This document reports on those aspects of the findings of the National Study of Local Operations under Chapter 2 of the Education Consolidation and Improvement Act of 1981, the federal education block grant, that are concerned with the relationships among the federal, state, and local governmental agencies charged with administering federal educational grants. Particular attention is paid to the degree of influence exerted by the state and to the degree of administrative flexibility experienced at the local level as a result of the consolidation of several federal categorical grants into the Chapter 2 block grant. This report's introductory chapter reviews these issues, lists the research questions addressing the intergovernmental issues discussed in this report, identifies the administrative responsibilities associated with Chapter 2 at each governmental level, and describes the national survey and site visit methods used to collect data for this study. The second chapter discusses the interactions taking place between various government agencies, noting (1) variations in administrative procedures developed by the states; (2) effects on paperwork demands, monitoring, and audits; and (3) state intervention in local programing. The third chapter focuses on the effects of these procedures on local decision-making and local perceptions of Chapter 2. A concluding section summarizes the findings. Appendixes present error values for the report's tables and list categorical grant programs consolidated under Chapter 2. (PGD)