Formula Grants: 2000 Census Redistributes Federal Funding Among States
Released: 2003-03-27T00:00:00

Letter

Background

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).

Most of Population Difference Between 1999 and 2000 Resulted from Correction of Errors That Occurred During 1990s

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.

Correcting Errors in Population Estimates Accounted for Three- Quarters of the Difference Between 1999 to 2000

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.

Size of Population Correction Differed Widely Across States

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.

2000 Census Correction of Population Estimates Redistributes an Estimated $380 Million Among States for Four Formula Grant Programs

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.

Population Correction Causes Significant Funding Changes for Many States

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.

Medicaid Accounts for Most of the Change in Program Funding

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.

Agency Comments

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.

Appendix I: Data for Population Estimates, Decennial Census Population Counts, and the Error of Closure

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.

Appendix II: Analysis of Estimated Funding Changes for Four Formula Grant Programs

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.

Medicaid, Foster Care, and Adoption Assistance

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.

Analysis of Funding Changes for Medicaid for Fiscal Year 2003

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.

Analysis of Funding Changes for Foster Care and Adoption Assistance for Fiscal Year 2003

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.

Social Services Block Grant

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).