Federal grants give the national government power over the state and local governments. Grants give them power over how much and on what the state and local government spends that money on. The federal government is expected to provide state and local governments more than $703 billion in federal grants in FY2018, funding a wide range of public policies, such as healthcare, transportation, income security, education, job training, social services, community development, and environmental protection.
The federal government allocates grants to state and local governments in one of two ways, either on the basis of formulas established by law (this is used for block grants and categorical formula grants) or through a competitive process (this is for project grants). Block grants are money given for a fairly broad purpose with few strings attached. Categorical grants are money given for a specific purpose that comes with restrictions concerning how the money should be spent.
There are two types of categorical grants; project grants and formula grants. Project grants are money that states apply for by submitting specific project proposals for review and approval. Formula grants are money given to states according to a mathematical formula.
Fun Fact: When Republicans retook Congress in 1994, they changed many federal grants into block grants. So, instead of giving money to states to buy textbooks or repair schools, Congress gave blocks of money to spend on education in any way the states saw fit.
For project grants, federal policymakers set out a list of criteria that will form the basis for evaluating applications from state or local governments. Grants such as to implement education reform and to construct transportation projects have recently been awarded through competitions.
Federal grants are typically intended to supplement the efforts of state and local governments rather than supplant them. This gives state and local governments the funds they need to complete projects or fund programs. This opens the door for business to in turn sell their goods and services to those governments who now have the money to spend.