...program experimentation innovation. This approach has been applied particular to federally funded redistributive policies. Transferring primary administration of major redistributive programs to the states through block grants has important implications for the effectiveness of program management, which can be assessed in terms of equity (do members of target populations all have fair access to program funds?) or efficiency (does the distribution of program funds optimize benefits?). The key issue, then, is whether the devolution approach actually leads to more effective program management.

When assessing block grants, it is essential to note that they are not all functionally equivalent: direct assistance programs operate differently from intergovernmental grant programs. The former operate through state-administered programs where goods, services, or income assistance are delivered directly to individuals. The latter operate by state governments' granting federal funds to local governments, agencies, and nonprofits that in turn deliver public goods and services to individual constituents. This second-level granting approach to redistributive policy has become an increasingly important one (Beam and Conlan 2001).

We argue that the key to understanding how state-level administration of intergovemmental grant programs functions in practice is to recognize that contract management issues are critical to policy implementation. Understanding how states manage the relevant grant contract arrangements is important because those management choices help determine a target population's access to federal funds and thereby affect the redistributive nature of federal programs. If state administration systematically excludes or diminishes access to federal funding, then equitable administration is not realized. Assessing the relative access to program funds is a direct means of assessing the equity dimension of block grant program management. To that end we develop a framework for analyzing the consequences of different state administrative arrangements on how intergovernmental grant programs function.

Specifically, our framework links access to federal block grant funding to the transaction costs associated with intergovemmental grant contracting. Both state governments, acting as the contracting agent for the federal government, and local governments pursuing grant funding must manage these costs. Key to our approach is the premise that both state-level institutional choices and the administrative capacity of local governments influence the salient transaction costs associated with grant contracting and thus access to federal funding. Consequently, potential grantees with the greatest needs may have the least access to federal redistributive benefits unless state-level institutions actually mitigate the transaction costs associated with second-level granting. In other words, it is essential to understand whether institutional design choices across states are relevant to the equity dimension of block grant program management. (We take up the efficiency dimension by assessing optimal distributive aspects of the non-entitlement Community Development Block Grant program in a separate article.)

Our central research objective is to tackle these issues by addressing this question: what explains variation in local governments' access to intergovernmental grants within a larger block grant program? Access is defined as receipt of program funds. We assess evidence from the non-entitlement portion of the Community Development Block Grant (CDBG) program, where authority to manage CDBG funds for small cities and counties was devolved to the states in 1981. In particular, we assess the impact of two key factors that affect access to program grants: local government administrative capacity and state-level institutional arrangements that create arenas of grant competition. The hypotheses derived from our theoretic framework are tested with a statistical analysis of data from four states--California, Kentucky, Texas, and Utah--selected to represent four basic institutional settings in which state governments operate. Our findings support several key elements of our framework as we show how state administration of block grant programs affects access to federal funding. These findings have important implications for understanding redistributive policies generally, and they are also especially relevant to other federal block grant programs that utilize second-level granting.

DILEMMAS IN BLOCK GRANT ADMINISTRATION: THE NON-ENTITLEMENT CDBG PROGRAM

Both the benefits and limitations of federal block grants are well documented (Beam and Conlan 2001; Gakhar 2002; Hale and Palley 1981; Musgrave 1997; Peterson 1981). Block grants provide states with federal revenue and broad, flexible standards to govern their use. This flexibility is intended, in turn, to allow states to leverage local expertise and information to create more efficient, effective, and innovative programs. However, potential principal-agent problems can undermine these desirable outcomes. Many analyses suggest that state governments have strong incentives to shirk the intent of federal block grants, especially if the program is redistributive in nature. Temporary Assistance to Needy Families is one example (Cho et al. 2005; Fellowes and Rowe 2004; Powers 2000; Winston 2002), and debates about whether to block grant Medicaid raise similar concerns (Kenney and Chang 2004; Weil 2003). In theory, the federal government recognizes potential goal incongruence and responds by specifying guidelines for state implementation that include penalties for inappropriate or inadequate use of federal funds (Beam and Conlan 2001).

Such agency dilemmas are particularly problematic when state governments use second-level grants to local governments as the primary policy tool for implementing a federal block grant. In the case of the non-entitlement CDBG program, local governments act as implementation agents for the state. The goal of the state government is to deliver grant funding to local governments who must implement projects consistent with block grant objectives and in accord with state and federal procedural requirements, which raises concerns about adverse selection and moral hazard problems for states. Even if local governments have incentives that are aligned with the redistributive intent of a block grant, they may lack the capabilities to implement programs effectively or in accordance with state and federal procedures--a problem that could result in the state losing federal revenue.

Therefore, state governments have strong incentives to resolve both adverse selection and shirking issues. There are many ways to address these problems, but contracts and the contracting process are foundational (Eggertsson 1990, chaps. 2, 5; Williamson 1987). State-level use of intergovernmental, or second-level, grants to implement federal block grant programs is quite similar to local governments using contracts to outsource the delivery of public goods and services. Both rely on a contracting process to make agreements with external organizations to implement public policy. In the case of state grants, local governments obtain federal funding from the state in exchange for implementing programs consistent with objectives and procedures defined by the state and federal governments.

The similarity is most important in terms of actual transaction costs. In each case, the parties to a contract bear search and information costs, negotiation costs, and monitoring and enforcement costs as part of the transaction of funds for program implementation. As the agent of the federal government, state governments have the duty to find local governments that can adequately implement both federal and state objectives. Once potential grantees are identified, states must select grant recipients and come to terms with the local government regarding expected performance. Finally, state governments must monitor and enforce the conditions of the grant to ensure compliance with federal and state regulations. Local governments must search for grant opportunities and provide information about the potential projects in detailed and often technical written proposals. Selected proposals are often subject to revision, which raises negotiation costs, and once grants are received, local governments must implement the program and document compliance as part of a mandated monitoring process.

Such transaction costs can affect the equity of using second-level granting to implement federal block grants. As a general rule, higher transaction costs decrease the likelihood of successful contracting (Coase 1937; Williamson 1987). State governments have an incentive to maintain transaction costs that are low enough to ensure that contracting with local governments maintains the flow of federal funds for program implementation. (1) If local governments desire federal funds, they must make sufficient investments in administrative capacity to bear the transaction costs associated with grant contracting. Investments in administrative capacity can be substantial, however, and some organizations may lack the administrative capacity to obtain grants. Consequently, some local governments may not have the capacity to engage in successful grant contracting and are therefore excluded from accessing federal funds for their constituents.

These issues are pertinent to the non-entitlement CDBG program--as a brief overview makes apparent. The Housing and Community Development Act of 1974 (HCDA) merged seven categorical federal grants into a single block grant, the CDBG program. Today the program is the seventh-largest block grant program in the federal government with a fiscal...

NOTE: All illustrations and photos have been removed from this article.



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