Federal grants are about one-sixth of all federal domestic expenditure. For states, these funds represent, on average, more than 30 percent of their annual budgets. For some departments—particularly those in health and human services—federal grants represent the majority of the spending at the state level. Each grant is accompanied by eligibility rules, cost principles, detailed application processes, and oversight regimes that require an army of administrators, accountants, compliance officers, and grant specialists. So, there are considerable costs in exchange for the federal deficits.

To illustrate these challenges from a state perspective, consider the experience of our former agency, the Idaho Department of Health and Welfare (IDHW), a health and human services agency that administers 100 federal grants. In this article, we quantify the cost of administering federal funds—not in abstract terms, but in hours worked, pages filed, committees convened, and dollars matched. We use data reported for each grant in response to Senate Bill 1207, a budget measure that mandates the IDHW report its administrative burden of managing federal grants, as well as data reported on the state’s Schedule of Expenditures of Federal Awards. If the administrative burden of federal grants is to be reformed, states must undertake a similar but broader review of that burden.

Architecture of the Burden

IDHW is the largest recipient of federal funds in Idaho, receiving $3.9 billion of the $5.6 billion that went to the state’s government agencies in FY2023. Of the 100 federal grants managed by IDHW, 52 were awarded through competitive processes, 72 required formal applications, and 40 demanded comprehensive state plans.

Eight of these grants, including Medicaid and the Supplemental Nutritional Assistance Program (SNAP), were “open-ended,” meaning they are not subject to appropriation limits. The remaining 92 were “capped” grants, meaning that funding was predetermined regardless of program cost growth. The eight open-ended grants accounted for 86 percent of the federal dollars expended by IDHW. In contrast, the 92 capped grants accounted for just 14 percent of the federal dollars spent at the state level. The number of federal grants managed by IDHW has roughly been constant over time: 93 grants in Fiscal Year 2013 and FY 2018, and 92 non-COVID grants in FY2023. (See Tables 1 and 2.) But inflation-adjusted spending increased from $2.4 billion to $3.6 billion over that period. The growth was mostly in Medicaid, which grew from 66 percent to 82 percent of total IDHW funding. In contrast, the median grant declined by 9 percent during the same period.

Thus, the large grants got larger while IDHW was managing more grants with smaller dollar amounts. The majority (55 percent) of IDHW grants were less than $1 million, or less than 50¢ per capita. The state incurs an administrative burden with these smaller grants disproportional to their award amounts. Capped grants accounted for 88 percent of the paperwork requirements despite accounting for just 14 percent of the funding, with nearly 30,000 staff hours spent administering or delivering services for grants under $100,000.

Quantifying the Impact

The administrative costs of federal grants are vast and growing. Managing IDHW’s federal grants in FY2023 required over 1,100 full-time-equivalent staff, amounting to more than 2.2 million hours of labor administering or delivering grant services. That’s nearly 38 percent of the agency’s total workforce dedicated to administration and services from federal funds.

The paperwork burden associated with the FY2023 grants included: 6,911 pages of grant applications; 3,967 pages of state plans; 1,065 pages of grant agreements; 5,785 pages of reports; 758 pages of implementation reviews; 403 pages of committee meeting minutes; and 53 pages of waivers. Altogether, that amounts to 18,942 pages of grant-related documentation.

Staff must also undergo regular training to remain compliant with shifting federal standards. In 2023, 20 grants required over 900 hours of training, and that training was often repetitive, platform-specific, and non-transferable across grants.

Then there are the advisory committees. Some 24 grants mandated formal advisory structures, and one such committee (along with its regional boards) met 84 times in a single year. These meetings require preparation, public notice, facilitation, and documentation. The grant that necessitated the 84 meetings yielded just $487k to the state in FY2023.

Compliance and oversight require reports. In FY2023, of the grants requiring ongoing reporting, 55 required annual reports, 13 required quarterly reports, and 32 included special reporting rules. These reporting requirements are rarely uniform. Each grant may require its own portal, spreadsheet template, metrics, and/​or performance narratives. The fragmentation multiplies complexity—and the labor needed to comply.

Pass-Through Complexity

In FY2023, IDHW passed along $133 million in federal grant funds to external partners, including $58 million to medical facilities such as hospitals, clinics, and federally qualified health centers; $28 million to Idaho’s public health districts; $16.3 million to community action agencies; $18.5 million to universities, including at least three out-of-state schools; and $13 million to school districts, tribes, counties, and municipalities.

These pass-throughs require another layer of oversight and compliance. The state agency is responsible for ensuring that sub-recipients follow federal rules, meaning that every audit, quarterly report, and spending discrepancy is ultimately the state’s responsibility and often requires local-to-state reporting in addition to the state-to-federal reporting. Small nonprofits and local governments often lack the internal capacity to manage federal compliance on their own, forcing state agencies to become both funders and technical support centers, guiding partners through the maze of federal requirements, and requiring time and effort on both sides.

State Costs of “Free Money”

Federal grants are far from “free.” In FY2023, IDHW spent $696 million in state and local match obligations for just 27 grants, including a $634 million match for Medicaid alone. Granted, that is a fraction of the $3.9 billion that IDHW received in federal money, but that fraction is substantial: about 18 percent.

Additionally, 14 grants required a “Maintenance of Effort” (MOE)—a mandate that states maintain existing funding levels—totaling $81 million in FY2023. These MOE rules mean that states cannot replace state dollars with federal ones, nor can they reduce baseline funding without risking penalties. That is reasonable during the time of the grant, but these obligations sometimes lock states into commitments that extend beyond the federal grant period.

Hidden Regulatory Regime

Federal grants often require state regulations. In FY 2023, IDHW oversaw 59 chapters of regulations, spanning 1,266 pages, 60 percent of which were driven by federal grants. Medicaid-specific rules accounted for 438 pages (58 percent) of those federal grant pages. The second largest category pertains to child protective services, comprising 111 pages (15 percent) and mandated by federal programs such as Title IV‑E (covering foster care, adoption, guardianship, and family separation prevention) and IV‑B (a more flexible funding stream that focuses on prevention, family support, and reunification), the Chafee Foster Care Independence Program, and the Child Abuse Prevention and Treatment Act (CAPTA).

State-Level Reform Strategies

The strongest federal oversight should be applied to “open-ended” grants to ensure that states are using federal funds appropriately. Yet, much of the grant bureaucracy arises from small, fixed-dollar programs, each with its own compliance regimen.

States should pursue federal grants only if the expected benefits, factoring in the administrative burden, are positive. The decision to pursue a grant should weigh the scope and intensity of the rules that will accompany it. States might evaluate grants using criteria such as: regulatory intensity (how complex are the program rules, reporting requirements, and audit risks?); dollar-to-compliance ratio (how much funding is received per unit of administrative effort?); strategic fit (does the grant advance existing state priorities or require the creation of new compliance-heavy programs?); fiscal flexibility (are there match or MOE requirements that limit future budgetary discretion?); and downstream burden (will the grant’s rules cascade to sub-recipients, increasing state oversight responsibilities?).

Idaho law now requires agencies to have exit strategies and contingency plans for reductions in federal funding. Such plans cannot simply shift federal fund reductions to state taxpayers. Further, all agencies must submit an annual federal funds inventory that collects information on match, MOE, and other information that increases transparency around federal funding.

Conclusion

States should take a strategic approach to federal funding, considering compliance costs, regulatory constraints, and long-term commitments. They should focus their administrative capacity on the programs that deliver the greatest net benefit.

Readings:

• Edwards, Chris, 2019, “Restoring Responsible Government by Cutting Federal Aid to the States,” Cato Policy Analysis No. 868, May 20.