Illegal Aliens: Assessing Estimates of Financial Burden on California
(Letter Report, 11/28/94, GAO/HEHS-95-22).

Concerns about the financial burden of providing public benefits and
services have prompted several states, including California, to sue the
federal government for repayment of these costs.  To help Congress
evaluate California's request for federal reimbursement, GAO examined
estimates of the fiscal impact of illegal aliens living in California.
GAO examined estimates presented in the Governor of California's 1994-95
budget published in January 1994, the state's revised estimates
published in September 1994, and estimates by Urban Institute
researchers published in September 1994.  This report (1) reviews the
studies' cost estimates for elementary and secondary education, Medicaid
benefits, and adult imprisonment; (2) reviews the studies' estimates of
revenues attributable to illegal aliens; and (3) summarizes current
federal efforts to improve estimates of the public fiscal impact of
illegal aliens.  GAO concludes that the credibility of such estimates is
likely to be a persistent issue, given the limited data available on the
population of illegal aliens and differences in key assumptions and
methodologies used to develop the estimates.  For example, the studies
differed in their treatment of capital costs, the age groups they used
to estimate education costs, and their methodologies for projecting
revenues.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-95-22
     TITLE:  Illegal Aliens: Assessing Estimates of Financial Burden on 
             California
      DATE:  11/28/94
   SUBJECT:  Illegal aliens
             Health care costs
             Elementary education
             Secondary education
             Statistical methods
             State budgets
             State-administered programs
             Prisoners
             Education or training costs
             Cost analysis
IDENTIFIER:  California
             Medicaid Program
             
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Cover
================================================================ COVER


Report to the Honorable
Barbara Boxer, U.S.  Senate

November 1994

ILLEGAL ALIENS - ASSESSING
ESTIMATES OF FINANCIAL BURDEN ON
CALIFORNIA

GAO/HEHS-95-22

Illegal Aliens in California


Abbreviations
=============================================================== ABBREV

  AFDC - Aid to Families With Dependent Children
  FICA - Federal Insurance Contributions Act
  HUD - Department of Housing and Urban Development
  INS - Immigration and Naturalization Service
  IRCA - Immigration Reform and Control Act
  NCES - National Center for Education Statistics
  OMB - Office of Management and Budget

Letter
=============================================================== LETTER


B-258905

November 28, 1994

The Honorable Barbara Boxer
United States Senate

Dear Senator Boxer: 

Concerns about the financial burden of providing public benefits and
services to illegal aliens\1 have prompted several states, including
California, to sue the federal government for repayment of these
costs.\2 These states have sought reimbursement on the basis that
immigration is exclusively a federal responsibility and that federal
assistance should be provided to states disproportionately affected
by illegal immigration.  California has filed suits seeking
reimbursement of state costs for incarceration and parole of illegal
alien felons and Medicaid benefits provided to illegal aliens. 
California also plans to file an additional lawsuit for reimbursement
of costs associated with elementary and secondary education. 

To assist the Congress in evaluating California's request for federal
reimbursement, you asked us to examine estimates of the fiscal impact
of illegal aliens residing in California.  Specifically, we examined
(1) estimates presented in the Governor of California's 1994-95
budget published in January 1994, (2) the state's revised estimates
published in September 1994,\3 and (3) estimates by Urban Institute
researchers published in a September 1994 report.\4 We agreed to (1)
review the studies' cost estimates for elementary and secondary
education, Medicaid benefits, and adult incarceration, and if
necessary, adjust the state's revised estimates to provide more
reasonable estimates; (2) review the studies' estimates of revenues
attributable to illegal aliens; and (3) summarize current federal
efforts to improve estimates of the public fiscal impact of illegal
aliens.  In addition to this report, we have work ongoing for other
congressional requesters to review estimates of the fiscal impact of
illegal aliens nationwide. 


--------------------
\1 An illegal alien is a person who is in the United States in
violation of U.S.  immigration laws (8 U.S.C.  1365).  Such an alien
may have entered (1) illegally, without the Immigration and
Naturalization Service (INS) inspection (undocumented) or using
fraudulent documentation; or (2) legally, under a nonimmigrant visa
or other temporary condition, but subsequently violated the visa's
terms or other terms of entry. 

\2 Florida, Arizona, Texas, and New Jersey also have filed suit for
reimbursement. 

\3 Phillip J.  Romero and others, Shifting the Costs of a Failed
Federal Policy:  The Net Fiscal Impact of Illegal Immigrants in
California (Sacramento, Calif.:  California Governor's Office of
Planning and Research, and California Department of Finance, Sept. 
1994). 

\4 Rebecca L.  Clark and others, Fiscal Impacts of Undocumented
Aliens:  Selected Estimates for Seven States (Washington, D.C.:  The
Urban Institute, Sept.  1994). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Developing credible estimates of the costs and revenues for illegal
aliens in California is difficult because limited data are available
on this population's size, use of public services, and tax payments. 
This difficulty is compounded by the lack of consensus among
researchers on the appropriate methodologies, assumptions, and data
sources to use in estimating costs and revenues associated with
illegal aliens. 

After reviewing the three studies, we found that by selecting the
most reasonable of their assumptions, we were able to adjust the
state of California's most recent fiscal year 1994-95 cost estimates
for education and adult incarceration of illegal aliens.  We did not
adjust the state's Medicaid cost estimate because the data we would
need to do so are not currently available.  Our adjusted fiscal year
1994-95 estimate of the state and local impact of illegal aliens on
these three programs is $2.35 billion.  While this total is the same
as the state's, estimates of the component costs differ--the adjusted
education estimate is higher than California's; the adjusted
incarceration estimate is lower.  Although we believe our adjusted
estimate is more reasonable, because of severe data limitations it is
by no means precise. 

Assessing the studies' estimates of tax revenue from illegal aliens
was more difficult.  Developing credible revenue estimates requires
not only information on the size of the illegal alien population, but
also on this population's income distribution, consumption patterns,
and tax compliance rates.  The limited data available to support the
studies' assumptions precluded us from judging the reasonableness of
their revenue estimates, which varied considerably.  For example, the
studies' estimates of state and local revenues from illegal aliens in
California ranged from $500 million to $1.4 billion. 

Given the inherent difficulties in developing precise estimates,
greater agreement about appropriate assumptions and methodologies
could help narrow the range of estimated costs and revenues.  The
Urban Institute study--conducted at the request of the Office of
Management and Budget (OMB) and the Department of Justice--represents
an initial effort to standardize and improve states' methodologies
for estimating selected costs and revenues.  However, our comparison
of that study with the state of California's most recent estimates
revealed many differences.  This suggests that further efforts to
develop consensus on assumptions and methodologies could provide
lawmakers with a better framework for assessing illegal aliens'
fiscal impact. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Illegal immigration has long been an important issue in California,
which historically has been estimated to be the state of residence
for nearly half of this country's illegal aliens.  Illegal aliens are
a concern not only because they are breaking immigration laws, but
also because their presence affects a wide range of issues of public
concern.  These issues include the government costs of providing
benefits and services to illegal aliens and the impact illegal
aliens' presence has on the employment of U.S.  workers. 

In an effort to reduce the size of the nation's illegal alien
population, estimated at 3 million to 5 million in 1986, the Congress
enacted the Immigration Reform and Control Act of 1986 (IRCA).  IRCA
reduced the size of the illegal alien population by granting legal
status to certain aliens already in the country\5 and attempted to
deter the inflow of illegal aliens by prohibiting employers from
hiring any alien not authorized to work. 

Despite a brief drop in illegal entries to the United States after
IRCA was enacted, the size of the illegal alien population is now
estimated to have exceeded the lower bound of the pre-IRCA estimate. 
INS and the Bureau of the Census estimated the population of illegal
aliens ranged from 3.4 million to 3.8 million in 1992.  At the same
time, governments at all levels began experiencing fiscal crises that
heightened public concerns about the costs of providing benefits and
services to illegal aliens. 

Illegal aliens are not eligible for most federal benefit programs,
including Supplemental Security Income, Aid to Families With
Dependent Children (AFDC), food stamps, unemployment compensation,
and financial assistance for higher education.  However, they may
receive certain benefits that do not require legal immigration status
as a condition of eligibility, such as Head Start and the Special
Supplemental Food Program for Women, Infants, and Children.\6
Furthermore, illegal aliens may apply for AFDC and food stamps on
behalf of their U.S.  citizen children.  Though it is the child and
not the parent in such cases who qualifies for the programs, benefits
help support the child's family. 

Education, health care, and criminal justice are the major areas in
which state and local governments incur costs for illegal aliens. 
Regarding education, the U.S.  Supreme Court has held that states are
prohibited from denying equal access to public elementary and
secondary schools to illegal alien children.\7 State and local
governments bear over 90 percent of the cost of elementary and
secondary education. 

To provide for certain medical services, the Congress in 1986 revised
the Social Security Act to stipulate that illegal aliens are eligible
for emergency services, including childbirth, under the Medicaid
program.\8 The federal government and the state of California each
pay 50 percent of the cost of these benefits for illegal aliens in
California.  In California and New York, illegal aliens are also
eligible to receive Medicaid prenatal services.\9

States also incur costs for incarcerating illegal alien felons in
state prisons and supervising those released on parole.  Section 501
of IRCA authorizes the Attorney General to reimburse states for the
cost of incarcerating illegal aliens convicted of state felonies. 

Illegal aliens generate revenues as well as costs; these revenues
offset some of the costs that governments incur.  Research studies
indicate that illegal aliens do pay taxes, including federal and
state income taxes, Social Security taxes, and sales, gasoline, and
property taxes.  Researchers disagree on the amount of the revenues
illegal aliens generate and the extent to which these revenues offset
government costs for benefits and services.  However, they agree that
the fiscal burden for aliens overall, including illegal aliens, falls
most heavily on state and, especially, on local governments and that
the federal government receives a large share of the taxes paid by
aliens.\10


--------------------
\5 IRCA extended legal status to aliens who entered the United States
illegally prior to January 1, 1982, and had been living illegally in
the country continuously since that time or who had worked in
agriculture.  IRCA has led to the legalization of almost 3 million
individuals. 

\6 In addition, while illegal aliens are ineligible by law for
housing assistance, the Department of Housing and Urban Development
(HUD) is allowing them to receive assistance until final regulations
implementing eligibility restrictions are issued.  HUD issued a
proposed rule on eligibility of aliens for housing assistance on
August 25, 1994 (59 Fed.  Reg.  43900, 1994). 

\7 Plyler v.  Doe, 457 U.S.  202 (1982). 

\8 Section 9406 of the Omnibus Budget Reconciliation Act of 1986,
Public Law No.  99-509.  Illegal alien applicants for emergency
Medicaid benefits in California must meet age, income, and asset
limits required of all Medicaid applicants in the state, as well as
residency requirements. 

\9 California chose to provide these services at its own expense; a
federal district court required New York to provide them (Lewis v. 
Grinker, CV-79-1740, E.D.N.Y., Mar.  14, 1991). 

\10 Urban Institute researchers pointed out that a large share of the
taxes paid by citizens also goes to the federal government. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To examine the costs of elementary and secondary education, Medicaid,
and adult incarceration associated with illegal aliens residing in
California, we evaluated the reasonableness of the assumptions and
methodologies underlying the cost estimates published by the state of
California in its January and September 1994 studies and the Urban
Institute in its Fiscal Impacts study.  We also reviewed the revenue
estimates for illegal aliens contained in California's September
study and the Fiscal Impacts study.  (California's January 1994 study
did not include revenue estimates.) The California study included
estimates for 13 types of federal, state, and local revenues; the
Fiscal Impacts study's estimates were limited to 3 types of revenues. 
With assistance from Urban Institute researchers, we used the Fiscal
Impacts study and another study published by the Urban Institute to
extrapolate estimates for the remaining 10 types of revenues.  This
enabled us to compare the revenue estimates in the California and
Fiscal Impacts studies.  (See app.  I for a detailed discussion of
the methodology we used to develop these additional revenue
estimates.)

We convened a panel of experts in May 1994 to obtain their opinions
regarding the reasonableness of California's January 1994 estimates
and the underlying methodologies, and interviewed state officials and
private researchers.  (See app.  II for a list of the researchers we
consulted.) In conjunction with related work we have done for several
congressional requesters on the national fiscal impact of illegal
aliens, we also examined the relevant research on the costs and
revenues--at all levels of government--associated with illegal
aliens.  Some of the issues raised in these studies were relevant to
our review, and we have incorporated them in our analysis. 

Assessing California's cost estimates was complicated by the fact
that the state's estimates are for California fiscal year 1994-95. 
That is, the estimates are projections of future costs and are only
valid to the extent that the growth trends assumed in the projections
hold true.  We did not assess the validity of the growth trends.  In
addition, we did not independently verify California's administrative
data for Medicaid and incarceration because we had no reason to
believe that the data on expenditures and number of recipients in
these programs presented any special concerns about reliability.\11

We did our work between April and September 1994 in accordance with
generally accepted government auditing standards. 


--------------------
\11 However, as indicated in the sections on education and
incarceration, we did identify problems with the administrative data
that made it difficult to identify illegal aliens receiving these
services. 


   COST ESTIMATES ARE QUESTIONABLE
   DUE TO LIMITED DATA AND VARIED
   ASSUMPTIONS
------------------------------------------------------------ Letter :4

As of September 1994, California estimated that it will spend $2.35
billion on elementary and secondary education, Medicaid, and adult
incarceration for illegal aliens in fiscal year 1994-95.  California
officials believe that these three programs represent the state's
highest costs for illegal aliens.  This estimate is $80 million lower
than California's January 1994 estimate primarily because the
education estimate was reduced. 

In the September estimate, California reduced its projections of the
numbers of illegal aliens who will receive education or Medicaid
services, or be incarcerated in state prisons.  At the same time,
however, this new estimate added in administrative costs not
previously included and for education and adult incarceration, added
capital costs.  The net effect of these adjustments is shown in table
1. 



                           Table 1
           
            Estimates of Education, Medicaid, and
            Adult Incarceration Costs for Illegal
                     Aliens in California

                    (Dollars in millions)

            of          of
            California  California
            initial     revised      Impacts
Program     estimate\a  estimate\a   study\b    estimate\c
----------  ----------  ----------  ----------  ------------
Elementary  $1,654      $1,531        $1,289    $1,596
and
secondary
education
(state and
local
costs)

Medicaid    400         395          113-167    395
(state
costs)

Adult       376         424            368      360\
incarcerat
ion (state
costs)

============================================================
Total       $2,430      $2,350       $1,770-    $2,351
                                      1,824
------------------------------------------------------------
Note:  The state of California initial estimate appeared in its
January 1994 study; its revised estimate, in its September 1994
study. 

\a Estimates are for California FY 1994-95, which began July 1, 1994. 

\b Education estimate is for academic year 1993-94 and incarceration
estimate for 1994.  Cost estimate for Medicaid is a "benchmark" for
California FY 1992-93, based on cost data on aliens legalized under
IRCA. 

\c Estimates are for California FY 1994-95.  The education and
incarceration figures are adjusted estimates; the Medicaid figure is
the September 1994 estimate from the state of California. 

The Urban Institute's Fiscal Impacts study estimated costs lower than
California's estimates for all three programs (see table 1).  This is
in part because the Fiscal Impacts study estimated costs for earlier
years--the education estimate was for the 1993-94 school year;
Medicaid, for fiscal year 1992-93; and adult incarceration, for 1994. 
Other reasons for the lower estimates in the Fiscal Impacts study
varied by program, as described in the following sections. 

The cost estimates in the California and Fiscal Impacts studies are
questionable because of the limited direct data available on illegal
aliens and certain assumptions made by the studies.  For example,
estimates of the cost of education--the single largest cost
associated with illegal aliens--are based entirely on assumptions
about the size and characteristics of the illegal alien population. 
However, by combining selected data and assumptions from both
California's September 1994 estimates and the Fiscal Impacts study,
we developed adjusted estimates for education and adult incarceration
that we believe are more reasonable than either study's original
estimates.  We did not adjust the state's Medicaid estimate because
the necessary data are not currently available. 

It is important to note that none of the estimates of education or
incarceration costs represents the amount that would actually be
saved if California did not educate or incarcerate illegal aliens. 
This is because the estimates are based on mean costs:  total cost
divided by total number of users.  Mean costs include both variable
costs, which are affected by the number of individuals using the
service, and fixed costs--such as certain administrative costs--which
are not.  The amount that would be saved if illegal aliens did not
receive these services could either be less than the mean costs or
greater (for example, if new schools would otherwise have to be
built).\12


--------------------
\12 Likewise, California's revised Medicaid cost estimate does not
represent the amount that would be saved if illegal aliens did not
receive services.  Although the estimate is based on cost data for
individual recipients, it includes an administrative cost component
based on mean costs. 


      LACK OF DIRECT DATA
      PRECLUDED DEVELOPING PRECISE
      EDUCATION COST ESTIMATE
---------------------------------------------------------- Letter :4.1

The state of California now estimates that it will spend $1.5 billion
to educate illegal alien children in fiscal year 1994-95.  The Fiscal
Impacts study estimated California's education costs at $1.3 billion
for school year 1993-94.  The Fiscal Impacts estimate was lower not
only because it covered an earlier year, but also because the study
relied on a different data source to develop its per pupil cost
figure.  Selecting the components of each estimate that we believe
are more reasonable, we adjusted California's fiscal year 1994-95
estimate upward to $1.6 billion. 

The education cost estimates were derived by multiplying estimates of
the following components:  (1) the size of the state's illegal alien
population, (2) the percentage of this population that is of school
age, (3) the percentage of school-aged illegal aliens enrolled in
school, (4) the percentage of school days actually attended,\13 and
(5) the statewide average cost per pupil.  The studies used an
indirect method\14 to estimate the number of illegal alien children
in school because school districts do not collect information on the
immigration status of students.  According to California state
officials, many school districts believe the U.S.  Supreme Court
decision, Plyler v.  Doe, prohibits them from asking about
immigration status. 

To develop each of the cost components, the state of California and
Urban Institute researchers relied on research studies and published
estimates.  For their estimates of the illegal alien population,
California's September 1994 study and the Fiscal Impacts study used
recently revised INS population estimates; the small difference
between the two estimates can be explained by the different years
being estimated (see table 2).  For the adjusted estimate, we used
California's September estimate of 1.7 million illegal aliens because
it is for the same time period (fiscal year 1994-95). 


--------------------
\13 The Fiscal Impacts study did not need to include this component
in its formula because of the way it calculated the average cost per
pupil (see p.  10). 

\14 Indirect methods rely on data on similar populations or
populations that include illegal aliens in addition to other groups. 

