What is a Formula Grant?

A formula grant is a type of U.S. federal grant that specifies a precise formula to be used in determining the amount of funding that a recipient is eligible to receive. Formula grants are distributed at the state level, and are typically calculated based on such factors as the proportion of the population that is unemployed or below poverty level; the rate of infant mortality; and state population or density of housing. The elements in the formula are typically chosen to reflect certain characteristics that are associated with the purpose of the funding. Some aspects of a formula grant are likely to reward some states more than others due to the many political factors involved in the legislation process.

U.S. state agencies are the only entities that are allowed to receive formula grants. The agencies then distribute the funds from these grants according to certain guidelines issued by the U.S. government. The basic logic behind the formula grant distribution method is the belief that state agencies are usually more knowledgeable about the particular needs of a local community. In some cases these guidelines will allow the state agency to have a certain amount of flexibility in the distribution of funds. In certain situations, however, the guidelines are very specific regarding the funding distribution and must be followed exactly.

The funding formula for a formula grant typically measures a state’s population density, poverty rate, and unemployment rate, along with its percentage of low income families, senior citizens, and individuals with a disability. Other formula grants, such as wetlands preservation grants, can only be issued by states that have some form of wetland areas to preserve. Forestry formula grants are usually issued according to a state’s total forest acreage. Specifically targeted states typically receive an extra portion of grant funds.

Many times, a specific project, such as urban renewal, will receive a formula grant after the potential recipients have persuaded a member of Congress to insert a special earmark for the project into a piece of legislation. These earmarks are often traded for other political favors among the different members of Congress. Sometimes, a potential grant recipient will hire a professional lobbyist in an effort to secure a particularly valuable formula grant. This practice has caused the grant allocation process to become highly competitive. Potential recipients must often be very involved in the allocation process in order to realize any type of equity in the distribution of funds from formula grants.