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 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. 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. 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. 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. 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. 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. We did our work between April and September 1994 in accordance with generally accepted government auditing standards. 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. 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). 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, and (5) the statewide average cost per pupil. The studies used an indirect method 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).