Grants constitute one form of federal assistance consisting of payments in cash or in kind to a state or local government or a nongovernmental recipient for a specified purpose.programs are extremely diverse. They can vary greatly in numerous ways including size, the nature of their recipients, and the type of programs they fund. Grant programs can also vary in two important dimensions— the amount of discretion they give to the recipient in how the funds will be used, and the way they are allocated or awarded. Typically, grants are grouped into three types based on the amount of discretion given to the recipient for the use of funds: categorical grants, block grants, and general purpose grants. Taken as a whole, federal grant Categorical grants are the most restricted, permitting funds to be used only for specific activities related to their purpose, such as funding for the narrowly defined purpose of nutrition for the elderly. Block grants are less restrictive, funding broader categories of activities, such as community development or public health, and generally give greater discretion to recipients in identifying problems and designing programs to address those problems. General purpose grants, such as revenue sharing, offer the greatest amount of discretion to the recipient, as they require only that the funds be spent for government purposes. However, grant categories with regard to categorical grants and block grants are not rigid and sometimes overlap occurs. Each of these grants strikes a different balance between the interests of the federal grant- making agency that funds be used efficiently and effectively to meet national objectives, and the interests of the recipient to use the funds to meet local priorities and to minimize the administrative burdens associated with accepting the grant. Grant programs also vary in the methods they use to allocate or award funds, that is, by formula or through discretionary project grants. Formula grants allocate funds based on distribution formulas prescribed by legislation or administrative regulation. Project grants are generally awarded on a competitive basis to eligible applicants for specific projects. OMB has emphasized the use of competitive grants as a means of increasing innovation in grant proposals. While these labels help classify grants based on prominent characteristics, they should not be understood to be mutually exclusive definitions, as more than one can apply to a given grant program. For example, the federal government distributes Community Development Block Grant funds to states using a formula, but states redistribute the funds to localities, sometimes as project grants. While there is substantial variation among grant types, competitive grants generally follow a life cycle that includes announcement, application, award, post-award, and closeout, as seen in figure 1. Once a grant program is established through legislation, which may specify particular objectives, eligibility, and other requirements, a grant-making agency may impose additional requirements on it. For competitive grant programs, the public is notified of the grant opportunity through an announcement, and potential recipients must submit applications for agency review. In the award stage, the agency identifies successful applicants or legislatively defined grant recipients and awards funding. The implementation stage includes payment processing, agency monitoring, and recipient reporting, which may include financial and performance information. The closeout phase includes preparation of final reports, financial reconciliation, and any required accounting for property. Audits may occur multiple times during the life cycle of the grant and after closeout. Federal agencies do not have inherent authority to enter into grant agreements without affirmative legislative authorization. In authorizing grant programs, federal laws identify the types of activities that can be funded and the purposes to be accomplished through the funding. Legislation establishing a grant program frequently will define the program objectives and leave the administering agency to fill in the details by regulation. Grant programs are typically subject to a wide range of accountability requirements under their authorizing legislation or appropriation and implementing regulations so that funding is spent for its intended purpose. For example, the Department of Housing and Urban Development (HUD) administers grants to aid states and localities in providing affordable housing for low-income families. Congress mandated that HUD administer these grant programs in a manner that furthers fair housing. HUD regulations direct grant recipients to prepare planning documents and maintain certain records proving the legislation’s fair housing requirements as a condition to receiving funds. Congress may also impose requirements on specific funding for grant programs. The American Recovery and Reinvestment Act of 2009 (Recovery Act) required increased reporting and oversight on both grant-making agencies and recipients for many different grant programs receiving additional funding under the Recovery Act. In addition, grant programs are also subject to cross-cutting requirements applicable to most assistance programs (see table 1 for more information). For example, recipients of grant funds are prohibited from using those funds to lobby members and employees of Congress and executive agency employees. OMB is responsible for developing government-wide policies to ensure that grants are managed properly and that grant funds are spent in accordance with applicable laws and regulations. For many decades, OMB has published guidance in various circulars to aid grant-making agencies with such subjects as audit and record keeping and the allowability of costs. For a detailed discussion of grants management legislation and OMB’s role in developing grants policy, see appendix III. Grants are an important tool used by the federal government to provide program funding to state and local governments. OMB has previously estimated that grants to state and local governments represent roughly 80 percent of all federal grant funding, with the remaining approximately 20 percent going to recipients such as nonprofit organizations, research institutions, or individuals. Federal outlays for grants to state and local governments totaled more than $606 billion in fiscal year 2011, equivalent to 4.1 percent of the gross domestic product (GDP) in that year. For comparison, federal outlays for national defense were 4.7 percent of GDP during the same period. With outlays of $275 billion in fiscal year 2011, Medicaid is by far the federal government’s largest single grant program and by itself accounted for 45 percent of federal grant outlays to state and local governments in that year. The Department of Health and Human Services (HHS), which administers the Medicaid program, is the largest grant-making agency, with grant outlays of almost $348 billion in fiscal year 2011, or about 57 percent of the total federal grant outlays to state and local governments. However, even when Medicaid is excluded, HHS remains the largest federal grant-making agency. While many federal agencies award grants, the large majority of grant outlays to state and local governments are made by just a few agencies, with the top five accounting for more than 90 percent of those grant outlays in fiscal year 2011. Following HHS, the next four agencies with the largest amount of grant outlays to state and local governments in fiscal year 2011 were the Departments of Education (Education), Transportation, HUD, and Agriculture. Figure 2 shows the amount of, and percentage of, grant outlays to state and local governments for the top 5 grant-making agencies. Federal outlays for grants to state and local governments increased from $91 billion in fiscal year 1980 (about $221 billion in 2011 constant dollars) to more than $606 billion in fiscal year 2011. Figure 3 shows the total federal outlays for grants to state and local governments over the period from fiscal years 1980 to 2011, in constant dollars, and the increasing amount of this total that went to Medicaid over time. While the past three decades have witnessed a dramatic growth in federal grants to state and local governments in absolute dollar terms, the same is not true when one considers these grant outlays as a proportion of total federal spending. As shown in figure 4, grant outlays to state and local governments as a percentage of total federal outlays in fiscal year 2011 were at a roughly comparable level to what they were more than 30 years earlier (16.8 percent versus 15.5 percent). However, during this period the proportion of federal grant outlays to state and local governments dedicated to Medicaid more than tripled, rising from 2.4 percent of all federal outlays in 1980 to 7.6 percent in 2011. The increase in outlays for Medicaid and other health-related grant programs was offset by an approximately equivalent decrease in the share of outlays for other grants to state and local governments. The dip in federal grant outlays to state and local governments as a percentage of total outlays during the 1980s, seen in figure 4, was likely due to a variety of factors, including efforts undertaken at the time to merge categorical grant programs in several functional areas into block grants and also reduce funding levels. For example, as part of the Omnibus Budget Reconciliation Act of 1981, nine block grants were created from about 50 of the 534 categorical programs in effect at that time. Overall, funding for the categorical grants bundled into these block grants was reduced 12 percent, about $1 billion, from their combined funding level the previous year. State officials believed that funding reductions would not result in the loss of services for recipients because the reductions would be offset by administrative efficiencies, although in our subsequent work we found that the administrative cost savings were difficult to quantify. Figure 4 also shows the upturn in federal grant outlays in 2009 and 2010 that were the result of the Recovery Act. Grant outlays can also be analyzed historically using OMB’s grant programs’ functional categories. In fiscal year 2011, the five largest grant program categories by government function were health; income security; education, training, employment, and social services; transportation; and community and regional development. Figure 5 shows federal grant outlays to state and local governments broken out by these five governmental functions, from fiscal year 1980 to fiscal year 2011. Health function grant outlays were 17 percent of total grant outlays to state and local governments in fiscal year 1980—lower than either income security or education. By fiscal year 2011, outlays for health- related grant functions increased to almost 50 percent of these total grant outlays.