On the basis of fiscal federalism, this paper analyzes the internal and external constraints faced by local governments, and constructs a central local principal-agent analysis framework in the context of centralized finance, so as to explain the causes of the difficulties in ensuring grassroots “Three Guarantees”. The analysis points out that in the context of centralized finance, local governments face both strong external constraints on economic growth goals and internal political and economic demands, and the former is the basic prerequisite for the latter to achieve. As a result, local governments tend to invest financial resources in areas that can attract liquidity resources and quickly generate explicit performance, thereby achieving residual claims on financial resources, resulting in grassroots “Three Guarantees” expenditures not being prioritized. At the same time, “fiscal federation”, “Promotion Tournaments” and “Elastic Tax Sharing System” are difficult to independently explain the current local financial allocation and the dilemma of grassroots “Three Guarantees”. Empirical evidence shows that the current proportion of grassroots “Three Guarantees” expenditure is far less than 50%, and local governments have not prioritized it. With the strengthening of constraints on economic growth targets, grassroots “Three Guarantees” expenditures decreases. This paper proposes several policy recommendations to strengthen the grassroots “Three Guarantees” and optimize local fiscal expenditure structure.