Local governments receive revenue from a number of sources. While most collect taxes, nearly all governments receive some funding from the federal government. This money is passed down in a number of different ways, including in the form of pass-through funds and grants for specific uses. Grants given by the federal government to local governments can be divided into two main types -- block grants and categorical grants. Block grants have fewer restrictions on their use than categorical grants.
Block grants allow local governments a large amount of discretion as to how they can be used. Generally, block grants are given for a broad purpose -- for example, community development and energy efficiency -- but come with no directions on which programs must be funded. These grants are generally not competitive but are allocated to governments based on a formula. The local governments then choose which programs and projects will be funded with the money.
Unlike block grants, categorical grants can only be used for very specific purposes outlined by the federal government. Often, categorical grants will be used to fund specific projects. Also, categorical grants are competitive. Governments and organizations must apply for the grants, and the federal government will choose to fund only those applicants that offer the best proposal. An example of a categorical grant would be for the federal Head Start program, which offers early education to children.
One of the main advantages of block grants is that they allow local governments to choose which programs in their community to fund. Often these governments are better able to identify where the money should be spent than the federal government. By contrast, categorical grants are beneficial because the federal government is able to choose projects based on merit. Because it is not bound by a formula, as with block grants, the federal government can give money to the most worthy applicants.
One of the main disadvantages of block grants is that the federal government usually does not provide much oversight into how the money is spent. So, local governments may use the money ineffectively; but because the money is allocated according to a formula, they will not be held accountable for failures. Categorical grants have a downside in that the federal government does not always have a good idea as to how money should be used in a particular community. Also, some communities with fewer resources may not be able to field as compelling an application for the grants as wealthier communities.