The Nature and Importance of Government Grants to a Local Government

Local government may be loosely defined as a public organization authorized to decide and administer a limited range of public policies within a relatively small territory which is a subdivision of a regional or national government (Local Government, n.d.). Within the pyramid of government institutions, the local government finds itself at the bottom, with the national government at the top and the intermediate governments at the middle. The intermediate governments could be state, regions, or provinces. Five broad categories of local governments have been postulated: 1) federal-decentralized, 2) unitary-decentralized, 3) Napoleonic-perfect, 4) communist, and 5) postcolonial.

The federal-decentralized system decentralizes much authority to its regional governments. In truly decentralized federal systems, a considerable degree of local independence prevails, though the degree of autonomy of local governments vary from country to country. This is the local government system that will be discussed, in relation to the nature and importance of grants to its proper functioning.

A government grant according to Investopedia, is a financial award given by the federal, state or local government to an eligible grantee. The grantee is not expected to repay a government grant. Grants exclude technical assistance or other varieties of financial assistance like loans, loan guarantees, interest rate subsidies, direct appropriation or revenue sharing. Generally, grant recipients are required to provide periodic reports on the progress of their grant project. Federal governments use grants to achieve national objectives. They are an important tool used by federal governments to provide program funding to state and local governments.

Some governments like the unitary-decentralized governments (e.g. Great Britain) categorize local government grants into conditional grants and unconditional grants. Conditional grants are funds transferred for a specific purpose. Such monies cannot be used for any other purpose/project. Unconditional grants on the other hand can be used for any purpose deemed appropriate by the recipient. In British Columbia for instance, unconditional grants include regional district basic grants, small community grants and traffic fine revenue sharing transfers.

In the federal-decentralized system of government, grants to local governments are of three categories: categorical grants, block grants and general revenue sharing.

Categorical grants are grants given by the federal government to state and local government which may be spent only for narrowly defined purposes. These grants are often given for the completion of specific projects like: infrastructural improvements – maintenance repairs and the like. Categorical grants can be further split into formula grants and project grants.

Formula grants are given by the federal government based on mathematical formulas designed to create fairness and equity in the distribution of the grants. Formula grants ensure that more populated states and towns receive more funding than the less populated ones. They also ensure that the states with higher poverty levels get more money than those with lower poverty rates. 

Project grants on the other hand are funded for the completion of specific projects e.g. the pavement of roads. Project grants are competitive in nature. Local governments submit proposals in bid to win government money.

Investopedia defines ‘block grant’ as money that is awarded, or granted, by a national government to state and local officials. There typically exists guidelines as to how such monies can or should be expended. There are no specific provisions on the spending pattern of the money. Block grants are issued for general areas of need. The Mental Health Block Grant is a well-known example of a block grant in the U.S. This block grant disburses huge amounts of money to individual states as assistance in the treatment of mental illnesses. Another example is the Social Services Block Grant in the U.S.

General revenue sharing grants can be used for any purpose, on condition that the purpose in question isn’t prohibited by federal or state law. Among the three main types of local government grants, general revenue sharing is the grant type that imposes the least restraint on recipients. Federal administrators have little discretion over who receives general revenue sharing. Legislation specifies formulae for the allocation of such funds to states.

References

Local Government. (n.d.). Retrieved January 07, 2015, from encyclopedia.com: http://www.encyclopedia.com/doc/1G2-3045000726.html