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 ************************************************************************** * This file contains an ASCII representation of the text of a GAO * * report. Delineations within the text indicating chapter titles, * * headings, and bullets are preserved. Major divisions and subdivisions * * of the text, such as Chapters, Sections, and Appendixes, are * * identified by double and single lines. The numbers on the right end * * of these lines indicate the position of each of the subsections in the * * document outline. These numbers do NOT correspond with the page * * numbers of the printed product. * * * * No attempt has been made to display graphic images, although figure * * captions are reproduced. Tables are included, but may not resemble * * those in the printed version. * * * * A printed copy of this report may be obtained from the GAO Document * * Distribution Facility by calling (202) 512-6000, by faxing your * * request to (301) 258-4066, or by writing to P.O. Box 6015, * * Gaithersburg, MD 20884-6015. We are unable to accept electronic orders * * for printed documents at this time. * **************************************************************************

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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.