As agreed with your office, we limited our examination of targeting opportunities to our published work. To answer your questions about whether targeting can help the federal government downsize and to provide illustrative examples of a targeting strategy for deficit reduction, we updated information from our March 1995 report on the budgetary implications of our work. At this date, the Congress is considering several of the options described in this report. Notwithstanding pending congressional actions, we included the options because they illustrate how targeting can fit in an effective deficit reduction strategy. That report presents a deficit reduction framework consisting of three broad themes. The first focuses on reassessing the objectives of federal programs and services. Our premise is that periodically reconsidering a program’s original purpose, the conditions under which it continues to operate, and its cost-effectiveness is appropriate. The second focuses on improved targeting of federal programs and services to beneficiaries. This theme concerns how efficiently federal programs and services reach their intended recipients. The third focuses on improving the efficiency of program and service delivery. This theme suggests that focusing on the approach or delivery method can significantly reduce spending or increase collections. This letter expands on the second theme—improved targeting—as a strategy that allows for reducing the deficit while improving the design of federal government activities. We did this work in Washington, D.C., from August 1995 through October 1995. The following examples from our work illustrate potential opportunities to better target federal programs and services. Examples are detailed under one of four strategies for better targeting the intended beneficiaries: revise grant formulas, change eligibility rules, target fees and charges, and narrow tax preferences. At a time when federal domestic discretionary resources are constrained, better targeting of grant formulas offers a strategy to concentrate lower federal spending levels on states or localities with greater needs and lower capacity to absorb grant reductions. Through this process, federal funding reductions would fall more heavily on those communities with lesser relative needs and with greatest fiscal capacity to finance services from their own revenue base. We have issued many reports over the past decade showing that the allocation of federal grants to state and local governments is not well targeted. This work has been confirmed by many economic analyses from other sources. As a result, program recipients in areas with relatively lower needs and greater wealth received a higher level of services than those available in harder pressed areas, or wealthier areas were able to provide the same level of services at lower tax rates. Reductions in federal grants to states could be targeted by adjusting the allocation formulas to concentrate funding on those states with relatively lesser fiscal capacities and greater needs. Similarly, reductions in federal grants to local governments could be targeted by either concentrating cuts on areas with the strongest tax bases or by changing program eligibility to restrict grant funding in places with high fiscal capacity and/or few programmatic needs. For example, in 1992 we reported that Maternal and Child Health (MCH) Services block grants could be allocated more equitably. This program was designed to secure basic health care for low-income and moderate-income expectant mothers, their infants, and children with special health care needs. However, our report concluded that the allocation method for distributing MCH grants to states ran counter to the equity standards we developed. We found that while the number of children at risk, the costs of providing maternal and child health services, and the states’ ability to pay for these services varied from state to state, the current MCH allocation method did not consider these factors. As a result, Louisiana—with the second highest proportion of children at risk and average service costs—ranked 14th in per capita grant funding. Similarly, at the time of our analysis, Kansas and Illinois received nearly equal per capita grants, even though Illinois had about 28 percent higher health care costs. In practical terms, this meant that Illinois consumers had to spend more money than Kansans to buy the same MCH services. We concluded that a new MCH allocation method that strikes a balance between each state’s (1) need adjusted for costs and (2) ability to pay could substantially improve the overall equity of the MCH program. Federal spending for the MCH program reached a reported $687 million in fiscal year 1994. If overall funding for this program were reduced, such a new allocation method could help target the remaining MCH program funds more equitably. In another example, we found that the Medicaid program formula does not target most federal funds to states with weak tax bases and high concentrations of poor people. In 1990, we reported that while the program covered 75 percent of those below the poverty line nationwide, the coverage varied from 37 percent in Idaho to 111 percent in Michigan. We suggested that a formula using better indicators of states’ financing capacities and poverty rates coupled with a reduced minimum federal share would more equitably distribute the burden state taxpayers face in financing Medicaid benefits for low-income residents in their respective states. Federal spending for Medicaid in fiscal year 1994 reached a reported $82 billion, and the Office of Management and Budget (OMB) projects spending to reach $136.5 billion by fiscal year 2000. Should the Congress act to reduce federal Medicaid spending, a revised grant allocation system could help target the reduced funding more equitably. Along these lines, a block grant that the Congressional Budget Office (CBO) estimated would reduce federal Medicaid spending by $163 billion over the next 7 years was included in the recently passed Balanced Budget Act of 1995. Under this proposal future Medicaid costs would be reduced and equity in the distribution of the remaining funding would be improved because the allocation formula uses new factors that more precisely measure differences in states’ fiscal capacity and poverty levels. In another example, Title I grants to local educational agencies (LEAs), which fund supplementary education services for low achievers in poverty areas, could be modified to improve targeting among counties. Under these grants, formerly known as Chapter 1 grants, school districts have broad discretionary powers to determine how resources are distributed to schools, specifying the grades served and the type and extent of services, and defining which students are low achievers. In 1992, we reported that these factors resulted in considerable variation among students who receive Title I LEA services. For example, in some school districts Title I LEA funds served only children scoring below the 20th percentile on standardized tests. In other districts, program funds served some children scoring above the national average (the 50th percentile). We found that the legislatively mandated formula for Title I LEA grants did not (1) accurately reflect the distribution of poverty-related low achievers, (2) provide extra assistance to areas with relatively less ability to fund remedial education services, or (3) adequately reflect differences in local costs of providing education services. We concluded that modifications to the Title I LEA allocation method could target more funds to counties with the largest numbers of poverty-related low achievers and those least able to finance remedial instruction. Federal funding for Title I grants to local educational agencies reached a reported $6.3 billion in fiscal year 1994. If the Congress decides to reduce funding for these grants, a revised formula could better target Title I LEA grants to those counties with the greatest overall need. The formula could be revised to rely on a more precise method of estimating the number of poverty-related low achievers, use an income adjustment factor to grant additional assistance to areas least capable of financing remedial instruction, and employ a uniform measure of educational services costs that recognizes differences within and between states. Changing eligibility rules to better target the intended beneficiaries of federal programs offers another strategy that can allow for deficit reduction by concentrating reductions on beneficiaries with little demonstrable need for government assistance. We have issued many reports in recent years showing that programs could be better targeted to more cost-effectively address those beneficiaries most in need. For example, we found that the Vaccines for Children (VFC) Program is not well targeted. This program was created to improve immunization rates for measles, mumps, rubella, and other childhood diseases by lowering the cost of immunization for all children. However, we found that most children had already been immunized because cost was not a significant barrier and that a disproportionate number of children in underserved areas were not immunized. We suggested that the Congress consider targeting the program. Services could be improved by directing VFC funds to children in those particular geographic areas where underimmunization has been a persistent problem. Fiscal year 1995 costs for the childhood vaccine program were estimated at about $450 million. Based on our examinations of the Market Promotion Program (MPP), we believe that the program’s eligibility rules could be tightened to provide support to small, generic, new-to-export companies, but not to large companies with substantial corporate advertising budgets. The MPP uses federal funds to subsidize efforts to expand export markets for U.S. agricultural products by financing such activities as advertising and consumer promotions. From 1986 through 1994, about one-third of MPP funds and those of its predecessor program (the Targeted Export Assistance (TEA) program) supported private for-profit companies’ brand-name promotions. These companies included many large for-profit businesses with substantial corporate advertising budgets, such as Sunkist Growers and E.J. Gallo Winery. In fiscal year 1995, MPP funding was reduced to $84.5 million from the budgeted level of $110 million. Eligibility rules could be revised to ensure that MPP funds are supporting additional promotional activities rather than simply replacing company or industry funds. While large firms receive MPP funds to increase exports of U.S. agricultural products, the resources otherwise available to such firms may indicate that they have no demonstrable need for government assistance. Our reviews of U.S. Department of Agriculture crop price supports show that the program’s eligibility rules allow producers to avoid payment limits and reduced program payments. These income support payments, known as deficiency payments, are the principal payments made to producers who participate in farm programs for wheat, feed grains, cotton, and rice. The payments are designed to protect producers’ incomes when crop prices fall below a legally established target price.