Many popular programs are funded by either block grants or categorical grants. Head Start, for example, is funded in part by categorical grants, as is Medicaid. The Community Development Block Grant from the Department of Housing and Urban Development is a long time program funded by a block grant.

Block grants and categorical grants are funding given to state and local governments by the federal government. The key difference is that block grants can be used for any purpose decided upon by the state or city whereas categorical grants must be used for a specific, designated purpose. There are positives and negatives to each type of grant.

Definition of Block Grants

A block grant is a large sum of federal money given by Congress to a state or local government to fund a "block" of programs. States are free to decide how to use block grants. Only general provisions are given as to the way it is to be spent. The idea behind this type of grant is that states have a better idea of how to spend the money for their state, and requiring conditions of aid is unproductive.

Block Grant Advocates

Those in favor of block grants argue that local government officials know better what the people of their own state need and can spend the money more wisely. The theory is that block grants end up in the hands of better-equipped local officials rather than federal bureaucrats who have no idea what a particular state needs.

Some argue that block grants are more cost-effective because they reduce federal administrative costs that are typically related to state and local government paperwork requirements. Advocates also argue that block grants allow local governments to experiment with new approaches. They can be creative and find new solutions to problems because they are given more freedom. If you're given a sum and told exactly what to do with it, innovation can be more difficult.

Block Grant Critics

The arguments in favor of block grants sound perfectly reasonable, but digging deeper, there are potential problems with giving money in this way. If the federal government doesn't specify the conditions of aid, critics of block grants argue that the way local governments spend the money can't be tracked and assessed, particularly because there are often no federal requirements for program data collection across states.

Opponents also claim that when there is a lack of oversight and guidance, the communities most in need are often overlooked. Local officials can spend block grant funding so that underserved communities are forgotten and communities with the greatest political influence end up with the most benefits.

Critics also argue that funding for block grants is more likely to decrease over time because it is more difficult to regenerate political support for broad-purpose programs than it is for categorical programs focusing on specific purposes.

Definition of Categorical Grants

Today, categorical grants are the primary source of federal assistance to local and state governments. Issued for a specific purpose, these grants can only be used for an explicitly defined objective. States don't have to accept categorical grants, but if they do, they are required to adhere to the rules and regulations of that grant or it will be taken away.

Project Grants and Formula Grants

There are two ways that categorical grants are distributed, either through project grants or formula grants.

Project grants are funding given for a specific project or service for a determined amount of time. These grants are competitive.

The process of project grants begins when an agency makes a funding program based on their mission or initiatives. Next, the agency announces the funding opportunity and invites groups to apply. At the end of the application period, the applications are evaluated by the agency and award recipients are chosen based on who best meets the application criteria. States compete for project grant funding by going through this process.

For example, the Department of Agriculture's Animal and Plant Health Inspection Service, which operates the Wildlife Services Program, often offers project grant funding. Applicants who are awarded a grant by this department might receive money for programs that help certain animals or repair damage done to a wilderness area.

Formula grant funding, on the other hand, is more for services that help a particular group of people. These types of grants might be given to programs that assist low-income students or children with disabilities, for example. Unlike project grants, these are not competitive and there is not the same type of application process. In the case of formula grant funding, all applicants who apply and meet the criteria receive funding based on a formula created by the federal government. The government decides how much money they want to spend, and it is divided up based on the formula.

The Nutrition Services Incentive Program offered by the U.S. Department of Health and Human Services, for example, offers grant funding for states to give nutritious meals to the elderly in a geographic location. The formula that determines how much grant money to give a state is based on how many meals were given out the year before.

Programs Funded by Categorical Grants

A well-known example of a program funded by a categorical grant is Head Start. Created in 1965 as a summer school program to help low-income students catch up before the start of their first year in school, Head Start now serves more than one million low-income families per year. Partially funded by categorical grants, Head Start programs must follow conditions of the grant, such as making reports to the U.S. Department of Health and Human Services and submitting to an annual audit.

Medicaid, food stamp programs and magnet schools are also funded, in part, by categorical grants.

Examples of Block Grants

A well-known example of a program funded by a block grant is the Community Development Block Grant from the Department of Housing and Urban Development. Established in the 1970s as a consolidation of similar, existing grant programs, this program has much more freedom of implementation than does a program such as Head Start.

The Social Services Block Grant is another example. Made to U.S. states and territories, the recipients of this grant decide which services to provide and who is eligible for the social services.

A Common Grant Debate 

Congress has debated whether or not Medicaid should act as a block grant program. Many in the GOP are in favor of changing Medicaid to a block grant program and giving the states more say in how they spend their money. However, those opposed argue that this has the potential to take money away from those who need it most: low-income, unserved communities, children and pregnant women.

As the program works now, states share the cost of Medicaid with the federal government. States with less wealth, pay less. And states with more wealth, pay more. For example, Mississippi pays less out of the state pocket than Massachusetts.

Federal funding is open-ended, and in return, states must cover certain services and people. If Medicaid went the route of the block grant, people who need the services the most could potentially be overlooked.