Understanding Federal Discretionary, Formula, Block, and Pass-through Grants

Last updated 1 month ago. Our resources are updated regularly but please keep in mind that links, programs, policies, and contact information do change.

Federal grants carry labels that answer different questions, and confusing them can send an applicant to the wrong funding office. Discretionary and formula describe how the money is awarded: for a discretionary grant, the agency generally may select the recipient from among those eligible, while a formula grant is allocated by factors written into law and regulation, such as state population.

Block describes how freely the money can be used: a block grant is usually not limited to narrowly defined activities. Pass-through describes the route: the money reaches an organization through another recipient of the federal award. One grant can carry more than one label. People looking for personal help should know that on Grants.gov, the federal site that lists funding opportunities, few are open to individuals, and none gives personal financial assistance.

Read the labels as different questions

Under federal law, a grant agreement supports a public purpose authorized by law rather than buying property or services for the federal government’s direct use. A cooperative agreement anticipates substantial federal agency involvement in carrying out the funded activity. Those definitions say why the government provides the money; the four labels answer other questions, about how it is distributed and used.

The eligibility section of a funding opportunity notice defines who may receive that award. Few opportunities on Grants.gov are available to individuals, and none provide personal financial assistance. Grants.gov directs people seeking personal assistance to USA.gov for information about benefits.

Discretionary grants: competing for an award

For a discretionary grant, the federal agency generally chooses among eligible recipients. It can decide whether to make an award based on an application’s programmatic, technical or scientific content, and it decides how much to award. Being eligible and being selected are therefore separate hurdles.

Unless a federal statute prohibits it, an agency must design and carry out a merit review for discretionary federal awards. That review evaluates applications objectively against written agency standards, with the aim of selecting recipients most likely to deliver the program’s objectives.

A mandatory grant, by contrast, is one whose authorizing statute requires an award to each eligible entity under the conditions and amounts, or formula, specified in that statute. To tell the two apart, check whether the law requires an award to qualifying recipients or leaves the choice among eligible applicants to the agency.

Discretionary and mandatory have a second meaning in the federal budget, where they describe how Congress provides the money rather than how an agency chooses recipients. Appropriations provide federal funding: regular appropriations typically cover a fiscal year, while continuing resolutions provide short-term funding. In the budget, discretionary spending is funding provided through appropriations acts, generally including the regular appropriations bills, continuing resolutions and supplemental appropriations. Mandatory budget spending includes funding provided in laws other than appropriations laws, as well as entitlement authority. Entitlement authority means a law obligates the government to make payments to any person or government that meets the law’s requirements, and the authority to spend that money is not provided in advance by appropriations acts.

Formula grants: allocation under a rule

A formula grant allocates money to eligible recipients using factors established in statutes and regulations, such as population or the share of people with income below the poverty level. Instead of comparing proposals to choose a winner, the agency applies the rule to divide the money among qualifying recipients. A formula still has eligibility boundaries; it does not open the program to every organization that wants support.

One more label, categorical, describes what the money is for, not whether applicants compete for it. Categorical grants usually support narrowly defined activities of a particular program. Categorical grants can take the form of competitive project grants or formula grants, with the latter allocated according to factors specified in legislation or regulations.

Title I, Part A of the Elementary and Secondary Education Act provides school districts with financial assistance for children from low-income families to support achievement on state academic standards. Its allocation system has distinct Basic Grant, Concentration Grant, Targeted Grant and Education Finance Incentive Grant formulas. District allocations use mathematical formulas involving eligible children and state per-pupil education costs, and districts distribute funds to schools with the highest percentages of students from low-income families. The formula explains only how the money is divided; the program’s purpose and spending rules still apply. Do not treat a formula label alone as a guarantee of a particular award amount or as permission to redirect the money.

Block grants: flexibility within a purpose

Where a categorical grant is tied to one program, a block grant supports a set of programs and usually allows a broader range of activities. That gives the recipient more room to choose within the range, not permission to spend federal money on anything.

The Community Development Block Grant (CDBG) can fund property acquisition, rehabilitation, public facilities, public services within limits, energy-related activities and assistance to businesses for economic development or job creation and retention. Each activity must satisfy a national objective: benefiting low- and moderate-income people, preventing or eliminating slums or blight, or addressing an urgent community need that poses a serious immediate health or welfare threat and lacks other available funding.

Generally ineligible CDBG activities include general government buildings, political activities, certain income payments and new housing construction, with some exceptions for the last category.

The Social Services Block Grant allows recipients, including states and territories, to tailor social services to their populations’ needs. Its purposes include reducing dependency and promoting self-sufficiency, protecting children and adults from neglect or abuse, and helping people stay in their homes or find suitable institutional arrangements.

Combining existing programs does not automatically create a block grant. The Government Accountability Office reported in 2014 that it had identified 15 grant program consolidations from fiscal years 1990 through 2012. Most of them either combined grants for specific activities into a broader categorical grant or set up a performance partnership, which offers more flexibility in using funds across programs while keeping accountability for performance measures. For example, the Environmental Protection Agency’s performance partnership grants combine two or more eligible environmental program grants into one grant with a single application, work plan and budget.

Pass-through grants: following the money

A pass-through entity receives federal funding, directly or through another recipient, and gives another organization a subaward, an award to carry out part of the federal program. The organization that receives the subaward is called a subrecipient, and it may also receive other awards directly from a federal agency.

For example, if a state receives a federal award and makes a subaward for a nonprofit to carry out part of the funded program, the state is the pass-through entity and the nonprofit is its subrecipient. Payments to contractors, beneficiaries or participants do not count as subawards under the federal definition.

A pass-through entity must make sure the subaward is clearly identified as a subaward and includes federal award information, such as the subrecipient’s name, the performance and budget periods, and the federal funds obligated. Its responsibilities include issuing subawards that meet agency and award requirements and managing risk through ongoing monitoring.

The program rules matter more than the label

Title I, the formula program described earlier, shows how much depends on a program’s own rules. Under the education law’s transferability provision, a state or school district may not transfer Title I, Part A funds out to another program. A school district may transfer funds from two other parts of the law, Title II, Part A and Title IV, Part A, into Title I, Part A under that provision.

A qualifying schoolwide program may consolidate Title I funds with other federal, state and local money to upgrade the school’s entire educational program. Ordinarily, at least 40 percent of the children enrolled in the school or in its eligible attendance area must be from low-income families. A school below that threshold may operate a schoolwide program with a state education agency waiver that takes account of student academic needs and other factors.

A school consolidating federal funds need not keep separate fiscal accounting records for each program’s activities, but must keep records showing that the schoolwide program as a whole addresses each consolidated federal program’s intent and purposes. That lets a school combine Title I, Part A money with other funds under specific conditions; it does not turn Title I, Part A into a block grant.

Two other phrases can look like grant types and are not. The first, miscellaneous grant funds, is a broad accounting label; without a named program, it says little about what the money is for. Federal Assistance Listings identify programs that provide grants and other assistance, and each listing has a unique Assistance Listing Number. Ask for the program name and listing number, then check its purpose, eligible applicants and funding notice.

The second, total computable, comes from Medicaid budget reporting, where it means the total cost of the program, listed separately from the federal government’s share and the state’s share. For medical assistance under a state Medicaid plan, the federal payment is the federal medical assistance percentage of the amount spent, subject to statutory conditions. Total computable is a cost-reporting term in that context, not another grant type or the amount the federal government alone pays. The term also appears in federal child-welfare reporting: for Title IV-E programs, total computable expenditures include both the federal and tribal or state shares.

Finding funding and staying accountable

For CDBG, the Department of Housing and Urban Development (HUD) does not provide assistance directly to individuals, businesses, nonprofits or other nongovernmental entities. HUD directs interested parties to municipal or county officials to learn how the program operates locally; participation requirements may differ among grantees. So federal funding does not always mean applying to a federal agency.

SAM.gov is the System for Award Management, which stores organizational information that Grants.gov uses to verify applicants. For an organizational application through Grants.gov, the organization must first register in SAM.gov, choose an electronic business point of contact and obtain a Unique Entity ID, or UEI. Funding opportunity notices include application due dates and, when materials are not yet available, the date they will be released. Read the actual opportunity’s eligibility and application instructions before preparing a proposal, and begin registration early enough to meet its deadline.

A federal award identifies its recipient, award number, performance and budget periods, and the federal funds obligated. Under the general federal cost principles, allowable costs must be necessary and reasonable for the award, properly assigned to that award under the federal cost rules, and within the applicable cost limits and exclusions. In practical terms, a legitimate organizational expense is not automatically an allowable expense for this particular award.

Recipients and subrecipients must oversee their awards and monitor each program, function or activity for compliance and performance. Noncompliance remedies can include withholding payments pending corrective action, disallowing costs, or suspending or terminating all or part of the award.