Formula Grants: 2000 Census Redistributes Federal Funding Among States
Published: 2003-02-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In fiscal year 2000, about $283 billion in federal grant money was distributed to state and local governments by formula, about half of it through four formula grant programs--Medicaid, Foster Care Title IV-E, Adoption Assistance, and the Social Services Block Grant (SSBG). States receive money based in part on factors such as annual population estimates derived from the previous decennial census, which is conducted by the Department of Commerce, Bureau of the Census. GAO was asked to measure the effect that using the 2000 census data has on redistributing funding for federal formula grant programs. To do this, GAO analyzed the change in the U.S. and state populations between 1999 and 2000 that was the result of correcting prior population estimates and estimated for the four programs the extent of any redistribution of federal funding among states.
section_title: What GAO Found
paragraphs: The 2000 census count of 281.4 million people exceeded the 1999 population estimate by 8.7 million people, or 3.2 percent. Three-quarters of this 1-year population increase, 6.8 million people, was the result of correcting errors in population estimates over the preceding decade; the remaining portion of the increase, 1.9 million people, was the result of population growth from 1999 to 2000. Every state's population had been underestimated during the 1990s, but the extent varied, from the smallest correction in West Virginia--0.3 percent--to the largest in the District of Columbia--10.2 percent. Twenty-eight states had a correction below the national average of 2.5 percent, and 23 states had a correction above the national average. Correcting population estimates for the 2000 census redistributes among states about $380 million in federal grant funding for Medicaid, Foster Care, Adoption Assistance, and SSBG. Funding for the 28 states that had below-average corrections to their populations decreases by an estimated $380.3 million; funding for the 23 states that had above-average corrections increases by an estimated $388.8 million. Most of the change in funding is concentrated in states with larger populations. However, changes in funding are smaller in several large states because the matching rates for Medicaid, Foster Care, and Adoption Assistance are limited by statute--matching rates cannot fall below 50 percent. Some higher-income states would receive matching rates below 50 percent if not for this limitation. Most of the shift in funding occurs in fiscal year 2003 when federal matching rates for the Medicaid, Foster Care, and Adoption Assistance programs are based on population estimates derived from the 2000 census. A small portion of the shift occurred in fiscal year 2002 because that is when the SSBG began using the 2000 census counts. The Department of Commerce provided technical comments on a draft of this report.

section_title: Letter
paragraphs: In fiscal year 2000, the federal government obligated about $332 billion in  grants to state and local governments to help fund an array of programs  ranging from Medicaid to Highway Planning and Construction. Over 85  percent, or about $283 billion, of this grant money was distributed to state  and local governments using formulas that are based on data such as state  population and personal income. For example, the $196 billion federal- state Medicaid program finances health care to low-income families with  children and aged, blind, and disabled individuals through a statutory  formula based on state per capita income—the ratio of total personal  income to state population.
To calculate grant amounts, formula grant programs generally rely on  annual population estimates for each state developed by the Bureau of the  Census. State populations are estimated by adding to the prior year’s  population estimate the number of births and immigrants and subtracting  the number of deaths and emigrants. These estimates are subject to error,  mainly because migration between states and between the United States  and other countries is difficult to measure. By the end of each decade,  when the decennial census is taken, a significant gap may have arisen  between the population estimate and the census population count for the  same day of the year, such as April 1, 2000.
When population data based on a new census enter into federal formula  grant calculations, states gain or lose funding depending on how the gaps  between their population estimates and their census counts compare with  the U.S. average gap. The larger the gap between a state’s population  estimate and its census count, the larger the shift in funding is. For  formula grant programs that distribute a set amount of federal funding, the  gains in states with increased funding are offset by the losses in states  with decreased funding. For open-ended formula grant programs, such as  Medicaid, states with increased funding do not necessarily offset states  with decreased funding.
To measure the effect of using the 2000 census on the distribution of  formula grant funding among the states, you asked us to examine (1) the  change in the U.S. and each state’s population between 1999 and 2000 due  to correcting prior population estimates and (2) the extent of any  redistribution of federal funding among the states for four selected  formula grant programs as a result of the 2000 census.
To address these objectives, we used information on annual state  population estimates that were derived from the 1990 census and state  estimates that were derived from both the 1990 and 2000 censuses, as  reported by the Census Bureau. To estimate the error in population  estimates, we compared the April 1, 2000, population estimates based on  the 1990 census with the April 1, 2000, census counts. To determine the  effect of correcting the errors in population estimates on the distribution  of formula grant funding to the states, we analyzed 4 federal formula grant  programs of the 172 such programs identified in the Catalog of Federal  Domestic Assistance—Social Services Block Grant (SSBG), Medicaid,  Foster Care Title IV-E, and Adoption Assistance. We chose these 4  programs because their formulas use population estimates to distribute  federal assistance, and they represented almost half of all formula grant  funding (46 percent) in fiscal year 2000. The SSBG distributes a set  appropriation exclusively on the basis of population data. The 3  entitlement programs, Medicaid, Foster Care, and Adoption Assistance,  use per capita income—the ratio of personal income to state population— in identical formulas to determine federal matching rates. We obtained  information on the formulas for these programs from the Department of  Health and Human Services, and we used funding data for each program  for the fiscal year in which the program first used population data derived  from the 2000 census to calculate grant awards. To calculate the change in  formula funding resulting from correcting population estimates, we  compared what funding would be if formula grant amounts were  calculated using two different population estimates for the same year, one  based on the 1990 census and the other on the 2000 census. We conducted  our work from July 2001 through January 2003 in accordance with  generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: The Census Bureau counts the U.S. population once every decade through  its decennial census. For the years in between, the Bureau estimates  states’ populations from annual data on changes in births, deaths, and net  migration (including net movements of military personnel). These annual  population estimates are called postcensal population estimates because  they are based on the prior census (see table 1 for definitions of different  population counts used in this report). This process of making annual  postcensal population estimates continues until the next census. Once the  new census is taken, the Bureau compares the population estimates to the  census population counts for the same date. The difference between the  population estimate and the census count is called the error of closure.  Subsequently, annual population estimates are revised for the prior decade  using the counts from the new census. For example, after the 2000 census,  the annual population estimates from the 1990s were revised to be  consistent with both the 1990 and 2000 censuses. These revised population  estimates are called the intercensal population estimates because they rely  on the preceding and the succeeding censuses.
Of the four programs we analyzed, Medicaid is the largest, comprising 43  percent of all federal formula-based programs and 94 percent of the total  funding for the four programs analyzed for this report (see table 2).
The SSBG formula allocates an amount of funding, set by annual  appropriation, directly to the states. A state’s allocation is proportional to  its share of the total U.S. population. State allocations for fiscal year 2002  used the April 2000 census, and allocations for prior years used postcensal  population estimates that were based on the 1990 census.
In contrast with the SSBG’s fixed appropriation, the Medicaid, Foster  Care, and Adoption Assistance programs are open-ended entitlement  programs—the states determine the level of program expenditures, and  the federal government reimburses a share of their expenditures according  to matching rates, called the Federal Medical Assistance Percentages  (FMAP), set by statutory formula. All three programs use the same  formula, which is based on a 3-year average of state per capita income— the ratio of aggregate personal income to state population. As a state’s per  capita income increases, its matching rate decreases, and vice versa. In  addition, unless a state experiences changes in aggregate personal income,  its federal payment generally declines if the state’s population growth is  less than the national average. Matching rates range from a minimum of 50  percent to a maximum of 83 percent of a state’s Medicaid expenditures.  The minimum 50 percent rate affects only the high per capita income  states. For fiscal year 2002, for example, a high-income state such as  Connecticut would receive a 15 percent federal matching rate if the 50  percent minimum was not in place.
For fiscal year 2002, the federal matching rates for Medicaid, Foster Care,  and Adoption Assistance were based on a 3-year average of per capita  income from 1997 through 1999. Rates for fiscal year 2003 are based on a  3-year average from 1998 through 2000. Although the formulas use  overlapping years, the state population numbers used to compute per  capita income differ depending on which fiscal year the grant is for. For  these three programs, the fiscal year 2002 formula calculations used  postcensal population estimates derived from the 1990 census for 1997  through 1999 to calculate per capita income. Fiscal year 2003 formula  calculations used population estimates for 1998 through 2000 derived from  the 2000 census. Thus, the 2000 census affects matching rates for these  programs beginning in fiscal year 2003 (see table 3).
section_title: Most of Population Difference Between 1999 and 2000 Resulted from Correction of Errors That Occurred During 1990s
paragraphs: The difference between the 2000 census count and the 1999 postcensal  population estimate was 3.2 percent, which is large compared with the 1  percent average annual growth rate estimated over the preceding decade.  Most of the difference was due to the correction of the error that had  occurred during the 1990s. According to the Census Bureau, the size of the  error was the result of an underestimate in the measurement of net  international migration during the 1990s and the improved coverage of the  2000 census compared with the 1990 census. Consequently, the postcensal  population estimate for 2000 was smaller than the 2000 census count.  Every state’s population growth was underestimated and needed  correction, but the correction amounts varied widely. Among the four  Census regions, only the Midwest showed a consistent pattern: all 12  states were close to or below the national average correction. California,  Florida, and New York accounted for a high percentage of the correction  in population estimates in their respective regions.
subsections: section_title: Correcting Errors in Population Estimates Accounted for Three- Quarters of the Difference Between 1999 to 2000
paragraphs: The 2000 census count of 281.4 million people as reported by the Census  Bureau exceeded the 1999 postcensal population estimate by 8.7 million  people, or 3.2 percent. Slightly more than three-quarters of this difference  (2.5 percent) was the result of correcting errors in the population  estimates that occurred over the decade, called the error of closure (see  app. I for detailed data for all states). The error of closure was 6.8 million  people, substantially larger than the 1.5 million error of closure associated  with the 1990 census. The error of closure for the 2000 census was four  times the corresponding percentage error for the 1990 census (2.5 percent  compared with 0.6 percent).
The large error of closure in 2000 was due to underestimating the annual  growth in population during the 1990s and to the improved coverage of the  2000 census over the 1990 census. The postcensal population estimates for  the decade grew an average 1.0 percent annually. However, the 2000  census showed that the average annual growth rate in population was 0.2  percent higher than the estimated rate, or 1.2 percent. The Census Bureau  revised its annual population estimates upward when it released its  intercensal population estimates in the spring of 2002.
The Census Bureau cited two reasons for the size of the error in its  postcensal estimated population growth through the 1990s. First, the net  international migration was underestimated during the decade, especially  for the Hispanic population. The Hispanic population was underestimated  by approximately 10 percent, four times higher than the national average  population underestimate, 2.5 percent. Second, the 2000 census was more  accurate than the 1990 census. The population undercount from the 2000  census was much smaller compared with the 1990 census (1.18 percent,  compared with 1.62 percent, making the 2000 census more accurate); the  2000 census counted people who were probably missed in the 1990  census.
section_title: Size of Population Correction Differed Widely Across States
paragraphs: The error of closure shows a wide variation across states. For example,  West Virginia and Michigan had the smallest percentage corrections, 0.27  and 0.34 percent, respectively. The District of Columbia and Nevada had  the largest percentage corrections in their population estimates, 10.2  percent and 7.5 percent, respectively. Twenty-eight states had a lower- than-average percentage difference, and 23 states had a greater-than- average percentage difference (see fig. 1 for the correction percentages for  all states).
Among the four Census regions, the Midwest had the smallest correction  in population, 1.5 percent; all 12 Midwest states had corrections close to or  below the national average. In the other three regions, a single state  accounted for a large share of the population change for the region. For  example, in the South, Florida’s correction in population of 4.7 percent  constituted about 25 percent of the correction for the entire region.  Similarly, New York’s correction was 44 percent of the northeastern states’  correction, and California’s correction was 26 percent of the correction for  the western states.
section_title: 2000 Census Correction of Population Estimates Redistributes an Estimated $380 Million Among States for Four Formula Grant Programs
paragraphs: The correction to the population estimates generally redistributes federal  funding for the four programs we analyzed from the states with the  smallest corrections to those having the largest. Federal funding for the 28  states that had below-average corrections decreases by an estimated  $380.3 million. In contrast, federal funding in the 23 states with above- average corrections to their population estimates increases by an  estimated $388.8 million. Most of the change in funding is concentrated in  states with larger populations. Michigan and Ohio, for example, account  for 57 percent of the total decrease in funding for states with below- average population corrections. A number of high-income states, including  California and New York, are largely unaffected by the correction in their  populations because their matching rates for the Medicaid, Foster Care,  and Adoption Assistance programs cannot decrease below the minimum  50 percent matching rate. Without this minimum, more funding would be  shifted among the states. While the redistribution of funding in the four  programs began to occur in fiscal year 2002, almost all of it occurs in fiscal  year 2003, when the 2000 census data are used to determine federal  matching rates in the three open-ended entitlement programs.
subsections: section_title: Population Correction Causes Significant Funding Changes for Many States
paragraphs: The correction in state populations resulting from the 2000 census causes  significant changes in the funding levels among the states for the four  programs we examined. We estimate that the funding for the 28 states that  had below-average corrections in their populations decreases by a total of  $380.3 million. Conversely, funding for the 23 states that had above- average corrections in their populations increases by an estimated $388.8  million (see table 4).
These results are dominated by a few highly populated states whose  corrections were among the largest—meaning they are estimated to  receive the most additional money or to lose the most. For example,  Michigan, the eighth most populous state, has an estimated $119 million  decline in funding because of its 0.34 percent correction in population.  Michigan’s federal funding decrease accounts for about one-third of the  decreases for the 28 states with a below-average correction in population.  Moreover, when Michigan’s decrease is combined with that of Ohio, the  seventh most populous state, the two states account for 57 percent of the  estimated total decline in funding from the corrections of the population  estimates. Conversely, Florida, the fourth most populous state, has the  largest estimated increase in funding (about $126 million) because of the  4.7 percent correction in its population estimate. This is almost double the  national average correction and accounts for about one-third of the  estimated increase for the 23 states with an above-average correction in  population.
Funding changes did not occur in some states and were muted in others  because the states’ federal matching rates were fixed by the minimum 50  percent rate for the three open-ended entitlement programs. For example,  on the basis of its fiscal year 2000 spending levels, California would  receive an estimated $305 million less in matching aid in the three  entitlement programs if its matching rate were allowed to fall below the  minimum. Because of the 50 percent minimum federal matching rate,  however, California only receives an estimated $2.8 million decrease—all  of it linked to the SSBG. For the three entitlement programs, the  correction in population had no effect in 11 states that were affected by  the 50 percent minimum, and for 2 states the correction in population had  a diminished effect because of the floor.
The funding changes due to the population corrections showed little  regional pattern except in the Midwest, where all 12 states had a  correction in population estimates close to or below the national average  that resulted in an estimated $289.5 million loss in funding owing to the  correction in their populations.
section_title: Medicaid Accounts for Most of the Change in Program Funding
paragraphs: Most of the change in funding resulting from the corrections in population  estimates is the result of changes in Medicaid funding. The federal share of  total Medicaid payments was approximately $111 billion in fiscal year 2000  and constituted 96 percent of the share of funding to the states for the four  programs and approximately 96 percent of the total estimated change in  funding as well.
The SSBG distributed $1.69 billion for fiscal year 2002, representing 1.5  percent of the funding we analyzed. It accounted for a slightly higher  percentage, 2.2 percent, of the estimated funding changes. Finally, the  Foster Care and Adoption Assistance programs represented 1.6 and 0.6  percent of the funding, respectively. They account for 1.4 and 0.7 percent,  respectively, of the estimated funding changes for 2003.
The earliest effect of the 2000 census on any of the four programs we  analyzed occurred when it was used to calculate fiscal year 2002 SSBG  grants. For the Medicaid, Foster Care, and Adoption Assistance programs,  the 2000 census is first used for fiscal year 2003 payments.
section_title: Agency Comments
paragraphs: We provided the Department of Commerce a draft of this report for  comment. The department provided technical comments, which we have  incorporated where appropriate.
As arranged with your offices, unless you release its contents earlier, we  plan no further distribution of this report until 30 days after its issuance  date. At that time, we will send copies of this report to interested  congressional committees; the Secretary of Commerce; the Secretary of  Health and Human Services; and the Director, Bureau of the Census. We  will also make copies available to others on request. In addition, the report  will be available at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staffs have questions about this report, please call me at  (202) 512-7114 or Jerry Fastrup at (202) 512-7211. Major contributors to  this report are Gregory Dybalski, Elizabeth T. Morrison, and Michael Rose.
section_title: Appendix I: Data for Population Estimates, Decennial Census Population Counts, and the Error of Closure
paragraphs: This appendix compares the postcensal population estimates for July 1,  1999, with the census count for April 1, 2000 (table 5), and compares the  April 1, 2000, postcensal population estimates (based on the 1990 census)  with the census counts (table 6). States are listed in tables 5 and 6 by the  magnitude of the percentage correction in population.
section_title: Appendix II: Analysis of Estimated Funding Changes for Four Formula Grant Programs
paragraphs: This appendix contains the supporting data for our calculations of the  estimated change in funding due to correcting the population estimates.  Specifically, for each state, we provide the funding amounts for the four  programs and the estimated funding changes due to the correction in  population estimates. States are listed in tables 7 through 11 by the  magnitude of the percentage correction in population.
subsections: section_title: Medicaid, Foster Care, and Adoption Assistance
paragraphs: The Medicaid, Foster Care, and Adoption Assistance programs are open- ended entitlement programs for which states determine the level of  program expenditures. The federal government reimburses states for a  share of eligible state spending based on state per capita income. To  calculate the effect of the population correction on the Federal Medical  Assistance Percentages (FMAP)—also called federal matching rates—we  compared actual matching rates for fiscal year 2003, based on the 2000  census, with the estimated matching rates based on the 1990 census  (shown in table 7). Subtracting the estimated rates from the actual fiscal  year 2003 rates shows the effect on the matching rates of correcting  population estimates.
In general, the states that had a below-average correction in population  have a decrease in federal matching rates, while the states that had an  above-average correction in population have an increase in matching  rates. For 13 high-income states, the correction in population had no effect  or had a diminished effect because of the minimum 50 percent matching  rate. (Under the matching rate formula, no state can receive less than a 50  percent matching rate.) In our analysis, 11 states receive the 50 percent  matching rate for fiscal year 2003; hence, under the estimated rates, the  correction in population shows no change in these states’ matching rates.  Two additional states, Washington and Nevada, are partially affected.  Washington’s actual fiscal year 2003 matching rate is at the 50 percent  minimum, while its estimated matching rate is slightly above the 50  percent minimum. Conversely, Nevada’s actual fiscal year 2003 matching  rate is above the minimum, and its estimated matching rate is at the 50  percent minimum.
The 70 percent matching rate for the District of Columbia is established by  a special statutory provision. Accordingly, the District of Columbia’s  matching rate remains unchanged, and the correction in population has no  effect on funding.
The census is a population count made at the beginning of each decade as  of April 1; it is based on a count of the entire population. Postcensal  population estimates are made annually throughout a decade, usually as of  July 1 of each year. Such estimates are based on the prior census and  include annual population changes due to births, deaths, and domestic and  international migration.
subsections: section_title: Analysis of Funding Changes for Medicaid for Fiscal Year 2003
paragraphs: To measure the effect of the correction in the population estimates on  federal payments, we estimated what federal payments would be using  matching rates calculated on the basis of postcensal population estimates  derived from the 1990 census. Specifically, multiplying the two sets of  state matching rates in table 7 by program expenditures (fiscal year 2000  Medicaid expenditures) yields the estimated payments. The 2000 program  expenditures were the latest year for which the data were available. (See  table 8.)
Overall, the states that had a below-average correction in population show  a decrease in payments, while the states that had an above-average  correction in population show an increase in payments. As discussed in  the previous section, 11 states show no effect, and 2 states show a partial  effect because of the minimum 50 percent federal matching rate. The  District of Columbia is also unaffected because of its special statutorily set  matching rate.
section_title: Analysis of Funding Changes for Foster Care and Adoption Assistance for Fiscal Year 2003
paragraphs: The effects on the funding for Foster Care and Adoption Assistance are  similar to the effects on the Medicaid programs because these programs  use the same matching rates. Table 9 shows the Foster Care program  expenditures for fiscal year 2000, the estimated federal payments, and  changes in funding for Foster Care based on these estimated payments.
Table 10 shows the Adoption Assistance program expenditures for fiscal  year 2000, the estimated federal payments, and the changes in funding for  the program based on the estimated payments.
section_title: Social Services Block Grant
paragraphs: The fiscal year 2002 formula allocations for the SSBG are based on the  April 1, 2000, decennial census population counts. To calculate the effect  of the correction in population estimates, we compared fiscal year 2002  allocations that were calculated using the April 1, 2000, decennial census  (actual allocations) with allocations using the 1990 postcensal population  estimates for April 1, 2000 (estimated allocations). The differences in these  allocations represent the effect of the population correction reflected in  the 2000 census. The change in funding is directly proportional to the  percentage correction in population because the SSBG allocations are  calculated exclusively on the basis of population data (see table 11).