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As noted in Chapter 5, local government expenditures, both capital and operating, are heavily conditioned by grants from higher levels of government, and some reasons why this system has developed are discussed there. There is a very large flow of federal grants to the states and a much smaller flow of grants that bypasses the states and goes directly to local governments and some districts, especially school districts. There is also a very large flow of grant money from the states down to local governments and districts.5 Grants come in a number of types, the most common being the closed-end matching grant, in which up to some limit the donor will match the expenditures of the recipient government. The Interstate Highway System and many sewage treatment plants were built with 90 percent federal money and 10 percent local money. Many other road projects have been done with a 50-50 federal-local match. Grants may have a very large effect on local capital expenditures both because they may be the difference between possible and impossible and also because they change the system of prices that the local government faces. For example, a local government may want to acquire some parkland, but not badly enough to pay the full price. If it can buy the land for 50 cents on the dollar because the state or federal government is picking up the other 50 cents, then it may decide to make the purchase.6

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