, based on each kind of government's proportionate share of nonschool

tax collections within the county. (School tax collections are excluded

because independent school districts are not eligible to receive GRS

payments.) Finally, the city and township shares are divided among all

cities and townships, respectively, on the basis of their population, relative

income, and nonschool tax effort. The size of any government's payment is

limited, however, by several constraints that set minimum and maximum

payment standards. 5/

Effects of Current Policy. GRS payments have never been large

relative to spending by state and local governments, and their importance

has declined steadily since the program's inception. In 1973—the first full

year of the program—GRS payments accounted for 3.1 percent of all

spending by state and local governments, or 2.8 percent of direct expenditures made by states and 3.3 percent of those made by local governments.

By 1980—the last year payments to state governments were made—GRS

had dropped to 1.9 percent of state and local spending. Payments were 1.6

percent of state spending and 2.0 percent of local spending. In 1981, when

3. In the interstate allocation, relative income is defined as the ratio of

U.S. per capita income to per capita income in the state. Tax effort is

defined as all state and local tax collections in the state as a fraction

of state personal income.

4. In the intrastate allocation among counties, relative income is defined

as the ratio of state per capita income to county per capita income,

and tax effort is the ratio of county nonschool tax collections to

county personal income.

5. See Congressional Budget Office, General Revenue Sharing: The

Administration's Reauthorization Proposals and Other Options for

Distribution Funds (September 1980), Appendix, for a detailed description of the allocation process.

103
only local governments received payments, GRS accounted for 1.9 percent

of direct expenditures made by all local governments.

The equalizing effects of the GRS program are also modest, both

among and within states. Estimates for 1982 indicate that the effect of

GRS payments was to reduce interstate disparities in fiscal capacity by less

than 2 percent, on average. An allocation of funds based solely on

population would have had nearly the same equalizing effect in the

aggregate, although individual states would have fared differently. For

example, energy-rich states with a high tax effort factor due to severance

taxes would have received less. (>/ Studies of the intrastate effects of GRS

payments conclude that needier jurisdictions—defined in various ways—tend

to receive somewhat higher allotments than less needy jurisdictions, although governments of different types (county, city, or township) in similar

circumstances may receive widely varying amounts of assistance because of

the tiered allocation process. 7/ Greater equalization could be accomplished by modifying the allocation formulas, as discussed in the next

section.

OPTIONS FOR MODIFYING THE GENERAL

REVENUE SHARING PROGRAM

Reauthorization of the GRS program is currently pending in the

Congress. Some have suggested that it should be eliminated because of the

unprecedented size of federal deficits, but reauthorization seems

certain. 8>/ Although major changes in the program are not likely at this

time, a number of proposals for modifying it (including elimination) will

likely arise again in later years. 9/ The options discussed in this section

include eliminating GRS or changing its funding provisions if it is continued.

6. Congressional Budget Office estimates. See Robert B. Lucke, "Rich

States—Poor States," for the methodology.

7. See Congressional Budget Office, General Revenue Sharing, p. 21; and

General Accounting Office, "Removing Tiering from the Revenue

Sharing Formula Would Eliminate Payment Inequities to Local Government," Report GGD-82-46, April 15, 1982.

8. Funding of $4.6 billion for GRS was included in the Administration's

budget request, and $5.0 billion was included in the First Concurrent

Budget Resolution for 1984.

9. The House bill (H.R. 2780) would reauthorize the current program with

funding for payments to local governments increased to $5.3 billion. A

104
Eliminate the GRS Program

At current funding levels, eliminating GRS would reduce the federal

deficit in 1984 by about 2.5 percent and would have only a small effect on

federal goals for realignment of public resources, since both the vertical and

horizontal realignment of fiscal resources brought about by the current

program is so limited. Substantial realignment—both vertically and horizontally—would still take place through categorical aid. About 95 percent of

the federal aid currently provided to state and local governments through

grants would remain after elimination of GRS. In addition, more than 85

percent of the interstate equalization resulting from current federal aid

would still be accomplished, due to the redistributive effects of categorical

grants. 10/ Further, categorical aid would allow the Congress to ensure that

federal funds are used to further federal goals.

On the other hand, the GRS program is very popular with local

governments because it is the only source of federal aid virtually free of

restrictions. A decline in aid available for general purposes would run

counter to the goal of reducing the coercive nature of current federalnonfederal relations. In addition, elimination of GRS would reduce the

proportion of federal aid that goes directly to local governments. Local

governments contend that direct aid for general purposes is important to

them because their state governments are often unresponsive to their needs.

It is argued that states are sometimes unwilling either to provide sufficient

state aid to help local governments meet their expenditure responsibilities,

or to modify the division of public service responsibilities, or to allow hardpressed localities to expand their tax capacity by annexing surrounding areas

or using new tax bases.

Change Funding Provisions

If continued, there are a number of ways in which the allocation of

funds might be changed in the GRS program. The options discussed here

include making state governments once again eligible for payments, modify9. (continued)

bill reported out of committee in the Senate (S. 1426) would reauthorize the current program at the current funding level of $4.6 billion for

payments to local governments, but would implement certain changes

in the intrastate allocation process if any increased funding for

payments to local governments was provided.

10. Congressional Budget Office estimates.

105
ing the formulas used to distribute funds among state areas, and altering the

intrastate allocation process.

Make State Governments Eligible for GRS Payments. One option

would be to resume GRS payments to state governments. Resumption might

be justified by the states' poor fiscal condition currently. GRS payments to

states were eliminated in 1980 because most states had accumulated

substantial surpluses, while federal deficits were growing, ll/ In 1983,

however, few states will end the fiscal year with a surplus despite recent

spending reductions and tax increases during the past couple of years,

because of the combined effects of recession and cuts in federal aid. On the

other hand, most states expect to begin building surpluses again if the

economic recovery continues, while the federal deficit is projected to

increase despite recovery. Reinstituting GRS payments to state governments would either add to the federal deficit or reduce the payments going

to local governments, unless offsetting actions were taken in other spending

or tax programs. 12/

Resumption of GRS payments to states might also be justified by a

desire to strengthen the role of states in the federal system. Some experts

on intergovernmental relations have advocated the eventual channeling of

most federal aid through state governments, eliminating the direct federalto-local link characteristic of GRS and some other current grant programs.

The rationale for this is that the division of responsibilities within states

varies so much from state to state that federal aid directly to local

governments is likely to treat similar localities in different states inequitably and to disrupt intergovernmental financing arrangements within states.

11. Payments to local governments were continued because their fiscal

condition—especially that of urban centers—was still considered precarious and because it was not certain that states would address local

needs adequately.

12. One offsetting action would be to finance increased GRS by limiting

the deductibility of state and local taxes, as was proposed by Senator

Durenberger in the State and Local Fiscal Assistance Act (S. 700).

This would, in effect, be an increase in taxes. Another offsetting

action would be to require that state governments receiving GRS

decline or refund an equal amount of categorical aid, which would then

return to the federal government rather than being reallocated to

other states. A refund requirement exists in the current legislation,

but it would apparently allow categorical funds declined by one state

to be reallocated to other states, and therefore would not offset

federal spending for GRS payments to states.

106
Local governments in some states fear, however, that their state governments would be less sensitive to their needs than the federal government is.

If payments to state governments were resumed, differences among

states in the division of public service responsibilities could be accommodated by dividing state and local shares for GRS funds based on their

proportionate share of direct expenditures. The original one-third, twothirds division between state and local governments was based on the fact

that local governments accounted for about two-thirds of aggregate state

and local expenditures, on average, at the time of enactment. 13/ In 1981,

the average local share of direct expenditures was 59 percent, but it varied

from a low of 23 percent in Hawaii to a high of 73 percent in Nebraska.

Consequently, a uniform division of GRS funds between state and local

governments in every state, based on this nationwide average, would favor

local governments over state governments in states like Hawaii, and state

governments over local governments in states like Nebraska. A similar

effect exists in the current GRS program. Because allocations to local

governments do not take account of the widely differing service responsibilities of local governments across states, GRS payments to localities in

Hawaii, for example, are far more generous relative to local service

responsibilities than they are in Nebraska. Ifr/

Modify the Interstate Allocation Formulas. The elements in the

formulas used to allocate GRS funds among state areas might be changed to

better reflect fiscal capacity differences. 15/ The formulas currently include population, tax effort, and per capita income. They could be changed

by using a more comprehensive measure of fiscal capacity than per capita

income. In addition, the tax effort factor could be modified or eliminated.

13. Richard P. Nathan, Allen D. Manvel, and Susannah E. Calkins, Monitoring Revenue Sharing (The Brookings Institution, 1975), p. 151.

14. If GRS payments continue to be made only to local governments, the

interstate allocation formula could be changed to take better account

of the different service responsibilities of local governments across

states by using only local tax collections, rather than state and local

tax collections, in calculating the tax effort factor.

15. GRS payments could be even more highly targeted on low-capacity

states if payments were made only to those states whose fiscal

capacity was below the national average. Currently, some payments

go to all states. This change would require modification of the

structure of the GRS allocation formula.

107
The Representative Tax System (RTS) might be used as a more

comprehensive measure of fiscal capacity than per capita income. Per

capita income is a poor measure of fiscal capacity because only 19 percent

of state and local tax collections is from the personal income tax, and

because there is no close correspondence between the geographic distribution of income and the distribution of other state and local tax bases, such

as property values and retail transactions. 16/ The RTS provides a measure

of tax capacity that considers the tax revenues that could be raised by state

and local governments, relative to other states, if all tax bases in the state

were taxed at the average rates for the nation as a whole. The data

required for updating the RTS depend in part on nongovernment sources,

however, so that new government data series might have to be developed to

implement this option. In addition, the RTS is itself an incomplete measure

of a state's fiscal bases, since it excludes user fees, for example, such as

university tuition and highway tolls. In 1980, user fees generated more

state-local revenues than the individual income tax. An expanded RTS—

including user fees—could be developed, but there would be difficulties in

determining what new bases should be included and in maintaining accurate

and up-to-date measures for them.

Although tax effort is a factor the Congress has deemed to be

important in the allocation of GRS funds, the tax effort measure used is a

poor one. Currently, tax effort is measured by the ratio of state and local

tax collections (from all bases) to personal income in the state. As already

discussed, income is only a partial measure of the tax bases a state has.

One problem with the tax effort measure, then, is that it overstates the tax

effort of states with substantial tax bases other than income. A second

problem is that tax collections by a state may overstate taxes paid by

residents of that state, because a substantial portion of some taxes may be

"exported," or paid by residents of other states.

As a result of these measurement problems, the tax effort factor has

distributional effects that are probably undesirable. Substantial allocations

are made to energy-rich states, for example, because severance taxes—paid

partly by the residents of other states—are included in the tax effort

measure, while the mineral wealth on which these taxes are assessed is not.

In the 1983 entitlement period, the average GRS payment per capita will be

$19.91. During this period, Alaska—the richest state in the Union—will

receive a per capita payment of $89.71, about 4.5 times the national

average. At the same time, Mississippi—the poorest state—will receive

$25.13 per capita.

16. Nathan et al., p. 136.

108
The measure used for tax effort might be improved by using the ratio

of tax collections to the RTS, in place of the current measure using the

ratio of tax collections to personal income. This would reduce the tax

effort factor for states with significant tax bases other than personal

income, relative to other states. Consequently, relatively smaller GRS

allocations would be made to wealthy states despite their large tax

collections. It would not, however, eliminate the problem of exported taxes,

with the result that states with tax collections paid in large part by

residents of other states would receive the same GRS payments as other

states with the same fiscal capacity but with taxes that must be paid by

state residents. Although it is conceptually possible to eliminate the portion

of taxes that are exported to residents of other states, it is impossible to do

so with accuracy, since unknown portions of a number of different taxes are

paid by non-residents. 17/

Alternatively, the tax effort factor could be eliminated because of

problems in measuring fiscal capacity accurately and in eliminating exported taxes from the measure of tax collections. This would also eliminate

the incentive created under the current formula for nonfederal governments

to increase their tax collections in order to increase their GRS payments.

There are objections to this incentive because it may induce nonfederal

governments to finance services through taxes rather than through user

charges, although the latter would be more efficient in some instances. 18/

In addition, the reward for tax collections under the GRS program may tend

to increase the size of the government sector at the state and local level.

On the other hand, the latter effect is one of the goals of the GRS program.

Alter the Intrastate Allocation Process. Two changes in the intrastate

allocation process for GRS payments are discussed. First, the tiering

process—by which allocations are made first to county areas, then to types

of governments within county areas, and finally to individual governmentsmight be eliminated. Second, constraints on the minimum and maximum

payments received by any government might be relaxed or eliminated. 19/

17. Other taxes that can be exported include corporate income and both

general and selective sales taxes.

18. If tax collections were expanded to include user charges, the basis for

this objection would be eliminated.

19. Detiering and relaxation of the constraints on the minimum and

maximum payments are changes that would be authorized under

S. 1426 if additional funding for GRS payments to local governments is

provided.

109
Modifications might also be made to the factors in the intrastate allocation

formula, which has problems similar to those that were discussed in

connection with the interstate formula. It is generally believed that these

problems are less severe in the intrastate allocation, however, and that

improvements—by development of an RTS for local governments, for

example—would not be feasible at reasonable cost.

Eliminating the tiering procedure would allow all local governments

within a state to compete for funds from a single state-area pot. Consequently, within each state, all local governments with similar characteristics in terms of the factors used in the allocation formula would receive

similar GRS payments, regardless of their type of government. As a result,

there would be equality of treatment across individual jurisdictions instead

of equality of treatment across county areas. Estimates by the General

Accounting Office indicate that "detiering" would increase the proportion of

state-area GRS funds going to the jurisdictions in which the states1 lowincome populations are concentrated. It would also mean, however, that

some county areas would benefit from higher payments than total income

and tax effort in the county would otherwise warrant. Further, the

aggregate effects of detiering would be modest since only about 3 percent

of GRS funds would be shifted. 20/

Relaxing or eliminating the constraints on minimum and maximum per

capita payments would help to concentrate GRS funds on jurisdictions

experiencing the most fiscal distress and would reduce the tendency of

current law to bolster marginally useful jurisdictions. 21/ With GRS funds

distributed less uniformly among jurisdictions, however, political support for

the program might decline.

About 25 percent of eligible local governments benefit from the per

capita allocation floor—equal to 20 percent of the state per capita allocation. Many of these jurisdictions perform limited functions, although they

meet the Census definition of general purpose governments. As a result of

the minimum constraint, they receive GRS payments that are

disproportionately large relative to the functions they perform, thereby

reducing funds available to other jurisdictions in the state. Most counties

and larger cities would gain substantially from elimination of the floor. 22/

20. See General Accounting Office, "Removing Tiering."

21. Nathan et al., pp. 155-162.

22. Statement by Arthur R. Goldbeck, Associate Director, General Government Division, General Accounting Office before the Subcommittee on Intergovernmental Relations, Senate Committee on Governmental Affairs, April 5, 1983.

110
GRS payments are also subject to a maximum per capita amountequal to 145 percent of the state per capita allocation—that limits payments

received by about 3 percent of eligible jurisdictions. The primary effect of

eliminating this cap would be to increase the payments going to the nation's

hardest-pressed large cities. Some additional funds would also go to a much

larger number of small local governments in low income areas. The net

effect would be to increase the tendency of the GRS program to narrow the

fiscal mismatch between central cities and the suburbs and to reduce the

tendency to provide greater relief to small cities than to large cities. 23/

RELINQUISHING FEDERAL TAX BASES

The Congress might enhance the fiscal resources of nonfederal governments by relinquishing part or all of some federal tax bases, rather than

providing federal aid through grants. This approach could achieve some

vertical realignment of resources, but would be ineffective for reducing

fiscal disparities among jurisdictions since resources would merely be

returned to their place of origin.

Substantial federal aid is already provided in this way through federal

tax expenditures, including the exclusion of interest on state and local debt

and the deductibility of state and local taxes (see Table 12). It is estimated

that in 1983 state and local governments paid $10.4 billion less in interest

costs because of their ability to issue bonds that are not subject to federal

taxation. In addition, individual taxpayers reduced their federal tax liability

by $28.9 billion because of federal deductions for state and local taxes.

Deduct ibility of state and local taxes does not aid nonfederal governments

directly, but it may reduce resistance to state and local tax increases among

those who itemize deductions on their federal income tax returns. 24/

Additional ways in which aid could be provided by relinquishing federal

tax bases include:

o Allowing individuals or businesses to claim a credit against their

federal tax liability for similar state or local taxes;

o Vacating certain tax bases entirely; or

23. Nathan et al., p. 159.

24. In 1980, itemized deductions were claimed on 31 percent of returns for

the individual income tax.

Ill

24-083 0-83- 9
TABLE 12. TAX EXPENDITURES FOR GENERAL PURPOSE FISCAL

ASSISTANCE (In billions of dollars)

1982 1983

Exclusion of Interest on

General Purpose State and

Local Debt 5.8 10.4

Deductibility of State

and Local Taxes

Income and sales taxes 20.4 20.1

Property taxes 10.1 8.8

Total 36.3 39.3

SOURCE: Congressional 3oint Committee on Taxation.

Providing "tax room" without entirely vacating a tax base, by

cutting or holding down rates on a federal tax that is also used by

nonfederal governments.

Credits Against Federal Taxes

All three approaches could augment the resources of state or local

governments, but the first approach—a credit against a federal tax for

similar state or local taxes—would be more effective than the last two.

This is because the first approach would provide a uniform federal tax rate

to serve as a kind of "umbrella" from which state or local governments could

benefit. Since all taxpayers would have to pay the full amount of the taxregardless of whether their jurisdiction took advantage of the credit—they

would have no incentive to change jurisdictions in order to lower their tax

burden (unless they were willing to move out of the country). Consequently,

nonfederal governments would be less reluctant to impose their own taxes.

There would be less accountability under the tax credit approach compared

to the others, however, because there would be no political cost to

nonfederal governments for raising their tax rates up to the level of the

federal credit.

112
The federal estate tax credit is cited as evidence of how well this

approach works in transferring tax resources from the federal to nonfederal

governments. The federal government has allowed taxpayers to apply state

estate taxes against their federal estate tax liability since 1926, with the

result that all states except Nevada now levy a tax equal to or greater than

the maximum federal tax credit. 25/ A second example is the tax credit

employers may take for state unemployment insurance taxes against the

federal unemployment payroll tax. This was effective in inducing the

development of unemployment insurance systems in all states in the 1930s.

The federal government could relinquish part or all of the corporate

income tax base by allowing businesses to claim a federal tax credit for

corporate taxes paid to states. 26/ This would allow states to make more

aggressive use of the corporate tax than they do now, because the uniform

federal rate nationwide would enable them to increase their rates—up to the

limit set by the federal credit—without fear of losing businesses to other

states with lower corporate tax rates. Forty-six states impose corporate

income taxes currently, but the maximum rate is 12 percent. A full tax

credit would allow states to increase their maximum rates to the top federal

rate of 46 percent. This would benefit only state governments, however,

and could reduce federal revenues substantially—by up to $60 billion in 1984.

If the federal tax credit was limited to half the federal corporate tax

liability, states could still increase their maximum rates substantially—to 23

percent—while the loss in federal revenues would be cut in half.

An alternative would be to institute a federal general sales tax, and

then to allow businesses to claim a credit for sales taxes paid to states. 271

This would allow states with low rates to increase them—up to the federal

rate—without fear of tax competition. Even states with rates higher than

25. The importance of this credit has been reduced by recent changes in

federal tax law that have eliminated federal estate tax liability on all

but large estates.

26. Claiming the tax credit would be easier for businesses if their states

defined taxable corporate income in the same way it is defined in the

federal tax code. Some states use different definitions currently, but

there would probably be pressure to adopt the federal definition if a

federal tax credit was implemented.

27. Alternatively, the tax credit could be for local sales taxes, or for both

state and local sales taxes. In the latter case, states might be more

successful than local governments at capturing most of the benefits,

though.

113
the federal rate might increase them by the amount of the federal tax, since

there would be no reason to be more fearful of having higher rates relative

to neighboring states than prior to implementation of the federal tax. This

option could increase state revenues substantially with little effect on

federal deficits, since the tax relinquished would be a new one. Federal

income tax revenues might be reduced somewhat, however, because of

increased deductions for sales taxes by individual taxpayers. In addition,

this option would tend to increase state reliance on sales taxes in preference

to income taxes. Some would see this as an advantage, since it would fall

upon consumption rather than penalizing saving as the income tax does.

Others would see it as a disadvantage, since state income taxes are probably

somewhat more progressive than sales taxes, even though state income tax

rates tend to be nearly constant over all taxable income classes.

Vacating or Reducing Federal Taxes

The last two approaches—vacating a tax base or reducing federal rates

so that nonfederal governments could increase their tax collections if they

chose—would be less effective at augmenting state and local resources

because they would not eliminate the problem of tax competition among

jurisdictions. If nonfederal governments fear losing business and highincome taxpayers to other communities, they may not raise taxes despite

federal efforts to aid them by vacating tax bases or reducing federal tax

rates. In this case, taxpayers and the private sector would benefit instead.

Past experience indicates that fear of tax competition is a serious constraint. States failed to take over revenues from repeal of the federal

electrical energy tax in the 1950s or from reduction of the federal excise

tax on amusement tickets in the 1960s. 28/ Nor were states quick to

increase their income tax rates in response to reductions in the federal

income tax legislated in 1981, despite substantial reductions in federal aid.

Instead, they allowed service levels to decline, cushioned somewhat by

increases in minor taxes, such as taxes on alcohol and tobacco.

Current tax bases that could be vacated or reduced to aid state or

local governments are limited, especially so for local governments (see

Table 13). The federal government does not use the property tax or general

28. States did pick up the real estate transfer tax (eliminated by the

federal government in 1965), but this was due as much to the need for

information as for revenue. See Advisory Commission on Intergovernmental Relations, "Changing the Federal Aid System: An Analysis of

Alternative Resource/Responsibility Turnbacks and Program Tradeoffs" (Staff Working Paper, December 1981), Appendix F, p.
TABLE 13. TAX REVENUES BY SOURCE AND LEVEL OF GOVERNMENT, 1981

Tax Base

Property

Individual Income

Corporate Income

Customs

General Sales

Selective Sales (Excise)

Motor fuels

Alcoholic beverages

Tobacco products

Public utilities

Other a/

Estate and Gift

Collections

by All

Governments

(billions

of dollars)

75.0

332.0

75.3

8.2

55.6

70.7

14.5

8.5

6.6

9.0

32.0

9.0

Vehicle and Operators Licenses 6.1

All Other

Total

SOURCE: Bureau of the

18.3

650.2

Percent of Collections

byjuovernment

Federal

0

86

81

100

0

57

32

67

39

26

79

75

0

20

62

State

t

12

19

0

83

37

67

31

59

kl

18

25

93

60

23

Census, Governmental Finances in

Local

96

2

0

0

17

6

1

2

2

27

3

0

7

20

15

1980-81,

Table 4, p. 17.

a. Revenues in this group come primarily from severance taxes, including

the federal windfall profits tax on oil of $23.3 billion in 1981.

115
sales tax, and it has already effectively relinquished the estate tax. The

only widely available tax bases that might be vacated would be excise taxes

on motor fuels, alcohol, and tobacco. Federal revenues from these taxes are

expected to be about $21 billion in 1984. Half of these revenues—from the

federal motor fuels tax—are essentially user fees earmarked for federal

highway and mass transit programs, however, although it might be appropriate to relinquish some portion of them to states if they assumed greater

financial responsibility for highways—as discussed in Chapter IV. It is not

necessary for the federal government to vacate these tax bases in order to

induce nonfederal governments to use them, though, since state and local

governments have been raising their rates on these bases despite the federal

presence.

116
APPENDIXES

117

APPENDIX A. BACKGROUND FOR PUBLIC WORKS INFRASTRUCTURE

AND DEVELOPMENT PROGRAMS

This appendix provides background on the public works infrastructure

and development programs discussed in Chapter IV. The treatment of

infrastructure programs is less extensive than the background material on

community and economic development, because detailed information is

available in previous CBO studies, including Public Works Infrastructure:

Policy Considerations for the 1980s (April 1983)1

HIGHWAYS

Federal highway programs are administered by two agencies within the

Department of Transportation--the Federal Highway Administration

(FHWA) and the National Highway Traffic Safety Administration (NHTSA)

(see Table A-l). The most important of these programs support the

Federal-Aid Highway System, which has grown from 169,000 miles and 5

percent of the nation's roads in 1923 to 820,000 miles and more than 20

percent of the route-miles at present. In 1983, roughly 85 percent ($11.4

billion) of federal highway funding was allocated to programs for this

system, including Interstate, Primary, Secondary (rural collector), and

Urban System roads and related bridges. The remaining $2.1 billion serves

a wide variety of purposes, ranging from regional development to safetyrelated grants, some of which are available for the Federal-Aid System as

well.

Since the modern highway program began in 1916, federal highway

spending has passed through several cycles. if A milestone was reached in

1956, when the Congress created the Highway Trust Fund to provide a stable

means of financing construction of the Interstate Highway System. Federal

user fees were increased, with the most important tax--that on motor

fuels—going from 1.5 cents per gallon in 1956 to 3 cents in 1957 and to

4 cents in 1959. In recognition of their importance for national growth, the

1. For more details, see Congressional Budget Office, Highway Assistance Programs: A Historical Perspective (February 1978); The Interstate Highway System: Issues and Options (June 1982); and Financial

Options for the Highway Trust Fund (December 1982).

119
TABLE A-l. FEDERAL FUNDING FOR HIGHWAYS, 1982 AND 1983

(In millions of dollars of budget authority)

Program

Federal-Aid Highways

Interstate construction

Interstate 4R a/

Primary System

Secondary System

Urban System

Bridges

Other b/

Total

Interstate Substitutions

Safety Grants d/

Appalachian Development

Highway System e/

Other i]

Grand Total

1982

3,100

800

1,500

400

800

900

779

8,279

400

133

108

20

8,940

1983

4,510

1,950

1,890

650

800

1,600

1,008

12,408

775£/

153

100

36

13,472

SOURCE: Congressional Budget Office.

a. Resurfacing, Restoration, Rehabilitation, and Reconstruction.

b. Includes emergency relief, safety, regional development, and other

special programs.

c. $518 million in Highway Trust Fund monies and $257 in general fund

appropriations.

d. Includes safety grants distributed by NHTSA, as well as FHWA safety

grants that are not part of the Federal-Aid program.

e. Administered by the Appalachian Regional Commission.

f. Includes access highways to public recreation areas, highway widening

demonstration, and other special programs.

120
Interstate routes became eligible for 90 percent federal financing, rather

than the 50 percent federal support that the other Federal-Aid roads

received. In 197*, the federal matching share for non-Interstate projects

was increased from 50 percent to 70 percent, and four years later was raised

to 75 percent for most programs. Because state and local governments

spend more than required to match federal dollars, federal funds account

today for about half of the spending by all levels of government for

construction and major repair of the Federal-Aid System.

Most federal highway grant monies are distributed to the states on a

formula basis. Formulas vary significantly according to program. For

example, the Interstate apportionment is based on a state's share of the cost

to complete the entire Interstate System; the Interstate 4R (Resurfacing,

Restoration, Rehabilitation, and Reconstruction) formula is based on need as

measured by highway age; and apportionment for Primary and Secondary

System funds rests on a state's area, rural population, and mileage of rural

and intercity mail routes, relative to those of the nation as a whole.

The federal share of overall highway spending has averaged about 30

percent for the last 25 years. 2/ State governments now supply about half

the spending, with cities, counties, and other local governments providing

the remaining 20 percent. Most state and local spending goes for roads that

are not included in any of the various federal systems, for the more locally

oriented federal roads (mainly the Secondary and Urban systems), and for

routine maintenance on all road systems.

Public spending on highways peaked in 1969 at close to $50 billion

(expressed in 1982 dollars). In 1982, all three levels of government together

spent about $37 billion on highways, of which about half represents capital

spending for new construction and major repair work. In terms of

purchasing power, this level of spending is equivalent to that of the late

1950s, shortly after the start of the federal Highway Trust Fund.

The bulk of government spending on highways is financed by taxes on

highway users. The most important of these are the taxes on motor

fuel—now nine cents a gallon at the federal level under the 1982 legislation,

and an average of about ten cents a gallon at the state level. About

2. Unless states increase their spending as well, the major jump in

federal spending called for by the Surface Transportation Assistance

Act of 1982 may cause the first major shift since the late 1950s. This

legislation raised the federal tax on motor fuels from four cents to

nine cents per gallon, with one penny of the five-cent increase

dedicated to public transit.

121
95 percent of federal highway spending is financed by users, and approximately 60 percent of state and local spending also comes directly from

users.

PUBLIC TRANSIT

The federal government's mass transit program, run by the Department of Transportation's Urban Mass Transportation Administration

(UMTA), provides capital and operating assistance grants to local governments, with transit operators largely responsible for the selection and

management of projects. Of the $4.3 billion in federal funding authorized in

1983, 80 percent ($3.4 billion) is for transit capital programs, including new

bus purchases and bus maintenance facilities, modernization and extensions

of existing rail transit facilities, and construction of new rail systems (see

Table A-2). The remaining $0.9 billion in federal assistance is intended to

help cover the operating deficits of public transit authorities.

Federal funding of mass transit began on a small scale in the early

1960s, mainly to enable localities to purchase failing private bus lines and

upgrade equipment. Early in this century, mass transit was dominated by

private firms that operated as profitable businesses. With the proliferation

of private automobiles after World War II, however, urban populations and

employment, which had once been concentrated in city centers, became

more dispersed. As a result, transit ridership declined by about 65 percent

between 1945 and 1965, and many privately owned transit companies failed.

By the early 1960s, the physical deterioration resulting from deferred

maintenance had reached crisis proportions in most of the remaining private

systems. 3/

During the 1970s, federal transit aid grew at a 40 percent annual

rate—faster than any other transportation program. In the early 1970s, the

capital program expanded dramatically, permitting greater use of funds for

both existing and new rail systems. Federal funding for approved capital

grants climbed from $174 million in 1965 to $2.9 billion in 1981 (in 1982

dollars). In many cities, fares were held down to encourage ridership; but,

as systems expanded, transit labor and other costs rose dramatically. As a

result, operating deficits grew so large that most systems came to rely on

the fare box for less than half their operating costs. In 1975, as this burden

increased, operating subsidies were added to the federal aid program,

peaking in 1981 at $1.1 billion (in 1982 dollars). More recently, the Surface

3. George W. Hilton, Federal Transit Subsidies (American Enterprise

Institute, 1974).

122
TABLE A-2. FEDERAL FUNDING FOR PUBLIC TRANSIT, 1982 AND 1983

(In millions of dollars of budget authority)

Program

UMTA Discretionary Grants

(capital)

Total

UMTA Formula Grants

Total

1982

531

880

195

91

1,697

330

1,036

69

T^ii

1983

500

8*0

206

60

1,606

325

875

69

779

IToTs

Typical Projects

Funded

Bus fleet and service

expansion

Rail modernization and

extensions

New rail systems

Other a/

Bus replacement

Operating assistance

Small urban and rural

(capital and operating) b/

Trust Fund (capital) c/

Interstate Substitutions d/

Washington Metro

Grand Total e/

560 365

— 240

3,692 4,259

Rail system extensions,

new rail construction,

bus acquisition

New construction

SOURCE: Congressional Budget Office.

a. Includes funding for privately provided public transit service for the

elderly and handicapped, and the Urban Initiatives program supporting

intermodal transfer and joint development projects. Urban Initiatives

was discontinued in 1982.

(Continued)

123
TABLE A-2. (Continued)

b. Urban populations below 50,000. These areas will also receive $23

million of the $779 million in Trust Fund revenues being distributed by

formula in 1983.

c. Trust Fund receipts from one penny of the federal motor fuels tax will

be distributed by formula only in 1983. Beginning in 1984, they will be

distributed as discretionary capital grants, at the discretion of the

UMTA Administrator.

d. Transit capital projects that are substituted for withdrawn segments

of the Interstate Highway System, but subject to appropriations and

financed out of the general fund rather than the Highway Trust Fund.

e. Excludes transit capital projects financed out of the Highway Trust

Fund's Urban Systems program.

Transportation Assistance Act of 1982 limited federal operating assistance

to $0.9 billion a year through 1986.

Throughout its history, the federal program of transit capital assistance has focused on big cities. From 1965 to 1976, six large cities received

two-thirds of federal capital funding commitments, and 10 urban areas

together accounted for four-fifths. 4/ Even so, the very largest cities have

not received funds in proportion to their shares of the nation's transit riders.

This reflects an apparent desire to encourage transit growth elsewhere in

the country and a belief that the largest cities may be more willing and able

to finance transit on their own.

The federal share of total capital spending by all levels of government

for mass transit has been about 75 percent, with state and local governments providing the remainder of the funding. Federal capital grants

available through UMTA totaled $2.6 billion in 1982. At least $0.6 billion

was provided by state and local governments to meet the 20 percent local

See Consad Research Corporation, A Study of Public Works Investment

in the United States, prepared for U.S. Department of Commerce

(April 1980), vol. Ill, pp. 52-53. In order of decreasing size of commitments, recipients include the Tri-State area constituting New York

City and environs, Boston, Chicago, Atlanta, San Francisco-Oakland,

Washington, D. C., Philadelphia, Baltimore, Seattle, and Pittsburgh.
matching requirements. In addition, some large cities—notably New

York—financed major investments with their own monies. The federal

share of transit operating costs nationwide is about 13 percent, but is less

than this in large cities.

With passage of the Surface Transportation Assistance Act of 1982,

the transit industry now has a dedicated revenue source—one penny of the

federal tax on motor fuels—amounting to an estimated $1.1 billion a year.

For 198* through 1986, these revenues will fund transit capital grants, which

are distributed at the discretion of the UMTA Administrator. The new act

reduced the federal matching share on these grants from 80 percent to 75

percent. Nevertheless, after receiving federal and state contributions, a

typical city may pay less than 10 percent of the costs of a project. The

federal matching share on operating assistance grants remains at 50

percent.

The Surface Transportation Act also created a modified transit block

grant program, to go into effect in fiscal year 198*. It will replace UMTA's

existing four-tiered urban formula grant program, which provides funds

primarily for operating assistance, as well as for routine capital investments

such as bus replacement. The new block grant will be available for capital

or operating purposes, with funds allocated to urban areas according to a

formula based on population, population density, and vehicle miles of

operation.

AIRPORTS

The Department of Transportation's Federal Aviation Administration

(FAA) manages the user-supported Airport and Airway Improvement Program, under which the federal government offers airport authorities matching grants of 50 percent to 9* percent for construction and rehabilitation of

airport facilities. In 1983, $800 million in federal spending was authorized

(see Table A-3), but the Congress has imposed an obligation ceiling of $750

million.

Recognizing that an adequate system of airports was a matter of

national concern, the Congress authorized the Federal-Aid Airport program

in 19*6. Federal capital spending on airports is financed by user fees,

chiefly levied as taxes on domestic airline tickets and general aviation fuel.

These taxes, which originated in 1933 and 19*1, were not formally linked to

expenditures until 1970, when the Airport and Airways Revenue Act

established the Airport and Airways Trust Fund. Today, this fund is.

supported mainly by an 8 percent tax on domestic passenger tickets and a

125
TABLE A-3. FEDERAL FUNDING FOR AIRPORTS, 1982 AND 1983

(In millions of dollars of budget authority)

Program 1982 1983

Airport and Airway Improvement

Program

Grants-in-aid for airports 476 800

Metropolitan Washington Airports

Operation and maintenance 30 32

Construction 17 11

Total 523 843

SOURCE: Congressional Budget Office.

14-cents-per-gallon tax on general aviation jet fuel (12 cents for gasoline). 5J Collections from user fees are distributed to major airports in the

form of matching grants determined by a formula based on passenger

volume. Collections are distributed to smaller airports in the form of block

grants to states.

Since 1960, cumulative investment in the nation's airports by all levels

of government has totaled $25.1 billion (in 1982 dollars), of which the

federal share accounts for $9 billion, or just above one-third. The year-toyear federal share of total airport investment has fluctuated widely,

however, owing largely to substantial swings in the mix and total volume of

airport investment. 6/ The level of federal airport spending remained

relatively stable throughout the 1970s, at about $600 million a year (in 1982

dollars). Today, the federal Airport and Airway Improvement Program

5. The general aviation user fees were increased from 7 cents per gallon

under the Airport and Airways Revenue Act of 1970 to 14 cents per

gallon for general aviation jet fuel and 12 cents for gasoline under the

Airport and Airway Improvement Act of 1982.

6. For further details, see Congressional Budget Office, Public Works

Infrastructure; Policy Considerations for the 1980s, Chapter VII.

126
channels funds to the nation's 780 commercial airports and 2,379 general

aviation facilities, including the 155 "reliever" airports, whose location

enables them to help reduce congestion at major commercial airports. The

federal share of capital spending averages about 20 percent for construction

at commercial airports, and around 85 percent at general aviation airports.

WATER RESOURCES

While about 25 federal agencies have some authority for water

resources development, federal water resources programs for financing,

constructing, and operating water resources projects are administered

primarily by four agencies: the U.S. Army Corps of Engineers, the Department of the Interior's Bureau of Reclamation, the Department of Agriculture's Soil Conservation Service, and the Tennessee Valley Authority (TVA).

Some 20 federal acts, dating back over a century, have formed the federal

water resources program for these four agencies, including development for

flood control, drainage, irrigation, municipal and industrial water supply,

fish and wildlife conservation, navigation, hydroelectric power, and area

redevelopment. The Corps of Engineers has built and maintained inland

waterways and ports under various rivers and harbors acts since 1826. All

four major federal water agencies finance, build, and sometimes operate

dams for a wide range of purposes. Federal spending amounting to $4.3

billion in direct expenditures was authorized in fiscal year 1983 to support

these diverse water resources programs (see Table A-4).

For most types of projects, the federal government finances all capital

costs but ultimately pays for somewhat less because of reimbursements

from users and other nonfederal sources. Cost-sharing for joint federal/state water resources projects varies according to the type of project

and lead federal agency. 7/ For the average inland waterway project, the

federal government pays about 94 percent of combined capital and operating

costs over the project's life. The federal government pays about 84 percent

of the average commercial harbor project. The average federal share of a

multipurpose dam project is about 70 percent of combined costs, but

portions may vary from a low of about 36 percent for a single-purpose

hydroelectric project to a high of about 89 percent for an irrigation project.

States or localities generally contribute land, easements, or rights-of-way;

users sometimes repay part of the initial capital cost and, more often, pay

operating and maintenance costs. Together, state and user contributions

cover the nonfederal share.

7. For further details, see Congressional Budget Office, Current CostSharing and Financing Policies for Federal and State Water Resources

Development (July 1983).

127

24-083 0-83-1 0
TABLE A-4. FEDERAL FUNDING FOR WATER RESOURCES, 1982 AND

1983 (In millions of dollars of budget authority)

Program 1982 1983

Corps of Engineers

Construction 1,430

General investigations 137

Operation and maintenance 1,025

Mississippi River and tributaries 256

Supplemental funding a/ —

Total 2,848

Bureau of Reclamation

Construction 549 580

General investigations 41 39

Operation and maintenance 119 122

Supplemental funding a/ — 116

Total 709 857

Soil Conservation Service

River basin surveys and

investigations 16 16

Watershed planning 9 9

Watershed and flood prevention

operations 194

Total 219

Tennessee Valley Authority

Water resources capital investment 19 40

Water resources operating expenses 20 23

Total 39 63

Grand Total 3,815 4,325

SOURCE: Congressional Budget Office.

a. Enacted in the 1983 Emergency 3obs Appropriation Act (P.L. 98-8).

128
In the early 1960s, annual federal spending for construction, operation,

and maintenance of water resources projects averaged between $5.5 billion

and $6.5 billion (in 1982 dollars). Since peaking in 1965, federal spending has

generally declined, reaching a low point of $3.8 billion in 1982. Since the

late 1970s, federal capital expenditures have declined even more rapidly.

The Corps of Engineers' combined capital outlays for flood control, multipurpose dams, and navigation, for example, fell from about $2.1 billion to

$1.2 billion (in 1982 dollars) between 1977 and 1983. The primary reason for

such a steep decrease, besides budgetary pressures, has been the inability of

the Congress and the Executive Branch to reach an accord over the proper

role of the federal government in making water resources investments. As a

result, no new federal water resources projects have been authorized since

1976. Overall, water resources expenditures appear to be shifting away

from massive new construction projects and toward rehabilitation of existing public works and more efficient management.

WASTEWATER TREATMENT

Federal programs supporting the construction and upgrading of wastewater treatment facilities are administered by three agencies—the Environmental Protection Agency (EPA), the Farmers Home Administration (FmHA)

in the Department of Agriculture, and the Economic Development Administration (EDA) in the Department of Commerce. In 1983, about $2.5 billion

in federal grant assistance was authorized for wastewater treatment programs (see Table A-5). In addition, Community Development Block Grant

funds, distributed by the Department of Housing and Urban Development,

can be used for wastewater treatment facilities.

Federal involvement in funding wastewater treatment facilities began

in 1957 under the U. S. Public Health Service (PHS). Between 1960 and

1966, only about $200 million a year (in 1982 dollars) in federal assistance

went for wastewater treatment grants to states. In 1966, the PHS

wastewater treatment grants program was transferred to the Department of

the Interior, and in 1970--when improving water quality became a national

priority because of rapidly degrading waterways and heightened public

awareness—it became the responsibility of the then-new Environmental

Protection Agency.

In recent years, by far the most important wastewater treatment

program has been the EPA's wastewater facilities grants program, accounting for about 85 percent of all federal wastewater spending since

1970. 8/ The EPA's outlays for wastewater facilities grants more than

8. These grants were authorized under section 201 of the Federal Water

Pollution Control Act of 1972 (P.L. 92-500).

129
TABLE A-5. FEDERAL FUNDING FOR WASTE WATER TREATMENT, 1982

AND 1983 (In millions of dollars of budget authority)

Program 1982 1983

Environmental Protection Agency

Construction grants for wastewater treatment 2,400 2,430

Farmers Home Administration

Rural waste disposal grants 38a/ 90a/

Economic Development Administration

Grants for public works and

development facilities 6 6k/

Total c/ 2,444 2,526

SOURCE: Congressional Budget Office.

a. The FmHA provides rural water and waste disposal grants and loans to

rural communities. In 1982, $125 million in grants and $375 million in

loans were authorized. $300 million in grants and $450 million in loans

have been authorized in 1983. Only a portion of these funds goes for

construction and upgrading of wastewater treatment facilities. Based

on recent spending levels, it is assumed here that, for 1982 and 1983,

grants used for wastewater treatment represent about 30 percent of

total rural water and waste disposal grant authorizations.

b. Estimate based on 1982 spending level.

c. Excludes federal funding for wastewater treatment available under the

Department of Housing and Urban Development's Community Development Block Grant program.

doubled between 1971 and 1974, from $1.1 billion to about $2.9 billion (in

1982 dollars). Between 1975 and 1982, the EPA's outlays for wastewater

treatment facilities grants ranged from $3 billion to $5 billion a year (iiv

1982 dollars). Under this program, the EPA now pays 75 percent of the

capital costs of constructing or improving conventional, publicly owned

130
treatment works, and 85 percent for so-called "innovative" technologies. 9/

Beginning with fiscal year 1985, the federal matching share under this

program will be reduced to 55 percent of capital costs for conventional

systems and 75 percent for innovative systems. Project grants are available

to states according to an allocation formula based on population and the

EPA's assessment of needs. Local recipients of EPA grants are responsible

for paying all operation and maintenance costs.

COMMUNITY DEVELOPMENT

A longstanding priority of local governments, community development

generally encompasses those activities necessary to support and improve

daily living conditions in cities and smaller communities, such as developing

and maintaining streets and sewers, providing parks and recreational facilities, and constructing or improving municipal buildings. Federal community

development efforts are centered in the Community Development Block

Grant program administered by the Department of Housing and Urban

Development. In addition, much of the federal assistance provided through

infrastructure and some social service programs helps to meet local

community development needs, even though these programs are not always

included in the context of community development efforts.

Federal involvement in community development dates to 1949. Early

federal efforts were motivated by a desire to eliminate slums and improve

conditions in urban areas. Although prohibited by court decisions from

directly exercising eminent domain to raze and rebuild decaying neighborhoods, the federal government funded local governments to undertake these

activities through a variety of urban renewal programs of the 1950s and

1960s.

Over time, federal regulations governing local government participation in community renewal programs became increasingly extensive and

restrictive, which led to reactions against the federal role in local affairs.

At issue were whether the federal government appropriately had a role in

addressing community development issues and, if so, what form its

9. Under provisions of the Clean Water Act, both "innovative" (new and

unproven) and "alternative" (proven in practice) technologies qualify

for the higher federal share. These technologies may be more costeffective than conventional collection and treatment systems, particularly for small or rural communities. For example, alternative

treatment processes include land application of wastewater or processes that reclaim or reuse water.

131

24-083 0-83-1 1
TABLE A-6. FEDERAL FUNDING FOR THE COMMUNITY DEVELOPMENT

BLOCK GRANT PROGRAM, 1982 AND 1983 (In millions of

dollars of budget authority)

1982 1983

Entitlement Funding for

Large Cities and Urban

Counties 2,380

Small Cities Funding 1,020

Secretary's Fund 56

Total 3,456

SOURCE: Congressional Budget Office.

involvement should take. The questions were extensively debated during the

Nixon Administration and resulted in the 1974 consolidation of then-current

community development programs into the Community Development Block

Grant (CDBG) program. 10/ The goal of consolidation was to return to local

governments the responsibility for setting priorities and for developing and

implementing strategies to achieve these goals. The federal role was

limited to establishing broad guidelines to govern local decisions and to

financing the activities undertaken.

Nearly $27 billion was spent for the CDBG program between 1975 and

1982, with an additional $4.5 billion allocated for 1983 including $1.0 billion

included in the supplemental jobs appropriation bill (see Table A-6). The

CDBG program has two primary components: 70 percent of annual

appropriations are allocated for annual, formula-based grants to large cities

and urban counties to implement locally designed development programs,

while the remaining funds are used for project grants awarded to smaller

communities to carry out specific activities, ll/

10. The programs consolidated included urban renewal, model cities, water

and sewer facilities grants, neighborhood facilities grants, public

facilities loans, open space land grants, and rehabilitation loans.

11. The division of funds between large communities and smaller ones is

made after subtracting out a small amount for the Secretary of HUD's

discretionary fund, which is used to make grants for special projects.

132
Formula-Based Entitlement Grants

Cities that have populations over 50,000 or that are designated as the

central city of a standard metropolitan statistical area and all urban

counties 12/ are entitled to apply for CDBG assistance and, if their

applications meet statutory requirements, to receive formula-based grants.

In 1982, 732 communities were eligible for entitlement grants, up from 594

in 1975. Of the total, 719 applied and were awarded grants, 12 did not

apply, and 1 applied and was not awarded funds because of failure to meet

application requirements.

Funding Levels. Prior to 1983, the peak funding year for community

development entitlement grants was 1980, when spending reached $2.7

billion. Funding fell in each of the next two years, both because total funds

for CDBG declined and because the share of the total allotted to entitlement jurisdictions was reduced in 1982 from 80 percent to 70 percent.

Current funding for entitlement grants is set at $3.1 billion, as a result of

higher program funding and an increased share (77 percent) of the supplemental jobs bill appropriation being allocated to entitlement jurisdictions.

Allocation of Funds. CDBG funds are distributed by formula among

eligible localities. Two formulas are used, and a jurisdiction receives the

higher of the two amounts. One formula, which dates to the establishment

of the program, considers a community's total population, population in

poverty, and number of overcrowded housing units. The second, added in

1977, includes the number of housing units in a jurisdiction built before

1940, its growth in population relative to that of all entitlement jurisdictions, and its population in poverty. In general, the earlier formula is

sensitive to the needs of low-income communities, while the second is

responsive to the concerns of jurisdictions with falling population levels and

shifting economic bases.

Eligible Activities. Entitlement jurisdictions may use CDBG allocations for a wide range of development activities. The enabling legislation

specifies that funds must be used to provide benefits to low- and

12. Urban counties are defined as those that have populations either of

200,000 or more (not counting cities within a county's borders that are

independently eligible for CDBG entitlement grants) or of 100,000 or

more and a population density of at least 5,000 people per square mile

and contain no incorporated places within their boundaries. Additionally, counties must have authorization under state law to carry out

essential community development and housing assistance activities to

qualify.

133
moderate-income households, to eliminate slums and blight, or to meet

urgent community needs. Under the Carter Administration, regulations

required that a majority of program benefits should accrue to low- and

moderate-income households, and applications showing that less than 75

percent of spending aided such households were subject to special review.

Under the Reagan Administration, this additional emphasis on aid to lowand moderate-income households was dropped. Bills recently reported by

the House and Senate Banking Committees (H.R. 1 and S. 1338) would,

however, add more specific guidance on the share of program benefits that

should be realized by lower-income households.

Within this general framework, eligible activities include: the acquisition, construction, or improvement of community facilities (such as centers

for the handicapped or elderly, playgrounds, and recreational facilities);

public works projects (street and sewer repairs, development or improvement of water systems or storm and drainage facilities, and construction or

improvement of parking facilities); housing code enforcement and assistance

to remedy violations; and economic development assistance, including direct

aid to for-profit firms. Up to 10 percent of CDBG funds may be used for

the direct provision of social services in such areas as prevention of drug

abuse, education, employment, and energy conservation.

Grants to Small Cities

In addition to entitlement grants to large cities and urban counties,

the CDBG program also provides project grants to smaller communities. All

general-purpose governments that do not qualify for funds under the

entitlement portion are eligible to apply for small cities aid, and the same

activities eligible for funding under the entitlement portion of the CDBG

program may be funded under the small cities component.

Funding for the small cities component of the CDBG program rose

from $259 million in 1975—when many smaller communities instead received

assistance under "hold harmless" provisions that maintained through 1979

their shares of earlier, categorical programs—to $1.0 billion in 1982. With

passage of the 1983 Emergency 3obs Appropriation Act, funding has risen to

$1.2 billion in 1983.

CDBG assistance to small communities is administered jointly by HUD

and by state governments. Funds are allocated among state areas on

essentially the same basis as they are divided among entitlement

13*
jurisdictions, 13/ and communities apply for grants to fund proposed projects. Prior to 1982, HUD awarded grants within states, but the 1981 budget

reconciliation act (P.L. 97-35) allowed state governments to participate by

distributing the funds within a state. In 1982, 37 states elected to do so, and

in 1983 that number has risen to 49. HUD continues to distribute a state's

funds when the state government has declined to participate.

To administer community development grants to small communities, a

state government must develop a means of allocating funds among localities

that is approved by the Secretary of HUD and must spend an amount equal

to 10 percent of the state's block grant on community development

activities in small communities. The strategies selected by states have

varied widely, but a general trend has been to increase the number of grants

made, relative to HUD's allocation practices, with the result that average

grant size has decreased. In addition, the types of projects receiving funds

have shifted under state government administration from housing rehabilitation, which received 43 percent of grants made in 1981 and just 12 percent

in 1982, to public facilities, which received 30 percent of 1981 grants and 47

percent of those made in 1982, and to economic development, which grew

from 4 percent in 1981 to 17 percent in 1982.

ECONOMIC DEVELOPMENT

The federal government has historically supported development of

economic resources through programs to develop highways and waterways,

through its management of natural resources, and through regulatory and

tax policies. It has also promoted the development of areas that lagged

behind the rest of the nation in their development, notably the Tennessee

Valley in the 1930s and Appalachia in the 1960s.

In addition, since the early 1960s, it has also attempted to address the

problems of areas that lack well-developed economic bases or that are

experiencing disruptive shifts in their economies. Current economic development programs assist such places to develop or sustain economic

activity, with the primary sources of aid being the Economic Development

Administration within the Department of Commerce and the Urban Development Action Grant program administered by the Department of Housing

and Urban Development.

13. The major difference between the formulas used to allocate funds

among entitled jurisdictions and the formulas used to divide funds

among state areas for smaller communities is that in the 1977 formula

the growth lag variable is replaced by a state's population.

135
Economic development activities are also independently undertaken by

state and local governments, and it is difficult to say, on net, how much the

federal government adds to their efforts. States and localities use a variety

of mechanisms to stimulate economic growth and attract new business.

Among the most common are: tax incentives, whereby governments provide

exemptions, temporary tax abatements, or preferential assessments; industrial development bonds, whereby states and localities issue tax-exempt

bonds to finance business relocation or expansion; and direct public services,

whereby governments provide new firms with such facilities as access roads

or utility connections at less than full cost. Further, some states and

localities deliberately set the structure and level of their taxes so as to

attract and maintain businesses. Virtually all states pursue economic

development strategies with some mix of these elements, and it is likely

that their efforts outweigh those of the federal government, although in

both cases it is difficult to determine how much effect on economic activity

these incentives and direct assistance offered to businesses produce.

Economic Development Administration

The Economic Development Administration (EDA) was established in

1965 to assist localities experiencing economic distress through a variety of

means, including:

o Grants for local public works projects, including site development

for industrial parks and infrastructure development;

o Grants for planning and technical assistance to communities for a

variety of uses, such as export development, technology transfer,

and research grants; and

o Direct loans and loan guarantees to private firms for working

capital and fixed asset requirements.

State and local government eligibility for EDA assistance is based on

local economic conditions, generally measured by high or prolonged unemployment or by low income. The criteria are set so loosely, however,

that areas eligible for EDA aid encompass 80 percent of the U.S. population.

Private firms applying for EDA credit assistance must be located in areas

eligible for assistance, must be unable to obtain aid elsewhere, but must

have reasonable assurance that they will be able to meet the terms of the

loan.

Funding for EDA activities in 1983 is set at $298 million for grants,

including $100 million added in the supplemental jobs legislation, and $150

136
million for loan guarantees (see Table A-7). Although no new loan authority

has been provided, additional direct loans may be made from the repayments

collected on outstanding loans. Of the 1983 grant funds, $230 million will be

used for public works projects, $100 million of which is planned for

relatively short-term, labor-intensive projects to aid areas with high rates

of unemployment. The remaining grant funds will be used for other support

such as planning and technical assistance. All EDA assistance is awarded by

federal officials on the basis of applications from eligible governments and

private firms.

TABLE A-7. FEDERAL FUNDING FOR ECONOMIC DEVELOPMENT, 1982

AND 1983 (In millions of dollars of budget authority)

Program 1982 1983

Economic Development Administration

Public works grants 130 230

Other grants a/ 68 68

Total 198 298 b/

Urban Development Action Grants 435 440

Grand Total 633 738

SOURCE: Congressional Budget Office.

a. Includes technical assistance, planning, and research grants.

b. Includes $30 million in new obligational authority transferred from

revolving fund.

Urban Development Action Grants

The Urban Development Action Grant (UDAG) program attempts to

link public and private investment directly by aiding projects that are

137
actively supported by local governments and that have firm commitments

from private developers. Cities identify projects that are not likely to be

undertaken by the private sector alone but that have the potential for

furthering economic activity within a distressed area. Officials secure

private commitments to the project and request UDAG aid to provide public

services or financing. UDAG funding is to be provided only if the project

could not proceed in its absence.

UDAG assistance is limited to localities experiencing economic distress, measured by such factors as their rates of growth in population,

income, and retail and manufacturing employment; their rates of unemployment; the proportion of population with incomes below the poverty line; and

the age of the housing stock. Local governments that do not meet these

requirements may still apply for action grants if the planned project would

be located in an area within the jurisdiction that is economically distressed.

UDAG funds are awarded on a competitive basis among eligible jurisdictions.

Funding for UDAG in 1983 is set at $HO million, down from a peak of

$675 million in 1980 and 1981, to fund a variety of commercial, industrial,

and housing projects. About 60 percent of program funds to date support

commercial projects such as the development of office buildings or hotel

complexes; 25 percent has been used for industrial projects such as the

expansion or relocation of small electronics firms; and the remainder has

been used for housing. UDAG funds may fill a variety of roles in

development projects, including: direct subsidies to developers through

loans, interest reductions, or land write-downs; provision of infrastructure

required for the project; or payment of relocation expenses associated with

a project.

138
APPENDIX B. BACKGROUND FOR EDUCATION, EMPLOYMENT, AND

SOCIAL SERVICE PROGRAMS

This appendix discusses the operation and effects of most current

intergovernmental grant programs for education, employment assistance,

and social services. Education programs are divided into two groups--

programs for students with special needs, and others.

EDUCATION PROGRAMS FOR STUDENTS WITH SPECIAL NEEDS

More than 70 percent of federal grant dollars for elementary, secondary, and vocational education—about $4.6 billion in 1983—fund programs for

students with special needs. \J These include compensatory programs for

low-income and underachieving students, educational and other services for

handicapped students, and bilingual education for non-English-speaking

students (see Table B-l). Additional federal funding for compensatory

services is available through Head Start, a social service program for preschool children from poor families.

The role of federal funding differs between compensatory programs,

on the one hand, and handicapped and bilingual programs on the other. Unless they accept federal funds for that purpose, schools are not required to

provide compensatory education to underachieving students. Federal courts

have ruled, however, that special efforts to facilitate access to mainstream

public education for handicapped and non-English-speaking children are

required under the law, whether or not federal funds are received by the

schools for that purpose. As a result, federal programs for the handicapped

and for bilingual education help to support activities that schools must

undertake in any case, while federal programs for compensatory education

provide funding for services that many schools might otherwise not provide.

Compensatory Programs

Title I/Chapter I of the ECIA. Title I of the Elementary and

Secondary Education Act—as modified by Chapter I of the Education Con1. In addition to grants, the federal government supports and administers

some education programs for Indians and migrants directly.

139
TABLE B-l. GRANTS FOR THE EDUCATION OF STUDENTS WITH SPECIAL NEEDS, 1982 AND 1983

Program

Budget Authority a/

1982 1983

(millions of dollars)

Distribution

Mechanism Beneficiaries

COMPENSATORY EDUCATION b/

Title I/Chapter I of the

Education Consolidation

and Improvement Act

(ECIA)

Vocational Education Act:

Special Programs for

the Disadvantaged

Adult Education Act

3,034 3,200 Formula grants to states

based on state expenditures per pupil and lowincome school-age population. Most funds

passed on to local

education agencies

Formula grants to states

14 14 based on income and

school-age population

86 95 Formula grants to

states based on the

number of adults with

less than a high school

education. Recipient costsharing (10 percent)

HANDICAPPED EDUCATION c/

Education of the

Handicapped Act

1,069 1,199 Mostly formula grants

to states based on the

number of handicapped

students, with passthrough to local agencies

Underachieving

students in low-income

school districts

Economically or

educationally disadvantaged

students

Adults lacking a

high school degree

Handicapped students
TABLE B-l. (Continued)

Program

Budget Authority a/

1982 1983

(millions of dollars)

Distribution

Mechanism Beneficiaries

BILINGUAL EDUCATION d/

Bilingual Education Act

Vocational Education Act:

Bilingual Training

13* Project grants to

state, local, and nonprofit educational

institutions

Project grants to

state, local, and nonprofit agencies

Children with limited

proficiency in English

Adults who are underemployed due to limited

proficiency in English

SOURCE: Catalog of Federal Domestic Assistance.

a. Congressional Budget Office estimates. For some programs, budget numbers include small amounts not

distributed as grants but used for associated federal activities.

b. Additional funding for the disadvantaged is provided through a 20 percent setaside required in vocational

education basic programs.

c. Additional funding for the handicapped is provided through a 10 percent setaside required in vocational

education basic programs, and through state programs for the handicapped under Title I/Chapter I of the

ECIA.

d. Additional support for language training for those whose proficiency in English is limited is provided through

Title I/Chapter I of the ECIA, Head Start, and Adult Education programs.
solidation and Improvement Act (ECIA) of 1981—is the largest source of

funding for compensatory education, and provides half of all grants for

elementary and secondary education—$3.2 billion in 1983. No state or local

match is required under the program. In more than half the states, the

ECIA is the only source of funds for compensatory education. In the 18

states that had state programs in the 1978-1979 school year, federal dollars

provided, on average, more than 70 percent of total federal and state

funding for compensatory education. Nationwide, federal dollars provided

nearly 80 percent of all funding for compensatory education.

Under Title I, Part A, formula grants are distributed among and within

the states on the basis of state school expenditures per pupil and the relative number of school-age children from low-income families, although at

the school level compensatory services are targeted on underachieving

children regardless of family income. 2/ Almost 90 percent of school

districts receive some funds under Title I, but districts with large concentrations of poor children receive larger per pupil allocations.

Strict regulations governing the use of Title I funds have resulted in

well-targeted programs of supplemental services—provided primarily to

elementary school students—that have increased educational performance

relative to comparable non-Title I students. Although relative performance

has been improved, the benefits of compensatory education have not been

great enough for Title I participants to "catch up" with nondisadvantaged

noncompensatory students. Further, it is unclear how long the relative gains

made by Title I participants are sustained. Preliminary evidence over a

three-year period indicates that most gains are made in the first year of

Title I participation, and that although Title I graduates do not generally fall

back in reading skills, mathematical skills decline after participation

ceases. 3/ Finally, the amendments to Title I authorized by Chapter I of the

ECIA may reduce the targeting and hence the efficacy of these compensatory programs, beginning with the 1982-83 school year.

2. About 85 percent of Title I funding is for Part A programs for local

education agencies. There are several smaller programs under Part B,

for services provided by state agencies to institutionalized and

migrant children.

3. See U.S. Department of Education, "An Evaluation of ESEA Title I—

Program Operations and Educational Effects: A Report to Congress"

(March 1982), Chapter IV.
Vocational Education Programs* A second source of federal funding

for compensatory services occurs through special programs for disadvantaged students under the Vocational Education Act, as well as through a 20

percent setaside in basic vocational programs. It appears that the provisions

of the Vocational Education Act have induced states to make a greater

effort to serve disadvantaged students from their own resources as well.

Although the proportion of state-local vocational expenditures devoted to

this purpose is modest—only about 10 percent—this reflects a state-local

contribution to services for the disadvantaged that exceeds federal matching requirements. (For example, states contribute more than a third of the

funding for special programs for the disadvantaged, although no match for

federal funds is required in these programs.) It is not known, however,

whether the supplemental services provided to the disadvantaged result in

educational or employability gains relative to similar students not receiving

services. */

Adult Education. Federal support under the Adult Education Act

provides formula grants to states to reduce functional illiteracy, by paying

up to 90 percent of the costs of remedial courses for adults lacking a high

school degree. Federal funds have apparently induced an increase in the

number of classes held and the number of disadvantaged adults served, with

states paying a growing share of the costs for these programs. Estimates

for 1982 indicate that states matched federal funds dollar for dollar, paying

50 percent of program costs.

Education of the Handicapped

Limited federal funding for education of the handicapped—special

education—was available earlier, but federal funding increased substantially

in 1975 with amendments to the Education of the Handicapped Act (EHA).

That is now the major source of federal funding—providing $1.2 billion in

1983—although some additional funding is provided under Chapter I of the

ECIA (for handicapped children in state institutions) and through a 10

percent setaside in basic programs under the Vocational Education Act.

Most funding under the EHA is allocated among the states on the basis of

the number of handicapped children aged 3 to 21 receiving special education

and related services. In addition, about 12 percent of federal funding is

allocated on a discretionary basis for special purposes, such as removal of

architectural barriers and personnel development. Federal funding is less

than 10 percent of all public spending for special education.

See U.S. Department of Education, "Vocational Education: Report by

the Secretary of Education to the Congress, 1981" (June 1982), Table

2; and The National Institute of Education, The Vocational Education

Study; The Final Report (September 1981).
Because supplemental services necessary to assure access to public

education for the handicapped are required under the law, whether or not

federal funding is provided to pay for them, federal education programs for

the handicapped probably have little effect now on whether or not some

services are provided. 5/ They may, however, affect the amount and kind of

services provided, since states that accept federal dollars for special education are then bound by federal program mandates and regulations. 6/

In particular, the EHA prescribes that handicapped children be educated in the "least restrictive" environment, which means that handicapped

children are to be served in regular rather than segregated classes if at all

possible. This has led to complaints by local educators, who contend that

they are in a better position to determine the appropriate educational

approach for the handicapped children they serve. They argue that, in some

instances, education for both handicapped and other children would be

improved if the handicapped were educated separately in special education

classes. This is because few regular classroom teachers have the training to

5. The educational rights of handicapped children were established initially in two major state-level suits: Pennsylvania Association for

Retarded Citizens v. Commonwealth of Pennsylvania; and Mills v.

D.C. Board of Education. At the national level, there are two federal

laws intended to assure certain rights to handicapped persons: Section

50* of the Rehabilitation Act of 1973 prohibits any program or

activity receiving federal assistance from discriminating against persons because of a handicapping condition; and Part B of the EHA

requires that each state participating in the state grant program

provide a "free appropriate public education" to all handicapped

children 3 to 21 years of age in the "least restrictive environment." In

July 1982, the Supreme Court began the task of defining reasonable

limits to the rights of handicapped children by deciding that very highcost types of help—such as a sign language interpreter for a single

child—were not required when the child was making "reasonable

progress" without them (Hendrick Hudson District Board of Education

v. Rowley). See Congressional Research Service, "Education of the

Handicapped," Issue Brief 780*0, April 1*, 1982.

6. For the 1978-1979 school year, New Mexico was the only state that did

not apply for a grant under Part B of the EHA. Even states that

refuse EHA funds may comply with EHA regulations, though, since

compliance with the EHA regulations is one way to demonstrate

compliance with the more generally applicable requirements of Section 50* of the Rehabilitation Act.

1**
deal effectively with handicapped children, so that the children make less

progress than they might if they had the attention of a special education

teacher. In addition, the behavior characteristic of certain disabilities can

be seriously disruptive of regular classroom activities.

Another major complaint with the EHA centers around the noneducational services—such as special medical and transportation services—

that are required for some students. Critics argue that it is not appropriate

to impose the sometimes large and uncontrollable costs of these related

services on the educational system. One study found that 25 percent of one

state's school transportation budget was spent on handicapped children,

although they were only 3 percent of the total school population. In addition, the study found that some state non-educational agencies had eliminated services to handicapped students because they assumed that educational agencies were receiving enough federal funds to take responsibility

for the necessary services. 7/

Supporters of the current requirements contend, however, that they

are needed to counter the tendency of some school districts to ignore the

special needs of handicapped children, or to offer them inferior services in

segregated classes. Although it seems clear that educational opportunities

for handicapped children have increased substantially as a result of court

decisions and legislation in the last decade, there is little evidence on the

relative effectiveness of alternative approaches to education for the handicapped. To date, most research has been confined to measuring compliance

with regulations.

Bilingual Education

The educational rights of non-English-speaking children, like those of

handicapped children, are protected by law whether or not federal funding is

available to pay the costs. 8/ Federal civil rights enforcement and grant

programs have emphasized bilingual education—some instruction in the

child's native language—in preference to English-only alternatives as the

means to ensure these rights.

7. See "P.L. 94-142: A Study of the Implementation and Impact at the

State Level" (Education Turnkey Systems, 1981).

8. In a 1974 decision (Lau v. Nichols), the Supreme Court decided that

special efforts to assimilate non-English speaking children in public

schools are required under Section 601 of the Civil Rights Act of 1964,

which bans discrimination based on national origin in any program or

activity receiving federal assistance.

145
Most federal funding is provided under the Bilingual Education Act of

1968 (Title VII of the Elementary and Secondary Education Act), although

some support for bilingual vocational training is available under the Vocational Education Act. 9/ Under Title VII, project grants—totalling $134

million in 1983—are awarded on a competitive basis to state and local

education agencies in order to facilitate the development of their capacity

to provide bilingual education, with rapid withdrawal of federal support once

this goal is met. In 1982, 43 states received Title VII funds, but about half

the projects (and funds) were in just three states—California, New York, and

Texas.

Local educators have argued for greater flexibility in addressing the

needs of non-English-speaking students, on two grounds. 10/ First, they

maintain that it is not feasible in many areas to provide instruction in the

native language of each student because so many different languages are

represented. Second, they argue that alternative techniques, such as English

as a Second Language or structured immersion programs, are often more

effective. A review of research on bilingual education programs supports

local claims about the need for greater flexibility. Based on these findings,

a report prepared by the Department of Education states that "continued

Federal pressure for bilingual education /to the exclusion of other

approaches/ warrants reexamination," and that "the problems of languageminority children are too complex to lend themselves to one nationally

mandated instructional approach." ll/ The Administration is seeking

legislative changes in Title VII to allow alternatives to bilingual education.

9. In addition, some language training is provided under Title I, Head

Start, adult education programs, and refugee assistance programs.

10. The first instance in which an all-English program was accepted as

fulfillment of federal civil rights requirements occurred in December

1980, when the U.S. Department of Education told Fairfax County,

Virginia, that it was not required to teach students in their native

language. Fairfax County has an English as a Second Language program. The burden of proof has rested with the local school system to

prove that alternative approaches are superior to bilingual instruction,

however. See Congressional Research Service, "Bilingual Education:

Federal Intervention or Equal Access?" Issue Brief 80093, January 15,

1982.

11. Beatrice Birman and Alan Ginsburg, "Addressing the Needs of Language-Minority Children: Issues for Federal Policy," U.S. Department

of Education (October 5, 1981), pp. 1 and 11.
OTHER EDUCATION PROGRAMS

In contrast to the programs examined in the previous section—which

support supplementary educational activities that were rare prior to federal

mandates or funding—the grant programs discussed in this section support

general educational activities at the state and local level. These include

basic vocational education programs, Chapter II of the ECIA, and impact aid

(see Table B-2). Spending for these programs accounts for less than 30

percent of all federal aid to elementary, secondary, and vocational education—about $1.7 billion in 1983. In addition, this section discusses programs

that provide grants to improve library services. 12/

Vocational Education

Federal support for vocational education is longstanding, dating back

at least to the Civil War at the postsecondary level and to 1917 at the

elementary and secondary level. Current support—a total of $725 million in

1983—is authorized under the Vocational Education Act of 1963 and

subsequent amendments. Most funds are distributed among states and then

to local education agencies through a formula based on population and per

capita income. States are required to match the federal contribution dollarfor-dollar in basic programs, but overmatching is so large that federal

dollars make up less than 10 percent of all public spending for vocational

education. This suggests that federal programs have little effect on the

overall level of spending, although (as discussed earlier) special programs

and setasides targeted on students with special needs have influenced the

composition of spending. Nearly one-third of federal dollars are targeted on

students with special needs.

There is no strong evidence that vocational education programs are

effective. At the secondary level (which receives 80 percent of federal

funds), there is no apparent long-term advantage for vocational education

students relative to general curriculum students, although there are shortterm gains in employment and earnings for women in office skills programs

and (to a lesser extent) for men in industrial education. There is very weak

evidence that vocational education may reduce high school dropout rates,

12. Federal spending for postsecondary education—$7.4 billion in 1983—is

mostly financial aid provided directly to students, through guaranteed

student loans, Pell grants, and campus-based programs. Since these

are not intergovernmental grant programs, federal aid for postsecond--

ary education is not discussed here.

24-083 0-83-1 2
TABLE B-2. GRANTS FOR GENERAL EDUCATION AND RELATED PROGRAMS, 1982 AND 1983

Program

Budget Authority a/

1982 1983

(millions of dollars)

Distribution

Mechanism Beneficiaries

Vocational Education Act:

Basic Programs b/

Chapter II of the

Education Consolidation and

Improvement Act (ECIA)

Impact Aid

634 707

479

466 540

Library Programs 80 130

Formula grants to states

based on population and

income. Recipient

cost-sharing (50 percent)

usually required

Mostly formula grants to

states based on

school-age population.

Minimum 80 percent passthrough to local education agencies

Mostly formula grants to

local education agencies

based on number of federally connected children

and per-pupil costs

Mostly formula grants

to improve library services.

Recipient cost-sharing

(33 to 67 percent) usual

Vocational education

students

School children

School districts with

federally connected

children

Patrons

SOURCE: Catalog of Federal Domestic Assistance.

a. Congressional Budget Office estimates. For some programs, budget numbers include small amounts not

distributed as grants but used for associated federal activities.

b. Excludes Special Programs for the Disadvantaged and Bilingual Training, which are shown in Table B-1.
but that it may also reduce the rate of college attendance. Postsecondary

vocational education appears to be more consistently related to earnings

gains for both men and women, with the increase somewhat larger for nonwhites than for whites. 13/

Chapter II of the ECIA

The State Education Block Grant is authorized under Chapter II of the

ECIA, which consolidated about 30 small categorical aid programs. Most of

the antecedent programs were project grants awarded competitively at the

federal level, with urban school districts as the major recipients. The

activities for which categorical aid was available included emergency school

aid for desegregation activities and career education programs, among

others. \M_I Under the block grant, funds are distributed by formula to the

states, with a mandatory minimum passthrough of 80 percent to local

education agencies. Funds may be used for any of the purposes of the

previous categorical programs, but they represent less than 0.5 percent of

all spending for elementary and secondary education. L5/ Up to 6 percent of

funds appropriated for Chapter II of the ECIA may be used by the Secretary

of Education for discretionary projects.

13. See Robert H. Meyer, "An Economic Analysis of High School Vocational Education," Parts III and IV, Urban Institute Project Report

(August 1981); National Commission for Employment Policy, The

Federal Role in Vocational Education (September 1981); National Institute of Education, The Vocational Education Study: The Final Report

(September 1981); and National Center for Research in Vocational

Education, The Effects of Participating in Vocational Education: Summary of Studies Reports Since 1968 (May 1980).

14. Follow Through—a program that provides continuing compensatory

services to Head Start graduates once they enter regular school

programs—was retained as a categorical program for three years,

after which it will be funded only through the block grant. See

Advisory Commission on Intergovernmental Relations, A Catalog of

Federal Grant-in-Aid Programs to State and Local Governments:

Grants Funded in 1981 (February 1982), pp. 67-69 for a list of the

categorical programs consolidated into Chapter II of the ECIA.

15. See Congressional Research Service, "Impact of Budget Changes on

Major Education Programs, Both Enacted and Proposed, During the

97th Congress," Issue Package 0199E, February 1982, pp. 1-4.

149
The block grant is essentially equivalent to unrestricted aid to education. Although the Congress reiterated its commitment to the basic goals of

the predecessor programs when it created the grant, it is not effectively

targeted at those goals. This is because funds are allocated on the basis of

school-age population, rather than on the basis of any criterion related to

the goals of the predecessor programs, and because federal oversight and

control are minimal.

Impact Aid

Impact aid provides unrestricted payments intended to compensate

local school districts whose tax bases are reduced or whose enrollments are

increased because of federal installations. The need for federal aid arises

because federal property has been exempted from state and local taxation

by the Congress. As a result, private property holders in federally affected

localities pay higher property tax rates to finance local services than they

would if all property in the locality was privately owned and taxable. In

recognition of this difference in treatment and of the value of local services

used as the result of federal installations, the federal government has a

number of programs that make payments in lieu of taxes to federally

affected localities. Impact aid is the largest of them.

In 1983, impact aid payments amounting to $540 million were made to

federally affected school districts. Most payments are allocated to local

school districts by a formula based on the number of federally connected

children enrolled and on local per pupil expenditures. Two classes of

federally connected children are distinguished: Class A children, whose

parents both work and live on federal property (including children who live

on Indian lands); and Class B children, whose parents either work or live on

federal property. The payment per pupil is currently less for Class B

children than for Class A children, and all payments for Class B children are

to be phased out by 1985. 16/ The reasoning behind this—as argued by both

current and previous Administrations—is that districts with Class B children

are not adversely affected by the federal presence, since economic activity

and off-site tax revenues are increased by parents who work or live outside

the installation. 17/

16. A three-year phaseout of payments for Class B children beginning in

1982 is a provision of the Omnibus Budget Reconciliation Act of 1981.

Even for Class A children, the program is not fully funded so that the

payment per child is less than per pupil expenditures.

17. See Congressional Research Service, "Education: Impact Aid—FY 83

Funding Levels and Priorities," Issue Brief 79018, April 1982.

150
Districts may be less adversely affected by Class B children than they

are by Class A children, since off-site property, income, and sales tax

collections are likely to be higher due to the activities of the parents of

Class B children. This difference may be small, however, since in many

areas only increases in off-site property tax collections benefit the affected

school districts directly. Increased income and sales tax collections are

more likely to accrue to state governments. It would probably be more

equitable to replace the current collection of payment schemes that

compensate localities for federal installations with a comprehensive

program of payments in lieu of taxes, based explicitly on the property tax

revenues that would be due if federal property were taxable.

Library Programs

Federal support for library services—$130 million in 1983—comprised

less than 5 percent of all public spending for library services. About 45

percent of federal funds were allocated through a population-based formula

to states to improve library services in underserved areas. A succession of

federal administrations have sought to eliminate the federal contribution to

library services, or to limit it only to funding for underserved areas, arguing

that relieving inadequate library services is a low priority item for scarce

federal dollars, particularly since there is no evidence that the public (as

distinct from the providers of services) perceives any serious inadequacy in

the availability of library services. Service providers, on the other hand,

maintain that federal support is important because the continuing "information explosion" and the development of new and expensive technology to

improve its availability have made it increasingly difficult for all but a few

major libraries to store all this information. 18/

EMPLOYMENT ASSISTANCE PROGRAMS

The federal government provides employment assistance in two ways:

it funds training and employment programs for selected groups; and it

supports the information and placement activities of the Employment

Service (see Table B-3). 19/ Employment assistance programs—which are

18. See Advisory Commission on Intergovernmental Relations, Federal Involvement in Libraries (3une 1980).

19. Job creation is also one of the goals of community and regional

development programs (discussed in Chapter IV) in addition to improv-

(Continued)

151
TABLE B-3. GRANTS FOR EMPLOYMENT ASSISTANCE PROGRAMS, 1982 AND 1983

Program

Budget Authority a/

1982 1983

(millions of dollars)

Distribution

Mechanism Beneficiaries

Training and Employment

CETA/JTPA:

Programs for the

Disadvantaged b/

Work Incentive Program

2,964 c/ 3,852 d/

281 271

Older Americans Act:

Community Service

Employment

277 319

Mostly formula grants to

state, local, and nonprofit agencies based

on low-income and

unemployed population

Formula grants to state

welfare agencies based

on the number of WIN

registrants. Recipient

cost sharing (10 percent)

required

Project grants to state,

local, and nonprofit

agencies. Recipient

cost sharing (10 percent)

required

Economically disadvantaged

workers

AFDC recipients

Low-income workers

aged 55 or more
TABLE B-3. (Continued)

Program

Budget Authority a/

1982 1983

(millions of dollars)

Distribution

Mechanism Beneficiaries

JTPA/TAA:

Dislocated Worker

Programs

Employment Service

25

757

135 Project and formula

grants to states. Recipient cost sharing (up

to 50 percent) required

824 Formula grants to states

based on labor force size

and number unemployed

Dislocated workers

Unemployed workers and

employers

SOURCE: Catalog of Federal Domestic Assistance.

a. Congressional Budget Office estimates. For some programs, budget numbers include small amounts not

distributed as grants but used for associated federal activities.

b. The Comprehensive Employment and Training Act (CETA) was replaced by the Job Training Partnership Act

(JTPA) in October 1982, but 1983 is a year of transition. JTPA should be fully implemented by October 1983.

Unlike CETA, JTPA includes a title that authorizes grants to states for providing employment services to

dislocated workers.

c. Includes $826 million for federally administered programs, including the Job Corps and national programs for

Indians and migrants.

d. Includes $866 million for federally administered programs.
heavily targeted on economically disadvantaged persons in the labor forceare designed to complement general economic policies intended to maintain

the economy at full employment, since past experience shows that prosperity alone will not suffice to integrate workers with severe disadvantages

into the labor market.

Training and Employment Programs

The federal government supports job training programs for two kinds

of workers—those who are economically disadvantaged and those who have

been dislocated by structural changes in the labor market. Currently,

almost all federal funding for job training programs is targeted on disadvantaged workers. Funding for programs for dislocated workers—provided

under the Trade Adjustment Assistance (TAA) provisions of the Trade Act of

1974—Was less than 1 percent of total federal spending for training and

employment programs in 1982. This share rose to 3 percent in 1983, though,

and is likely to increase further as the new 3ob Training Partnership Act

(3TPA)—which authorizes a new program for dislocated workers in addition

to programs for disadvantaged workers—is fully implemented in 1984 as a

replacement for the Comprehensive Employment and Training Act (GETA).

Programs for Disadvantaged Workers. 3TPA is the largest source of

funding for employment and training for disadvantaged workers. Funding

under 3TPA was $3.9 billion in 1983. Some additional employment and

training for disadvantaged workers is provided to AFDC recipients under the

Work Incentive (WIN) program, while public service employment is provided

to low-income older workers through the Community Service Employment

(CSE) program. The federal government administers directly some job

training programs—the 3ob Corps for youth, and special programs for

migrant and Indian workers—but most federal training programs are administered by state or local agencies that receive federal grants. CETA grant

programs (and the new programs for the disadvantaged under the 3ob

Training Partnership Act) are 100 percent federally funded, while a 10

percent state-local match is required under the WIN and CSE programs.

Typically, there has been little overmatching by nonfederal governments in

19. (Continued)

ing the physical environment and the fiscal capacity of targeted areas.

It seems unlikely, however, that current economic development programs have been very successful at generating private employment

demand in depressed areas. See 3ohn L. Palmer and Isabel V. Sawhill,

ed., The Reagan Experiment (The Urban Institute, 1982), pp. 263-267.
these programs. Responses to the substantial reductions in funding for

federal training programs in 1981 and 1982 indicate, however, that state and

local governments might step in to cushion reductions in service levels at

least for summer youth employment programs. 20/

Evidence on the effectiveness of employment and training programs

for the disadvantaged is mixed. Intensive programs in remedial education

and training—like the Job Corps—have been successful at increasing the

employability and earnings of severely disadvantaged youth, but less intensive programs providing primarily work experience—characteristic of most

CETA youth programs—typically have not. For youth who already have

basic employment skills, much less costly programs providing intensive jobsearch assistance have been successful at increasing employment rates by

reducing the time these youth spend looking for work. 21/ For adult women

entering the labor force for the first time, or reentering after a number of

years, it appears that most approaches—work experience, classroom instruction, or on-the-job training—are equally successful at increasing employability, indicating that the least costly approach would be most costeffective. Job-search assistance alone might be equally effective for these

women, at a lower cost, but this is uncertain. By contrast, none of these

approaches appears to enhance significantly the employability or wage rates

of adult men with a history of low-wage or unstable employment. 22/

Programs for Dislocated Workers. Workers dislocated for any reason

(trade-related or not) are eligible for employment services—including training and relocation allowances—under Title HI of the Job Training Partnership Act (JTPA). 23/ Start-up funding of $110 million has been provided for

1983 under this program, including supplemental appropriations of $85

20. See Richard P. Nathan, Philip M. Dearborn, and Clifford A. Goldman,

"Initial Effects of the Fiscal Year 1982 Reductions in Federal Domestic Spending," in John William Ellwood, ed., Reductions in U.S.

Domestic Spending (Transaction Books, 1982).

21. See Congressional Budget Office, Improving Youth Employment Prospects: Issues and Options (February 1982).

22. See Congressional Budget Office, CETA Training Programs—Do They

Work For Adults? (July 1982).

23. Estimates of the proportion of the unemployed who are dislocated

range from 1 to 20 percent, depending on how dislocation is defined.

See Congressional Budget Office, Dislocated Workers; Issues and

Federal Options (July 1982).

155
million under the emergency jobs bill recently enacted (P.L. 98-8). Additional funding of $25 million is available under the TAA program for workers

dislocated by increased imports, but this program is due to expire at the end

of 1983.

Evidence on the effectiveness of readjustment programs for dislocated

workers is scarce, but there are indications that job search assistance can

improve labor market outcomes for dislocated workers, often without the

need for extensive job retraining. In pilot projects offering reemployment

services to workers permanently laid off from automotive supply plants in

Michigan, it was found that workers who received services were significantly more likely to find new employment than workers who did not receive

special services. Reemployment rates for those who received services were

72 percent, compared to 50 or 60 percent for those who did not receive

services. The results indicated that training plus job search had no greater

impact on reemployment rates than job search alone, but this finding must

be viewed with caution since participants assigned to training were those

the program staff believed would be less likely to find reemployment

without training. 2fr/

The TAA program, however, has been more one of income maintenance than of adjustment. Of those who received trade readjustment

allowances from 1976 through 1980, about 13 percent received counseling,

fewer than 3 percent were referred for training, and about 3 percent were

placed in new jobs. Since more than two-thirds of workers who received

TAA benefits returned to their former employment, they were not really

dislocated workers. 25/

The Employment Service

The principal public source of labor market information and placement

assistance is the U.S. Employment Service, authorized by the Wagner-Peyser

Act of 1933. The Employment Service is a federally funded but stateadministered system, with offices operating throughout the country. It is

primarily a labor exchange, attempting to match—without charge—the skills

and interests of job applicants with openings listed by employers. The

2k. Abt Associates, "The Downriver Community Conference Economic

Readjustment Activity Program: Impact Findings from the First

Phase of Operations" (April 1983).

25. Congressional Budget Office, Dislocated Workers, pp. 27-28.

156
primary service provided to jobseekers is referral to listed job openings.

Services to employers include job analysis, studies of turnover and absenteeism, and assistance in job restructuring, along with help in filling job openings. The Employment Service does nothing to develop the employability of

job applicants, although it provides some aptitude testing and counseling and

serves as a source of information and referral for employment and training

programs and apprenticeship programs in which job applicants might usefully

participate. Agencies make some efforts at job development, in which they

encourage local employers to list more of their vacancies with the Service

as well as soliciting placements for specific Employment Service applicants. 26/

The amount appropriated for the placement activities of the Employment Service—$824 million in 1983—is allocated among the states by a

formula based on labor force size and the number of unemployed. Staff

years funded under the Wagner-Peyser Act have not increased significantly

since 1966 despite a large increase in the labor force over that time. 27/

Some additional funding is provided for services rendered to CETA prime

sponsors, local welfare agencies, and others.

Despite its large scale of operation—17 million applications, 8 million

job listings, and 6 million placements in 1981—the Employment Service has

never been the dominant labor exchange in U.S. labor markets because most

placements are achieved through the private efforts of jobseekers and

employers. 28/ It is, however, an important placement resource for many

disadvantaged workers. In 1980, minority workers accounted for 30 percent,

and youth accounted for 31 percent, of all applicants. Women, the

physically handicapped, migrant farm laborers, and other disadvantaged

groups are also served in numbers disproportionate to their representation in

the labor force. 29/ Much of the Employment Service's responsibility for

disadvantaged workers, however, has been of a regulatory or enforcement

nature, which has reduced the time and effort devoted to counseling and

placement activities with resultant discontent about the overall effective26. Employment and Training Report of the President, 1981, pp. 47-50.

27. See Youth Employment Act of 1979, Hearings, Pt. I, p. 381.

28. National Commission for Employment Policy, Seventh Annual Report

(October 1981), p. 84; Employment and Training Report of the President, 1982, p. 48.

29. Employment and Training Report of the President, 1981, p. 48.

157
ness of the Service. 30/ Conflict between these supplementary responsibilities and basic labor exchange functions was reduced by amendments to the

Wagner-Peyser Act included in the Job Training Partnership Act of 1982,

which established separate funding provisions for the two kinds of activities.

SOCIAL SERVICE PROGRAMS

Social service programs serve a number of functions. Foremost among

these is the provision of protective, rehabilitative, and community- and

home-based services intended to prevent both the neglect and the unnecessary institutionalization of dependent persons—children, the aged, and the

disabled. Secondary functions include counseling, referral, and advocacy

services intended to ensure that eligible persons receive the benefits that

are available for them.

These services are currently funded through a mix of private, federal,

and state-local sources. It is estimated that private charities contribute 35

to 40 percent of total spending for social services, while public spending is

60 percent federal and 40 percent state-local. 31/

30. In addition to its placement activities, the Employment Service has a

number of other responsibilities under various laws, executive orders,

and agreements with other agencies. Agencies are supposed to ensure

that employers who use the Service abide by equal employment

opportunity laws and federal labor regulations. Some beneficiaries of

income transfer programs such as Unemployment Insurance, Aid to

Families with Dependent Children, and food stamps are required to

register for job placement with the Service. Employment Service

offices are the certifying agents for employees eligible for the Targeted Jobs Tax Credit. They have a major recruiting role for the Job

Corps and other youth programs. They are also responsible for certifying alien workers, for monitoring migrant farm housing, and for certifying eligibility for rural business and development loans. See

National Commission for Employment Policy, Seventh Annual Report

(October 1981), p. 85; and Youth Employment Act of 1979, Hearings,

Pt. I, p. 78.

31. See Michael F. Gutowski and Jeffrey J. Koshel, "Social Services,"

Chapter 10 in John L. Palmer and Isabel V. Sawhill, ed., The Reagan

Experiment (The Urban Institute, 1982), pp. 325-26.

158
The federal role is limited almost entirely to funding and technical

support through grants to the state, local, and nonprofit agencies that

provide services. To a large extent, federal dollars simply subsidize services

that would be provided anyway, at some level, by nonfederal governments.

Some services—such as Head Start, rehabilitation services, and developmental disabilities programs—would probably be greatly reduced or eliminated in

the absence of federal funding, though.

Although federal support for social services dates back at least to

1912 and the formation of the Children's Bureau, the Public Welfare Amendments of 1962 initiated a period of rapid expansion in federal funding for

social services, with provisions aimed in part at preventing welfare dependency—and thus ultimately reducing welfare costs—among the population

wherever possible. As the result of this expansion, the ratio of federal

spending for social services to spending for income security and health rose

from less than 3 percent in the early 1960s to a peak of 6.2 percent in 1972.

Since then, however, the growth of spending for income support and health

entitlement programs has outstripped that for social service spending, so

that the ratio fell to 2.3 percent by 1982. 32/

Currently, the largest federal program for social services is the Social

Services Block Grant, which accounted for 42 percent of grants spending for

social services in 1983. This program supports a broad set of services,

including day care for children and dependent adults, homemaker and other

in-home services, and family planning. Other more restrictive categorical

programs support foster care and adoption services for homeless or abused

children, social and nutrition programs for the elderly, rehabilitation programs for the disabled, and volunteer activities in low-income areas (see

Table B-4).

Social Services Block Grant

This grant was created by the Omnibus Budget Reconciliation Act of

1981, which merged a similar but more restrictive block grant authorized by

Title XX of the Social Security Act with two much smaller Title XX programs: grants for day care services, and for training state and local social

service workers. Federal funds under the current block grant—equal to $2.7

billion in 1983—are allocated among the states solely on the basis of

population.

32. Gutowski and Koshel, p. 323.

159
TABLE B-4. GRANTS FOR SOCIAL SERVICE PROGRAMS, 1982 AND 1983 a/

Program

Budget Authority a/

1982 1983

(millions of dollars)

Distribution

Mechanism Beneficiaries

Social Services

Block Grant

Community Services

Block Grant

Head Start

2,400

366

912

Child Welfare Programs:

Title IV-B of the

Social Security Act:

Child Welfare Services

173

2,673 Formula grant to states

based on population

384 Formula grant to states

based on preexisting

distribution of funds.

Minimum 90 percent passthrough to local agencies

912 Project grants to state,

local, and nonprofit

agencies. State allocation determined by a

formula based on preschool-age low-income

population. Recipient

cost-sharing (20 percent)

required

173 Mostly formula grants

to states based on

population and income.

Recipient cost-sharing

(25 percent) required

Generally children,

the aged, and the disabled

Principally persons in

low-income areas

Economically disadadvantaged pre-school

children

Any children or families

in need of services

(Continued)
TABLE B-4. (Continued)

Program

Budget Authority a/

1982 1983

(millions of dollars)

Distribution

Mechanism Beneficiaries

Title IV-E of the

Social Security Act:

Foster Care and

Adoption Assistance

Runaway and Child

Abuse Programs

305

Older Americans Act:

Social and Nutritional

Services b/

Rehabilitation Services

27

636

952

400 Entitlement for AFDCeligible children.

Recipient cost-sharing

required, at the state

AFDC rate

38 Project grants to state,

local, and nonprofit

agencies. Recipient

cost-sharing (10 percent)

required for runaway

programs

Mostly formula grants

672 to states based

on elderly population.

Recipient cost-sharing

(15 percent) generally

required

1,045 Mostly formula grants

to states based on

population and income.

Recipient cost-sharing

(20 percent)

generally required

Welfare children in

foster care

Abused, neglected, and

runaway children

Persons aged 60 or more,

especially those with the

greatest economic or

social needs

Persons with physical or

mental disabilities that

impede their employment

(Continued;
TABLE B-4. (Continued)

Program

Budget Authority a/

1982 1983

(millions of dollars)

Distribution

Mechanism Beneficiaries

Volunteer Programs

(ACTION)

132

Developmental

Disabilities Programs

129 Project grants to

state, local, and

nonprofit agencies.

Recipient cost-sharing

(10 to 50 percent)

generally required

61 Mostly formula grants

to states based on

population and income.

Recipient cost-sharing

(25 percent) generally

required

Low-income and elderly

persons

Mentally retarded persons

SOURCE: Catalog of Federal Domestic Assistance.

a. Congressional Budget Office estimates. For some programs, budget numbers include small amounts not

distributed as grants but used for associated federal activities.

b. Excludes Community Service Employment, which is shown in Table B-3.
Under the consolidated grant, there is no requirement that spending

levels under the predecessor grants for day care and for training be

maintained. In addition, federal requirements under the prior grants

restricting eligibility for services to low-income individuals and requiring

matching state-local funds were eliminated. The elimination of the

matching requirement is not likely to have much effect on total service

levels, however, since most states provided more than their required share.

Since federal funding for 1982 was about 7 percent below that required

to maintain 1981 service levels, some states reduced their spending for day

care and for training in an effort to maintain other services, particularly

protective services for children and adults and community-based services

for the elderly and disabled. In addition, they shifted costs to other federal

programs wherever possible. For example, for welfare clients, day care

costs were shifted to AFDC, and family planning and home health care costs

were shifted to Medicaid. Evidence for the priority given to broad-based

social service programs (over redistributive programs) is the decision by 20

states to transfer funds from the Low Income Energy Block Grant to the

Social Services Block Grant under provisions contained in the Omnibus

Budget Reconciliation Act. 33/

Although social services are often supported simply for humanitarian

reasons, some services might be expected to yield positive results on a strict

cost-benefit basis. Family planning services help to reduce the incidence of

teenage pregnancies, for example, and reduce long-term welfare costs. 3fr/

Community- and home-based services for the elderly and the disabled might

enable some individuals to remain in their own homes at less public expense

than if they were institutionalized. If benefits of this sort are substantial,

immediate savings from cutting spending for social service programs could

be offset in later years by increased public assistance and health costs for

both federal and nonfederal governments.

33. See Gutowski and Koshel, pp. 316-17.

34. See 3acqueline Forrest, Albert Hermalin, and Stanley Henshaw, "The

Impact of Family Planning Clinic Programs on Adolescent Pregnancy,"

Family Planning Perspectives, vol. 13, no. 3 (May/June 1984), pp. 109-

16; and R. Wertheimer and K. Moore, "Teenage Childbearing: Public

Sector Costs," Final Report to the Center for Population Research,

Department of Health and Human Services (The Urban Institute,

December 1982). See also Kristin A. Moore and Martha R. Burt,

Private Crisis, Public Cost; Policy Perspectives on Teenage Childbearing (The Urban Institute, 1982),

163

24-083 0-83-1 3
Community Services Block Grant

The Community Services Block Grant replaced programs run by the

Community Services Administration (CSA) in 1982. Block grant funds with

no matching requirement are distributed among the states based on the

previous allocation of funds to states under the CSA, which gave project

grants directly to community action agencies in largely urban, low-income

areas. Some states indicate, however, that they intend to distribute funds

more broadly among localities in the future since federal requirements for

continued funding of previous recipients no longer apply beginning in

1983. 35/ It is uncertain how community action agencies will fare under the

new block grant. Federal dollars may instead be channeled entirely through

local government agencies.

Funds may be used for a variety of community-based services and for

community economic development. In the past, community action agencies

often served as sponsors for Head Start programs, and were the recipients of

grants for a variety of other federal and state programs. Their major role

was to draw together and coordinate the various federal, state, and local

resources that could be used to improve the lot of the poor in the

community. If funds are distributed to local agencies uniformly throughout

the state in the future, though, this grant will probably become a general

subsidy for social services, indistinguishable from the Social Services Block

Grant.

Head Start

Head Start is an additional source of funding for compensatory

services. It provides educational, nutritional, health, and social services to

pre-school children from poor families in an effort to reduce disparities in

development between disadvantaged children and others, so that poor

children might begin their formal education on a more equal basis. Most

programs operate 4 to 6 hours a day, for 8 to 12 months a year. Head Start

programs spent $2,311 per child, on average, in 1982, but sponsors typically

made extensive use of other federal programs—especially nutrition

subsidies, Medicaid, and public service employment—in providing services as

well. 36/

35. Nathan, et. al., p. 343.

36. The use of public service employees has been greatly reduced by the

elimination of public service employment in most employment assistance programs (CETA and its successor, JTPA). Some public service

employment continues, however, for older workers through the Community Service Employment (CSE) program under the Older Americans

Act.
Head Start funds are apportioned among the states by a formula based

on each state's relative number of poor children. Project grants from a

state's allocation are then provided by the federal government to eligible

local organizations within the state—including community action agencies,

schools, and churches. Local sponsors are required to provide at least 20

percent of program expenses. Some provide more than this, but the bulk of

local contributions is in-kind—volunteer workers and donations of space and

equipment. Federal dollars are nearly 100 percent of cash support. Head

Start programs, like compensatory services under Chapter I of the ECIA,

would probably be greatly reduced or eliminated in the absence of federal

funding.

Both the General Accounting Office and the Department of Health and

Human Services have reviewed existing evaluation studies of Head Start,

and have concluded that full-year (but not summer) programs are generally

effective in meeting their goals—gains in the cognitive skills, social

development, and health of Head Start children relative to similar children

who do not participate in the program. 37/ Although it is not known how

long the relative gains for Head Start children are sustained once the

children enter regular school programs, there is evidence from some highquality demonstration projects providing services similar to those available

to Head Start children that the gains are long-lasting. 38/

Child Welfare Programs

The principal source of federal funding specifically for child welfare

services is Title IV of the Social Security Act. 39/ Funds appropriated under

Title IV-B are distributed to the states by a formula based on the size of the

37. See General Accounting Office, "Head Start: An Effective Program

but the Fund Distribution Formula Needs Revision and Management

Control Needs Improvement," Report No. HRD-81-83, July 23, 1981;

Department of Health, Education and Welfare, "A Review of Head

Start Research since 1969, and An Annotated Bibliography," HEW

Publication No. OHD-77-31102; and Congressional Research Service,

"The Head Start Program: History, Legislation, Issues, and Funding:

1964-82," Report No. 82-93 EPW, May 10, 1982.

38. Center for the Study of Public Policies for Young Children, High Scope

Educational Research Foundation, "High Quality Early Childhood

Education Programs."

39. Child welfare services may also be funded under the Social Services

Block Grant.

165
under-18 population and per capita income; these funds may be used for

foster care maintenance, family counseling, adoption, and child protective

services, regardless of family income. States spend far more than the

required 25 percent match, so that less than 10 percent of services are

federally funded.

Funds under Title IV-E, by contrast, are provided to the states on an

entitlement basis for foster care and adoption assistance for abused or

neglected children from AFDC families. Adoption assistance may include

cash payments to the adoptive family and the continuation of Medicaid

benefits to the adopted child. The required state share is the same as the

state's AFDC and Medicaid share, which averages around 45 percent.

Before the Adoption Assistance and Child Welfare Act of 1980, states were

reimbursed on an entitlement basis for their foster care expenses for AFDC

children, but no federal assistance was provided to adoptive parents. The

intent of the Adoption Assistance and Child Welfare Act was to increase

incentives for permanent adoption of children in foster care when family

reunification was not possible. Since the act was not fully implemented

until the beginning of fiscal year 1983, there is no evidence as to how

effectively the new program provisions will meet these objectives. 40/

Services for the Elderly

The largest federal program of social services for the elderly is the

Older Americans Act (OAA) of 1965, which funds nutrition programs and a

range of community- and home-based services (as well as the CSE program,

discussed earlier under employment assistance programs). The elderly are

also major recipients of (often similar) services under the Social Services

Block Grant, the Community Services Block Grant, and federally supported

volunteer programs.

The services available under these programs have two principal purposes: to reduce the social isolation of the elderly; and to provide the

nutritional, health, homemaker, and transportation services necessary to

enable elderly persons who are only moderately disabled to continue living in

their own homes. Funds under the Older Americans Act (excluding the CSE

program) are allocated among the states on the basis of each state's population aged 60 or over. State and area agencies provide about 50 percent, on

average, of the funding for nutrition and social service programs for the

elderly, although their required share under the OAA is only 15 percent.

3an Fowler, "Federal Child Welfare Programs: Titles IV-B and IV-E of

the Social Security Act," Congressional Research Service, Education

and Public Welfare Division, January 1983.

166
The OAA originally served as a catalyst for generating more services

directed toward the needs of the elderly, but now services for the elderly

receive considerable independent support at the local level. Still, only a

small proportion of older Americans with physical limitations who are not

institutionalized receive federally supported social services of any type.

Further, the decentralized and unrestrictive nature of current programs has

led to a distribution of benefits that is not necessarily targeted on those

most in need. Elderly persons with strong community ties and an awareness

of the existence of programs are more likely to be participants than are the

socially or physically isolated. In addition, the services that are received by

the disabled are not always comprehensive enough to prevent institutionalization.

Rehabilitation Services

The vocational rehabilitation program now authorized under Title I of

the Rehabilitation Act of 1973 has been a federal categorical program since

1920. Basic grants to the states are distributed to state agencies by

formula, based on population and per capita income. States are required to

provide matching funds of 20 percent, and apparently little overmatching

occurs. 42/ Federal support for state rehabilitation services has been

declining in real terms since 1975, and the number of new cases accepted

has been dropping correspondingly, indicating that states have not increased

their support to maintain services.

The federal government will reimburse state agencies for the cost of

rehabilitation services for clients receiving Social Security Disability Insurance or Supplemental Security Income, if successful rehabilitation is demonstrated by a return to gainful employment for a period of not less than nine

months, subject to the stipulation that the reimbursement for each case

must not exceed savings (from reduced benefit payments) to the trust fund.

41. There is a bias toward institutionalization in the major federal health

care programs, since coverage for home-based services under Medicare and Medicaid has been available only since 1981, and is subject to

severe constraints. Currently, about 2 percent of payments under

Medicare and Medicaid are for home-based care.

42. In 1981, the actual state share was about 24 percent. In 1982,

reported figures show a state share of 26 percent, but this included

federal reimbursements through SSDI and SSI, which are not appropriately counted as matching state funds.

167
Studies by the Rehabilitation Services Administration (RSA) indicate

that its programs, unlike some other social service programs, create

significant public savings by putting handicapped persons back to work. The

RSA estimates that discounted lifetime earnings for rehabilitated persons

improve, on average, by $10 to $11 for every dollar spent on services for all

clients whose cases are closed in a given year (with or without successful

rehabilitation). In 1980, it estimates that the first-year improvement in

personal earnings yielded public benefits from rehabilitation—due to

increased tax collections and reduced public assistance—of $280 million. Of

this, an estimated $213 million were benefits to the federal government. At

this rate, the total costs of rehabilitation for cases closed in 1980 ($1.1

billion) would be recovered by federal and state governments combined

within 4 years, and the federal costs would be recovered by the federal

government in that period as well. 43/

Based on these estimates, reductions in federal funding for vocational

rehabilitation—if the resultant reductions in the number of persons served

are not offset by increased rehabilitation through private or charitable

organizations—are likely to increase rather than decrease federal budget

deficits in the long run. 44/

43. Discounting would lengthen the period required for cost recovery,

but—at current interest rates—it would not eliminate the net public

benefit from rehabilitation. See Rehabilitation Services Administration, Division of Program Administration, Basic State Grants Branch,

"In-House Benefit/Cost Ratios: State-Federal Program of Vocational

Rehabilitation," April 1982.

44. This assumes that all increased earnings are the result of rehabilitation services. One study estimates that in 1977 about 25 percent of

those counted as rehabilitated would have recovered without rehabilitation services. This would reduce the public benefits attributable to

rehabilitation, thereby lengthening the period necessary for recovery

of public costs through increased tax revenues and reduced public

assistance. The increasing emphasis in recent years on serving the

severely disabled—defined as those with work potential who would not

recover without rehabilitation services—has probably reduced the proportion of those served who would have recovered without services,

however. See Leo A. McManus, "Evaluation of Disability Insurance

Savings Due to Beneficiary Rehabilitation," Social Security Bulletin

(February 1981), vol. 44, no. 2, p. 20.

168
Volunteer Programs

Volunteer activities are a local resource that may be useful in combatting the effects of poverty, and grants from ACTION—a federal agency

supporting volunteer programs—are available to local agencies on a project

basis for the administrative and technical expenses associated with

neighborhood volunteer activities. The elderly and the handicapped are

major beneficiaries of these volunteer activities, since programs such as

Foster Grandparents, the Retired Senior Volunteer Program (RSVP), and

Senior Companions help to alleviate the social isolation of the able-bodied

who serve as volunteers, while they provide household services and longterm care for those who are not able-bodied. Some federal funding may

play an important role here as seed money, although at higher levels federal

dollars may instead supplant private charity by reducing the vigor with

which charities solicit private contributions.

Developmental Disabilities Programs

The federal government provides formula grants to states for services

to persons with developmental disabilities—defined as severe, chronic, and

seriously limiting disabilities that began prior to age 22. To qualify for

federal funds, states must have a protection and advocacy system intended

to ensure that the legal and human rights of mentally retarded individuals

are protected. A state match of 25 percent is required, and few states

provide much more than this. Similar services can be provided under the

Social Services Block Grant. Advocates for the retarded contend that their

needs are shortchanged when they must compete with other groups for

services, however, because retarded persons tend to be difficult and

expensive to serve and because their numbers are so small compared to

other target groups.

169

APPENDIX C. BACKGROUND INFORMATION ON INCOME SECURITY

AND HEALTH PROGRAMS

This appendix provides detail on federal income security and health

programs. Like Chapter VI, it concentrates on public assistance programs,

most of which are funded jointly by the states and the federal government.

The first section of the appendix describes income security programs while

the second discusses health care programs. I/

INCOME SECURITY PROGRAMS

Over one-third of the federal budget in 1982 was devoted to income

security programs. The largest of these are Social Security and other

retirement programs, but since those programs are generally accepted as

federal responsibilities they are not examined here. The income security

programs discussed are means-tested and are jointly operated by the federal

government and state or local governments (see Table C-l).

Aid to Families with Dependent Children (AFDC)

The AFDC program provides grants to states for income assistance to

low-income families with children. AFDC is an entitlement, which means

that all applicants who are eligible and who apply receive benefits.

Eligibility is jointly determined by the federal government and each state.

The federal government stipulates the category of people eligible—generally single-parent families with children—and states determine the income

level at which such households may receive assistance and the amount of

assistance they receive. 2/ The federal government pays a share of program

1. The budget numbers shown in this appendix are generally outlays,

rather than budget authority as was shown in previous appendixes.

Many of the programs discussed here are entitlements for which funds

are usually appropriated as needed. Outlay estimates for the nonentitlement programs considered here have also been given, where

possible, to allow consistent comparisons across programs.

2. The federal government allows, but does not require, two-parent

families with an unemployed parent to be covered, at state option.

171
TABLE C-l. FEDERAL OUTLAYS FOR INCOME SECURITY PROGRAMS, 1982 AND 1983 (In millions of dollars)

Program

Aid to Families with

Dependent Children a/

Supplemental Security Income

Food Stamps

Housing Assistance b/

Child Nutrition c/

Others d/

1982

Actual

7,990

7,677

11,01*

7,888

3,950

3,899

1983

Estimated

8,153

8,870

12,539

9,356

M21

3,797

SOURCE: Congressional Budget Office.

a. Includes Child Support Enforcement.

b. Includes the public housing program and the lower income housing

assistance program (Section 8 of the Housing Act of 1937, as

amended).

c. Includes National School Lunch Program, Special Supplemental Food

Program for Women, Infants, and Children (WIC), National School

Breakfast Program, Childcare Feeding Program, Summer Feeding

Program, Special Milk Program, and other small programs.

d. Includes Low Income Home Energy Assistance (LIHEA), Earned Income

Tax Credit, and Refugee Assistance.

costs in each state, based on the state's per capita income. The federal

share varies from 50 to 78 percent and currently averages about 55 percent.

Estimated federal outlays in 1983 are $8.2 billion.

172
Since states determine benefit levels for the AFDC program, families

with similar characteristics and similar incomes may receive widely varying

amounts of assistance in different states. Each state sets payment

standards, which are the maximum benefits paid to families of varying sizes

that have no other source of income. Payment standards (in the continental

United States) vary from a low of $96 per month for a family of three in

Mississippi to a high of $513 per month for a similar family in Connecticut.

Benefits are calculated as the difference between the family's adjusted

income and the state's payment standard.

Program History. AFDC was established in 1935 under the Social

Security Act to assist families with an absent or disabled parent. Since

then, several important changes in eligibility and work rules have been

made.

The major change in program eligibility came in 1961, when states

were given the option of providing benefits to two-parent families whose

primary wage earner is unemployed or partially employed. To date, 20

states and the District of Columbia have exercised this option. Other

eligibility changes, made as part of the Omnibus Budget Reconciliation Act

of 1981, include ending benefits for children beyond high school age and for

pregnant women without children until the third trimester of their pregnancies.

Several changes designed to increase recipients1 work incentives have

also been enacted. In 1967, a rule was established allowing the first $30 per

month in earnings to be disregarded in computing AFDC payments, as well

as one-third of each recipient's earnings above that threshold. Also

beginning in 1967, the Congress required states to deny AFDC payments to

adults who refused to accept employment or training opportunities and

authorized federal grants to provide such opportunities through the work

incentive (WIN) program. In 1971, registration for WIN was made mandatory

for all able-bodied AFDC recipients when their youngest child reached the

age of six. In 1981, however, the Omnibus Budget Reconciliation Act

reversed the trend toward stronger work incentives by limiting to four

months the period during which earnings are disregarded, and by reducing

benefit levels for working parents through changes in the treatment of work

expense deductions. At the same time, an attempt was made to tighten

work requirements by authorizing states to establish community work

programs ("workfare") in which recipients would be required to work on

public projects in exchange for their benefits.

Recipiency and Benefits. The number of AFDC recipients grew from 3

million in 1960 to over 11 million in the late 1970s and then—largely as a

result of changes implemented in the 1981 budget reconciliation

173
act—declined to 10.4 million in 1982. Since 1961, the fraction of all

families receiving aid that are two-parent families with an unemployed

primary wage earner has ranged from about 4 percent to its current level of

about 7 percent.

Benefit increases under AFDC have varied widely over time and

among states. Average benefits per person increased by about 36 percent in

real terms between 1960 and 1970. From 1970 to 1980, benefits on average

rose by 5 percent in real terms, but most of this increase occurred in just a

few states, while benefits in most states failed to keep pace with inflation.

Between 1980 and 1982, average benefits fell 11 percent in real terms.

The costs of the AFDC program have risen in response to both

increases in program participation and increases in benefits. Federal spending for AFDC totaled $667 million in 1960 and increased to $2.3 billion in

1970. Federal outlays rose in real terms through the 1970s by an average

annual rate of under 4 percent. Between 1980 and 1982, real outlays grew

by under 1 percent, to $8.0 billion in 1982.

Supplemental Security Income (SSI)

SSI is an entitlement program that provides income support for elderly

and disabled persons. Unlike in AFDC, the federal government determines

SSI eligibility standards, sets the basic program benefits, and pays the full

costs of providing basic assistance. States may then supplement these benefits. Persons are categorically eligible for SSI if they are either 65 years of

age or older or are disabled, with benefit levels determined by income.

Federal payment standards for recipients with no other income are currently

set at $304 for individuals and at $456 a month for couples. The benefits

provided are the difference between the payment standard and a recipient's

adjusted income. Estimated federal outlays in 1983 are $8.9 billion.

Although federal SSI benefits are uniform among states, variations in

states' supplemental benefits mean that similar households may receive

different benefit levels from state to state, although the variation is not as

great as in the AFDC program. In establishing the SSI program in 1972, the

Congress required states that had previously provided higher benefits to any

group than would be provided under SSI to maintain the previous level of

support. In 1981, 7 states provided only required supplemental benefits; 24

provided supplementation to selected categories of recipients; and 17 states

and the District of Columbia supplemented federal SSI payments to all or

nearly all recipients. State supplements range up to $167 a month for

individuals and up to $412 for couples, though most are below these levels.

174
Program History, SSI was created under the 1972 amendments to the

Social Security Act and took effect in 3anuary 1974. It replaced federal

grants to states under the earlier Old Age Assistance (OAA), Aid to the

Blind (AB), and Aid to the Permanently and Totally Disabled (APTD) programs.

Few major changes have been made in the SSI program since its enactment. In 1976, states were required to pass on the cost-of-living adjustments

made in federal SSI benefit levels each year, thus preventing them from

reducing their required hold-harmless payments by the amount of the

federal increase. The Social Security Disability Amendments of 1980

modified eligibility requirements and the benefit structure to provide

greater work incentives for the disabled. In 1981 and 1982, minor

modifications were made in the benefit calculation rules, lowering average

benefit levels slightly. Additional changes in 1983 that increased program

benefits for most recipients, however, more than offset these reductions.

Recipiency and Benefits. The number of SSI beneficiaries in December 1974 was 4 million, up from the 3.1 million receiving aid under the

programs that preceded SSI. The program peaked at 4.3 million recipients in

1976 and since then has slowly declined to 4.0 million in 1982. The number

may rise in the near term, however, because in 1983 the Congress passed

legislation requiring that the Social Security Administration notify certain

Social Security recipients that they may be eligible for SSI. The composition of SSI beneficiaries has shifted over time, with the number who are

disabled rising from 39 percent in 1974 to 57 percent in 1982, the share who

are elderly declining from 58 percent in 1974 to 41 percent in 1982, and the

proportion who are blind remaining nearly constant at 2 percent. 3J

Benefits under the federal portion of the SSI program are increased

each year by the same cost-of-living adjustments used in Social Security

retirement and disability programs. Thus, the delay in the annual cost-ofliving increase authorized by the Social Security Amendments of 1983 will

reduce benefits by $400 million over the next three years. The amendments

also increased SSI benefits by up to $20 a month for single recipients and by

up to $30 a month for married recipients. These increases will more than

offset the average reduction caused by delay in the cost-of-living adjustment, resulting in a net increase in SSI outlays of about $1.4 billion over the

1982-1985 period.

3. These percentages probably understate somewhat the share of SSI

recipients who are elderly, because disabled recipients are classified

as such even after they reach the age of 65.

175
The federal government currently provides about 75 percent of SSI

benefits, at a cost of $7.7 billion in 1982. The states' contributions to SSI

vary widely. For states that provide only the required hold-harmless

benefits, costs have fallen dramatically, particularly when compared with

the costs of the pre-SSI programs. States providing limited supplementation

have also experienced declining costs, at least in real terms, as caseloads

have fallen. For states providing nearly universal supplementation, costs

have generally risen as a result of growth in both caseloads and payment

standards.

Food Stamps

The Food Stamp program—an entitlement that is federally funded but

administered by states and localities—provides coupons to low-income

persons and families with which they may purchase food. It is the only

federal income security program with no categorical limitations; eligibility

is based on income. The federal government pays all of the benefit costs

and about half of state and local administrative expenses.

Both benefit levels and eligibility criteria are federally determined

and are uniform among states, bj Benefits are based on the Thrifty Food

Plan, a low-cost but nutritionally adequate diet. For a family with no

income, benefits equal 99 percent of the Thrifty Food Plan amount—$199

per month for a family of three, for example. Since families are assumed to

spend about 30 percent of their income on food, benefits are reduced by 30

cents for each dollar of adjusted income. Cash transfer payments like

AFDC and SSI benefits are counted as income in determining a family's food

stamp benefits, and, since benefit levels in those programs vary among

states, federal spending on food stamps also varies considerably among

states. In states with high payment levels for AFDC and SSI, average food

stamp benefits tend to be fairly low, while in low cash-benefit states, food

stamp benefits are relatively high. Estimated federal outlays in 1983 are

$12.5 billion.

Program History. In the early years of the Food Stamp program,

states played an important role in determining who benefited. Following a

set of pilot programs initiated by an executive order in 1961, the Food

Stamp Act of 1964 established a state-oriented, but nationwide, program in

which states could participate. The federal government, which financed the

entire program save a share of administrative costs, set the benefit levels.

States decided the geographic coverage of the program—with the option of

Benefit levels are higher in Alaska and Hawaii.

176
providing benefits only in some areas—and the criteria for determining

eligibility. Eligible households were required to pay a portion of their

incomes in order to obtain their allotment of stamps, a provision commonly

referred to as the "purchase requirement."

Over time, the federal government assumed a larger role in determining eligibility and benefit levels. The 1971 Food Stamp Amendments

replaced varying state eligibility standards with uniform federal standards,

and indexed allotments to the rate of food price inflation. Another set of

amendments, enacted in 1973, provided for nationwide operation of the

program in all states and localities, expanded eligibility, and introduced

semiannual indexing of allotments. The Food Stamp Act of 1977 eliminated

the purchase requirement and replaced it with the reduction of benefits by

30 cents for each dollar of income. The new act also simplified the

deductions from income and restricted eligibility and benefits somewhat,

though some benefits lost to elderly and disabled recipients by these changes

were restored by amendments in 1979. Further, small changes were made

by amendments in 1980, including provisions intended to reduce error and

fraud.

In 1981 and 1982, Congress made several changes that further reduced

eligibility and benefits. For example, the Omnibus Budget Reconciliation

Act and the Agriculture and Food Act of 1981 eliminated inflation indexing

of benefits for 1982, postponed certain other inflation-related adjustments

in later years, and replaced the Food Stamp program in Puerto Rico with a

block grant. In addition, the incentives for states to lower their rates of

erroneous payments were replaced by stronger sanctions that reduce federal

funding for administrative costs in states that fail to achieve specified

annual reductions in error rates.

Recipiency and Benefits. Participation in the Food Stamp program in

1962 averaged 143,000 recipients per month and steadily climbed to 4.3

million in 1970 as the number of participating localities increased. Continuing geographic expansion, adoption of uniform federal eligibility standards,

the recession in 1974-1975, and—most important—the transfer of participants in the Food Distribution Program to food stamps caused the number of

recipients to quadruple between 1970 and 1975, to about 17 million.

Average monthly participation declined steadily from the recession peak of

19.3 million in May 1975 to a low of 15.2 million in September 1978 as

unemployment dropped. With the elimination of the purchase requirement

and other changes in 1979 and with the economic downturn of 1980,

participation again increased to a peak of about 23 million in March 1981

and declined slowly afterward. The legislative changes in 1981 and 1982

eliminated the eligibility of about 4 percent of program recipients, while the

177
recent recession increased participation. With the decline in unemployment,

monthly participation is currently averaging roughly 23 million people.

Monthly food stamp benefits—currently averaging about $43 per

person—are a function of the level of the Thrifty Food Plan, price inflation,

household size and composition, and the cash incomes of participants from

earnings and government transfers. Average monthly benefits increased in

real terms about 50 percent from 1970 through 1975 and have increased

another 80 percent since 1975, although the rate of increase has been much

lower in recent years.

Federal outlays for food stamps totaled almost $37 million in 1965.

With growing levels of participation and benefits, outlays increased to $577

million in 1970 and to $4.6 billion in 1975. Outlays increased more slowly

after 1975, reaching $9.1 billion in 1980. Legislative changes in 1981 and

1982 are expected to reduce outlays for the 1982-1985 period by about 13

percent relative to what they would have been under previous law, mostly by

delaying benefit increases. Program funding totaled $11.0 billion in 1982.

Housing Assistance

The federal government provides direct housing assistance to lowerincome households through a variety of programs, the largest being the

public housing program and the housing assistance payments program

(commonly called the Section 8 program, after the section of the Housing

Act of 1937, as amended, that authorized it). .5/ Unlike other income

security programs in this section, housing programs are not entitlements,

and therefore not all eligible households who apply receive assistance.

Through the public housing program, the federal government finances

the construction costs of rental housing projects owned and operated by

local public housing authorities (PHAs) and also pays a portion of the

operating expenses associated with these projects. The units are then

rented to low-income households who pay a fixed share of their income

toward their shelter costs. Through the Section 8 program, the federal

government enables eligible households to live in privately-owned housing in

either existing, recently rehabilitated, or newly built structures of their own

5. The federal government also provides housing assistance to middleand upper-income households through the tax system by allowing the

deduction of interest payments on mortgages and of property taxes

paid to state and local governments. The cost of this aid was nearly

four times the cost of direct housing assistance programs in 1982.

178
choosing. The federal government pays the difference between a fixed

portion of a household's adjusted income and the unit's rent, not to exceed a

federally established maximum level.

The federal role in these housing programs includes determining the

amount of assistance to be made available each year, the programs through

which it is to be made available, and the eligibility criteria to be used in

identifying recipients. Local PHAs then allocate available assistance among

eligible households and, in the case of the public housing program, operate

housing projects. The costs of housing assistance not covered by tenant

rents are generally borne by the federal government, though localities

contribute by accepting payments in lieu of taxes on public housing projects.

Estimated federal outlays in 1983 are $9.4 billion (see Table C-2).

TABLE C-2. FEDERAL OUTLAYS FOR HOUSING ASSISTANCE PROGRAMS, 1982 AND 1983 (In millions of dollars)

Program

Public Housing

Housing Assistance Payments a/

Other b/

Total

1982

Actual

2,574

4,085

1,229

7,888

1983

Estimated

3,312

4,880

1,164

9,356

SOURCE: Congressional Budget Office.

a. Section 8 of the Housing Act of 1937, as amended.

b. Includes rental housing assistance, rent supplements, homeownership

assistance, and college housing grants.

Program History. Federal housing assistance has served several goals

that have received varying emphasis over time, including stimulating

economic activity through new construction, revitalizing low-income neighborhoods, and assisting low-income households. Federal policy has generally

179
shifted from public to private ownership of housing, from improving the

quality of housing to lowering the costs paid by low-income households, and

from serving households of modest means to aiding very poor households.

The public housing program is the oldest federal housing assistance

program, established in 1937 as a means of stimulating economic activity

following the Depression. 6/ Through it, local PHAs were able to construct

new rental housing, often as part of efforts to restore declining neighborhoods, thus increasing the supply of decent-quality housing. Tenants of

public housing were generally experiencing temporary hardship, and the

program was not designed to serve very poor households who could not pay

the required rent levels. Federal subsidies covered only debt service on

initial construction costs.

In the postwar period, public housing tenants grew relatively poorer

because of shifting federal policies and widening opportunities for middleincome households. As the rents paid by tenants fell increasingly short of

the levels required to pay operating costs, in 1969 the federal government

limited tenant rents to 25 percent of adjusted household income and

instituted subsidies for operating expenses on behalf of all tenants. These

subsidies have grown to nearly half of public housing operating costs in 1982.

From 1937 until 1961, the public housing program was the sole

mechanism for federal housing assistance, and during that period over

460,000 units were made available. Beginning in the 1960s, additional forms

of federal assistance relying on the private market were developed, including rent supplements to cover the difference between the share of household

income designated for rent and actual rents in privately owned projects, and

reduced-interest mortgages for multifamily projects that resulted in lower

rents charged to low-income households. By 1973, total public housing units

available numbered just over one million, while 721,000 units were provided

through other federal programs.

In response to growing concern about the costs and effectiveness of

these programs, the Congress in 1974 instituted the Section 8 program,

which provides supplementary rental payments to private landlords on behalf

of low-income households. Although program emphasis was initially placed

on improving the housing stock through new construction and substantial

rehabilitation—in response to the priorities of local PHAs—the rising costs

of this approach have recently dictated a shift toward reliance on the

existing stock of private housing. Of Section 8 assistance commitments

6. For further detail on the public housing program, see Congressional

Budget Office, Federal Subsidies for Public Housing: Issues and

Options (1983).

180
made through 1981, 45 percent were for newly constructed or substantially

rehabilitated units; in 1982, only 20 percent of commitments were for such

units.

The major recent change in housing assistance programs was made

under the Omnibus Budget Reconciliation Act of 1981, which increased the

rents paid by assisted households from 25 to 30 percent of adjusted income,

to be phased in over a five-year period. Further, the act required that 95

percent of new housing commitments be directed to households with

incomes below 50 percent of area median income, with no more than 5

percent provided to households with adjusted incomes between 50 and 80

percent of the area median.

Recipiency and Benefits. In 1982, 4.0 million federal rental housing

assistance commitments were outstanding, while 18.6 million renter households were eligible for such aid on the basis of their incomes. 7/ Of the

total, 1.2 million commitments were for the public housing program, while

1.6 million were through the Section 8 program. Outlays for housing

assistance programs have climbed from $2.1 billion in 1975 to $7.9 billion in

1982. Of the 1982 total, $2.6 billion was for the public housing program and

$4.1 billion for the Section 8 program.

Child Nutrition Programs

Child nutrition programs include the National School Lunch Program,

the Special Supplemental Food Program for Women, Infants, and Children

(WIC), the National School Breakfast program, the Child Care Feeding

program, the Summer Feeding program, the Special Milk program, and

several others. They provide cash and commodities to states for distribution

to individuals, schools, and child care programs. The WIC program provides

food supplements to low-income women and young children, while other

programs subsidize meals for children in schools, child care facilities, and

other institutions.

Federal aid amounts to about half of total spending on child nutrition

programs, with the remainder coming from states and local institutions and

from families. Typically, the programs are locally operated and administered. The federal government assists participating institutions by providing

a mix of commodities and cash reimbursements based on the number of

meals served, using nationwide formulas to determine the amount of

7. See Congressional Budget Office, Federal Housing Assistance; Alternative Approaches (May 1982), p. 28.

181
subsidy. Total estimated obligations in 1983 are $4.4 billion (see Table C-3).

In addition, roughly $0.4 billion in commodities will be provided.

In most programs, all meals served receive some federal subsidy,

regardless of the family income of the participant, as long as federal

nutritional criteria are met. Substantially higher subsidies, however, are

provided for meals served free or at a reduced price to children from lowincome families. Income eligibility for free meals is 130 percent of OMB's

income poverty guidelines and 185 percent of these guidelines for reducedprice meals. %J

Program History. Federal aid for child nutrition began during the

Depression with the purchase and distribution of surplus agricultural commodities to school lunch programs, and has expanded since then to encompass a wide range of programs. Cash subsidies to school lunch programs

began in 1943 and were permanently authorized by the Child Nutrition Act

of 1946. The school lunch program remained the only federal child nutrition

effort until enactment of the Special Milk Program in 1957. A period of

expansion in federal child nutrition programs began with the Child Nutrition

Act of 1966, which established the National School Breakfast Program. The

National School Lunch Amendments of 1968—which authorized the Child

Care Food Program—extended federal nutrition assistance from schools to

other institutions serving children by authorizing a summer meal program

and a year-round food service program for children in day-care facilities. In

1969, the Department of Agriculture began what was eventually called the

Commodity Supplemental Food' Program, which provided free commodities

to low-income, nutritionally at-risk, pregnant women, new mothers, and

young children. The Special Supplemental Food Program for Women,

Infants, and Children (WIC), was created in 1972 to serve the same groups

through federal grants to state agencies.

The Omnibus Budget Reconciliation Acts of 1980 and 1981 lowered

federal subsidy rates in the school lunch and related programs and restricted

income eligibility for free and reduced-price meals. In addition, eligibility

limits were lowered for WIC, and the Special Milk Program was substantially

reduced.

Recipiency and Benefits. Increased participation in child nutrition

programs during the 1970s was largely the result of new programs and new

8. For a family of three in the continental United States and the District

of Columbia between July 1983 and June 1984 the limit for free meals

is $10,686 per year and $15,207 for reduced-price meals. The limits

are higher in Alaska and Hawaii.

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TABLE C-3. FEDERAL OBLIGATIONS FOR CHILD NUTRITION PROGRAMS, 1982 AND 1983 (In millions of dollars)

Program

National School Lunch Program

Supplemental Food Program for

Women, Infants and Children

(WIC) a/

National School Breakfast Program

Childcare Feeding Program

Summer Feeding Program

State Administration

Special Milk Program

Other b/

Total

1982

Actual

2,134

929

319

290

89

45

20

8

3,834

1983

Estimated

2,350

1,194

335

344

94

47

20

8

4,392

SOURCE: Congressional Budget Office.

NOTE: Because of limited data, this table reports obligations and is

not, therefore, consistent with funding reported for child nutrition programs in Table C-l.

a. Includes Commodity Supplemental Feeding Program.

b. Includes funding for nutrition education and training, as well as special

studies.

national eligibility standards that included higher income eligibility limits

for free and reduced-price meals. Overall, the number of meals served in

the school meal and child care programs increased by half to 5.4 billion in

1980 with most of the increase occurring in programs other than the school

183
lunch program. The school lunch program—the largest of the child nutrition

programs—served 4.4 billion meals to 27 million children in 1980, an

increase of one-fifth from 1970. Most of the increase in the school lunch

program occurred in the free and reduced-price categories where participation increased 150 percent during the decade. The creation of the WIC

program in 1974 also increased participation in nutrition programs, adding

about 88,000 in 1974 and nearly 2 million in 1980. The budget reconciliation

acts of 1980 and 1981 reversed the trend of growing participation in school

and child care nutrition programs; in the school lunch program, for example,

participation declined from 27 million to 23 million between 1980 and 1982,

although these acts had little effect on WIC participation.

Because of these increases in participation, higher federal reimbursement rates, and the creation of WIC, federal expenditures increased from

$0.7 billion in 1970 to $4.6 billion in 1980. Much of the growth occurred in

the meal categories with highest federal subsidies and in the entirely

federally funded WIC program. As a result, the federal share of total child

nutrition spending increased from less than a third in 1970 to a half in 1980.

Because of cutbacks enacted in 1980 and 1981, outlays for child nutrition

fell from $4.3 billion in 1980 to $4.0 billion in 1982. Expenditures for

programs other than WIC declined from $3.5 billion to $3.0 billion, while

WIC increased from $0.7 billion to $0.9 billion.

Other Income Security Programs

In addition to the major public assistance programs discussed above, a

number of smaller programs provide assistance to low-income families and

individuals for specific purposes (see Table C-4). The largest of these is the

Low Income Energy Assistance program (LIEA), which provides funds to

states to aid individuals with high fuel bills, energy related emergencies, or

weatherization projects. The assistance may be any combination of direct

payments to individuals, vendor payments, vouchers, tax credits, or other

forms of aid, and state programs vary widely in types of aid, eligibility

criteria, and participation rates. In 1982, about two-thirds of energy

assistance funds were used for heating assistance, and the average benefit

provided for this purpose was $182. In all, between 8 and 9 million

assistance grants were made. The program is entirely federally funded, but

is operated by the states, which have considerable discretion in the

allocation of funds.

Other income security programs that provide some aid to low-income

households include the earned income tax credit and the Refugee Assistance,

program. The first of these is a refundable credit available to those with

earnings below $10,000 and little other income, and the second provides

grants to states to aid needy refugees and immigrants.

184
TABLE C-4. FEDERAL OUTLAYS FOR OTHER INCOME SECURITY

PROGRAMS, 1982 AND 1983 (In millions of dollars)

1982 1983

Programs Actual Estimated

Refugee and Entrant Assistance 1,011 632

Low Income Energy

Assistance

Earned Income Tax Credit

Total

1,687

1,201

3,899

1,960

1,205

3,797

SOURCE: Congressional Budget Office.

HEALTH PROGRAMS

The major federal health care programs are Medicare—for elderly and

disabled persons who are eligible for Social Security—and Medicaid, which

makes payments to providers of medical services on behalf of public

assistance recipients and other medically needy persons. In addition, the

federal government funds a number of much smaller grant programs for

health care that support community health centers, family planning services, migrant health services, and black lung clinics, among other things

(see Table C-5). As in Chapter VI, Medicare is not discussed here, since it is

not an intergovernmental program.

Medicaid

Medicaid is an entitlement program, jointly operated and financed by

the federal and state governments, that provides payments for medical

services to low-income persons. The federal government designates eligibility for all recipients of AFDC and SSI, who account for about three-quarters

of all Medicaid recipients, and states may at their option include other

185
TABLE C-5. FEDERAL OUTLAYS FOR SELECTED HEALTH CARE

PROGRAMS, 1982 AND 1983 (In millions of dollars)

1982 1983

Program Actual Estimated

Medicaid 17,391 19,472

Health Care Grants a/ 1,33* 1,558

SOURCE: Congressional Budget Office

a. Appropriations, not outlays. Includes Preventive Health Care Block

Grant, Substance Abuse and Mental Health Block Grant, Maternal and

Child Health Block Grant, Primary Care Block Grant, Family Planning

Services, Migrant Health Services, and Black Lung Clinics.

groups. 9/ Since the income cutoffs for SSI and AFDC eligibility differ

across states, eligibility for Medicaid also varies.

The major supplemental coverage that states have elected to provide

is for the "medically needy," who account for about 13 percent of current

Medicaid recipients. Thirty states now have programs for the medically

needy, and eligibility requirements under them vary considerably. In

general, however, recipients under these programs have medical expenditures that are high relative to their incomes and meet the categorical

eligibility requirements, except for income level, for either AFDC or SSI.

States may also choose to cover people who meet some, but not all, of the

categorical eligibility criteria for AFDC or SSI.

States pay a fixed share of total Medicaid expenditures, with the

percentage in each state depending on the state's per capita income. The

formula used to determine a state's share of costs is generally the same for

Medicaid as for AFDC. The federal share of Medicaid expenditures varies

among states from 50 to 78 percent, and averages about 55 percent. States

9. States have the option of limiting Medicaid coverage for SSI recipients

by requiring them to meet any more restrictive eligibility criteria in

effect before the implementation of SSI.

186
are required to provide certain services, and may provide additional services

at their option. Somewhat more than half of total federal expenditures go

for required services, although much of the remainder is spent on services

that may provide lower-cost substitutes for some mandatory services, such

as intermediate care facilities. Estimated federal outlays in 1983 are $19.5

billion.

Program History. Federal matching payments for medical services to

recipients of federally supported public assistance programs were first

authorized in 1950 by amendments to the Social Security Act. In the early

1960s, the federal government began to provide matching grants to states to

pay the costs of medical services to aged, blind, or disabled persons who

were medically needy but who were not eligible for public assistance. About

four-fifths of states participated in these optional programs.

The current Medicaid program—authorized in 1965 under Title XI of

the Social Security Act—replaced earlier matching grant programs. By the

end of calendar year 1966, Medicaid's first year, 26 states had begun

operation of Medicaid programs. Another 11 began their programs in 1967,

and all remaining states but Arizona soon followed. 10/

The services covered through Medicaid have changed little over the

program's history, but increases in the number of participants and in usage

have prompted efforts to reduce program outlays. Both the Omnibus Budget

Reconciliation Act of 1981 (OBRA) and the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) contained provisions directed toward limiting

the increase in Medicaid outlays. The 1981 act provided that the amount

that a state was otherwise entitled to receive in Medicaid matching funds

would be reduced by 3 percent in fiscal year 1982, 4 percent in 1983, and 4.5

percent in 1984, although these reductions could be avoided if states

successfully reduced error and growth rates. States were given additional

flexibility in designing and modifying their Medicaid programs to adjust to

the reductions, such as the adoption of alternative hospital reimbursement

methods and the provision of home- and community-based services for

persons who would otherwise require institutional care. TEFRA allowed

states to require small copayments by patients in most cases, and expanded

the states' authority to impose property liens to pay for nursing home care.

It also added home health care services for disabled children as an optional

covered service.

In response to severe fiscal pressure, however, some states cut back

their Medicaid programs even before implementation of the federal changes

enacted in 1981 and 1982. More than 30 states reduced benefits, eligibility,

10. In 1982, Arizona established a demonstration Medicaid program.

187
or proyider reimbursement in 1981, and approximately the same number

made such cutbacks in 1982 after OBRA took effect. Common changes

included limiting the number of annual hospital days, limiting payments for

emergency room and outpatient care, and dropping eligibility for certain

categories of recipients. States also took advantage of the flexibility

provided under recent federal acts by, for example, substituting home health

care for nursing home care. On the other hand, some states acted in 1982 to

reinstate benefits previously cut, to lift access restrictions, or to increase

payments to providers. State activity in 1983 has also been mixed, with

some states adding or reinstating services and others reducing them.

Recipiency and Benefits. Starting from 11.5 million recipients in

1968, when most state programs had been established, Medicaid participation grew rapidly in the early and mid-1970s as a result of increases in the

number of AFDC recipients and in the number of aged, blind, and disabled

people qualifying for Medicaid after implementation of national eligibility

standards for SSI. The number of recipients has declined from a peak of

22.9 million in 1977 and has fluctuated around 22 million in recent years. In

1982, 44 percent of Medicaid recipients were dependent children, 25 percent

were adults in families with dependent children, 15 percent were aged, and

13 percent were disabled.

The federal government requires basic services to be provided under

state Medicaid programs, and also pays for selected supplementary services.

States must provide inpatient and outpatient hospital care, physicians1

services, diagnostic services, nursing home care, family planning consultation, and screening services for children. Required services account for

about 55 percent of program outlays. In addition to the required services,

each state has chosen to provide some of the optional services, including

intermediate (non-hospital) care, prescription drugs, dental services, and

prosthetic devices, for example.

Federal outlays for Medicaid increased from $2.7 billion in 1970 to $14

billion in 1980. This large increase was due to a number of factors, notably

growing numbers of eligible individuals and increased usage of some medical

services. The recent cutbacks in Medicaid, both at states1 initiative and in

response to federal cutbacks, have reduced the annual rate of increase in

Medicaid outlays from an average of over 15 percent annually between 1975

and 1980 to less than 10 percent between 1981 and 1982. Outlays in 1982

were $17.4 billion.

Health Care Grant Programs

In addition to Medicaid, the federal government funds a number of

nonentitlement health care programs. These include four block grants—for

188
preventive health care; substance abuse and mental health; maternal and

child health; and primary care—and three narrower-purpose grant programs

for family planning services, migrant health services, and black lung clinics

(see Table C-6). The Administration has proposed that the latter narrowpurpose programs be folded into the Primary Care Block Grant, which

supports community health centers.

The four block grants were created by the Omnibus Budget Reconciliation Act of 1981, which consolidated 21 small categorical health programs.

For each of these block grants, funding was set at or below the total that

had been appropriated for the individual programs before consolidation. As

a result, funding for all the programs consolidated was about 25 percent

lower in 1982 than it would have been had current policy in 1981 been

continued. Real spending for the three narrower-purpose health grant

programs also declined—by more than 30 percent—from 1981 to 1982.

Preventive Health Care. The Congress created this block grant by

combining small grant programs for rodent control, fluoridation, hypertension, health education, home health care, and emergency medical services

with a previously existing broad-based program for public health services

authorized under Section 31ft(d) of the Public Health Services (PHS) Act.

Federal funds are distributed by formula to states and may be used for a

wide variety of preventive health services, most of which are also supported

by state and local governments. Benefits are community-wide.

Substance Abuse and Mental Health. This block grant combined

separate programs for alcohol abuse, drug abuse, and mental health that had

been enacted in the 1960s in order to increase the availability of community-based treatment centers. In 1982, states were required to divide

spending under the block grant between mental health and substance abuse

programs in the same proportions as had existed in the predecessor programs

in 1980, although this restriction was to be relaxed and then eliminated in

later years (by 1985). Funds are distributed by formula to states. State and

local governments provide substantial funding for mental health and substance abuse programs as well, but much of this is for institutional care

rather than community-based services.

Maternal and Child Health Care. The 1981 budget reconciliation act

combined a number of small grant programs—for services to disabled

children, the prevention of lead poisoning, genetic screening, sudden infant

death programs, hemophilia treatment, and adolescent pregnancy prevention—with programs for promoting the health of mothers and children in

rural or economically depressed regions authorized under Title V of the

Social Security Act. Funds are distributed to states by a formula based on

the number of low-income children. States are required to provide matching

189
TABLE C-6. FEDERAL APPROPRIATIONS FOR HEALTH CARE GRANT

PROGRAMS, 1982 AND 1983 (In millions of dollars)

Program

1982

Actual

1983

Estimate

Preventive Health Care

Block Grant 82 86

Substance Abuse and Mental

Health Block Grant 432 469

Maternal and Child Health

Block Grant 37* 478

Primary Care Block Grant 281 360

Family Planning Services 12* 12*

Migrant Health Services 38 38

Black Lung Clinics 3 3

Total 1,33* 1,558

SOURCE: Congressional Budget Office.

funds—three state dollars for every four federal dollars received. Under the

new block grant, states provide services to mothers and children in high risk

groups, but they are permitted to establish income-based charges for

beneficiaries with incomes above the federal poverty guidelines.

Primary Care. This block grant continued the grants for community

health centers established in 1966 under Section 31*(e) of the PHS Act.

Under this grant, the federal government provides formula grants to states

for distribution to local agencies for the development and operation of

health centers in communities that are medically underserved. States are

required to provide a matching share of funds, which will increase from a

fifth in 1983 to a third in 198*.

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Family Planning Services* Funding for this grant is authorized under

Title X of the PHS Act and is used by state, local, and nonprofit agencies to

operate family planning clinics, offering services primarily—but not exclusively—to low-income women and teenagers. In 1981, about 4 million

women were served. Funds are distributed among the states by formula

based on the number of low-income women and the number of women under

20. Additional federal funding for family planning services is available

through the Maternal and Child Health Block Grant, Medicaid, and the

Social Services Block Grant. Although state and local governments also

fund family planning services from their own sources, it is estimated that 86

percent of all public funding is federal, with 40 percent channeled through

Title X.

Migrant Health Services. Grants for migrant health centers are

authorized by the PHS Act and are awarded competitively to public and

nonprofit agencies in areas with seasonal influxes of migrant workers.

Funds are used to provide access to primary health care and environmental

health services for about 2.7 million migratory and seasonal farmworkers

and their families. In 1981, about half a million persons were served.

Although state and local governments provide some funding for these

services, federal dollars provide about 95 percent of all public spending for

migrant health services.

Black Lung Clinics. The black lung clinics program is authorized under

the Black Lung Benefits Act of 1972, and provides support for respiratory

and pulmonary health care in areas where there are significant numbers of

active and retired coalminers. Services are provided through existing

community health centers, other outpatient health care facilities, or freestanding black lung clinics. Funds are distributed among the states by

formula, based on the number of active and retired miners. In 1981, the

program supported about 70 clinics in 14 states serving between 50,000 and

60,000 persons.

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