The Changing Federal Grant Structure and Its Potential Effects on State and Local Community Development Efforts

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ABSTRACT.

Changing political landscape often renews the call for dramatic changes to federal community and economic development grant-in-aid programs. The most dramatic proposal in recent years was President Bush's 2006 call to consolidate federal assistance programs for communities into a new block grant known as the Strengthening America's Communities Initiative (SACI). This conceptual study reviews key characteristics of intergovernmental transfers including grant types, features, changes in the intergovernmental fiscal environment, the fungibility/flypaper debate, and the symmetry/asymmetry response of governments to declining intergovernmental revenue. The effects of intergovernmental transfers on state and local governments are connected to differences in grant design features. Potential fallout from proposed or similar changes to grant structure is discussed using the SACI proposal as an example.

INTRODUCTION

Over time, the relationships between U.S. federal, state, and local governments have become increasingly complex as government has grown in size and breadth of services provided, as the number of local governments and special districts have increased, and as the roles of distinct layers of government have become blurred through interaction among, rather than separation by, policy areas. Over time, the federal government has increased its stature in policy arenas previously left to state discretion. One of the primary mechanisms through which the federal government has acted to induce state policy reactions and increase state efforts is through intergovernmental fund transfers.

Students of government have long been interested in the effects federal grants have on the sub-national governments they seek to assist. This study reviews the fiscal federalism literature to identify key characteristics of the federal intergovernmental transfer system, and to identify the effects of changing levels of federal grant support on state and local government budgets. This literature is brought to bear on the 2006 proposal to restructure federal community economic development assistance through consolidation of programs into a new block grant under President Bush's Strengthening America's Communities Initiative.

BACKGROUND: FEDERALISM AND INTERGOVERNMENTAL RELATIONS

Intergovernmental relations pertain to the dynamic of interaction between the levels of government in the American system. When considering issues of intergovernmental finance, such as taxing and spending, the term fiscal federalism is applied. "From its beginnings, the fiscal system of the United States has been committed to the principle that multiple layers of government are the preferred structure for the financing and provision of government services. The U.S. Constitution, through the Tenth Amendment, expressly protects the rights of states to pursue their own fiscal agendas, provided those agendas do not conflict with clearly legislated federal objectives or constitutionally protected individual rights" (Inman, 1988, p. 33).

Federalism in the U.S. has undergone a major shift during the twentieth century from a model wherein each level of government has its own realm of duties, to a model where multiple layers of government may be involved in providing a given service. This general trend reflects increased power of the national government in dealing with affairs that were previously the sole responsibility of the states. This shift has been exacerbated by the increase in direct interaction between the federal and local governments (in addition to federalstate relations) during the period following the New Deal (O'Toole, 2000). Grants-in-aid soon became a very powerful tool of fiscal federalism. The Grants-in-aid system has enabled the federal government and Congress to wrest control of programs from the states, or at least to exert considerable influence over them.

Federal grants-in-aid have a long and convoluted history, but are generally acknowledged to have begun in the nineteenth century, when the federal government granted land to state governments for the establishment of state 'Land Grant' universities (Nathan, 1983, p. …