In a fiscally decentralized public sector, local governments play an important role in raising revenues and delivering services. Even with expenditure and revenue decentralization, a crucial instrument that links local governments to state and federal governments is intergovernmental fiscal transfers or grants. Transfers from higher-level governments to local governments serve important social welfare, equity, and stabilization functions.

Higher-level governments, for example, provide grants to local governments to ensure the consistent provision of critical public services. What factors affect the effectiveness of local grant implementation? Do federal control and oversight (extent of local management discretion, rule clarity, and communication frequency with the federal government), local capacities (grant administration centralization, human capacity, and fiscal resources), and local political actors (elected officials, citizens, and various interest groups) matter for grant implementation performance?

What if higher-level governments experience fiscal stress? Do fiscal difficulties at the state level reduce state governments’ expenditure responsibilities vis-à-vis the local public sector? What service responsibilities are implicitly devolved to local governments or centralized at the state level as a consequence of declining state fiscal condition?