Categorical Grants & Block Grants Categorical Grants Categorical grants are the way in which the federal government influences local and state governments. These kinds of grants come with strict rules on their spending. We'll explore these limitations and look at some examples in this article. Definition Imagine you are the governor of a state, and you are looking for some funding for your area. How would you like to receive a boatload of money from the federal government? Not so quick, though! There's always a catch! This scenario outlines the basic idea of a categorical grant. A categorical grant is money granted by the federal government to state and local governments with strict limitations on how the money is spent. The money can only be received if the state or local government complies with certain regulations in order to receive the money. The states further do not have to receive the money if they do not want to. Categorical Grants and the Federal System Categorical grants are a result of the United State's federal system. With this system, the federal government has power in some areas such as military spending, while the state and local governments have power over other areas such as schooling, roads and law enforcement. But just because certain areas are the domain of local governments does not mean that the federal government can't influence state and local governments. Instead, the federal government uses money to convince the states to comply with national goals. This is where categorical grants come into play. Take, for example, education. Nowhere in the Constitution does it say that the federal government should provide for education. Yet we have a Department of Education in Washington, D.C. Why is that? The simple answer is that the Department of Education does not provide schooling. Instead, this department provides federal money to local states to oversee schooling. However, the money provided is contingent upon local governments meeting the requirements that the Department of Education creates through its categorical grants. Categorical Grants vs. Block Grants Categorical grants are the most common type of grants given by the federal government to state and local governments, but they are not the only type of grants. There also exist block grants, which are grants given by the federal government directly to local governments with few strings attached. They are basically the opposite of categorical grants. Types of Categorical Grants There are two ways in which categorical grants are distributed. The first way is through formula grants. With formula grants, Congress decides how much it wants to spend overall on a project, and then the money is distributed to all states according to a formula. Take, for example, food stamps, a national program designed to allow those in poverty the ability to buy food. The national government spent just over $75 billion on food stamps in 2013. But how was that money distributed? Clearly, some states have higher levels of poverty than other states. So using a formula, the money was distributed to the different states based on the poverty levels and the number of people in each state. Another type of categorical grant is a project grant. Rather than distributing money by a formula, project grants are competitive grants where local governments submit proposals in a bid to win government money. An example of a project grant was the Department of Education's Race to the Top. In this program, states competed for education money by making changes to their educational system, such as adopting the Common Core standards, uncapping the number of charter schools and making improvements to the lowest achieving schools. Several states tried to win the money, but federal money was only given to the select states that won the contest. Examples of Categorical Grants Categorical grants are a major part of American society, even if we don't always realize it. Anti-poverty programs, such as Medicaid, Head Start and food stamps, are categorical grants. Likewise, the national drinking age is a result of a categorical grant. In order for states to receive federal highway funding money, all states have to make 21 years of age the official age to drink. Otherwise, the state would not get the federal grant money. A controversial categorical grant has been the Patient Protection and Affordable Care Act, sometimes called Obamacare. This program, among other things, gives states massive amounts of money in order to start private insurance exchanges to help individuals buy insurance individually. Because of the controversial nature of the bill, some Republican governors have refused federal government money in order to not comply with the federal government's requirements. They have thus left billions of dollars on the table as an act of protest against the controversial piece of legislation. Block Grants Block grants are large chunks of money given to state and local authorities by the federal government for general purposes such as public enforcement, law enforcement or community development. They usually have few strings attached to them and give a lot of discretion to the local and state governments in how to spend the money. They are the opposite of categorical grants. Here is an analogy that can help you understand and remember the difference between these grants. Think of the difference between a car loan and a personal loan. With a car loan, you can only use the money lent to you to buy a car. But with a personal loan, you can use the money for whatever purpose you want. Likewise, in a categorical grant, a state or local government can only spend the money in a certain way. But a block grant can be spent any way the state or local government wants so long as it is generally kept within the broader domain of the grant (e.g. healthcare, law enforcement, education, etc.). Both block grants and categorical grants are the result of the United State's federal system. In a federal system, the federal government is in charge of certain government functions (for example, national defense), and the local and state governments are in charge of other government functions (for example, education). But the federal government often tries to influence state and local governments by offering money grants in exchange for complying with their requirements. For example, all states have adopted 21 as the legal age to drink in large part because the federal government requires the states to enact this rule in order to receive money for their highways. So even though states are in charge of patrolling their own highways, they must adhere to the federal government's wishes on the drinking age to receive desired funding for their highways. Examples of Block Grants In the 2013 fiscal year, the federal government had 25 block grants, as reported by the Congressional Research Service. They are shown in the following table: One of the biggest block grant programs is called Temporary Assistance for Needy Families, or TANF for short. TANF is commonly called welfare. This block grant replaced an earlier categorical grant called Aid to Families with Dependent Children(AFDC), which placed a lot of requirements on states. Now, under TANF, states have more control over how money is spent. Another block grant is the Low Income Home Energy Assistance Block Grant, which provides assistance to low-income families to help pay energy bills. Like TANF, this grant gives a lot of control to states in deciding how to distribute funds across the state. This program is especially important for northern states, where cold winters drive up heating costs. Proponents and Opponents of Block Grants Generally speaking, block grants are preferred by those who support giving more power to local governments rather than the national government. Although not necessarily exclusive to one party, Republicans generally tend to promote block grants more than Democrats. For example, former Republican Vice Presidential Candidate Paul Ryan has proposed overhauling the Medicare and Medicaid systems by converting them from categorical grants to block grants. Ryan argued that block grants give local states more control, allowing them to decide how they should spend money. Opponents of block grants, on the other hand, argue that the money is rarely spent with the intended purpose, and states usually end up spending less or cutting critical programs important to the national goals. TANF is an example here. After switching from a categorical grant to a block grant, government spending on welfare dramatically dropped, causing states to cut several welfare programs for poor families. Likewise, critics of Paul Ryan's plan to convert Medicare into a block grant argue that the end result will simply be to cut funding for the healthcare of older Americans.