v.o. key, the matching requirement in federal grant legislation

8/7/2019 V.O. Key, The Matching Requirement In Federal Grant Legislation

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FOREWORD~he present study has been prepared by Professor V . O. Key

of Johns Hopkins Universi ty, a consultant of the Bureau of Researchand Statistics. It is made available in tentative form at this timeboth because its preliminary findings may be useful to others andin order to secure comments and suggestions which can be used in itsrevision. The present report will be revised when companion studiesnow in preparation have also reached a form which wi 11 permi t thei rci rcula tien.

Thi s report is one of a series of monographs being preparedin the Di vi sion of Finance and Economic Studies in the course of acomprehensive study and review of the major fiscal and economicrelations involved in the grant-in-aid programs established by theSoc~. al Securi ty Act. These studies , being conducted under theimmediate direction of Eleanor L. Dulles , Chief of the Division ofFinance and Economic Studies , and Daniel S. Gerig, Jr., Chief of theGeneral Economics Section, bear closely upon proposals for theamendm~nt of the grant-in-aid policies embodied in thlS and relatedlegi sla tion.

In preparin~ this document Professor Key has conferred fre-quently wi th others working on related problems in the Division ofFinance and Economic Studies and elsewhere in the Bureau of Researchand Statistics. He has utilized knowledge and experience which hebrought to this study from earlier undertakings , and he has illus-trated and summarized his conclusions in a manner which should beuseful to many who are engaged in the study of intergovernmentalft seal relationships.

The relation of variations in State fiscal capacity to theallocation of Federal grants-in-aid has been studied from variou~points of view. Analysi s of the comparative burdens occasioned bythe raising of funds to be used in matcMng Federal grants, however,has been a somewhat neglected area. The relatiOiships examined hereby Mr. Key will be of particular interest to those concerned wi th themethod of alloea ting grants under the social aecuri ty program andthe problems of rai sing State funds, especially because of the largeamounts of money disbursed to the States on a matching basis underthi s program.

Thi s report should be regarded as tentative and preliminary.It is not an official publication of the Board and has not been sub-mi tted to the Board for formal com:

ration. It is hoped , howeverthat i ts ~irculation in the preser:t form will encourage interest inthe stlldy and the development of effective Federal- State fiscalrelationships and will invite comments which will be helpful inbringing the repo rt into fj nal form.

I. S. Falk , DirectorBureau of Research and Statistics

ebruary 1942


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Introduction

CONTENTSPage

General Principles of the Grant SystemThe Differential Effects of Matching Requi rements . . 10The 1imi ts of the Match! ng Principle . 35The Federal Grant System and Equali zation . . . 55Policy Al terna ti ves and ConsiderationsDirect Federal AdministrationUnmatched GrantsThe Variable Gran . 63Appendix . . 67

III


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Tables

Table l. Per capi ta amount s which would have been requiredfor full matching of all 1939-40 allotments of Federalgrant s , excluding public assistance grant s , related toper capita income . 0 0 0 0 . 0 0 0 . . . . 0

Table 2. Per capi ta amount s actually expended from Stateand local funds in 1939-110 for matching Federal grant sexclusi ve of public assi stance grant s , related to percapita income . 0 . . . 0 o . 0

Table 3. Per capita amounts actually expended from Stateand local funds in 1939-110 for matching Federal grantsincluding public assistance grants, related to per capiincome. . . . 0 0 . . 0 .'

Table 4. Selected data for old-age assistance programs.1939-40 by States, grouped according to per cap!matching expenditures from State and local funds. .

Table 5. Per capita amounts actually expended from Stateand local funds in 1939-110 for matching Federal grantsincluding public assistance grants anc sponsorscontributions on WPA projects

Table 6. Per capi ta amounts actually expended from State andlocal funds in 1939-110 for matching Federal grant s,excluding and including public assi stance grant s.

Table 7 . Sta te and local funds expended in 1939-40 formatching Feder~l grants as percentages of Federal grantsplus such State and local funds

Appendix table l. Amount of State and local funds expendedin ~939-40 in matching Federal grants under specifiedprograms

Page

_ _ _


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Charts

Chart lo Hypothetical iilustration of division of costsof federally aided State programs under legislationof traditional type. , 0 . . . 0 0 . . 0 . 0 . . 0 0 .

Chart 2 . --Hypothetical illust~tion of general tendency ofrelationship between State fiscal resources and Stateshare of costs of fede~lly aided State programs underlegislation of traditional type. . . 0 . .

Chart 3o Federal-State division of costs of aided programwith recognition of relative State fiscal capacity(title VI. Social Security Act).

Chart 4. P~lationship between per capita income in eachState and percentages of income required to match all1939-40 allotment s of Federe:l grants, excluding publicas s:1 stance grants 0 . . . 0 . '0 0 .

, Chart 50 --Rele. tionship between per capi te, income '-n eachState and percentages of income expended from Stateand local funds in 1939-40 to match Federal grants,excluding public assistance g~nts 0 . . .

Chart 6. Relationship between per capi taincome in eachState and percentages of income expended from Stateand local funds in 1939-40 to match Federal grants,including public assistance g~nt s .

0 . 0 . .Chart 7 . Relationship between per capita income and

percentages of income expended from State and localfunds in 1939-40 to match Federal grants. includingpublic assistance grants, in States in group I, table 4.

Chart 8. Relationship between per capita income andpercent&.ges of income expended from State and localfunds in 1939-40 to match Federal grants, includingpublic assistance grants, in States in group II.table 4 . .

Chart 9. Relationship between per capita income andpercentages of income expended from State and localf~ds in 1939-40 to match Federal grants, in Statesin group III. table 4. ., 0 0 . . 0 . . . . 0

Page


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PageChart 10. Relationship between per capita income in each State

and percentages of income expended from State and localfunds in 1939-40 to match Federal grants , including publicassistance grants and sponsors I contributions on WPA projects.

Chart ll. Relationship between per capita income in each Stateand percentage increases resulting from inclusion of publicassistance grants in per capi ta amounts actually expendedfrom State and local funds in 1939-40 for matching Federalgrants.

Chart 12. Relationship between per capita income in each Stateand per capita expendi tures from State and local funds in1939-40 to match Federal grants , excluding public assistancegran t s.

VII


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IntroductionAn important characteristic of the system of Federal grants

is its failure to take into account differences in the financialcapaci ties of the States. It is a matter of common knowledge thatthe fiscal resources of States do not vary directly among the Stateswi th the outlays necessary to provide comparable levels of govern-mental service. Yet most Federal aid acts apportion money among theStates on the basis of service need and require that the Federalgrant be matched by State or local funds. The hidden assumption in

this division of costs between the Federal and the State treasuriesis that all States possess , in relation to their responsibilities,similar financial capacities. The nature and consequences of thisundeli berate and implici t assumption have become apparent only withthe expansion of the grant system.

It is to the matching requirement and its effects that atten-tion will be directed in this memorandum. When funds to be matchedare allocated among the States on the basis of need for the aidedservice , the burden of meeting the matching requirements will increasefrom State to State as relative fiscal capacity declines. As long asFederal grants were fairly insignificant in State finance no illeffects resulted from this characteristic of Federal aid legislation.Wi th cumulative additions to the grant system through Federal legilatibn providing aid for new functions . the following, among otherconsequences , may flow:

_d_


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(1) A point may be reached in the development of the grantsystem at which the States with least resources become unable orable only wi th the greatest effort to raise revenues to match addi-tional Federal grants while the wealthier States may take advantageof such grants with comparative ease.

(2) The effect of inability of some States to participatefully in the federally-aided program is that Congress is at leastpartially defeated in its presumed objective of reducing variationsin the level of performance from State to State in the aided function.

(J) Inability of some States to match Federal funds may induceCongress to eliminate matching requirements for all States or to makeaddi tional Federal funds available to all States on an unmatchedbasis. The amount of Federal collection and return to States andlQcali ties thus would be increased over the amount of Federal col-lection and return that would be necessary to maintain a national

minimum under an equalization principle.(4) For State and local finance , an important consequence of

the differential effects of the matching requirement is that theproportion of State and local resources that must be devoted tofederally-aided activi ties increases as fiscal capacity declines.Presumably the poorer the State, the greater is the di sadvantage ofunaided State activi ties in competition for appropriations againstfederally-aided State departments.

(5) Continued failure to recognize State fiscal capacitywi th continued growth of the grant system. would finally make the


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grant system, in its traditional form, unavailable to Congress inthe execution of Nation-wide programs. Under such circumstances thealternati ves open to Congress. if it desired to continue the use ofthe grant device , would be to make grants on an entirely unmatchedbasis or to introduce into law recogni tion of variations in relativeState fiscal capacity.

These propositions are reasonable deductions that followfrom an analysis of the principles of Federal grant legislation.They have been extensively discussed by students of the grant system,yet they have not been demonstrated by a comprehensive analysis ofthe operation of the system. The principal object of this memorandumis to determine whether the evidence supports these deductions.General Princi les of the Grant System

As a background for the analysis of the effects of the grantsystem it is essential that the general principles followed in mostgrant legislation be understood. The apparent congressional objectivein most of these acts is to assure a ~ational minimum of performance

among the States in accordance with their need. The Federal g~nt

in each State in the aided function. To accompli sh this end thegeneral practice has been to devise some rough measure of the needfor the aided service . and to divide the Federal graht appropriation

plus an -equal amount of State and local matching funds. would thusenable each State to make about the same degree of progress in deal-ing with the problem concerned. Those States which were willing andable might , of course, spen~ more from State and local funds than


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A concrete example will perhaps give more specific meaning

necessa~ to match the Federal allotment and thereby exceed thenational minimum.

:ii~ i'I :'~!I j

~.l I to thei r total population:The

iji II

, ::::1:::::" U

::::: :: t

:::::::: 1::" that

~i! ' about the same proportion of the population in each State dis-I i abled and UbI f ti habUit ti If thatI'i r: suscep e 0 voca - onare on.fl

vi.... \ assumption is correct, each State can, with the Federal grant and~ii

\ the State matching funds, make approximately the same headway eachv4, ~

- II , u.d~ I year in the vocational rehabilitation of its disabled. A State is~I : ~1)..ti' ~'1'rt free, if it desires and has the revenues, to spend from its own!I&11:'

to these general remarks. The annual appropriation for grants toStates to promote the vocational rehabilitation of "persons disabledin indust r:r or otherwise" is allocated among the States according

a State that has 5 percent of the total

funds more than is necessary to match the Federal allotment.the extent that it does so, it exceeds the national minimum set upby the apportionment formula of the Fede ral aid act.

Graphically the ideas in the preceding paragraph assume aform something like that in chart 1. In the bar chart 100 percentrepresents the expenditures required to establish comparatively thesame level of performance in each State as measured by the legalformula for the apportionment of Federal funds. I t would beexpected that those States that appropriated more than necessaryto match the Federal funds . indicated at the left of the chart.


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Chart l. --Hypothetical illustration of division of costs offederally-aided State programs under legislationof traditional type

State

Legend:

122

44 45 46 47 48

100~ nationalminimum

50~

State matching funds

State expenditures in excess of matching requirement

Federal grant

_ __ __


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would normally be those States with relatively the most resources,if it is assumed that a uniformly intense demand for the serviceprevails from State to State.

To chart the general idea underlying the grant system as inchart 1 conveys. of course, the impression that the me~sures ofneed in each State to attain the national minimum are much moreexact than they actually are in practice. Nevertheless , in theformulation of most Federal aid acts there bas been an effort tod~vise some presumptive measure, however crude it may be, of thecomparative 'need of each State for the aided service. At theinception of most federally-aided programs it was not essentia!that these measures be accurate since grants were generally designedto stimulate the inauguration of service rather than to insure themaintenance of a uniformly high level of service quanti tati vely inall the States. It was only necessary to apportion the Federal

funds in an apparently equitable way among the States and thisusually involved the use of a formula based on factors that mightbe presumed to be related to the need for or the cost of performingthe aided service.

The assistance grants under the Social Security Act aresomewhat different in form from traditional Federal :-:--.id practicebut in certa~n important respects they are identical in principlevi th the older component s of the grant system. The older form of

See the discussion of the problem of apportionment by Bittermann,Henry J., State and Federal Grants-In-Aid, ch. 20, 1938.


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g~nt is based on the appropriation of a fixed sum to be apportionedamong the States according to their re-lative need for the serviceand gene~lly to be matched , dollar for dollar, by State and localfunds. Thus , the cost of the minimum program would be equallyshared by Federal and State governments. The Social Security Actinstead of providing that fixed sums shall be apportioned among theStates according to some measure of the relative need for each ofthe categories of public assistance , authorizes grants to equal theexpendi tures from State and local funds to meet public assistancecosts falling wi thin the limits of the Federal act. The SocialSecuri ty Act defines categories of assistance and authorizesindefinite grants equal to State and local outlays wi thin thosecategories; the older type of Federal aid act defines the functionto be aided and authori zes grants of specific amount s to be spentwi thin the definition provided that the grant or that part of the

grant accepted is matched by State funds. Thus the principle ofthe Social Security Act, insofar as the division of the costs ofaided services between the national government. and the States isconcerned , is in accord with the Federal aid tradition.

Wi th a few minor exceptions Federal aid laws do not take intoconsideration the varying fiscal capacities of the States. In theallocation of Federal funds allowance is made only for variationsin the need for ai~ed services. The expectat'ion of- the effectthe grant system , insofar as Federal grant s are required to bematched , would be that the State share of the cost would bear most

_


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heavily on the States with least reso~rces. Presumably the pro-portion of State resources required to match Federal grants wouldincrease as resources declined. Thi s hypothetical general tendencywould appear graphically as in chart 2.

Why could it be presumed that the cost of maintaining auniform level of service from State to State would bear more heavilyas State resources decline, as indicated in chart 21 The presumptionmade here is that the cost of a given level of service, in relationto population, tends to be more or less uniform from State to State.If that is true, it would require a larger proportion of Stateresources to pay the State I s share of the minimum program as Stateresources (in relation to population) declined. It is undoubtedlytrue that the outlay necessary to maintain a national minimum in aparticula.r service does not vary directly with population from Stateto State. Apart from possible regional differences in price levelsand standards of living, the need for the service varies. A hundredth~usand people in Oregon would need much more forest-fire protec-tion than the same number of people in Kansas. It is undoubt edlytrue , however, that the cost of maintaining a comparatively uniformlevel of performance in the entire system of federally-aidedactivities bears a more nearly uniform ratio to population fromState to State than does the cost of anyone of the individual. com-ponents of the Federal aid system. That matter will be exploredfurther; for tllli moment it is sufficient to assume that needg! forrr=---By need in this passa~ is meant not a subjective desire for

public services , but the cost of maintaining an objectively deter-mined standard of service in coverage and quality.


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--Hypothetical illustration of general tendencyof relationship between State fi seal resourcesand State share of costs of federally-aidedState programs under legi slat ion of t radi tionaltype

Chart

Rank ofState inresources 44 45 46 47 48

State resources100%

Percentagerequi red tox % matchFederalz % grant 8


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services varies much less among the States (in relationship topopu~ation) than does relative capacity to finance those services.

In the Federal aid system there has been , it must be notedsome recognition of the varying fiscal capacities of the States.a few Federal aid programs of small fiscal consequence that factorgoverns, in part , the division of cost of the minimUm program betweenthe National Government and the States. The general effect of theintroduction of fi scal capacity into the computations is that theproportion of the total cost of the minimum program to be borne bythe State declines as relative fi scal capacity declines. The resultmay be illustrated by the 1940 apportionment of public health fundsunder ti tIe VI of the Social Security Act. The division of costs ofthe .title VI program between National and State governments in a fewhigh-income and a few low.income States is shown in c~~rt 3. Thedegree of Federal participation , it may be seen from the chart, ingeneral i~creases as State resources decline.The Differential Effects of Matching Requirements

The preceding discussion has been in the nature of an exposi-tion of the general principles of the Federal aid system and astatement of hypotheses about some of the ~robable effects of theapplication of those principles. The verification of these ~o-theses presents certain technical difficulties that are almost

J./ e figures for the chart are as follows: to receive all Federalfunds apportioned for 1940 the States indicated had to financethe indicated percentages of the aided program: New York , 49. 7';California , 48.9; New Jersey, 46. 0; Connecticut , 45. 4; South Caro-lina , 33. 5; Alabama , 28. 2; Arkansas, 27. 4; Mississippi , 25.


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insurmountable, but a usable method has been devised for testing theinterest in this analysis; that is , the sup-

position that under the prevailing principles of legislation theweight of matching Federal grants bears more heavily as Stateresources decline.

One measure of the effect of the matching requirements mightbe obtained by determining the percentage of State and local revenues,in each State , necessary to match Federal grants. If the hypothesis

of variation in burden is correct, the percentage would increase as

relati ve State fiscal capacity declined if the further assumptionwere made that State and local revenue accurately reflect fiscalcapaci ty . A ranking of the States by the percentage of State andlocal revenue used to match Federal grants would probably not furnisha test of the hypothesis since it is probably incorrect to supposethat State and local tax yields represent a uniform tax effort fromState to State. The problem would remain of putting the States inorder according to their relative revenue-raising or fiscal capacity.At any rate, suitable data on both State and local revenues '!.! arenot available for 1940, the year selected for analysis.

The problem is to obtain some measure of the relative fiscalcapaci ties of the States. For the purposes of this analysis the

State revenues alone could not be used as a base for computationfor several reasons , one being that some Federal grant s may bematched by a cOmbination of State and local funds and the practicein this respect is not uniform from State to State. MoreoverState by State comparisons of State revenues alone present diffi-culties because the division of revenues and functions betweenState and local governments varies from State to State.


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, Ii :

Chart 3. Federal-State division of costs of aidedprog~ with recogni tion of relative Statefiscal capaci tl (title VI, Social Security Act)

Percent100 100% of costs

of ti tIe VIprogram

State andlocal funds

Federal funds

r-IIoi!I 0

to;) ~. 0Ioi!I 0

en ~ ::E


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caP2!!2_ !De , ~~ theJ. ~s ~938-:,~9..!." ~h~,

_

~.l.,.P,~1!!!!..of Commerce estimates, has been employed as ' a measure of relative..~.."w"..,,_

fi scal capac i ty . This measure is not. precise gauge of relativecapacity. A State with an average per capita income of $600, itwill doubtless be conceded , has greater fiscal capaci ty than a Statewi th an average per capi ta income of $300. But no one would claimthat small differentials in per capi ta income would exactly parallelvariations in fiscal capacity. Apart from evaluations of the fine-ness of the estimates of per capita income, there are undoubtedlyinstances in which some income in one State is in a form not readilytaxable while in another type of State it may be chiefly of a kindthat can be reached readily through taxation. Nevertheless it isprobable that relative State fiscal capacity is closely enoughrelated to per capita income to make the income figures usable forthe present analysis.

If the hypothesis is correct , the percentage of per capitaincome (or the percentage of total income wi thin the State) necessaryto match Federal grants would rise, from State to State , as averageper capi ta income declined. The data presented in table 1 and inscatte~diagram form in chart 4 furnish a test of the hypothesis asapplied to a part of the grant system. The per capita matchingrequirements shown in table 1 are based on the amounts which eachState would have had to furnish from State and local funds toreceive all grants offered to it on a " 50-50" basis for the Federalfiscal year 1940 with the exception of the grants for the three


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I i

r :.

ji';1! \:

il i

i; ~i : :!If::,\\1\ il

i i

' I

fl,: i11

I I

categories ,of public assistance. The figures are not preciselythe same as the amounts actually used by States and local governments

for matching, since some States failed to match the entire sumsallotted to them on a matching basis. Hence , the data constitute abetter measure of the principle of Federal aid leg! alation thanwould figures on actual expenditures.

Examination of the scatter-diagram, chart 4 . reveals thatthe percentage which the per capita matching quota is of per capitaincome in general tends to decline as per capita income rises.view of the weight given population in the apportionment formulaethat tendency is not astoni shing. Certain States , identified on thediagram , however, diverge markedly from the central tendency.will be noted that the States which are out of line with the generaltrend are scattered over the entire income range. They have , howevertwo common featur~s: they are among the smallest States in terms oftotal population and they are , with one exception , among the most:JI The public assistance grants are excluded because there is no

apportionment of such grants in the same fashion as there is ofgrants governed by legislation of the traditional fonn. Includedin the per capita matching requirement figures are the sums neces-sa~ to receive the allotments for the fiscal year 1940 for thefollowing purposes: highways (ll regular" Federal aid and secondary).agricultural experiment stations , agricultural extension workforest~ (under the Clarke-McNa~ and Norris-Doxey acts), voca-tional education, vocational rehabilitation , venereal diseasecontrol , public health services (under ti tIe VI , Social SecurityAct), chi ld and mate rnal health. crippled children , employmentservices (Wagner-Peyser). and wild-life restoration. The figuresfrom which the per capita computations were made were obtained bydeducting from the total apportionment to each State for thesepurposes the amounts which under current legislation do not haveto be mat chad.


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Table 1. --Per capita amounts which would have been required for fullmatching of all 1939-)+0 allotments of Federal grants, excludingpublic assistance grants, related to per capi ta income

Average per Per capita Matching requirementsState capi ta income, matching as percentage1938-40 1/ requirements 2/ of per capita incomeevada $874 $5. 117ew Jersey 797 638 '1-"*ew York 789 665onnecticut 785 727 ri-'elaware 774 2. 790California 771 746 'f:+assachusetts 714 631 'f"!ode Island 678 1. 148 '7xarYland 653 856Illinois 646 865 'Ii-yoming 615 4. 284hio 603 884 '1'FWashington 602 328ichigan 601 969ennsylvania 583 782.Oregon 553 646Montana 544 892

New Hampshire 541 607Colorado 524 1. 869Wisconsin 509 1. 232Indiana 508 1. 132Minnesota 502 483Vermont 493 159Maine 483 637Missouri 476 1. 242Arizona 469 019Utah 466 457Idaho 451 2. 435Florida 449 1. 176Iowa 449 515Nebraska 420 197Virginia 420 1. 172Texas 407 462Kansas 404 038West Virginia 386 053South Dakota 365 2. 865 . 78North Dakota 354 3. 278Louisiana 349 071Oklahoma 343 438New Mexico 325 629Kentucky 309 1. 118

, North Carolina 307 147Tennes see 305 ' 1. 186Georgia 300 326South Carolina 269 1. 256Alabama 249 1. 249Arkansas 245 448Miss iss ippi 198 1. 349 it'

From annual figures of Department of Commerce.Amounts required for full matching derived from data showing allotments ofFederal grants requiring matching for the year 1939-40. In some of the sub-sequent tables, matching expenditures exceed these allotments because ofunexpended ~alances from prior years.


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sparsely populated States. These two factors as would be expectedfrom the formulae of the legislation, operate to increase the per

capi ta matching quotas of these States. Under several acts eachState , as a part of its apportionment , receives an equal or minimumsum regardless of population. This practice inflates the per capitafigures in the States of small total population; it has been defendedon the ground that unit costs are higher in States of small popula-tion. In the highway grants, area and road mileage are importantconsiderations in the allocation. The effect is to increase the percapi ta grants in the sparsely populated States. II In general , how-ever, the scatter-diagram, chari 4 , would seem to confirm, insofaras the grants covered by it are concerned , the hypothesis that theburden of matching tends to decline as State resources increase.

The ranks of the deviating States intotal population are as follows:

Bank indensi ty

densi ty of population andBank: intotaltate

DelawareNorth DakotaSouth DakotaIdahoNew MexicoMontanaWyomingNevada1/ Most of the States deviating markedly from the cent ral tendency

also contain large blocks of public lands and in such States avariable matching requirement for highway grants prevails.States with over 5 percent of their areas in unappropriated publiclands the United States bears 50 percent of the cost of Federal-aid highway projects plus "a percentage of such estimated costequal to one-half of the percentage which the area of the unap-. propriated public lands in such State bears to the total area ofsuch State. This factor has been taken into account in the com-putations of matching requirements, but it does not pull down thematching requirements in these States to the central tendency forall States.


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Helationship between per capita income in each State andpercentages of income required to match all 1939-40 allot-ments of Federal grants , excluding public assistance grants !/

requi rement 8f i coms'Dercen

Dak.

). Dak.Mon \It..",

. N

Dt! 1.

200 300 400 500 600 700Per capita income

data upon which this chart is based , see table

800


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The range of variation in the weight of the matching quotasshown in table 1 is impressive. - If the highest six States in percapi ta income (with the exception of the atypical States of Nevadaand Delaware) are compared with the six lowest States in per capiincome , the average weight of the matching requirements (in termsof proportion of per capita income) of the high income States isabout one-fifth that of the low-income group.

If the amounts actually used to match grants (a~in exceptingthe public assistance grants) are used , the result in fact is almostexactly the same as for the apportionments. The data are presentedin table 2 and chart 5. The general pattern is almost precisely thesame as that ~f table 1 and chart 4. 2/ In table 2 , and all other

The matching quotas , on the average, were . 10 percent of per capitaincome in New Jersey, New York , Connecticut , California , Massachu-setts , and Rhode Island. The average for Tennessee, Georgia . SoutCarolina , Alabama , Arkansas, and Mississippi was . 51 percent.

/ \ ~ \ll:)(0~y 6/)

The figures in table 2 are not exactly comparable with those intable 1. In the totals on which the per capita matching expendi-tures in table 2 are based is included one item excluded fromtable 1 , that is, expenditures to match grants for the maintenanceof soldiers ' homes. but this is a small item. Other sources ofvariations in the figures in the two tables include the following:(1) In some instances States did not match the total sums avail-able; (2) In other instances States matched more than the 1940apportionment , since, under some of the Federal aid actB it is POB-st ble to match in 1 year unexpended balances from apportionment s ofprior years. The most important feature of the figures in table 2however, relates to the highway grants. Accounting for publicworks projects does not readily lend itself to fiscal breaks at agi ven moment. A project may be contracted for in one year andpaid for in an~ther. Different States spend thei r Federal allot-ments at different rates and funds are available for some timeafter the end of the year for which the apportionment is made.Hence, to obtain figures comparable between States it was necessaryto use the highway apportionment figures. Sui table expenditurefigures are not available. It should also be noted that the speciadispensationwai ving the highway matching requirement for the bene-fit of Arkansas was not in effect during the fiscal year 1940.


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_' --_H

'rable 2. Per capita amounts actually expended from State and local funds in1939-40 for matching Federal grants , exclusive of public assistance grantsrelated to per capita income

Average per Per capi ta Expendi tures asState capi ta income matching percentage of per1938-40 1/ expendi ture s capi ta incomeNevada $874 $4. 378

1./-5ewJer sey 797 647New York 789 656Cohnecticut 785 752 '15Delaware 774 695California 771 796 If LtMassachusetts 714 640Rhode Island 678 129Maryland 653 849 lf3Illinois 646 878Wyoming 615 188Ohio 603 884 ~15 'toWashington 602 358Michigan 601 974 ~'lPennsylvania 583 774Oregon 553 692Montana 544 888New Hampshire 541 557Colorado 524 897Wisconsin 509 262Indiana 508 154Minnesota 502 493Vermont 493 144Maine 483 635Missouri 476 252Arizona 469 018Utah 466 479Idaho 451 470Florida 449 182Iowa 449 507Nebraska 420 156Virginia 420Texas 407Kansas 404 030We st Virginia 386 054South Da.k:ota 365 812North Dakota 354 268 92,Louisiana 349 071OklahOJll8. 343 448 . 2New Mexico 325 632Kentucky 309 109North Carolina307 153Tennessee 305 203Georgia 300 1.337 . 5South Carolina 269 209AlabaJl!a 249 249Arkansas 245 457Mississippi 198 337

From annual figures of Department of Commerce.See appendix for dB.ta of individual programs and sources used.


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Chart 5. Relationship between per capita income in each State andpercentage of income expended from State and local fundsin 1939-40 to match Federal grants , excluding publicassistance grants

Matching expenditures as~ercent of income

Dak.

. i Dak.. Mo

. Wyo.

200 300 400 500 700 800For data upon which this chart is based , see table 2.

t-=;


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tables in this memo~ndum, the amounts spent by States, if any, inSuchexcess of sums used to match Fede~l funds are not included.

data are not available for all the federally-aided functions; and ifthey were, their use would introduce factors irrelevant to the ques-tions under examination.

The gene~l conclusion regarding the effects of the matchingrequirements seems to be fairly well established insofar as theg~nt system as a whole, with the exclusion of the public assistanceg~nts , is concerned. It would hardly be expected that the additionof expenditures to match the public assistance g~nts would producefor the entire system a pattern like that in charts 4 and Theformulae on which charts 4 and 5 are based presumably produce com-pa~bility from State to State in the level of service since theg~nts plus matching outlays are designed to furnish within eachState a roughly uniform level of service. Moreover, most of theFederal money available under the older g~nts, which predominate inaharts 4 and 5, is matched. No data satisfactorily measuring thecomparati ve adequacy of levels of service from State to State areavailable for the public assistance prog~s. The States vary inthe amounts which they pay in assistance to each recipient, in theproportion of eligible persons g~nted assistance, and in the pro-portion of the total population that is eligible for assistance underthe terms of the Social Security Act. 1 t would be useful for analysito employ estimates of what it would cost in each State to maintainassistance prog~ms of a compara?le character. Presumably the weight,


28/85

from State to State, of financing all the Fede~l aid activitiesincluded in chart 5 plus a uniform level of public assistance wouldvary among the States inversely with per capita income as in charts 4and 5. No satisfacto~ estimates of the cost of such assistanceprograms are available, and the analysi smust be designed to ascer-tain the pattern, if any, of actual expenditures.

In table 3 and chart 6 the relationship between per capitamatching expenditures on Federal aid programs, including the g~nts

!!1Jfor public assistance, and average per capita income are shown.While there is some tendency for the ratio of matching expendituresto income to rise as per capita income declines, the scatter diagramdoes not indicate a close correlation. The relationships shown inthe scatter ~~~~~--_d?_ D:?!_-!,:c:,c()r~_ neatly wit~ ,. ()~r hypothesh chieflybecaus~_ tl1!_.~~vels - of public assistance programs ~:!_E:~~_.State toState. This fact suggests the possibility of furthering the analysisby a classification of the States into groups with approximately thesame levels of public assistance performance.

The question immediately arises , what criteria shall be usedin classifying the States into groups wi th similar assistance levels?As a beginning, the States were grouped into three classes accordingto per capita expenditures for old-age assistance. It is at once

-- The figures in table 3 are based on those of table 2 plus Stateexpenditures to match the public assistance grants. The calendar1940 figures for aid to dependent children are used instead of forfiscal 1940, however. Table 3 includes then the data of table 2plus expenditures to match grants for old-age assistance, aid toblind, aid to dependent children, and administration of aid todependent children.


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Table 3. Per capita amounts actually expended from State and local funds in1939-40 for matching Federal grants. including public assistance granteerelated to -ner can ta ncomeAverage per Per capi ta Expenditures asState capi ta income, matching percentage of per1938-40 !./ expendi ture s capita income

Nevada $874 $7. 652New Jersey 797 040New York 789 338Connecticut 785 318Delaware 774 724California 771 447Massachusetts 714 452Rhode Island 678 628Maryland 653 751Illinois 646 958Wyoming 615 739Ohio 603 671Washington 602 012Michigan 601 155Pennsylvania 583 646Oregon 486Montana 026New Hampshire 541 216Colorado 524 873Wisconsin 509Indiana 508Minnasota 502 068Vermont 493 912Maine 154Mis80uri 950Arizona 469 673Utah 466 885Idaho 451 672Florida 449 849Iowa 449 155Nebraska 420 021Virginia 420 716Texas 407 641Kansas 404 ~04West Virginia 386 2. 14South Dakota 365 ~01North Dakota 3~4 5. 41Louisiana 3 9 955Oklahoma 343 419 1.58New Mexico 325 891Kentucky 309 1.941North Carol ins 307 075Tenne saee 305 598Georgia 300 1. 924South Carolina 269 885Alabama 249 818Arkansas 245 998Mi ssi ssippi 198 1. 77211 .From annual figures of Department of Commerce.gf See 'appendix for data of individual programs and sources use~.


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Coo rt Relationship between per capita income in each State andpercentages of income expended from State and local fundsin 1939-40 to match Federal grants , including publicassistance grants !/

Percent of income

Colo.

NI!

1.6

1.4

1.2

1.0

600 700 800400 500Per capita income

For data upon which this chart is ba.sed, see table 3.200 300


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apparent , of course, that within each of these three groups percapi ta matching expenditures (on all grant programs) will bear moreheavily as per capita income declines. However , does this method ofclassifying the States also have the effect of grouping then! intocategories with assistance programs of similar characteristics?statistical maneuver groups the States as in table 4 where certaincharacteristics of the old-age assistance program is shown for theStates in each of the three categories. The States wi thin each ofthese groups do not have exactly the same sort of assi stance programsor the same assistance needs , but the differences wi thin each groupare much less than the differences among all the States. By averag-ing the various columns for each of the three groups the followingsumma is obtained:

StatesAverage

recipients per000 age 65and ove r

Averagepercent oftotal popula-tion 65 andover

Average ofaveragepayment perrecipient

Averageapplicationspendi ng . pe r100reci ient s

Group I $11.19.

27.12.

231. 7

233.360.

Group II23.roup I I I

Probably the most important difference between the three groups ofStates is in the amount of monthly assi stance payment per recipientbut between groups II and III there is a marked difference in the

The emphasis in this comparison lies on the State as a unit , hencethe figures computed are averages of the figures for the Statesand the States have not been merged as if each group constitutedan area.

This


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proportion of those over 65 receiving assistance. Observe, also,the interesting gradation in the number of applications pending foreach of the three groups. If there 18 any basis for supposing that

administrative policy is roughly similar with reference to the stimu-lation and acceptance of applications when funds "re inadequateCj~-":the conclusion would be that the State s in group I had the largest

unmet need, those in group III the least.Whatever the conclusion with reference ~o the validity of

the grouping of the States, the data for each of the three groupsare presented in scatter-diagram form in charts 7, 8, and 9. Withthe data for chart 6 thus subdivided the familiar pattern of charts 4and 5 reappears; that is, the percentage that the matching expenditureis of average per capita income increases sharply with a decline inincome.!5I In the examination and study of these charts let it beremembered: (1) the factors that accounted for deviations from thecentral tendencies in charts 4 and 5 project through into thesecharts; (2) among the States shown on each of the charts there remainsconsiderable variation in assistance levels.

It may be thought that the turn of affairs in charts 6, 7, 8,

and 9 invalidates the hypothesis. The hypothesis is not invalidated

but it must be modified somewhat to take into consiaeration all thefact s . It was stated at the outset that through cumulative additionsto the grant system the point might be reached at which the States

illThe fact that a State wi th a low per capita income devotes a rela-ti vely large percentage of that income to matching grant s does notassure a high or adequate ~l of performance in the aided programs.


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Table 4. --Selected data for old-age assistance progra!IIS. 1939-)~0, by States, groupedaccording to per capita matching expenditures from State and local funds

Recipients perStates ranked Per capita 000 estimated Persons 65 and Average Applicationswi thin groups matching population 65 over as percent payment per pending perby 1938-40 per expendi- years and over. of total po-ou- recipient. 100 recipients.capi ta income ture June 19~0 2/ lation June 1940 !i/ June 1940 5./Group I: States spending less than $1. 10 per capita for matching old-age assistance grants. 1939-

New Jersey 875 125 20.Delaware 658 128 11. 35Rhode Island 086 150 19. 6. iMaryland 034 174 17.Virginia ,349 115 18./lest Virginia 708 234 13.Louisiana 937 452 11. 18.New Mexico 622 310 4,3 14.Kentucky 832 263 21.North Carolina 585 253 10. 20.Tennessee 795 299 10. 19.Georgia ~87 217 197.South Carolina . 83 320 14.Alabama 363 181 17.Arkansas 341 247 44.Mississip-oi 421 239 33.

Group II: States spending from $1. 10 to $2. 10 per capita for matching old-age assistance grants, 1939-110York 162 150 25.necticut 1. 551 147 26.linois 080 276 20.oming 853 341 23.chigan 445 251 16. 43.nnsylvania 139 158 22.Hampshire 288 109 21. 19.sconsin 047 234 22.

diana 017 229 18.rmont 451 140 15. 17.ine 937 161 21. 43.orida 338 371 12. 01 23.raska 037 284 16.xas 167 415 10.sas 599 225 19.rth Dakota 1. 410 245 16.

NewCon

New

NebKan


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Table 4 (Continued)

Group III: States spending over $2. 10 per capita for matching old-age assiste~ce grants, 1939-Nevada 274 379 26.California 944 308 37.Massachusetts 148 261 28.Ohio 407 254 23. 15.We.shington 959 313 22.Oregon 370 228 21. 22.Montana 342 393 18.Colorado 892 508 3-3. 75Minnesota 882 323 21.Missouri 243 295 16. 23.Arizona 514 479 27.Utah 134 505 21.Idaho 128 308 21.Iowa 569 252 20.South Dakota 440 351 19. 70Oklahoma 162 611 17. 71

1/ Amounts expended by States and localities for matching Federal grants assumed to equal Federalexpenditures for assistance to recipients as reported in Social Securit Bulletin, February 1941, p. 58.2/ Social Securit Bulletin, August 1940, p. 48.1/ Release of U. S. Bureau of the Census based on 5 percent cross-section entitled Number and Pro ortion ofPersons 6 Years Old and Over Preliminary) : 1 40. (series P-5, No. 7), April 23, 19

Fifth Annual Re ort of the Social Securit Board, 1940, p. 197.21 Ibid. , p:J:9li.


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Chart 7. Relationship between per capita income and percentagesof income expended from State ana local funds in 1939-to match Federal grants. including public assistancegrants , in States in group I, table 4!/

Matching expendi turesas percent of income1.4

1.2 - N. UQ'

Del.

It N.

400 500Per capita income

!/ For data upon which this chart is based , see table 3.

600 8000000 300


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Chart 8. Relationship between per ~apita income and percentagesof income expended from State and local funds in 1939-to match Federal grant s, including public assistancegrants , in States in group II, table 4 !/

Matching expendi turesas percent of income

IB.k.

Wyo.

. 8

1.4

200 300 400 500 600 700 gOOPe r capi ta income

For data upon which this chart is based see tab Ie 3

--- --_n


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Chart 9. Relationship between per capita income and percentagesof income expended from State and local funds in 1939-to match Federal grants , including public assistancegrants , in States in group III , table 4 !/

Matching expendituresas percent of ~ncome

1. g

1.6. Colo.

. Mon

. N~'

. C~lif .

40000 60000 500 700 800Per capita income

For data upon which this chart is based, see table 3.

900


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wi th least resources might be unable to match Federal grants whilethe wealthier States could take advantage of grants available.

hypothesis must be modified to ine1ude the proviso, " other thingsbeing equal. In other words , fi seal capaci ty alone does not d~ter---_._~---,~O,"'mine whether a S~k.mJ.J,.mt,t,tch, hQ~E!~~J:'~nts available. Among thefactors other than variations in fiscal capacity that may have con-

. tributed to the formless statistical distribution in chart 6 arethe following:

(1) The greater desire for old-age assistance in certainStates as manifested in pressure by organizations of the aged hasled to a relatively higher level of old-age assi stance in some Statesthan in others; the factor of public demand also influences levelsof performance in aid to dependent children.

(2) The traditional or customary atti tudes toward the levelof public expenditures varies greatly from region to region and

would be expected to influence the level of State and local appro-priations for public assistance quite independently of fiscalcapaci ty.

(3) The degree to which some States had taken advantage ofpublic assistance grants even as late as 1940 may have beenil~luenced by constitutional limitations and traditional govern-mental i~flexibility. If some States operate under a higher resist-ance to action than others , this factor alone , apart from absolutefiscal capacity, would influence the level of the public assistanceprogram.

That


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(4) The comparatively low level of public assistance underthe Social Security Act in a very few States of high fiscal capacitymay have been influenced by a tendency to care for some of the agedas a part of the family unit under general relief financed solelyfrom State and local funds.

(5) A basic assumption of the type of analysis in chart 6 isthat the cost of providing a comparable level of service tends tovary from State to State with population. The deviation of some of

the low income States may be explained not so much by relative fiscalcapacity as by a tendency to regard a comparatively low level ofpublic assistance as adequate. In other words the variations in

"level of service " as measured by the degree of local satisfactionwi th prevailing programs, may be less than the variation in dollarsof expendi ture per capita.

(6) A source of noncomparabili ty comes from the fact that

some States in 1940 had no programs of aid to dependent children.less important variation, in terms of dollars, was the absence insome States of programs of aid to the blind.

A case study of each State would be necessary to explain itsposition on chart 6. The foregoing factors, and perhaps others, inaddition to relative fiscal capacity would enter into the explanationfor each State. Yet on the basis of the entire analysis , the general

_ _ _

proJ)~~~~ lit the pre~iling PI'inciples of the grant ~y:stE!lD. tend

_

a heavier burden on the poorer States in the maintenance ofa uniform national level of service seems to be comp~E!telY ~t,~~d.


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The form of the scatter in chart 6 is determined by the fact that inthe public assistance programs no national minimum has been achieved.

The establishment of such a minimum would require relatively largercontributions by the poorer States as was shown in charts 7, 8, and 9in which the States were classified into groups with more nearlyuniform standards for public assistance. Although other factors have

been influential in determining whether a State would take advantageof the grants available for the public assistance programs , it appears

that relative fiscal capacity has been one of the most importantfactors governing assistance levels.

To make the analysis of the effects of matching requirementscomplete it may be desirable to include the Work Projects Adminis-tration program. Although the WPA does not operate through thetraditional grant procedure , the principles for the division of thecosts of WPA non-Federal projects between the Federal and Stategovernments is similar to that of the grant system in that there isnow no recognition of variation in relative State fiscal capacity.Un~er the Emergency Relief Appropriation Act of 1939 it was providedthat after January 1, 1940, "not to exceed three-fourths of the

total cost of all non-Federal projects thereafter approved" shouldbe borne by the United States and not less than one- fourth by theState and its political SUbdivisions.!2J In table 5 and chart 10the same sort of analysis as in chart 6 is given but sponsorscontributions on WPA projects are included in addition to the total

ill 53 Stat. 928


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matching expenditures on ordinary grants in table 4. The pe rcentagethat State and local matching expenditures including sponsors I con-

tributions bears to State income tends generally to increase fromState to State with a decrease in per capita income as may be seenfrom chart 10. One might conclude from the chart tr~t the necessityof meeting these charges was placing a very heavy burden on thepoorer States. There are important unknown factors , however.is impossible to estimate the degree to which WPA expenditures havebeen substi tuted for outlays formerly made exclusively from Stateand local funds; nor is it known whether this varies from State toState. The degree to which States and localities have had to developnew revenue sources to finance sponsors I contributions is not known;

nor is it known whethe~ this varies from State to State.The Limits of the Matching Princi

So long as federally-aided acti vi ties involved comparativelysmall sums of money the differential effects of the matching require-menta on State and local finance were of more theoretical than actualimportance. The question now is whether the level of total matchingquotas has been raised to the point where serious consequences ensue.It will be recalled that among the probable consequences of cumula-ti ve additions to the grant system pointed out were the following:

(1) Inability of poorer States to match grants offered on thetraditional grant principles to the same degree as the wealthier States;

(2) Development of unmatched grants because of a hesitancy toaban,ion the traditional practices which the recognition of -variationsin State fiscal capacities would involve;


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Table 5. Per capita amounts actually ' expended from State and' lo~a1funds in 1939-40 for matching Federal grants I including publicassistance grants and sponsors ' contributions on WPA projects

Average per Per capi ta Expendi tures asState capi ta income, ma t ching percentage of ~er1938- 40 1.1 expendi tures g.l capi ta incomeNevada $874 $14.New Jersey 797New York 789Connecticut 785Delaware 774 711California 771Massachusetts 7111 1.27Rhode Island 678 1.15Maryland 653nUlloi s 646Wyoming 615 11. 1.82Ohio 603Washington 602 10.Michigan 601Pennsylvania 583Oregon ?53 lL9Mon tana 544 1~. 84New Hampshi re 541Colorado 524 14.Wisconsin 509Indiana 508 1.65Minnesota 1)02 c:nV ermon t 493 113Maine 11g3Mi s s ouri 476 1.56Art zona 469 11.Utah 466 12.Idaho 451 11. 70Florida 449Iowa 449 1.68Nebre,ska u20Virginia 420 59 -Texas 407 1.36Kansas 404 1.89West Virginia )86Sou th Dako te, 365 11.North Dakota 354 10.Loui siena 349Oklahoma ;43New Mexico 325Ken tucky 309North Carol-ina 307 1.57Tennessee 305 1.88Georgia 300 1.58Sou th Carolina 269Alabama 249 2. J 6Arkan sas 245Mississi"rrpi 198

From annual figures of Department of Commerce.See a:r:mendix for data of individual programs and sources used.


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Chart 10. Relationship between per capita income in eash State andpercentages ' of inco~e expended from State and local fundsin 1939-40 to match Federal grants , including publicassistance grants and sponsor s contributions on WPAprojects !.I

Matching expendi turesa~ percent of income DakDak.

Co 10.Mon

.NI

1.0

40000 60000 500 700 800 900Pe r capi ta income

For data upon which this chart is based, see table


44/85

(3) Financial disadvantage for unaided services particularlyin the poorer States because of the superior position of aided ser-vices in maneuvering for appropriations.

In this section of the memorandum the evidence on thesepoints will be examined and let it be said at the outset that theseproposi t ions are more difficult of verification or disproof than thequestion examined in the first part of this analysis.

The over-all growth of the matching requirement s may be indi-cated by the fact that in 1930 approximately $90 million in Stateand local revenue was needed to match all Federal grants offered; in1940, the 48 States expended approximately $429 million to match Fed-eral grants. If the sponsors I contributions for WPA projects are con-!'!!Jsidered to be matching funds the figure rises to around $920 million.

The figures on matching expenditures underestimate the ~Qtal effectof Federal aid on State finance, for almos every ederallY-Qidedprogram is so conditioned that qualification for the grants re-quires the expenditure of more than the matching requirement. Someacts permit the expenditure of the Federal grant and matching fundsonly for certain phases of a governmental function. Highway rightof-way. for example , must be financed without benefit of Federal aidwhich is available for road construction and design only. Similarsorts of conditions prevail in most of the other grant programs.In old-age assistance , for example, the 5 percent addendum may beused for administ ration or for assistance, but more than the 5 per-cent sum is usually required to maintain adequate administrativeservices. Another type of grant condition requires the earmarkingof State revenues from certain sources for specified purposes. Theact of June 18, 1934 , which is the most important legi slation ofthis type , requires that States use for highway construction, im-provement , or maintenance "at least the amounts " provided by law atthat time from the proceeds of motor-vehicle registration feeslicenses, ~soline taxes, and other special taxefl on motor-vehicleowners and operators. The penalty for violation is the forfeitureof not more than one-third of the annual Federal grant. The proceedsof these taxes are generally much more than is necessary to match theFederal. grant for highway purposes. The Wildlife Restoration Act(50 Stat. 917) requires as a qualification for the receipt of grantsthe passage of "laws for the conservation of wildlife which shallinclude a .prohibi tion against the diversion of license fees paid byhunters for any other purpose than the administration" of the Statefish and ~me department.


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The effect of matching requirements on State finance differsgreatly under two sets of condi tion~. If grants are offered to aidin the financing of an activity already being carried on in most ofthe States, existing expenditures may (in the absence of special con-ditions in the Federal act) be used to match the Federal' grant.result may be either the substitution of Federal for State funds orthe expansion of the scope of the activity in the States. I f grant sare offered , however , to aid in the financing of an activity that isnew and relatively undeveloped, two possible consequences may follow.The State will have to divert revenue from other acti vi ties to matchthe grant or it will have to discover new sources of revenue.Generally the only alternative open to the State is the exploitationof new sources of revenue since existing functions are firmlyentrenched and the very fact of their longer existence is an indexof the priority they hold in the scale of social values.

The bulk of matching revenues has been for new or expandinggovernmental functions , and probably most of this revenue has been

new" revenue. Outlays to match highway and public assistance grantsmake up a very large proportion of State and local funds used tomatch Federal grants. The present highway system has been in largepart built since the inauguration of Federal aid for highway con-struction, and in the same period motor-vehicle and gasoline taxesdeveloped to finance highway acti vi ties. Similarly State old-ageassistance programs have been developed chiefly since the passage ofthe Social Securi ty Act. In 1934 , State and local governments spent

The


46/85

$32 177, 000 under old-age assistance acts. State and local expendi-tures for this purpose have multiplied over sevenfold since that

time. In no State was the 1934 level of expenditure so high thatthe introduction of Federal grants permitted a substitution of Federalfor State and local fundS.!2/ The degree, however, to which locali-ties had to increase their expenditures to car~ on the securityprogram varied from State to State. Although it is not essential forthis discussion, detailed analysi B would show that as the Federalgrant system has evolved the general effect has been to require thedevelopment of new sources of State and local revenue or the moreintensive exploitation of old sources. It is not to be supposed, ofcourse, that the Federal grant system was the sole cause of thedevelopment of new State and local revenues. New State and localfiscal effort and the development of the grant system have been paral-lel results of the growth of demands for new and enlarged publicservices.

With these background remarks , it is possible to turn to theconsideration of the evidence on the general questions under analysisin this section of the memorandum. In the determination of whethermatching requirements bear more heavily as resources decline , itbecame apparent (in the discussion of charts 6, 7, 8, and 9) thatvariations in per capita income were not the only factor in deter-mining whether a State could or would raise revenue to match new

For a description of old-age assistance as of 1934 , see Committeeon Economic Security, Social Security in America , ch. viii.


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Federal grants , but the contention was expressed that the per capitaincome was perhaps the most important factor in the situation.

It may be supposed that as the total level of all types ofgrants requiring matching reaches a cri tical point the rate of increasein the appropriation of matching funds might vary with fiscal capacity.If, through some strange enactment , all States were offered all themoney that they could match to be used as they desired , presumablythe State wi th the most resources would receive the largest grant withgradations on down to the State with relatively the least resources.

In the case of grants for specific purposes public atti~udes towardthe aided service and other factors in addition to fiscal capacitydetermine whether grants offered will be matched. Yet if those non-fiscal factors could be held constant , it might be supposed thatafter a certain point in the development of the grant system, therate of increase of State and local matching funds would decline asrelative Sta~e fiscal capacity declines.

How can this supposition be tested and how can it be deter-mined whether the grant system as a whole has reached the point indi-cated? Table 2 shows the per capita matching expenditures for allthe regular Federal ~rants except the grants for public assistance.Table 3 shows the per capita matching expenditures for all grantsincluded in table 2 plus the expenditures for matching public assis-tan ce gran t s . Wi th the exception of a few grants of small fiscalimportance, the change from table 2 to table 3 is about what happenedhistorically as the public assistance grants became available.


48/85

the hypothesis expressed in the preceding paragraph is correct, itwould be expected that the percentage increase for each State fromtable 2 to table 3 would be greater as average per capita incomeincreased, the theory being that the States with larger per capiincomes had relatively greater latitude in the development of newrevenues. The percentage increases are shown in table 6 the data ofwhich are presented in scatter-diagram form in chart 11.

The array in chart 11 would seem to lend considerable supportto the theory that the higher per capita income States were muchless near to the margin of income that could be diverted to publicpurposes than the low income States and, hence, could increase theirrevenues more readily. In the interpretation of the scatter diagramcertain additional factors must be taken into account. Some ext remedeviations from the cent Tal tendency will be noted. In some of theseinstances the State was already making relatively high per capimatching expenditures and the percentage increase under the assistanceprogram was , hence , compara ti vely small. In other instances thepercentage increase vas high because the increase was computed froma relatively low per capita matching outlay. The inquiry mayimmediately arise , do the States with high inc.reases in chart 11consistently have low per capi ta matching outlays on the functionsincluded in table 2. If so, the relationship between per capitaincome and the expansibility of the Federal aid system shown inchart 11 would be a spurious one. To furnish a check on this question,the per capita matching expend! ture data from table 2 are plotted


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Table 6. Per capita amounts actually expended from State and local funds in 1939-for matching Federal grants, excluding and including public assistance grants

StateAverage per

ca'Pita income,i938-40 1/$874797789785774771714678653646615603

602601583553544541524509508502493483476469466451449449420420407404386365354

. 349343325309307305300269249245198

Per cap! ta matchin endi turesExcluding Includingpublic assistance public assistancerants rants$4. 3786476567526957966401298498781888843589747746928885578972621541. 4931441. 6352520184792. 4701825071561734740300548122680714486321. 1091532033371. 2091. 249457337

$7. 6522. 0403382. 3183. 7244474526282. 7519586. 7396710121552. 6464. 4860263. 2168. 8730554. 1040689721549506738856728491550211. 7166413044143014419554198919410755989248858189981. 772

NevadaNew JerseyNew YorkConnecticutDelawareCaliforniaMassachusettsRhode IslandMarylandIllinoisWyomingOhioWashingtonMichiganPennsylvaniaOregonMontanaNew HampshireColoradoWisconsinIndianaMinnesotaVermontMaineMissouriAri zonaUtahIdahoFloridaIowaNebraskaVirginiaTexasKansasWest VirginiaSou th DakotaNorth DakotaLouisianaOklahomaNew MexicoKentuckyNorth CarolinaTennesseeGeorgiaSouth CarolinaAlabamaArkansasMississippi

From annual figures of Department of Commerce.See appendix for data of individual programs and sources used.

74.215.256.208. 238.584595.132.224.236. 960.315-3269.223.241.165.80.106.367. 7221.255.239.85.154.215.181.297.129.141.175. 7132.46-379.112.129.88.66.175.274.47.75.80.116.43.55.45.37.32.


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Chart ll. Relationship between per capita income in each State andpercentage increases resulting from inclusion of publicassistance grants in per capita amounts actually expendedfrom State and local funds in 1939-40 for matching Federalgrants

Percentage increase in matchingexpenditures by inclusion ofpublic assistance grants600

500

. "'1a~8. Calif.

Co 10.400

300

200.

100

200 400 60000 500 700 800 900Per capi ta income

For data upon which this chart is based , see table


51/85

in chart 12. It is evident from this chart, that, while the variationsin per capita matching expenditures included in table 2 have influencedsomewhat the pattern of chart 11 , they are not of such a characteras fully to explain away the general tendency exhibited in the latterchart.

When the States in the lower ranges of the income spectrumcease to meet expanding matching requirements , Congress has two majoralter~ati ves , if it wishes to continue to employ the grant device forrelatively undeveloped functions. It may inaugurate grants withmatching requirements that decline as State resources decline, or. tomake the objectives of its program attainable , it may offer grantson an unmatched basis to all States. During the past 10 years therehas been a very rapid increase in unmatched grants. In 1930 theFederal grants available on an unmatched basis were almost negligiblein amount. Unmatched payments consisted of small flat sums available

to each State under some acts as a part of a larger program, such asthe flat grant of $10. 000 to each State under the Smith-Hughes Act.The entire sums for agricultural experiment stations and the agri-cultural and mechanical colleges were paid on an unmatched basis andthe public-land States were not required to match completely thehighway grants. During 1940, however, unmatched funds !2/ excludinggrants for unemployment compensation insurance administration, were$82 796, 242; with the addition of unemployment insurance administrationWmhat is , grants with no matching requirement and the amounts ofother grant s above the St~ te matching requi red , as , in a program

in which the Federal Government furnished 75 percent of the costtwo-thirds of the Federal grant was considered to be unmatched.


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grants , the unmatched total becomes $137, 864 506; with the furtheraddition of ~atched WPA expenditures the total was $l 044, 378, 506.

To evaluate the significance of the rise in unmatched grantsit is necessary to recount briefly their development. The mo re impo r-tant modifications of the matching policy since 1930 are attributableto the exigencies of the depression period, but others have the ear-marks of a permanent departure from traditional practice. Thesemodificat ions have taken several forms. In some of the Federal aidfunctions Congress has since 1930 eliminated completely the matchingrequirements for short periods. In other instances the requirementsin an established Federal aid function have been altered by theprovision of funds in addi tion to the exi sting Federal contributionsbut on an unmatched basi The effect of such a step may be topermit the substitution of Federal for State funds being spent inexcess of the earlier matching requirement. In a thi rd type ofpolicy change Congress has increased the grant and broadened thepurposes for which Federal money might be used, thereby assuming ashare of certain expenditures which prior thereto had been bornesolely by the States.

For several years the requirement that grants for highway con-struction be matched was abandoned completely. This policy was in

part a reflection of the inability of the States to match grants ina depression period and in part a consequence of the Federalill. All these totals exclude payments to States in the nature of pay-

ments in lieu of taxation. Also excluded are comparatively smallunmatched payments under various emergency highway appropriations.


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Chart 12. Relationship between per capita income in each State andper capita expenditures from State and local funds in1940 to match Federal grants, excluding public assistancegrants

Per capitamatching expenditureNleWyo.

' Iel.

600 700 Soo00 50000 300Per capi ta income

For data upon which chart is based, see table 2.


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assumption of responsibility for unemployment relief and the decisionto include highways in the work-relief program. The fi rat departurefrom the highway matching requirement occurred in 1930 when Congressappropriated $80 million as a " temporary advance" to the States withwhich to match their regular Federal aid allotments. Another " tem-porary advance" of $120 million was made for the same purpose by theEmergency Relief and Construction Act of 1932. The fiction of thetemporary advance" was dropped enti rely in the National IndustrialRecovery Act and in the succeeding emergency acts making highway-grant appropriations without any matching requirement.

Highway policy has now returned toward its t radi tional formbut not all the way. Depression innovations left a residue of moreor less permanent new policy. Grant s for the elimination of grade-crossings and crossing hazards , first authorized by the NationalIndust rial Recovery Act. continue to be made on an unmatched basi

this unmatched grant aids in paying costs that were formerly borneexclusively by the States and localities. The depression highwaylegislation also paved the way for the continuation of Federal grantsfor use on secondary road construction. The grants for this purposemust be matched, but since they are available for a matter that vasformerly solely a State and local responsibility the effect probablyhas been (varying from State to State): (1) to lay no heavier burdenfor matching since the prevailing level of State and local outlaycould be used for matching, thereby increasing the sums spent on thistype of road construction; or (2) to permit a substitution of Federalfor State or local funds.


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The traditional highway policy was also altered to take intoaccount the particularly necessitous circumstances of a few States.In 1936, Congress &brogated as to certain States for the fiscal year!1936 and 1937 the requirement of " 50-50" matching of the highwaygrant. The 1936 amendment provided that when "the proceeds of allspecial taxes on motor-vehicle transportation . are applied tohighway purposes " and an insufficient balance remains to match theFederal grants all of such portion, of such apportionment as theState is unable to match shall be available for expenditurewi thout being matched by the State or with State funds. TheFederal Aid Highway Act of 1938 continued the exemption from thematching requirement for the fiscal years 1938 and 1939. The pro-vision then lapsed but was revived for the fiscal years 1942 and 1943by the Federal Highway Act of 1940. The special dispensation wasenacted chiefly for the benefit of the Stat' e of. Arkansas , but a fewother States have been able to take advantage of its provisions.

!2/Another type of situation is represented by alte~tions in

agricultural extension policy. Most of the payments for agriculturalextension work are made under two acts. Those under the terms of theSmi th-Lever Act are required to be matched (except for the $10, 000flat grant to each State), while the addi tional s~s authorizedthe Bankhead-Jones Act of 1935 are given on an unmatched basis. Thechief effect of the increase by the 1935 act was to expand the serviceill48 Stat. 993.!:jJFor an analysis

. U., American of the Arkansas financial situation , see RatchfordState Debts , ch. xv.


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without relying on State and local appropriations. In all States theproportion of the total extension service outlay borne from Federalfunds has thus increased. Changes in vocational education policyhave been similar in character. Grant s authori zed by the George-DeenAct of 1936 (supplementary to payments under the Smith-Hughes Act)are required to be matched only to the extent of 50 percent (that is$1 State and local money brings $2 Federal money) until the fiscalyear 1943, when 60 percent matching is to be required; and matchingis to be increased by steps of 10 percent until the fiscal year 1947,when matching of the entire Federal grant will be required. Theamounts to be matched under the George-Deen Act are about the sameas the matching requi rement s of a prior act supplementa~ to thebasic legislation; hence , the George-Deen Act placed no immediatematching burden on the States.

I'n addition to these modifications of the matching require-ments in the older aided functions , a few of the newer acts are sodrawn as to grant all , or a portion of , the Federal aid without obli-gations to match. The grant for child welfare services under theSocial Security Act is not conditional upon State financial partici-patton. The grants for public health work , for services for crippledchildren, and for child and maternal health work under the SocialSecurity Act as well as the grants under the Venereal Disease Control

Some States apparently take more complete advantage of grantavailable under the George-Deen Act than of those under the Smi th-Lever Act which must be completely matched. Under the Bankhead-Jones Act the grants under the Smith-Lever Act must be matchedbefore the unmatched Bankhead-Jones funds for agriculturalextension work are available.


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Act have to be matched only in part. It is under these acts ofsmall financial importance that some recognition of variations in

State fi seal capacity has been int roduced. Furthermore , althoughthe facts differ from State to State, a part of the matching raquire-ments under these acts have been met by the use of preexisting Stateand local expendi tures.

The most striking departure from the matching principle duringthe decade 1930-40 was under the Federal Emergency Relief Act.During the years 1933, 1934 , and 1935, Federal grants cove red 70.percent of the total obligations incurred for relief, but the ratioof Federal funds to the total varied widely among the States.South Carolina the Federal Government bore 98. 0 percent of reliefcosts; in Rhode Island , 39. 4 percent. Or to state the situation con-versely, State and local funds accounted for 2 percent of the totalin South Carolina; for 60. 6 percent in Rhode Island.

Not all the new legislation adopted in the decade 1930-involved a departure from the traditional matching principle , but

there were special cir~~stances in several of the new acts. TheBankhead-Jones Act introduced the matching principle into the addi-tional grants which it authorized for the State agricultural experi-ment stations , but the stations had been in existence for many years

most of them had built up State support , and generally the existinglevel of State expenditure met the new matching requirements. TheWildlife Restoration Act contained a matching requirement , but on abasis different from the customary 50-50 rale. The Act provides that


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the Jederal GoverDlllent shall bear not to "exceed 75 percentum of thetotal estimated cost ofN wildlife restoration projects. In practicea straight 75 percent ru.le is followed. This act, thus , departedfrom the 50-50 ru.le and alao involved aid to State ~encieB whichwere probably in a considerable meal1lure able to furnish theircontri-button from revenues already being collected. The extent to whichthe Federal aid system as a whole has , through foregoing developmentde~arted from the straight 50-50 principle may be seen from table 7.

The public assistance titles of the Social Security Act thusare the only important new grant legislation of the Ithirties" whichfollowed in detail the t radi t tonal principle of the di vi lion of COlt sof federally-aided services between Federal and State funds.

What can be inferred from the trend of congressional actionof the "thirties" on matching policy? In one respect it might beargued that the cumulative' effec~. of !C?~~hh

_

~~c~ed in theeeieral acts constitute a recognition by Congress that the point has

C'~""_C h~h"been reached at which s~raight matching in the old tradition is no"Ch_-",~,,~_C'-'-_C"~" h~'~""' hC"h '~~-C '" nn "" . C _"ChC,-

_

~h~' _~'h .- 'Clonger a completely satisfactory basis for Federal grants._'~'~""C hO.~...cn It is , ofcourse, impossible to dete~ine the considerations governing thecongressional deci sion in each instance. Undoubtedly many factorso~her than estimates of the revenue-raising capacity of the Statesentered into each decision, but probably that was an element of nomean impo rtance.

In another respect the rise of unmatched grants has a direct-_..--.... C

bearing on one of the hypotheses under examination in this memorandum.


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Table 7. State and local funds expended in 1939-40 for matchingFederal grants as percentages of Federal grants plus suchState and local funds

Average Federal grants State and Column (4)State per capita plus State and local as percentageincome local matching matching of column (3)1938-40 1/ expendi tures gj expendi tures(1) (2) (3) (4) (5)Nevada $874 $3, 673, 368 $843, 584 23.New Jersey 797 713, 842 488 . 501 41.New York 789 134 653 518 454Connecticut 785 888 336 961 419 40.Delaware 774 614 007 992 543 38.California 771 615, 354 37, 621 999Massachusetts 714 43, 210 469 19, 220 085Rhode Island 678 815, 001 868 676 38.Maryland 653 676 861 009, 340Illinois 646 53, 077, 339 23, 361 308 44.Wyoming 615 991 072 689. 789 33.Ohio 603 251 760 25. 355, 503 45.Washington 602 020 683 702 249 43.Michigan 601 206 830 585, 061 43.Pennsylvania 583 957, 726 191 , 4)~5 43.Oregon 553 320 , 817 888 604 38.Montana 544 953, 526 930 521 39.New Hampshire 541 007, 159 1 , 580 , 598 39.Colorado 524 421 835 967, 497 44.Wisconsin 509 168 727 722 487 45.Indiana 508 482 812 066 630Minnesota 502 302 295 151 907 45.Vermont 493 548 472 426 812 40.Maine 483 135, 444 519, 334 43;3Missouri 476 33, 462 027 951 070Arizona 469 950 379 832 298 35.Utah 466 470 116 238 432 38.Idaho 451 056 814 977 , 195 37.Florida 449 393, 303 405, 220 43.Iowa 449 23, 421 408 547, 071 45.Nebraska 420 695, 031 606 146 45.Virginia 420 469, 972 594 091 40.Texas 407 39, 328 254 944 375 43.Kansas 404 17, 258 192 752 125 44.West Virginia 386 999, 657 590 836 41.7South Dakota 365 250 758 408 218 41.North Dakota 354 , 067 , 905 493, 044 43.Louisiana 349 15. 957, 868 985. 897 43.Oklahoma 343 091 083 660 578 45.New Mexico 325 044 276 069, 293Kentucky 309 13, 395, 000 524 , 069 41.North Carolina 307 17, 886 182 412 585 41.4Tennes see 305 17, 617, 955 574 274 43.Georgia 300 691 601 008 812 40.South Carolina 269 024 593 3, 581 , 526 39.Alabama 249 750 194 149, 654 40.Arkansas 245 718 216 893, 913 40.Mississippi 198 723, 635 870 400 39. _u-From annual figures of DeDartment of Commerce.Includes matched and unmatched Federal grants and expenditures from State and localfunds for matching Federal grants. Data for Federal grants obtained from reportspublished by agencies administering the individual grants programs.

3J See appendix for data of individual programs and sourbes used.


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The argument has been advanced that one effect of inability or dis-inclination of the States with least resources to match Federal grants

might be the modification o!_~~~- matchin JlI_quiremellts fQI'--nalL~~by offering unmatched or partially matched grants~ - That c~~~_~~onseems to have come about. The consequence is probably the collectionand return of more funds in the form of Federal grants than would benecessa~ to maintain an equivalent service level under an equaliza-tion system.

Another question remains to be examined , viz., the suppositionthat the differential effects of the matching requirements mightaffect adversely State and local activi ties excluded from Federalaid especially in the low-income States. The scope of the analysishas not been broad enough to provide data on this point , but thequestion is of such great importance that some general comment shouldbe made upon it. That the distortion of State budgets through the

di version of State and local resources from exi sting uses to federally-aided programs on a large scale would seriously cripple unaidedactivities is a self-evident proposition. A few States are wellknown illustrations although the availability of Federal grants forold-age aesistance has not been, of course, the sole factor leadingto the atypical expansion of the programs of old-age assi stance inthese States. Yet ,the question re MJ.h~~_~EjI_ ~f~ects of the

Simple Federal collection and return to the State of origin throughgrants is not without its importance if it is assumed that the inci-dence of Federal taxation is markedly different from the incidenceof the tax system of the State to which the return is made. More-over, some types of revenues while paid from the incomes of residentsof the States are not as available to the States as to the FederalGave rnment .


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grant program in inducing St~te and ~~~e.la~~~ori ti~. ~ote:esour p~ograms has actually tended to handicap functionsfi~nced solely from non-Federal sources."M_".

The consequences of differential weight of matching might beexpected to include the following, among others:

(1) States with lower per capita incomes might follow thecourse of diverting funds from preexisting services in order to matchnewly 0 ff ere d Fede ral grant s

(2) They might fail to expand their unaided services in keepingwi th changing requirements while more prosperous States developedtheir unaided services at a more rapid rate; or

(3) They might tax themselves more heavily than other States inorder to match Federal grants and to finance unaided activities.The Federal Grant System and Equalization

The emphasis in this memorandum on the burden of matchingFederal grants conflicts so sharply with the general feeling that theStates are being given something through grant s that some furtherexplanation would probably be ~ise. It is

v.o. key, the matching requirement in federal grant legislation

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