Federal Intergovernmental Grants and the States: managing devolution. (Book Reviews).

Northampton, Massachusetts: Edward Elgar Publishing, Inc. (164 pp)

Reviewed by Michael English, policy analyst, GEOA Research and Consulting Center, Chicago, Illinois.

In Federal Intergovernmental Grants and the States, Shama Gamkhar discusses the motivations for converting categorical grants into block grants, raises concerns about doing so, examines state responses to shifts in federal aid, and explores how federal grant allocation decisions are made. While partly intended for an academic audience, the book is also relevant to federal, state, and local finance officers because it offers an original perspective on how devolution has impacted state and local finance.

The first chapter of the book presents trends in intergovernmental grant data over the past 50 years. This data feeds into the second chapter, which examines both the rationale behind the trend of converting categorical grants into block grants and how states and localities have responded to this trend. The author considers the question: Is converting categorical grants into block grants a way of devolving power to states or just a way to reduce federal spending? Empirical evidence does not suggest that block grants are simply a shield for budget cuts. She points out that both economic theory and empirical research indicate that local innovation increases when categorical grants are converted to block grants. The author illustrates this point using the case of welfare reform. She concludes that block grants initiated important innovations in the way the welfare program is structured.

Gamkhar acknowledges that the conversion to block grants often is accompanied by a reduction in funds. She identifies three courses of action state and local government can take to compensate for decreased federal funding: (1) they can use unexpended funds from the previous year, (2) they can use federal money meant for other programs for the program whose funding was cut, and (3) they can use their own money. The third option reflects the fact that although state and local spending is highly responsive to increases in grants, it is relatively insensitive to decreases. When federal funding is reduced, state and local governments usually find replacement funds.

The most important lesson of the second chapter for state and local finance officers is that while government spending usually increases in proportion to increased grant funding, it does not usually decrease when federal funding decreases. States and localities must take this reality into consideration as they contemplate new programs, since they will have to foot the bill if and when funding runs out.

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