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Statistical Issues in Allocating Funds by Formula 3 Basic Features of Formula Allocation Programs This chapter is an overview of the context in which federal formula allocation programs operate. Who receives the funds initially, and where do they go from there? What is the timing and frequency of disbursements to the recipients? What provisions are made to cover administrative costs? What program rules place constraints on the purposes for which the funds can be used by the recipients? Answers to these questions vary widely by program. The way in which each program operates depends on a complex body of legislation, regulations, and policies at several levels of government. We present some examples of different arrangements, taken primarily from the 12 large federal programs whose formulas and allocation processes were systematically reviewed to provide input to the panel’s deliberations (see Appendix B). TARGET ALLOCATION UNITS Funds appropriated for federal programs go initially to an executive branch program agency that is charged with using the funds in accordance with legislative requirements. For formula allocation programs, typically most of the appropriated funds are distributed by the program agency to the 50 states, the District of Columbia, and in some instances, to American Indian tribes and U.S. territories, based on formulas and procedures included in the authorizing legislation or developed by the program agency based on general objectives specified in the legislation. Funds allocated to
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Statistical Issues in Allocating Funds by Formula states go to various state agencies, such as state transportation agencies for highway programs and state education agencies for the special education program; these agencies use the funds for purposes defined by program rules. There are some exceptions to the usual pattern of making the initial distribution to state agencies. For the Title I education program, through school year 1996-1997, funds were allocated to state education agencies and those agencies were responsible for determining the amounts to be distributed to counties and school districts. For school year 1997-1998, however, Congress decided that allocations down to the county level were to be determined by the U.S. Department of Education, and starting with school year 1999-2000 the federal responsibility for allocations was extended to the school district level. Thus, in this program, school districts are now the target allocation units.1 Another exception occurs in the community development block grants program, which is administered by the U.S. Department of Housing and Urban Development. Most of the appropriated funds are distributed directly to 860 metropolitan cities and 153 urban counties (counts for FY 2001) for their use in programs designed to develop viable urban communities by providing decent housing and a suitable living environment and by expanding economic opportunities, principally for people with low and moderate incomes. FURTHER DISTRIBUTION OF FUNDS BY INITIAL RECIPIENTS For many formula allocation programs, the ultimate beneficiaries are eligible individuals or family units who receive cash or in-kind benefits or services. Of the 12 programs reviewed in Appendix B, 7 fall into this category: Medicaid, Temporary Assistance for Needy Families (TANF), the school lunch program, special education, State Children’s Health Insurance Program (SCHIP), foster care, and the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). For all of those seven except special education, eligibility is restricted to low-income families or 1 An exception was made for school districts with less than 20,000 population. States are permitted to aggregate the funds allocated to such districts and to reallocate them based on alternative criteria, subject to review by the Department of Education.
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Statistical Issues in Allocating Funds by Formula individuals. To some extent, eligibility requirements are established in the authorizing legislation for the programs, but states are typically given some leeway. In the Medicaid and SCHIP programs, for example, income eligibility is determined by the ratio of family income to the official poverty level, but states are given flexibility in deciding what ratio to use and what items to count as income. The TANF program stands out as one that has given states substantial freedom to develop activities designed to meet the program’s broad objectives and to establish eligibility requirements for the benefits provided. As noted previously, in the Title I education program, funds are allocated to school districts, using formulas designed to favor districts with large numbers or proportions of school-age children in poor families. Along with much larger amounts of state aid and local funds, the Title I allotments go to support the budgets for individual schools and school district administration. For some programs, federal funds are used to make loans to local governments for specific purposes. Under the Environmental Protection Agency’s state capitalization grants program, allotments to states, along with matching state funds, are used to establish state revolving funds from which loans are made to water districts for specific waste water treatment and water pollution control projects. This system was established by 1987 amendments to the Clean Water Act; prior to that time, funds allotted to the states were disbursed as grants for eligible projects. Highway Planning and Construction program funds are used primarily for specific projects to construct or make improvements to public (nonlocal) highways and for several related purposes. Projects proposed for federal aid funding must be included in a statewide transportation improvement program developed by the state transportation agency and submitted for approval to the Federal Highway Administration and the Federal Transit Administration. Each state’s program is constrained by the funds allocated to it under the various subprograms of the Highway Planning and Construction program. For some large projects, design and construction are subject to oversight by the Federal Highway Administration. As illustrated by these few examples (see also Chapter 7, which describes state aid programs in California), a variety of administrative mechanisms, some preexisting and some created specifically for a particular grant program, are used to channel funds from state agencies to the ultimate beneficiaries.
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Statistical Issues in Allocating Funds by Formula FREQUENCY AND TIMING OF ALLOCATIONS AND DISTRIBUTIONS Most formula allocation programs are continuing programs supported by annual appropriations. For many of them, the authorizing legislation calls for reauthorization after a specified number of years, typically four or six. The reauthorization process gives Congress an opportunity to conduct periodic reviews of the effectiveness of the program and of the existing allocation formulas and procedures. This arrangement does not preclude more frequent changes if Congress sees a need for them. Changes in formulas, data sources, and other features of the allocation process can be enacted through special legislation, added on to other related legislation, or even enacted as part of the annual appropriations legislation for the program. Within this general framework, requirements for sound financial management and differences between programs in the timing and predictability of funding needs have led to development of various practices with respect to frequency and timing of allocations and distributions. Some examples are: For Medicaid, which is an open-ended matching grant program, payments to the states are quarterly, based on statements of eligible expenses submitted by each of the state programs. Matching grants under the foster care program, which is also open-ended, are handled in the same way as Medicaid grants. In the initial stages of SCHIP, it was difficult for states that were just starting their programs to determine when those programs would be approved and what their caseloads would be. Although the program provides for federal matching of state expenditures at varying rates, the total amount to be allocated to the states each year is fixed. Consequently, the law allows states up to three years to spend their allocation for a given fiscal year. After that period, unused funds are reallocated to states whose expenditures have exceeded their allotments for that year. As provided for in the regulations for the WIC program (7CFR246.16), the U.S. Department of Agriculture recovers unexpended prior-year funds from the state agencies. These funds are reallocated to other states in accordance with a formula established for that purpose. For the Title I education program, school districts receiving funds need to have at least a rough idea of how much federal and state aid they will be receiving in order to plan for the coming school year. Allocations of
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Statistical Issues in Allocating Funds by Formula Title I funds are normally announced in the spring and are available to the school districts for obligation by the July preceding the beginning of the school year. School districts are not permitted to carry over more than 15 percent of their allotments to the next fiscal year. State education agencies have the authority to reallocate unused funds. In the Unemployment Insurance Program, which provides federal funds for the administration of state-financed unemployment insurance programs, the amounts required for a fiscal year depend in part on the levels of insured unemployment in each state, which are difficult to predict. The Employment and Training Administration of the U.S. Department of Labor, which administers the program, divides the total amount available for allocation to the states into base and contingency budgets. Formula-based allocations under the base budget are made available to the states at the start of each fiscal year. Contingency funds are made available to states when their quarterly workloads exceed the base budget level. This procedure makes it possible to distribute funds roughly in proportion to observed needs. The Canadian equalization program (discussed in Chapter 8) calculates annual provincial entitlements using a large number of data items. These allotments are preliminary estimates, which are revised twice a year until the final estimate is made 30 months after the end of the fiscal year, at which time all of the relevant data are available. Payments to the provinces are made each month, with adjustments after each revision and after the final estimate for a fiscal year. PROVISIONS FOR ADMINISTRATIVE AND OTHER OVERHEAD COSTS For many formula allocation programs, the authorizing legislation provides that a specified proportion of the annual appropriation shall be set aside for use by the executive branch program agency for administrative and planning purposes. In the highway program, for example, a maximum of 1.5 percent of the total appropriation is set aside for administrative activities of the federal program agencies. This is sometimes called the “administrative takedown.” The legislation for the school lunch program includes two set-asides for the secretary of agriculture: a maximum of 3 percent of the appropriation for administration of the program and a maximum of 1 percent for training and studies. The substance abuse block
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Statistical Issues in Allocating Funds by Formula grant program has a 5 percent set-aside for data collection and evaluation studies. At the state level, there are various provisions for covering and in some instances capping expenditures for administration of programs whose main purpose is to pay benefits to families or individuals. A separate formula-based program, State Administrative Expenses for Child Nutrition, supports states’ administrative expenditures for the school lunch program, the school breakfast program, and the special milk program. Similarly, the WIC program includes a separate formula-based grant to states for nutrition services and administration. A total of 10 percent of the grant amount for each state is withheld and pooled with amounts withheld from other states to form regional discretionary funds, which are distributed by the U.S. Department of Agriculture according to guidelines that take into account the varying needs of state agencies within each region. The unemployment insurance program, as noted earlier, exists solely to pay administrative costs of state-financed and operated programs that pay benefits to unemployed workers. The foster care program, which provides matching grants, at rates that vary by state, for direct assistance, also provides matching funds, but at uniform rates, for selected overhead costs: 75 percent for training staff and foster parents and 50 percent for administrative data collection. The SCHIP program permits states to devote up to 10 percent of their total expenditures to nonbenefit activities, such as administration, outreach, health services initiatives, and other child health assistance. These expenditures are matched for each state at its enhanced federal medical assistance percentage, the same rate used to match its expenditures for program benefits. PROGRAM RULES Program rules, which are established pursuant to a program’s authorizing legislation, are laid out in detail in federal regulations and also in regulations and policies of state agencies or other bodies involved in the subsequent distribution of program funds and benefits. Program features covered by these rules can include eligibility requirements for individuals, families, and other program beneficiaries; acceptable uses of program funds by recipients; time limitations on the use of funds; reports by state agencies to federal program agencies; audits of program operations and expenditures; and evaluation studies. To illustrate the kinds of features that can be covered by federal program regulations, Box 3-1 shows the table of contents of
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Statistical Issues in Allocating Funds by Formula BOX 3-1 Regulations for the National School Lunch Program: Table of Contents SUBCHAPTER A—CHILD NUTRITION PROGRAMS PART 210—NATIONAL SCHOOL LUNCH PROGRAM Subpart A—General Sec. 210.1 General purpose and scope. 210.2 Definitions. 210.3 Administration. Subpart B—Reimbursement Process for States and School Food Authorities 210.4 Cash and donated food assistance to States. 210.5 Payment process to States. 210.6 Use of Federal funds. 210.7 Reimbursement for school food authorities. 210.8 Claims for reimbursement. Subpart C—Requirements for School Food Authority Participation 210.9 Agreement with State agency. 210.10 What are the nutrition standards and menu planning approaches for lunches and the requirements for afterschool snacks? 210.11 Competitive food services. 210.12 Student, parent, and community involvement. 210.13 Facilities management. 210.14 Resource management. 210.15 Reporting and recordkeeping. 210.16 Food service management companies.
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Statistical Issues in Allocating Funds by Formula Subpart D—Requirements for State Agency Participation 210.17 Matching Federal funds. 210.18 Administrative reviews. 210.19 Additional responsibilities. 210.20 Reporting and recordkeeping. Subpart E—State Agency and School Food Authority Responsibilities 210.21 Procurement. 210.22 Audits. 210.23 Other responsibilities. Subpart F—Additional Provisions 210.24 Withholding payments. 210.25 Suspension, termination, and grant closeout procedures. 210.26 Penalties. 210.27 Educational prohibitions. 210.28 Pilot project exemptions. 210.29 Management evaluations. 210.30 Regional office addresses. 210.31 OMB control numbers. APPENDIX A TO PART 210. ALTERNATE FOODS FOR MEALS APPENDIX B TO PART 210. CATEGORIES OF FOODS OF MINIMAL NUTRITIONAL VALUE APPENDIX C TO PART 210. CHILD NUTRITION LABELING PROGRAM AUTHORITY: 42 U.S.C. 1751Ø1760, 1779. Source: 53 FR 29147, Aug. 2, 1988, unless otherwise noted.
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Statistical Issues in Allocating Funds by Formula the current regulations for the National School Lunch Program. The authorizing legislation for this program stresses the importance of providing nutritionally adequate lunches. The regulations include a section (210.10) on nutrition standards and three lengthy appendices with detailed provisions on the use of meat protein substitutes, a listing of foods of minimum nutritional value, and a description of food labeling procedures. Program rules are extremely varied in their content and level of detail. A detailed analysis would go well beyond the scope of this study. To some extent, as noted in Chapter 6 under “Bonuses and Penalties,” the rules can affect the amounts received by the target allocation units. In the April 2000 workshop that preceded and motivated the formation of this panel, one participant made a distinction between formula allocation procedures, which determine how much money goes to each recipient jurisdiction, and program rules, which determine, with varying degrees of specificity, how the money is to be used by the recipients. This participant argued that marginal adjustments in the distribution formulas were considerably less influential in determining the degree to which program goals are met than are the rules governing what happens after the funds are received. The panel agrees that program rules are a major determinant of success in achieving program goals, but in our view allocation formulas and procedures are important and deserve close attention. The issues of potentially unnecessary formula complexity and the interaction between formula features and inputs require additional study.
Representative terms from entire chapter: