What's the Significance of Categorical Grants?

What's the Significance of Categorical Grants?
Categorical grants play a key role in federalism, by ensuring cooperation between Congress and state establishments. Buzzle tells you the definition of categorical grants, along with their significance.
WealthHow Staff
Did You Know?
Almost 90% of the funding for the Interstate Highway Project was provided through categorical grants.
The US government is federal in nature, which means, power is divided in three levels - Congress, state governments, and local governments. When the Great Depression hit the country in 1929, it caused a huge economic down-slide, characterized by high unemployment and loss in industrial production. In these circumstances, the state and local administrations could do little to improve living conditions.

It is here that the federal government stepped in. The New Deal policy was passed, which increased federal grants to the states by ten times in just two years. This aid increased steadily through the Second World War till the early 1960s, after which it saw a dramatic upsurge.

Most of the aid given by Congress at the time was in the form of categorical grants. Under this arrangement, the states are provided with funds, but Congress has a final say on how to use them. With time, Congress began providing these grants directly to local administrations, even bypassing state governments in the process. It was so successful that by 1976, 24.7% of state and local spending was contributed by Congress. Let us understand more about the significance of categorical grants.
What are Categorical Grants?
Categorical grants are grants given by the federal government to the state and local governments for specific projects that meet certain well-defined objectives or fall in specific 'categories'. The funding is authorized by a vote of Congress. Thus, the federal government can specify which particular schemes will receive its aid. The receiving governments can utilize the grants only under certain restrictions. Besides, Congress also decides on how the funds will be used.

Categorical grants are of three types - project-based, formula-based, and project-formula-based grants. In project-based grants, interested states compete with each other to form a proposal. All the proposals are then compared, and the grant goes to the one most suited to federal regulations. In formula-based grants, federal agencies specify a project and decide the amount of funding they will provide to it based on a mathematical formula. The grant then goes to that proposal which satisfies that formula, as a matter of 'right'. For example, grants for a scheme which provides food to low-income families may be based on a formula which favors states having more low-income families. In project-formula grants, the state receives funding from the federal government, and then, local communities compete for the grant for a specific proposal.
Significance
Categorical grants form the majority of funding authorized by the federal government. These allow Congress to step in and fund those schemes for which state and local governments are running out of finances. Since these grants come with a strings-attached policy in the form of meeting strict regulations, they allow the federal government to monitor the implementation of the project. This makes it necessary for the state to efficiently implement the project, so as to avoid violating the laws applicable, if they don't want the funding to be canceled.

Categorical grants allow Congress to decide the guidelines that the states have to meet if they desire funding, which means that the federal government can exert an influence on how the states implement their schemes. Agencies involved in the project have to carry out audits on a regular basis, which ensures that funding is used wisely. All this also ensures that Congress and the states cooperate with each other to achieve their objectives. More importantly, such grants enable Congress to identify those sectors in the local governments which are in urgent need of attention.

To become eligible for a categorical grant from the government, a state has to put up some of its own money, called 'matching funds'. These funds can be obtained either from the state budget, donations, or financial organizations. This provision for matching funds is shrewdly designed to ensure that there is no corruption, fraud, or mismanagement of funds. Most categorical grants come with a rule that allows the state to raise matching funds even while the application for the grant is still pending. In most cases, the matching fund is a miniscule amount as compared to the grant.

The future funding for a project by a categorical grant may be regulated by Congress based on whether other parameters related to the project improve. For example, Congress may authorize funding for a project of classroom construction in schools in a state or district if other parameters like the literacy rate of students shows any improvement. This can have an overall positive effect on the whole sector.

Since categorical grants enable assistance from the federal government, this provides long-term stability to local projects. State agencies are also able to synchronize the planning stage with the sanction of grants for a program. A crucial advantage of such grants is that, they allow the federal government to channel funds from prosperous states to those states which need them the most.
While categorical grants have played a major role in US federalism, beginning from the 1960s, they have also been criticized for their shortcomings. For instance, these grants require lengthy procedures and bureaucratic hurdles, even after which, funding is not guaranteed. Moreover, they require program implementation under strict regulations, which can be a burden for the local governments.