Historically, state departments of education, or SEAs, have--for the most part--been compliance-focused organizations that managed federal education policy. Over the past several decades, these agencies have been education policy implementation entities. Today, while their compliance responsibilities have remained, they are taking on more responsibility for education and academic outcomes than ever before, substantially increasing the scope of their work. State leaders and their staffs must distribute federal education dollars and monitor the districts' use of these funds in accordance to regulations set by federal policymakers. To make compliance easier, state leaders have traditionally separated agency staff into different areas responsible for each federal fund. Once an approach has passed external audits, they then have maintained the status quo of SEA staffs' work. To support this work, the U.S. Department of Education, or DOE, allows states to set aside certain amounts of federal funds to cover SEA administrative costs. Tensions between states and the federal government are inherent to the enterprise of co-governance, but state education leaders can point to specific federal regulations that have a direct impact on their work decisions and that make it difficult for them to meet the demands of federal policymakers. This paper explores states' uses of federal education dollars and how federal policy conditions might lead states to use funds in the ways that they do, which are not always the most productive ways. This study focuses on how the eight study SEAs use federal dollars for their own activities, rather than on how school districts--another major recipient of federal education support--use federal resources. The goal was to learn more about state leaders' use of federal dollars to administer these programs and what implications that had for how they organized their own agencies. Based on the findings, the following are recommended: (1) Congress and the U.S. Department of Education should strategically reduce compliance and reporting requirements for state education agencies; (2) DOE should highlight federal compliance flexibilities that exist and ensure state education agencies will not be incentivized to use staff in ways that foster silos; and (3) State education leaders should take another look at their regulatory environment and find new ways to improve how they organize their agencies. In the effort to achieve better outcomes for today's students, education leaders and policymakers must achieve a new equilibrium where the conditions set by federal policymakers meet the intents of federal education policy itself. [This report is part of a larger multi-year project on governance, conducted in partnership with the Thomas B. Fordham Institute, which evaluates the governance arrangements of the nation's K-12 education system and how they may be improved.]