3.3 Intergovernmental Relationships

Evolution and Types of Federal Intergovernmental Grants

Federal grants have evolved from limited funding in early America to complex programs that shape modern federalism. These grants range from highly specific categorical grants to flexible block grants, and they significantly affect how state and local governments spend money and set policy. Understanding how these grants work is central to understanding how power actually flows between levels of government.

Evolution of Federal Intergovernmental Grants

The history of federal grants tracks closely with the broader shifts in American federalism.

Dual Federalism (1789–1932): Federal grants were rare and narrow. The federal government mostly provided land and targeted funding for things like transportation (Pacific Railroad Acts), higher education (Morrill Act of 1862, which funded land-grant colleges), and vocational training (Smith-Hughes Act of 1917).

Cooperative Federalism (1932–1960s): The New Deal dramatically expanded federal grants as the government responded to the Great Depression. Programs like the Works Progress Administration put federal dollars to work through state and local agencies. After World War II, major grants funded public housing (Housing Act of 1949) and the Interstate Highway System (Federal-Aid Highway Act of 1956). The federal and state governments increasingly worked as partners.

Creative Federalism (1960s–1980s): Federal grants expanded even further, especially for social welfare. Medicaid, created in 1965, became one of the largest grant programs in U.S. history. This era also introduced block grants, which gave states more flexibility in how they spent federal money (e.g., the Community Development Block Grant). Revenue sharing programs like the State and Local Fiscal Assistance Act of 1972 provided states with funds for general purposes, with few strings attached.

New Federalism (1980s–present): Starting under Reagan and continuing through the 1990s, the goal shifted toward reducing federal control and devolving power back to the states. A landmark example is the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, which replaced a federal entitlement program with Temporary Assistance for Needy Families (TANF), a block grant giving states wide discretion over welfare policy. Categorical grants like Head Start continued alongside block grants, so the system became a mix of both approaches. Devolution, the transfer of responsibilities from the federal government to state and local governments, became a defining theme of this era.

Types of Federal Grants

Not all federal grants work the same way. The differences matter because they determine how much freedom states have in spending the money.

• Categorical grants fund specific, narrowly defined purposes and come with strict federal oversight. States must follow detailed rules about how the money is spent. Examples: Medicaid, Title I education grants, Federal Transit Administration grants. These are the most common type of federal grant.
• Block grants provide funds for a broad policy area (like community development or welfare) but give states much more discretion over how to use the money. Examples: Community Development Block Grant, TANF.
• Formula grants distribute money based on a set formula, often using factors like population, poverty rate, or per-capita income. They can be either categorical or block grants. Example: Title I education funding is allocated based on the number of low-income students in a district.
• Project grants are awarded competitively. States, localities, or organizations submit proposals, and the federal government selects which projects to fund. Examples: National Institutes of Health research grants, TIGER transportation grants.
• Matching grants require state or local governments to put up a share of the cost. This encourages states to invest in federal priorities. Medicaid is a major example: the federal government covers between 50% and 90% of costs depending on a state's per-capita income, and the state covers the rest.

Impact of Unfunded Mandates

An unfunded mandate is a federal requirement imposed on state or local governments without providing the funding needed to carry it out. These are a persistent source of tension in intergovernmental relations.

• Financial strain: States must use their own budgets to comply. For example, the Individuals with Disabilities Education Act (IDEA) requires schools to provide special education services, but the federal government has never funded its promised share of the costs, leaving states and school districts to cover the gap.
• Reduced autonomy: Federal mandates can override state and local preferences. The Real ID Act, for instance, imposed specific requirements on how states issue driver's licenses, regardless of what states wanted.
• High compliance costs: Implementing mandates requires staff, training, and administrative resources. Meeting Clean Air Act regulations, for example, demands significant investment from state environmental agencies.
• Preemption conflicts: Some mandates directly preempt state or local laws. The FCC's preemption of local zoning rules for 5G infrastructure is a recent example where federal authority overrode local decision-making.

Congress passed the Unfunded Mandates Reform Act (UMRA) of 1995 to address these concerns. UMRA requires Congress to estimate the costs of proposed mandates and provide funding if costs exceed a certain threshold. In practice, though, UMRA has had limited impact because many mandates are exempt from its requirements, and Congress can still pass unfunded mandates if it chooses to.

Intergovernmental Relations and Federalism

A few key terms tie this all together:

• Intergovernmental relations is the broad term for all the interactions between federal, state, and local governments. It covers everything from grants and mandates to informal cooperation and political negotiation.
• Fiscal federalism refers specifically to the financial side: how taxing power, spending authority, and grant money are distributed across levels of government. Federal grants are the primary tool of fiscal federalism.
• Vertical federalism describes the up-and-down relationships between the federal government and state/local governments. Grants, mandates, and regulatory oversight all flow along this vertical axis.
• Horizontal federalism describes the side-to-side relationships between states. This includes interstate compacts (formal agreements between states, like the Port Authority of New York and New Jersey) and the Full Faith and Credit Clause, which requires states to honor each other's legal proceedings, public records, and court judgments.