The considerable money that the federal government provides to state and local governments takes one of the following six forms.

• Direct cash grants to state or local government units. These can take the form of either categorical grants for specific programs (like Head Start) or block grants for a general purpose or policy area (like education).

• Payments for grants-in-kind. Examples include the purchases of commodities distributed to state or local government institutions, such as food for school lunch programs.

• Payments to non-government entities when such payments result in cash or in-kind services passed on to state or local governments. One example is payments to the American Printing House for the Blind.

• Payments to regional commissions and organizations that are redistributed to the state or local level. Examples would include programs such as the Panhandle Regional Narcotics Trafficking Task Force (which was disbanded in 2004) or regional commissions on environmental quality.

• Federal government payments to state and local governments for research and development that is an integral part of the provision of public services. Examples are research on crime control financed from law enforcement assistance grants or research on mental health associated with the provision of mental rehabilitation services.

• Federal revenues shared with state and local governments. These payments to state or local governments are computed as a percentage of the proceeds from the sale of certain federal property, products, or services (e.g., payments from receipts for Oregon and California grant lands) or are other collections by the federal government that are passed on to state or local governments.

These six types of support to states and localities exclude federal government payments to individuals, profit or nonprofit institutions not included above, or payments to them for services rendered.

The first of these types, direct cash grants to state or local governmental units, represent the most important single type of federal aid. Direct cash grants in turn can be divided into two types: categorical grant (for specific programs) and block grants (for general purposes or policy areas that might include a number of related programs).

Until the 1970s, categorical grants were the dominant form of direct cash grants. However, beginning with the administration of President Richard Nixon, many such grants began to be consolidated into so-called block grants. These changes were the centerpiece of a broader effort referred to as new federalism that sought to diminish the power of the national government over the states.

Primarily an approach to federal-state relations promoted by Republican Party presidents Nixon and Reagan, new federalism was an attempt to redirect the programs begun under the New Deal of the 1930s and more fully articulated in the post-World War II boom of the 1950s, when the resources of the federal government increased dramatically.

That approach to federal aid to the states and localities, commonly grouped under the rubric cooperative federalism, was perceived by some as overly restrictive and not always responsive to the particular needs on the local level. This might be true of some categorical grants, but in the end the continuing push and pull over the rules for disbursing federal funds ultimately results from the struggle over control of policy.

The federal government wants to ensure uniformity of policies and programs across the nation, and is constitutionally empowered to pass laws that overrule state policies. But states chafe at this federal preemption of state authority, in part because they don't want to be told what to do.

For the states, this concern is particularly acute when the federal government passes laws that require certain policy actions or enforcement (often requiring additional expenditure) by state and local governments, but without proving any additional funds. Such unfunded federal mandates, like the No Child Left Behind (NCLB) law of 2002, only reinforce the perception among state officials that federal programs are often out of touch with the reality on the ground.

Under new federalism initiatives, many programs were decentralized in the belief that control over a program should be placed at the level closest to the people to be served, whether on the state or local level. During the Nixon Administration, for instance, many categorical grants were eliminated, while others were consolidated into block grants. This consolidation of categorical grants into broader block grants gave the states additional flexibility in designing programs. Instead of requiring that specific sums be spent on, say, teacher training, the states could decide on spending for specific programs as long as that entire block of money was spent on things related to education.

Categorical grants can be further divided into two types: project grants and formula grants. In each of these cases, the federal money must be dedicated to a specific program or use.

Project grant programs require that states and localities (depending on the program) submit applications in order to compete for federal money. States and local governments must complete detailed forms and supply extensive documentation on their proposed uses of available funds. After the submission deadline the federal agency running the grant program evaluates the competing proposals and makes final funding decisions. The U.S. Department of Education runs numerous such programs for classroom innovations, core programs, and special education. The U.S. Environmental Protection Agency also runs a number of programs for research and pilot programs.

In contrast, formula grant programs award funding based on a formula established by Congress in the enabling legislation. These programs provide money to all states and local governments that qualify under the formula. As long as the applicant satisfies the criteria, money is awarded - without evaluation of the quality of the project or program by the sponsoring federal agency.

Additionally, the federal government provides entitlement programs, which may distribute benefits through relevant state-level agencies or directly to individuals. All federal entitlement programs, whether they work through the state bureaucracies or directly with individual citizens, provide benefits to all persons qualified to receive them under the enabling legislation. Congress establishes the qualifications according to things like age, income and disability. Those individuals who satisfy the qualifications are entitled to the particular benefit, whether it is Medicare coverage or social security income, or some other benefit.

In the case of all three of these types of programs - project grants, formula grants and entitlement programs - some commitment and degree of decision-making by the state or local government is required. States and localities make their own decisions with regard to the size and shape of their bureaucracies. But these decisions occur within a complex network of incentives created by the federal government.