State education agencies are allowed to retain up to 20 percent of the funds they receive from the federal government through the block grant provisions of the Education Consolidation and Improvement Act. A review by the General Accounting Office (GAO) of the United States of the uses to which these retained funds were put in California and Washington failed to determine the amount of block grant funds used for administration. The block grant regulations allow the states to use their own procedures for managing their block grant programs. As a result, no nationally applied set of definitions or classifications of programs or activities has been developed, nor have the accounting systems in the two states examined required that all programs using block grant funds use uniform reporting procedures. Comparisons between states and among state programs are therefore practically impossible. The GAO did determine that the state education agency budgets in California and Washington rely less than the average state on federal aid, that the two states' budgets rely more on block grant funds, and that fewer block grant funds are used to administer the block grant program in these two states than in the average state. Some options for reducing use of block grant funds at the state agency level are offered. The letter requesting the GAO study is appended, as are tables of state and national financial data relevant to the report. (PGD)