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Statistical Issues in Allocating Funds by Formula
tion by one dollar. In other words, matching aid programs like SCHIP encourage more spending on the aided function by reducing the “price” of that function from the perspective of the recipient government.
Because the objectives of promoting equal treatment of equals and redistributing economic well-being focus on individuals, not communities, mapping these objectives into specific elements of aid formulas is more challenging. Still, aid can come closest to accomplishing these objectives if it is distributed according to a formula. Suppose, for example, that the goal is redistribution. Then, given that poor individuals tend to reside in poor communities, aid should go disproportionately to poor communities (Ladd, 1994). This will happen if aid is distributed using an aid formula that accounts for a community-level measure of ability to pay such as total taxable resources (TTR), with aid amounts varying inversely with ability to pay.
Facilitating Political Compromises
As was noted in Chapter 1, aid exists in a domain somewhere between the idealized world in which aid programs are designed to fulfill explicit objectives and the purely political world in which aid programs simply divvy up pots of money. Many of those who advocate for aid programs are motivated by specific objectives, but they must make compromises to get the authorizing legislation approved. Formulas can offer political cover to those involved in the process of compromising (Melnick, 2002). Also, formulas can simplify the process of compromising by reducing the dimensionality of the problem. In other words, if a formula is used to distribute aid, agreement needs to be reached on the structure of the formula and the statistical inputs to that formula. Without the aid formula, the programmatic description that allocates decision-making responsibility to a federal agency must be crafted to generate sufficient support (Melnick, 2002). Finally, formulas make it easier to quantify the impact of alternative compromises.