Over the past two decades, direct payments from the Federal Government to local governments has increased more than sixfold as a percentage of the revenues local governments raise on their own. Both the Ford budget and the Carter budget revisions for 1977 and 1978 contain policy changes with important implications for cities. In this document urban conditions, the problems of cities, and the role of the Federal government in relation to them are examined. The population shift away from the northeast quadrant to the Southern and Western States is discussed as it relates to urban decline. Three factors are used as indicators of city problems: population decline, old age, and economic conditions. Regional differences in the effects of these phenomena are cited. It is stressed that the urban crisis is not nationwide, as many large cities are well off. Structural and demographic differences among cities are shown to complicate Federal efforts to formulate effective urban policy. Various types of Federal aid and the trends evident in funding practices are discussed. Detailed information is provided on the types of local projects funded including community development and housing programs emanating from the Department of Housing and Urban Development (HUD). Means of capital acquisition, revenue sharing, and specific Federal grants to local governments are also described. Strategies for reform and policy alternatives are examined and their feasibility and consequences assessed. (GC)