Report 2002-123.1 Summary - May 2003

Federal Funds:

California's Share of Grant Funding Is Close to Its Share of the Population, but State Spending Cuts May Result in Reduced Federal Funds

HIGHLIGHTS

Our review of federal funding received by California found that:

  • California received $188.5 billion, or 10.6 percent, of federal funding in federal fiscal year 2001, $24.9 billion below the level it would have received if funding were allocated according to its 12 percent share of the U.S. population.
  • Factors beyond the State's control, such as demographics, explain much of California's relatively low share of federal funding.
  • California's share of grant funding, at 11.6 percent, was only slightly below its population share, or $1.5 billion lower than a share based on population.
  • Eight grants accounted for the majority of award amounts diverging from California's population share. Funding formulas for these grants generally explain the discrepancy.
  • The fiscal year 2003-04 Governor's Budget included cuts in state spending that will reduce federal funding because of federal cost-sharing requirements.

RESULTS IN BRIEF

In the federal fiscal year ending September 30, 2001, the federal government provided $1.8 trillion to U.S. states and territories for activities ranging from Social Security retirement payments to military wages to highway construction grants. California, including individuals, private organizations, and state and local governments, received $188.5 billion, or 10.6 percent, of this amount. This percentage was significantly below California's 12 percent share of the nation's population (population share), the benchmark we used as a starting point for analyzing federal funding. If California had received federal funds according to its population share, it would have received $24.9 billion more in federal fiscal year 2001. Nevertheless, most of the difference between California's population share and its actual funding share relate to factors beyond the state government's control. For example, the average age of California's population is the sixth youngest among the states, and its elderly population is a relatively small percentage of its total population. Consequently, it receives only 9.5 percent of the nation's Social Security retirement and survivors insurance payments.

California's share of grant funding was also below its population share, although the difference was much smaller. Grant funding is the only component of federal funding that flows primarily through the State of California's (State) accounts, so it is the focus of this report. California's awards for formula grants (ongoing grants made according to a formula, such as Temporary Assistance for Needy Families) and project grants (fixed-term grants made to fund specific projects, such as those for research) in state fiscal year 2001-02 totaled $40.4 billion, or 11.6 percent of such awards nationwide. This amount is $1.5 billion below an allocation based on population share alone. For 84 grants making up 90 percent of federal grant funding nationwide, California's award share exceeded its population share in 46 cases and fell below its population share in 38 cases.

Eight formula grants accounted for the large majority of the award amounts that diverged from California's population share. Of these, six grants were above the population share and two were below it. California's above-average poverty and urbanization rates, its youthfulness, and its large undocumented immigrant populations are important factors in explaining its large award share for six grants—Temporary Assistance for Needy Families; Special Supplemental Nutrition Program for Women, Infants, and Children; State Children's Insurance; Foster Care Title IV-E; Federal Transit; and State Criminal Alien Assistance. On the other hand, California's above-average per capita income, its comparatively low costs per beneficiary for medical assistance, and its high degree of urbanization largely explain its relatively small award share for two grants—the Medical Assistance Program and Highway Planning and Construction. We will discuss the remaining grants that fell below California's population share in our next report, to be completed in late summer, along with issues related to how the State identifies and manages federal grants.

Although California's share of federal grant awards is close to its population share, federal cost-sharing requirements may cause the amount of these awards to fall as state spending is cut. Many grants include provisions requiring recipients to match federal spending at an established rate or to maintain a historic level of nonfederal spending. For example, in fiscal year 2003-04, the federal government will match the State's spending for medical benefits under the Medical Assistance Program on a one-for-one basis. Thus, if the State reduces its spending for medical benefits, federal funding will drop by an equal amount. In the fiscal year 2003-04 Governor's Budget, federal expenditures for the State are expected to decrease by nearly $4 billion, or 7.3 percent, from fiscal year 2002-03. A significant portion of this decline is related to cuts in state spending that will trigger reductions in federal funding. Any further budget discussions regarding reductions in or restorations of state funding should continue to consider the effect of these cost-sharing requirements on federal funding.

AGENCY COMMENTS

The Department of Finance generally agrees with the report's approach, description of matching requirements, and conclusions.


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