Categorical grants are federal funds given to state and local governments that come with strict spending limitations and rules. They’re a way for the federal government to meet specific national objectives in areas regulated and controlled by state and local governments. Categorical grants are common in areas such as education, infrastructure and housing.
How Categorical Grants Work
Unlike with block grants that address broad purposes, categorical grants fund specific projects and specific programs. Although state and local officials administer and manage grant funds, the federal government holds officials accountable for their decisions. To receive funds, officials must agree to the terms, conditions and associated reporting requirements that come with the money. Most categorical grants do not fund state and local programs entirely, but do provide a majority of funding requirements.
For example, states that use federal grants to fund school breakfast and lunch programs must serve meals that comply with nutrition requirements for subsidized meals and meet administrative review and reporting requirements.
Types of Categorical Grants
Categorical grants come in two versions: formula grants and project grants. Both accomplish the same goal, but allocate funds in different ways.
Formula grants are noncompetitive grants designed to allocate funds in a fair and impartial way. This classification often applies to grants for social programs such as food stamps, housing assistance and early childhood education programs.
Formula grants use a mathematical equation and variables such as population density, poverty levels or crime levels to allocate funds according to need. For example, a formula grant that considers poverty levels will allocate more money to states with high levels and less to other states. In the same way, the federal Office for Victims of Crimes awards grants to fund state victims compensation programs based in part on crime statistics.
Project grants are competitive or first-come, first-serve grants used to fund specific projects. These grants use specific eligibility criteria and prioritize applications based on need or the order in which applications are received.
Federal Pell Grants are one example of a project grant. Recipients must not have earned a bachelor’s degree, must meet certain income requirements and must use grant funds for eligible education-related expenses.
As another example, most grants offered by the Office of Housing and Urban Development are competitive project grants. These include grants relating to the housing voucher program and the Neighborhood Networks program. For this program, HUD provides up to 75 percent of the funds necessary to operate Neighborhood Network centers that assist in job training activities.