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p In the United States, local governments, just as in most of highly developed capitalist countries, receive grants from the national budget for covering part of their expenditures. This is a reflection of the centralisation of government finance inherent in the present level of development of statemonopoly capitalism. This is one of the reasons for the widening gap between the rise in expenditures for public needs of state and local authorities and their own financial resources. Simultaneously the more centralised form of financial relations between the federal government and localities is developed to the utmost, through allotments from the national taxes in the form of grants for definite purposes. The size of grants significantly affects the scope of state and local budgets and the character and proportions of specific budgetary items. This, as will be subsequently shown, undermines the economic independence of state and local governments which become increasingly dependent on the aid of the federal government.

The process of state-monopoly regulation of the economy, combined with centralisation of financial resources in the 181 hands of the federal government, increased noticeably in the 1960s. This development affected intergovernmental budget relations.

Table VI-16 Federal Grants to State and Local Governments in Relation to Their Revenue  [181•1  Total revenue of state and local budgets, million dollars Sum of federal grants, million dollars Per cent of federal grants in total revenue 1942 13,148 858 6.5 1950 25,639 2,486 9.7 1955 37,619 3,131 8.3 1960 60,277 6,974 11.6 1965 87,777 11,029 12.6 1968 117,581 17,181 14.6 1969 132,153 19,153 14.5

p Murray Weidenbaum, characterising the relations of the federal government and state-local authorities, notes: “There is a widespread tendency to think of these grants as gifts and thus to assume that they merely add to the financial resources of the recipients. Such is hardly the case."  [181•2  He points to the conditions for providing such grants, with the help of which the central authorities gain the opportunity to control and direct state and local budgets, and declares: “The question arises inevitably as to the extent the grant-in-aid system is converting the states into veritable agents of the federal government. Is there the possibility that the states may become the civilian counter-parts to the arsenal-like, government-oriented corporations in the military sphere?" He arrives at the conclusion that the total effect of federal influence through grants given to state and local governments is considerable.  [181•3 

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p In nine years direct federal grants to states, counties, municipalities and school districts more than trebled—from $6,974 million in 1960 to $20,255 million in 1969.

p In the main, federal grants are provided for public works, trade, transport and means of communication, for financing anti-crisis measures; for the needs of education, health and public welfare, benefits and services to war veterans and for financing some administrative agencies and private enterprise connected with public services.

p Though states and local governments continuously obtain more revenue, federal grants are becoming an increasingly significant source of their budget receipts as a result of the more rapid rise in the size of grants as compared with the increase in the state incomes from their own sources.

p The first large programmes of grants to states and local governments, envisaged by the US Constitution, arose during the crisis of the 1930s with the need to provide subsidies for stabilising the economic situation. In the course of 10 years of depression 13 main aid programmes were initiated as compared with 10 programmes implemented in the years prior to 1930.

p The financial position of states and local authorities became the most acute problem: as a result of the sharp drop in employment and population incomes they were badly in need of resources for social welfare. The aid programmes therefore concentrated grants in this sector of government spending. Their purpose was to cope with pressing current problems and did not aim at long-range consolidation of the financial position of states and local governments.

p After the Second World War, the inadequacy of the funds of states and local authorities received from their own sources was revealed more clearly. The limited nature of tax resources in contrast to the rapidly rising needs, made it necessary for the federal government to come up with more effective financial support. In 1950, federal grants to states and local administrative units reached $2,486 million. By that time not a single substantial part of state and local expenditures could be fully financed through their own resources. Federal grants were mainly directed at helping states and local governments in health, education, highway 183 construction and restoring the natural environment in cities.

p The 1958 National Defense Education Act provided for federal aid in the form of grants and loans to states and local governments for special educational purposes. It envisaged the adaptation of educational programmes to purposes of a military nature.

p Simultaneously federal funds were allotted for the clearing of slums, urban renewal and planning, and combating pollution of the environment. These programmes, including public welfare, amounted to about 70 per cent of all federal grants in 1955.

p With the passage of the Federal-Aid Highway Act, grants-in-aid for commerce and transportation exceeded other types. In 1960, after the adoption of programmes on education, personnel training, economic opportunities and similar purposes, the share of such grants again rose. At the same time the increase in federal aid did not keep pace with the growth in needs, and the financial difficulties of the local authorities continued to mount.

p This period was marked by big budget deficits of municipalities, especially in large metropolitan areas. The constant growth in the urban population demanded expansion of costly public services, linked with current needs and investments requirements for housing, public works and urban reconstruction. Of the total appropriations grants-in-aid, about 70 per cent were allotted for metropolitan areas. In 1964, these areas received only 55 per cent; moreover, the total sum was much smaller.

p At present the system of federal aid to states and local bodies consists of three main elements: grants-in-aid, shared revenue and loans.

p The grants-in-aid programmes allot resources of the federal government (Congress) to local governments for definite purposes. As a rule they are made conditional on state and local participation in their financing.

p Conditional grants, as pointed out earlier, are above all provided for purposes arising from priorities set by the federal government. They thus do not always coincide with the primary tasks of states and local governments. The purposes of aid, formulated by Congress, are determined 184 by certain factors which do not directly concern the interests of states and local authorities.

p Among them are questions of defence, the geographical location of the productive forces, the priority development of individual industries and lines of production.

p Arnold Cantor, examining the use of federal grants, wrote that “the aid programs must meet the test of aiding in the provision of a public facility or service that is in the national interest and in accordance with national priorities. The state and local government receiving the funds must use the money for the purpose intended by Congress and must agree to certain performance conditions such as civil rights and labor standards."  [184•1 

p It is clear that what is meant here are priorities put forward by the central government and not by the states and local authorities which have their own pressing needs.

p States and local governments who receive aid of this type are forced to accept definite terms, including those which do not coincide with their direct interests as well as to take part in financing the subsidised measures.

p James Henderson, studying some aspects of the influence of federal -grants-in-aid on different types of local governments, specifically counties, metropolitan areas and other administrative units, proves that the local budget receipts from the central government inevitably cause additional outlays by the recipients from their own sources. “These revenues,” he points out, “are less than perfect income substitutes.... An intergovernmental revenue increase also leads to increases of local taxes and debt, and a reduction of private expenditures for both groups of counties."  [184•2 

p Though all grants-in-aid are made conditional on specific terms of financing, there are several varieties which can be grouped in two main types.

p There are what are known as categorical grants allocated among the states or indirectly among local governments in accordance with the terms provided for in the relevant act 185 (formula-allocated grants). They take as a basis factors determined from statistical information for the district, such as the size of the population or per capita income.

p A distinctive feature of this type of grant is that it determines in advance the sums which can be taken into account by state and local governments in planning budget items, specifically for education.

p The manpower potential, unemployment level, the amount of welfare provided, and so on are taken as criteria.

p Grants of this kind are more convenient forms of aid to state and local authorities than project grants which are of a more general, national significance.

p Examples illustrating this type of conditional grant are those provided for under the Manpower Development and Training Act.

p Project grants are given for strictly defined purposes. These programmes make up the majority and they absorb the main part of the aid. In awarding them, federal agencies take into account not only the concrete socio-economic statistics of individual states and their subordinate administrative units but other considerations which follow from accepted economic principles. At the same time to receive these grants, states must display initiative in solving local and regional tasks. Moreover, they must be ready to finance, in part, their implementation. In some cases, as for example, in low-cost housing construction programmes, participation is natural and the states, in fact, receive the opportunity to facilitate the accomplishment of primary tasks. The participation with their own funds in other programmes is less favourable for states. Inadequacy of state financial resources undermines their initiative in securing project grants. To a certain extent, this applies to grants for building highways, airfields and other projects where the principle of sharing the cost between the federal and the state-local contribution is applied.

p With the exception of grants for highway construction, the distribution of financing, as a rule, is made in accordance with the “equalisation” principle or a 50:50 “sharing of costs".

p Individual grants, under the Elementary and Secondary Education Act of 1965, were provided directly for local 186 governments, in particular school districts, without making them conditional on their participation.

p Other aid programmes, for example, the construction of health facilities, presuppose a fluctuating participation of the recipients, depending on the size of the project and their financial resources.

p The federal share in financing varies, usually from onethird to two-thirds of the total cost of the project. Thus, even assuming a smaller part of the expenditure, the central authorities are given the possibility to practically fully determine the nature of the expenditures made by states and their subordinate administrative units.

p A less important form of federal support to state and local budgets is shared revenue. It represents direct financing of states and localities from of a definite type of income—the sale or rent of certain federal property.

p This type of financial aid, as a rule, contains certain terms, set by the federal government, which in this sense brings it closer to grants-in-aid.

p President Nixon in his message to the Congress of February 4, 1971, officially proposed an expansion of shared revenues. The principle of “new federalism" he formulated presupposes definite decentralisation of state administration, including finance. It proceeds from the need to transfer all responsibility for public services from the centre to the localities.

p This decision, possibly of a temporary nature, adopted in the period of a critical condition of states and local finances, apparently was designed to give local governments greater independence in manoeuvring with financial resources so as to utilise them more rationally.

p At present the proportion of aid in the form of shared revenue is insignificant, although state and local governments are interested in them more than in conditional grants.

p Shared revenues on a larger scale were also proposed to the Johnson Administration in 1964 by Walter Heller, who at that time was Chairman of the Council of Economic Advisers to the President. His proposals encountered strong opposition and were not adopted. This happened at a time when all official organisations, representing state and local governments, called for unconditional shared revenues.

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p Analysing the economic and administrative terms of federal aid to states, B. Masse noted that the National Governors Conference, the US Conference of Mayors, the National League of Cities, the National Association of counties, the City Managers Association and the Council of State Governments, Democrats and Republicans equally, all were in favour of snared incomes.  [187•1 

p But, notwithstanding the position taken by the US President as regards increasing the financial independence of state and local governments, their dependence on federal aid continues to grow. This applies above all to conditional grants which carry rigid terms in respect to their use.

p Apparently centralised government administration of local finances is supported by the private sector which receives big orders through the system of federal grants to states.

p The dependence of state and local governments on federal grants, which has been increasing in recent years, is arousing growing dissatisfaction among official agencies of the recipients and a number of economists. Three main features of the system have become the object of sharp criticism: 1) loss of financial independence by states and their subordinate administrative units; 2) the general inadequacy of federal aid for coping with urgent tasks and 3) the frequent discrepancies between federal aims and local priorities.

p Other aspects of the system of federal grants-in-aid are also criticised, for example, the advantages given to individual states, direct financing of measures in local governments, the impossibility of planning allocation of their own resources on a long-term basis as a result of the absence of information concerning future size of grants.

p A most detailed analysis of the influence of federal grants-in-aid has been given by Murray Weidenbaum in his monograph The Modern Public Sector. The author examines the economic and social consequences not only in respect to goal-oriented redistribution of national resources, but also in connection with the influence they exert on the entire system of the private-monopoly economy. He 188 demonstrates the widespread impact grants have on the economic pattern of states and localities and draws the conclusion that “the shift in the location of the actual conduct of government programs gives the rise to more than just administrative and managerial repercussions. It strongly influences the role of the states and cities in our federal form of government. It affects the size and strength of the business sector and of other nongovernmental institutions in our economy which has been primarily geared to corporate enterprise and private initiative."  [188•1 

One can hardly disagree with this conclusion because this situation follows from the main terms on which grants are given. They are to be used for special purposes, recipients have to match federal funds, and controlling agencies or some other federal bodies have to approve in advance detailed plans for which the money will be used.