What is a Categorical Grant?

Categorical grants are the primary source of federal aid to state governments and other entities. These payments are made to states for a specific purpose and can only be used towards that stated objective.

State budget control initiatives are a popular option for states seeking to exert some control over federal funds. Unfortunately, they come with limitations.

Definition

Categorical grants are the primary source of federal aid to state and local governments. These funds may be designated for specific purposes, but must be utilized according to strict federal guidelines.

For instance, the federal government provides grants to states for programs like road safety and education. These funds not only help improve citizens’ quality of life in these communities but they also give the federal government greater power over state policy decisions in certain policy areas.

Economists support the categorical grant system because it gives states considerable latitude in how they utilize their funding. This flexibility can be especially advantageous when federal programs target certain groups of people, like Head Start or Medicaid.

Similar to state and local school districts, state taxpayers provide a base grant that isn’t tied to any particular program. This foundation allowance varies annually but serves as the initial investment made in public education by taxpayers.

State and local school districts must use this foundation allowance wisely. This could include allocating funding to programs that cater specifically to students’ needs, such as decreasing class sizes or offering services for English language learners.

Many school districts have had to use a portion of their funding budgets on categorical grants, and the amount received is typically limited. This makes it challenging for districts to plan ahead and reach their objectives when they don’t know what they can afford.

Categorical funding has been an essential element of public education in many states for years, helping explain why some districts have been able to offer top-notch educational experiences to their students.

For instance, in Iowa, categorical funding is available for a range of student-focused activities and services like teacher salaries, textbooks, materials and technology. This money comes from both federal and state governments in addition to general-purpose revenue that districts already receive.

Purposes

Categorical grants are federal or state funds with specific criteria attached. Unlike block grants, which give states more discretion in how they spend grant funds, categorical grants typically have stringent administrative criteria that determine project selection, performance evaluation, and financial oversight.

Many states use categorical funding to finance educational programs and initiatives not covered by their foundation or base funding system. Examples include decreasing class sizes, creating English language learning programs, offering financial assistance to low-income students, and more.

Some states utilize these funds to reward districts for meeting certain objectives. For instance, districts can receive up to $60 for every student who completes a college dual enrollment course and they get grants to cover the cost of taking Advanced Placement or International Baccalaureate tests.

Categorical funds make up a substantial part of school funding, according to a recent report from the Education Commission of the States (ECS). On average, states disburse between six and a dozen such programs with an annual average dollar amount close to $1 billion through categorical funding.

State categorical funds are often the major source of funding for education programs, yet some districts and education researchers have questioned their effectiveness. They have expressed worries about how policymakers use categorical funding to support specific projects and how overly strict restrictions may prevent districts from making the most efficient use of these resources.

To better comprehend the role categorical funding plays in state school finance systems, we conducted interviews with district superintendents and local school board members from four case study states to gain insight into their perception of its use and any challenges that may arise when implementing it.

These interviews were based on data collected by the Education Commission of the States from 30 states between fiscal years 2008 and 2012. Overall, 16 states utilized an average of 16 categorical-funding programs during 2012-13 compared to 25 during 2008. Five states which used the most categorical-funding programs between 2008-12 experienced decreases; Ohio saw its use drop from 105 in FY 2008 down to 12 during 2012-13, while Arkansas experienced a reduction from 86 down to 4.

Origins

Categorical grants are one of the main forms of federal assistance. They’re usually designed to restrict recipients’ discretion in using funds and require strict administrative criteria that guide project selection, performance monitoring, and financial oversight. Furthermore, many categorical grants require some commitment of matching funds – examples include Medicaid and food stamp programs.

Since the New Deal, grant programs have seen an exponential expansion as a means for federal governments to implement their policy objectives. This has resulted in a shift from Roosevelt’s cooperative federalism – wherein the Constitution provided for divided powers – to coercive federalism where Congress attempts to force states and local governments into abiding by its laws or face legal repercussions.

This shift has not gone uncontested by critics, who feel it undermines the constitutionally established division of powers between federal and state government. Furthermore, they assert that coercive grants encourage wasteful practices and unsustainable spending patterns.

Another concern is that, as state and local governments become more estranged from federal administration, they become less accountable for their spending – potentially leading to corruption and fraud. One such example is Columbia University, where allegations surfaced of millions of dollars in categorical grants it received for AIDS research being fraudulently reported to the federal government.

Categorical grants are a major source of federal aid in the United States and make up most grant programs within the grant-in-aid system. On average, they represent about 95 percent of all grant programs and more than 80 percent of overall grant outlays.

In the 1960s, categorical grant programs experienced unprecedented growth due to President Johnson’s Great Society initiative. During this time, there were more than 400 grant-in-aid programs and funding more than doubled during this period.

In the 1970s and ’80s, New Federalism sought to consolidate dozens of categorical grant programs into a few small block grants. Unfortunately, their share of federal aid never exceeded 20 percent due to changes in distribution formulas that left some governmental units without funds while others could benefit more from more flexible block grant systems.

Examples

Categorical grants are federal funding that are allocated specifically to certain programs or services. Typically, these grants come from Washington D.C. to states and localities in the form of project or formula grants.

Categorical grants can cover a range of needs, such as school funding, health care services and transportation. Some of the most well-known and commonly utilized categorical grants include Medicaid and Head Start.

Categorical grants in education can be awarded for many purposes, such as reducing class size, providing services to English language learners (ELLs), and aiding students from low-income families with the education they need to succeed academically. Schools may also use categorical funding to pay for teacher salaries and textbooks.

However, critics of categorical grants contend they restrict local districts’ flexibility and hinder innovation. Furthermore, they point out that money from categorical grants is not a fixed source of funding but instead fluctuates according to changes in state or economic policies.

In California, for instance, the state’s 2009 economic downturn led the legislature to ease restrictions on 40 of their categorical programs, giving local districts more discretion when spending limited funds.

Other examples of categorical grants include Medicaid, which offers medical and mental health services to those eligible. Another popular example is the Department of Education’s Race to the Top competition, which awarded federal education money to states that made changes in their educational systems.

Categorical grants have their supporters, yet researchers have noted their limitations when it comes to student success. Funding may inadvertently group students based on needs rather than strengths, leading to inconsistent outcomes.

Despite these challenges, some research indicates that state-level surveys and interviews of local school district administrators have revealed that categorical funding helps meet student improvement targets without impeding their capacity to innovate.

Categorical funding is an integral element in a state’s education system, regardless of its advantages and drawbacks. It helps ensure that every child has access to opportunities necessary for them to become successful adults who live on their own.