Small Business Administration
Additional Actions Are Needed to Certify and Monitor HUBZone Businesses and Assess Program Results Gao ID: GAO-08-975T July 17, 2008The Small Business Administration's (SBA) Historically Underutilized Business Zone (HUBZone) program provides federal contracting assistance to small firms located in economically distressed areas, with the intent of stimulating economic development. Questions have been raised about whether the program is targeting the locations and businesses that Congress intended to assist. This testimony focuses on (1) the criteria and process that SBA uses to identify and map HUBZone areas; (2) the mechanisms SBA uses to ensure that only eligible small businesses participate in the program; and (3) the actions SBA has taken to assess the results of the program and the extent to which federal agencies have met HUBZone contracting goals. To address these objectives, GAO analyzed statutory provisions as well as SBA, Census, and contracting data and interviewed SBA and other federal and local officials.
SBA relies on federal law to identify qualified HUBZone areas, and recent statutory changes have resulted in an increase in the number and types of HUBZone areas--changes that could diffuse the economic benefits of the program. Further, the map that SBA uses to help firms interested in participating in the program to determine if they are located in a HUBZone area is inaccurate. Specifically, the map incorrectly includes 50 metropolitan counties and excludes 27 nonmetropolitan counties. As a result, ineligible small businesses participated in the program, and eligible businesses have not been able to participate. The mechanisms that SBA uses to certify and monitor firms provide limited assurance that only eligible firms participate in the program. Although internal control standards state that agencies should verify information they collect, SBA verifies the information reported by firms on their application or during recertification--its process for monitoring firms--in limited instances and does not follow its own policy of recertifying all firms every 3 years. GAO found that more than 4,600 firms that had been in the program for at least 3 years went unmonitored. Further, SBA lacks a formal policy on how quickly it needs to make a final determination on decertifying firms that may no longer be eligible for the program. Of the more than 3,600 firms proposed for decertification in fiscal years 2006 and 2007, more than 1,400 were not processed within 60 days--SBA's unwritten target. As a result of these weaknesses, there is an increased risk that ineligible firms have participated in the program and had opportunities to receive federal contracts. SBA has taken limited steps to assess the effectiveness of the HUBZone program, and from 2003 to 2006 federal agencies did not meet the government-wide contracting goal for the HUBZone program. Federal agencies are required to identify results-oriented goals and measure performance toward the achievement of their goals. SBA tracks the number of firms certified or recertified, the annual value of contracts awarded to HUBZone firms, and the number of program examinations completed annually, but has not devoted resources to completing an evaluation of the program. Consequently, SBA lacks key information that could help it better manage and assess the results of the program. Finally, most federal agencies did not meet their HUBZone contracting goals during fiscal year 2006, the most recent year for which we had data. While the percentage of prime contracting dollars awarded to HUBZone firms increased in each fiscal year from 2003 to 2006, the 2006 awards fell short of the government-wide 3 percent goal by about one-third.
GAO-08-975T, Small Business Administration: Additional Actions Are Needed to Certify and Monitor HUBZone Businesses and Assess Program Results
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Testimony:
Before the Committee on Small Business, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Thursday, July 17, 2008:
Small Business Administration:
Additional Actions Are Needed to Certify and Monitor HUBZone Businesses
and Assess Program Results:
Statement of William B. Shear, Director:
Financial Markets and Community Investment:
GAO-08-975T:
GAO Highlights:
Highlights of GAO-08-975T, a testimony before the Committee on Small
Business, House of Representatives.
Why GAO Did This Study:
The Small Business Administration‘s (SBA) Historically Underutilized
Business Zone (HUBZone) program provides federal contracting assistance
to small firms located in economically distressed areas, with the
intent of stimulating economic development. Questions have been raised
about whether the program is targeting the locations and businesses
that Congress intended to assist. This testimony focuses on (1) the
criteria and process that SBA uses to identify and map HUBZone areas;
(2) the mechanisms SBA uses to ensure that only eligible small
businesses participate in the program; and (3) the actions SBA has
taken to assess the results of the program and the extent to which
federal agencies have met HUBZone contracting goals. To address these
objectives, GAO analyzed statutory provisions as well as SBA, Census,
and contracting data and interviewed SBA and other federal and local
officials.
What GAO Found:
SBA relies on federal law to identify qualified HUBZone areas, and
recent statutory changes have resulted in an increase in the number and
types of HUBZone areas”changes that could diffuse the economic benefits
of the program. Further, the map that SBA uses to help firms interested
in participating in the program to determine if they are located in a
HUBZone area is inaccurate. Specifically, the map incorrectly includes
50 metropolitan counties and excludes 27 nonmetropolitan counties. As a
result, ineligible small businesses participated in the program, and
eligible businesses have not been able to participate.
The mechanisms that SBA uses to certify and monitor firms provide
limited assurance that only eligible firms participate in the program.
Although internal control standards state that agencies should verify
information they collect, SBA verifies the information reported by
firms on their application or during recertification”its process for
monitoring firms”in limited instances and does not follow its own
policy of recertifying all firms every 3 years. GAO found that more
than 4,600 firms that had been in the program for at least 3 years went
unmonitored. Further, SBA lacks a formal policy on how quickly it needs
to make a final determination on decertifying firms that may no longer
be eligible for the program. Of the more than 3,600 firms proposed for
decertification in fiscal years 2006 and 2007, more than 1,400 were not
processed within 60 days”SBA‘s unwritten target. As a result of these
weaknesses, there is an increased risk that ineligible firms have
participated in the program and had opportunities to receive federal
contracts.
SBA has taken limited steps to assess the effectiveness of the HUBZone
program, and from 2003 to 2006 federal agencies did not meet the
government-wide contracting goal for the HUBZone program. Federal
agencies are required to identify results-oriented goals and measure
performance toward the achievement of their goals. SBA tracks the
number of firms certified or recertified, the annual value of contracts
awarded to HUBZone firms, and the number of program examinations
completed annually, but has not devoted resources to completing an
evaluation of the program. Consequently, SBA lacks key information that
could help it better manage and assess the results of the program.
Finally, most federal agencies did not meet their HUBZone contracting
goals during fiscal year 2006, the most recent year for which we had
data. While the percentage of prime contracting dollars awarded to
HUBZone firms increased in each fiscal year from 2003 to 2006, the 2006
awards fell short of the government-wide 3 percent goal by about one-
third.
What GAO Recommends:
In the report upon which this testimony is based (GAO-08-643), GAO
recommended that the SBA Administrator take steps to ensure that only
eligible firms participate in the HUBZone program and further assess
the effectiveness of the program. SBA agreed with these recommendations
and outlined steps that it plans to take to address them.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-975T]. For more
information, contact William B. Shear at (202) 512-8678 or
shearw@gao.gov.
[End of section]
Madam Chairwoman and Members of the Committee:
I am pleased to be here today to discuss the Small Business
Administration's (SBA) Historically Underutilized Business Zone
(HUBZone) program. Created in 1997, the HUBZone program provides
federal contracting assistance to small businesses located in
economically distressed communities, or HUBZone areas, with the intent
of stimulating economic development in those areas. In fiscal year
2007, federal agencies awarded contracts valued at about $8 billion to
HUBZone firms. Firms that participate in the program must be located in
a HUBZone and employ residents of HUBZones to facilitate the goal of
bringing capital and employment opportunities to distressed areas.
There are more than 14,000 HUBZone areas, and, as of February 2008,
almost 13,000 firms participated in the program. Further, to support
and encourage the development of small businesses in HUBZones, Congress
has set a goal for federal agencies to award 3 percent of their annual
contracting dollars to qualifying firms located in HUBZones.
My statement today is based on our June 2008 report that is being made
public today, which discussed SBA's administration and oversight of the
HUBZone program.[Footnote 1] In my testimony, I will discuss (1) the
criteria and process that SBA uses to identify and map HUBZone areas;
(2) SBA mechanisms to ensure that only eligible small businesses
participate in the HUBZone program; and (3) steps SBA has taken to
assess the results of the program and the extent to which federal
agencies have met their HUBZone contracting goals.
To assess the accuracy of the HUBZone map, we reviewed applicable
statutes, regulations, and agency documents. We also interviewed SBA's
mapping contractor and reviewed the contractor's policies and
procedures. To assess the mechanisms that SBA uses to help ensure that
only eligible businesses participate in the program, we reviewed
policies and procedures established by SBA for certifying and
monitoring HUBZone firms and internal control standards for federal
agencies. We compared the actions that SBA took to its policies and
procedures and selected internal control standards. In examining such
compliance, we analyzed data from the HUBZone Certification Tracking
System (the information system used to manage the HUBZone program) for
fiscal years 2004 through 2007 to determine the extent of SBA
monitoring. To determine the measures that SBA has in place to assess
the results of the HUBZone program, we reviewed SBA's performance
reports and other agency documents. To determine the extent to which
federal agencies have met their HUBZone contracting goals, we analyzed
data from SBA's "goaling" reports for fiscal years 2003 through 2006
(the most recent reports available). In addition, we visited a
nongeneralizable sample of four HUBZone areas--Lawton, Oklahoma (to
represent Indian Country); Lowndes County, Georgia (a nonmetropolitan
area); and Los Angeles and Long Beach, California (two metropolitan
areas)--to interview stakeholders about what, if any, benefits they
believed the selected firms and communities received. For all the
objectives, we interviewed SBA officials in headquarters and selected
field offices. We assessed the reliability of the data we used and
found them to be sufficiently reliable for our purposes. We conducted
this performance audit--on which our recent report and this testimony
are based--from August 2007 to June 2008 in accordance with generally
accepted government auditing standards. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on
our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
In summary, we found that:
* Because SBA relies on federal law to identify qualified HUBZone
areas, recent statutory changes have resulted in an increase in the
number and types of HUBZone areas--changes that could diffuse the
economic benefits of the program. Further, the map that SBA uses to
help firms interested in participating in the program to determine if
they are located in a HUBZone area is inaccurate. Specifically, the map
incorrectly includes 50 metropolitan counties as difficult development
areas that do not meet this or any other criterion for inclusion in the
HUBZone program. In addition, 27 nonmetropolitan counties that are
eligible based on their unemployment rates were excluded because SBA
has not updated its map since August 2006. As a result, ineligible
small businesses participated in the program, some of which received
federal contracts, and eligible businesses have not been able to
participate.
* Furthermore, the mechanisms that SBA uses to certify and monitor
HUBZone firms provide limited assurance that only eligible firms
participate in the program. For certification and recertification,
firms self-report information on their applications. However, we found
that SBA requested documentation or conducted site visits of firms to
validate the self-reported data in only limited instances. Our analysis
of the 125 applications submitted in September 2007 showed that SBA
requested supporting documentation for 36 percent of the applications
and conducted one site visit. While SBA's policies and procedures
require program examinations--the one process that consistently
includes reviews of supporting documentation--the agency conducts them
on 5 percent of certified HUBZone firms each year. Further, SBA has a
policy of recertifying firms every 3 years, yet more than 4,600 of the
firms that have been in the program for at least 3 years (about 40
percent) have not been recertified. SBA also decertifies firms (removes
them from the list of certified firms), after determining that they no
longer meet eligibility criteria. However, in fiscal years 2006 and
2007, of the more than 3,600 firms proposed for decertification, more
than 1,400 were not processed within SBA's informal goal of 60 days. As
a result of a lack of controls (or limited application of controls) and
weaknesses in the application and monitoring-related processes, SBA
lacks assurances that only eligible firms participate in the program.
* Finally, SBA has taken limited steps to assess the effectiveness of
the HUBZone program, and from 2003 to 2006 federal agencies did not
meet the government-wide contracting goal for the HUBZone program.
Federal agencies are required to identify results-oriented goals and
measure performance toward the achievement of their goals. SBA tracks
the number of firms certified or recertified, the annual value of
contracts awarded to HUBZone firms, and the number of program
examinations completed annually, but has not devoted resources to
completing an evaluation of the program. Consequently, SBA lacks key
information that could help it better manage and assess the results of
the program. We also found that most federal agencies did not meet
their HUBZone contracting goals during fiscal year 2006. While the
percentage of prime contracting dollars awarded to HUBZone firms
increased in each fiscal year from 2003 to 2006, the 2006 awards fell
short of the government-wide 3 percent goal by about one-third.
To improve SBA's administration and oversight of the HUBZone program,
we recommended in our recent report that SBA correct and update its
HUBZone map, develop and implement guidance to ensure more routine
verification of application data, eliminate its backlog of
recertifications, formalize and adhere to a specific time frame for
decertifying ineligible firms, and further assess the effectiveness of
the program. SBA agreed with our recommendations and outlined steps
that it plans to take to address each of them.
Background:
The purpose of the HUBZone program, which was established by the
HUBZone Act of 1997, is to stimulate economic development, through
increased employment and capital investment, by providing federal
contracting preferences to small businesses in economically distressed
communities or HUBZone areas.[Footnote 2] The types of areas in which
HUBZones may be located are defined by law and consist of the
following:
* Qualified census tracts. A qualified census tract has the meaning
given the term by Congress for the low-income-housing tax credit
program.[Footnote 3] The list of qualified census tracts is maintained
and updated by the Department of Housing and Urban Development (HUD).
As currently defined, qualified census tracts have either 50 percent or
more of their households with incomes below 60 percent of the area
median gross income or have a poverty rate of at least 25 percent. The
population of all census tracts that satisfy one or both of these
criteria cannot exceed 20 percent of the area population.
* Qualified nonmetropolitan counties. Qualified nonmetropolitan
counties are those that, based on decennial census data, are not
located in a metropolitan statistical area and in which:
1. the median household income is less than 80 percent of the
nonmetropolitan state median household income;
2. the unemployment rate is not less than 140 percent of the average
unemployment rate for either the nation or the state (whichever is
lower); or:
3. a difficult development area is located.[Footnote 4]
* Qualified Indian reservations. A HUBZone qualified Indian reservation
has the same meaning as the term "Indian Country" as defined in another
federal statute, with some exceptions. These are all lands within the
limits of any Indian reservation, all dependent Indian communities
within U.S. borders, and all Indian allotments. In addition, portions
of the State of Oklahoma qualify because they meet the Internal Revenue
Service's definition of "former Indian reservations in Oklahoma."
* Redesignated areas. These are census tracts or nonmetropolitan
counties that no longer meet the economic criteria but remain eligible
until after the release of the 2010 decennial census data.
* Base closure areas. Areas within the external boundaries of former
military bases that were closed by the Base Realignment and Closure Act
(BRAC) qualify for HUBZone status for a 5-year period from the date of
formal closure.
In order for a firm to be certified to participate in the HUBZone
program, it must meet the following four criteria:
* the company must be small by SBA size standards;[Footnote 5]
* the company must be at least 51 percent owned and controlled by U.S.
citizens;[Footnote 6]
* the company's principal office--the location where the greatest
number of employees perform their work--must be located in a
HUBZone;[Footnote 7] and:
* at least 35 percent of the company's full-time (or full-time
equivalent) employees must reside in a HUBZone.
As of February 2008, 12,986 certified firms participated in the HUBZone
program. More than 4,200 HUBZone firms obtained approximately $8.1
billion in federal contracts in fiscal year 2007. The annual federal
contracting goal for HUBZone small businesses is 3 percent of all prime
contract awards--contracts that are awarded directly by an agency.
SBA Relies on Federal Law to Identify HUBZone Areas but Its Map Is
Inaccurate:
Our June 2008 report found that a series of statutory changes have
resulted in an increase in the number and types of HUBZone areas. These
changes could diffuse (or limit) the economic benefits of the program.
Further, while SBA relies on federal law to identify qualified HUBZone
areas, its HUBZone map is inaccurate.
Recent Legislation Increased the Number and Types of HUBZone Areas:
In recent years, amendments to the HUBZone Act and other statutes have
increased the number and types of HUBZone areas. The original HUBZone
Act of 1997 defined a HUBZone as any area within a qualified census
tract, a qualified nonmetropolitan county, or lands within the
boundaries of a federally recognized Indian reservation. However,
subsequent legislation revised the definitions of the original
categories and expanded the HUBZone definition to include new types of
qualified areas (see fig. 1). Subsequent to the various statutory
changes, the number of HUBZone areas grew from 7,895 in calendar year
1999 to 14,364 in 2006. SBA's data show that, as of 2006, there were
12,218 qualified census tracts; 1,301 nonmetropolitan counties; 651
Indian Country areas; 82 BRAC areas; and 112 difficult development
areas.[Footnote 8]
Figure 1: Statutory Changes to Definitions for HUBZone Areas and Effect
on Number of HUBZones, 1997-2006:
[See PDF for image]
This figure is an illustration of statutory changes to definitions for
HUBZone Areas and effect on number of HUBZones, 1997-2006, as follows:
Statutory timeline: December 2, 1997: The original HUBZone Act of 1997
defined a HUBZone as any area within a qualified census tract, a
qualified nonmetropolitan county, or lands within the boundaries of a
federally recognized Indian reservation;
Number of HUBZones: 0.
Statutory timeline: 1998;
Number of HUBZones: 0.
Statutory timeline: 1999;
Redesignated HUBZones: 0;
HUBZones that continue to meet eligibility requirements: 7,895.
Number of HUBZones: 7,895.
Statutory timeline: 2000; December 15: A new poverty rate criterion was
added to the definition of qualified census tracts, making a qualified
census tract either an area of low income or high poverty; December 21:
Lands covered by the term ’Indian Country“ were added, and the HUBZone
area definition was changed to allow redesignated areas–census tracts
or nonmetropolitan counties that no longer meet economic criteria but
remain qualified for a 3-year period;
Redesignated HUBZones: 121;
HUBZones that continue to meet eligibility requirements: 7841;
Total: 7962.
Statutory timeline: 2001;
Redesignated HUBZones: 342;
HUBZones that continue to meet eligibility requirements: 9686;
Total: 10,028.
Statutory timeline: 2002;
Redesignated HUBZones: 2,471;
HUBZones that continue to meet eligibility requirements: 10,909;
Total: 13,380.
Statutory timeline: 2003;
Redesignated HUBZones: 2,525;
HUBZones that continue to meet eligibility requirements: 10,873;
Total: 13,398.
Statutory timeline: 2004; December 8: Redesignated areas were changed
to remain qualified until the release date of the 2010 census. Areas
within the external boundaries of former military bases closed by the
BRAC also became qualified. Counties also became eligible based on
their unemployment relative to the national unemployment rate, if it
was lower than the state unemployment rate;
Redesignated HUBZones: 2,534;
HUBZones that continue to meet eligibility requirements: 11,237;
Total: 13,771.
Statutory timeline: 2005; August 10: Difficult development areas
outside the continental United States were qualified for the HUBZone
program;
Redesignated HUBZones: 2,626;
HUBZones that continue to meet eligibility requirements: 11,371;
Total: 13,997.
Statutory timeline: 2006;
Redesignated HUBZones: 2,854;
HUBZones that continue to meet eligibility requirements: 11,510;
Total: 14,364.
Source: GAO analysis of SBA data.
[End of figure]
In expanding the types of HUBZone areas, the definition of economic
distress has been broadened to include measures that were not in place
in the initial statute. For example, a 2000 statute amended the HUBZone
area definition to allow census tracts or nonmetroplitan counties that
ceased to be qualified to remain qualified for a further 3-year period
as "redesignated areas."[Footnote 9] A 2004 statute permitted these
same areas to remain qualified until the release date of the 2010
census data.[Footnote 10] Further, in 2005, Congress expanded the
definition of a qualified nonmetropolitan county to include difficult
development areas outside the continental U.S.--areas with high
construction, land, and utility costs relative to area income--and such
counties could include areas not normally considered economically
distressed. As a result, the expanded HUBZone criteria now allow for
HUBZone areas that are less economically distressed than the areas
initially designated. HUBZone program officials stated that the
expansion can diffuse the impact or potential impact of the program on
existing HUBZone areas. We recognize that establishing new HUBZone
areas can potentially provide economic benefits for these areas by
helping them attract firms that make investments and employ HUBZone
residents. However, such an expansion could result in less targeting of
areas of greatest economic distress.
SBA's Web Map Inaccurately Identifies Eligible Areas:
SBA program staff employ no discretion in identifying HUBZone areas
because they are defined by federal statute; however, they have not
always designated these areas correctly on their Web map. To identify
and map HUBZone areas, SBA relies on a mapping contractor and data from
other executive agencies (see fig. 2). Essentially, the map is SBA's
primary interface with small businesses to determine if they are
located in a HUBZone and can apply for HUBZone certification.
Figure 2: Process Used to Map HUBZone Areas:
[See PDF for image]
This figure is an illustration of the process used to map HUBZone
areas, as follows:
Congress:
Statutory criteria that define qualified HUBZone areas.
HUBZone Office:
Changes/updates;
Mapping Contractor:
Obtains updated public data from federal agencies and creates new map;
New ma of HUBZone areas in sent to SBA.
SBA:
Approves map if no discrepancies are found, and the contractor
publishes it on the HUBZone Web site.
SBA relies on firms to alert them to HUBZone areas that are miscoded.
Source: GAO analysis of SBA documents and interviews; Art Explosion
(map).
[End of figure]
During the course of our review, we identified two problems with SBA's
HUBZone map. First, the map includes some areas that do not meet the
statutory definition of a HUBZone area. As noted previously, counties
containing difficult development areas are only eligible in their
entirety for the HUBZone program if they are not located in a
metropolitan statistical area. However, we found that SBA's HUBZone map
includes 50 metropolitan counties as difficult development areas that
do not meet this or any other criterion for inclusion as a HUBZone
area.[Footnote 11] As a result of these errors, ineligible firms have
obtained HUBZone certification and received federal contracts. As of
December 2007, 344 certified HUBZone firms were located in ineligible
areas in these 50 counties. Further, from October 2006 through March
2008, federal agencies obligated about $5 million through HUBZone set-
aside contracts to 12 firms located in these ineligible areas.
Second, while SBA's policy is to have its contractor update the HUBZone
map as needed, the map has not been updated since August 2006.[Footnote
12] Since that time, additional data such as unemployment rates from
the Bureau of Labor Statistics (BLS) have become available. Although
SBA officials told us that they have been working to have the
contractor update the mapping system, no subcontract was in place as of
May 2008. While an analysis of the 2008 list of qualified census tracts
showed that the number of tracts had not changed since the map was last
updated, our analysis of 2007 BLS unemployment data indicated that 27
additional nonmetropolitan counties should have been identified on the
map, allowing qualified firms in these areas to participate in the
program. Because firms are not likely to receive information on the
HUBZone status of areas from other sources, firms in the 27 areas would
have believed from the map that they were ineligible to participate in
the program and could not benefit from contracting incentives that
certification provides.
In our June 2008 report, we recommended that SBA take immediate steps
to correct and update the map and implement procedures to ensure that
it is updated with the most recently available data on a more frequent
basis. In response to our recommendation, SBA indicated that it plans
to issue a new contract to administer the HUBZone map and anticipates
that the maps will be updated and available no later than August 29,
2008. Further, SBA stated that, during the process of issuing the new
contract, the HUBZone program would issue new internal procedures to
ensure that the map is updated continually.
SBA Has Limited Controls to Ensure That Only Eligible Firms Participate
in the HUBZone Program:
Our June 2008 report also found that the policies and procedures upon
which SBA relies to certify and monitor firms provide limited assurance
that only eligible firms participate in the HUBZone program. While
internal control standards for federal agencies state that agencies
should document and verify information that they collect on their
programs, SBA obtains supporting documentation from firms in limited
instances. In addition, SBA does not follow its own policy of
recertifying all firms every 3 years, and has not met its informal goal
of 60 days for removing firms deemed ineligible from its list of
certified firms.
SBA Largely Relies on Self-Reported Data for HUBZone Certifications and
Recertifications, Increasing the Risk That Ineligible Firms Can
Participate:
Firms apply for HUBZone certification using an online application
system, which according to HUBZone program officials employs automated
logic steps to screen out ineligible firms based on the information
entered on the application. For example, firms enter information such
as their total number of employees and number of employees that reside
in a HUBZone. Based on this information, the system then calculates
whether the number of employees residing in a HUBZone equals 35 percent
or more of total employees, the required level for HUBZone eligibility.
HUBZone program staff then review the applications to determine if more
information is required. While SBA's policy states that supporting
documentation normally is not required, it notes that agency staff may
request and consider such documentation, as necessary. No specific
guidance or criteria are provided to program staff for this purpose;
rather, the policy allows staff to determine what circumstances warrant
a request for supporting documentation. In determining whether
additional information is required, HUBZone program officials stated
that they generally consult sources such as firms' or state
governments' Web sites that contain information on firms incorporated
in the state.[Footnote 13] SBA ultimately approves the majority of
applications submitted. For example, in fiscal year 2007, SBA approved
about 78 percent of the applications submitted.
To ensure the continued eligibility of certified HUBZone firms, SBA
requires firms to resubmit an application. That is, to be recertified,
firms re-enter information in the online application system, and
HUBZone program officials review it. In 2004, SBA changed the
recertification period from an annual recertification to every 3
years.[Footnote 14] According to HUBZone program officials, they
generally limit their reviews to comparing resubmitted information to
the original application. The officials added that significant changes
from the initial application can trigger a request for additional
information or documentation. If concerns about eligibility are raised
during the recertification process, SBA will propose decertification or
removal from the list of eligible HUBZone firms. Firms that are
proposed for decertification can challenge that proposed outcome
through a due-process mechanism. SBA ultimately decertifies firms that
do not challenge the proposed decertification and those that cannot
provide additional evidence that they continue to meet the eligibility
requirements. For example, SBA began 6,798 recertifications in fiscal
years 2005, 2006, and 2007 and either had proposed to decertify or
completed decertification of 5,201 of the firms (about 77 percent) as
of January 22, 2008 (the date of the data set).[Footnote 15] Although
SBA does not systematically track the reasons why firms are
decertified, HUBZone program officials noted that many firms do not
respond to SBA's request for updated information.
Internal control standards for federal agencies and programs require
that agencies collect and maintain documentation and verify information
to support their programs. However, SBA verifies the information it
receives from firms in limited instances. For example, our review of
the 125 applications that were submitted in September 2007 shows that
HUBZone program staff:
* requested additional information but not supporting documentation for
10 (8 percent) of the applications;
* requested supporting documentation for 45 (36 percent) of the
applications; and:
* conducted one site visit.
According to HUBZone program officials, they did not more routinely
verify the information because they generally relied on their automated
processes and status protest process.[Footnote 16] For instance, they
said they did not request documentation to support each firm's
application because the application system employs automated logic
steps to screen out ineligible firms. For example, the application
system calculates the percentage of a firm's employees that reside in a
HUBZone and screens out firms that do not meet the 35 percent
requirement. But the automated application system would not necessarily
screen out applicants that submit false information to obtain a HUBZone
certification.
Rather than obtaining supporting documentation during certification and
recertification on a more regular basis, SBA waits until it conducts
program examinations of a small percentage of firms to consistently
request supporting documentation. Since fiscal year 2004, SBA's policy
has been to conduct program examinations on 5 percent of firms each
year.[Footnote 17] From fiscal years 2004 through 2006, nearly two-
thirds of firms SBA examined were decertified, and in fiscal year 2007,
430 of 715 firms (about 60 percent) were decertified or proposed for
decertification.[Footnote 18] The number of firms decertified includes
firms that the agency determined were ineligible and were decertified,
and firms that requested to be decertified. Because SBA limits its
program examinations to 5 percent of firms each year, firms can be in
the program for years without being examined. For example, we found
that 2,637 of the 3,348 firms (approximately 79 percent) that had been
in the program for 6 years or more had not been examined. In addition
to performing program examinations on a limited number of firms,
HUBZone program officials rarely conduct site visits during program
examinations to verify a firm's information.
In our report, we recommended that SBA develop and implement guidance
to more routinely and consistently obtain supporting documentation upon
application and conduct more frequent site visits, as appropriate, to
ensure that firms applying for certification are eligible. In response
to this recommendation, SBA stated it was formulating procedures that
would provide sharper guidance about when supporting documentation and
site visits would be required, and plans to identify potential areas of
concern during certification that would mandate additional
documentation and site visits.
Because SBA Has a Backlog of Recertifications, Some Firms Went
Unmonitored for Longer Periods:
As noted previously, since 2004 SBA's policies have required the agency
to recertify all HUBZone firms every 3 years. Recertification presents
another opportunity for SBA to review information from firms and thus
help monitor program activity. However, SBA has failed to recertify
4,655 of the 11,370 firms (more than 40 percent) that have been in the
program for more than 3 years.[Footnote 19] Of the 4,655 firms that
should have been recertified, 689 have been in the program for more
than 6 years. According to HUBZone program officials, the agency lacked
sufficient staff to complete the recertifications. However, the agency
hired a contractor in December 2007 to help conduct recertifications,
using the same process that SBA staff currently use.[Footnote 20]
Although SBA has acquired these additional resources, the agency lacks
specific timeframes for eliminating the backlog. As a result of the
backlog, the periods during which some firms go unmonitored and
reviewed for eligibility are longer than SBA policy allows, increasing
the risk that ineligible firms may be participating in the program.
In our recent report, we recommended that SBA establish a specific time
frame for eliminating the backlog of recertifications and take the
necessary steps to ensure that recertifications are completed in a more
timely fashion in the future. In its response to this recommendation,
SBA noted that the HUBZone program had obtained additional staff and
that the backlog of pending recertifications would be completed by
September 30, 2008. Further, to ensure that recertifications will be
handled in a more timely manner, SBA stated that the HUBZone program
has made dedicated staffing changes and will issue explicit changes to
procedures.
SBA Lacks a Formal Policy on Timeframes for Decertifying Firms, Which
Provides Ineligible Firms with an Opportunity to Obtain Contracts:
While SBA policies for the HUBZone program include procedures for
certifications, recertifications, and program examinations, they do not
specify a timeframe for processing decertifications--the determinations
subsequent to recertification reviews or examinations that firms are no
longer eligible to participate in the HUBZone program. Although SBA
does not have written guidance for the decertification timeframe, the
HUBZone program office negotiated an informal (unwritten) goal of 60
days with the SBA Inspector General (IG) in 2006.[Footnote 21] In
recent years, SBA ultimately decertified the vast majority of firms
proposed for decertification, but has not met its 60-day goal
consistently (see table 1). From fiscal years 2004 through 2007, SBA
failed to resolve proposed decertifications within its goal of 60 days
for more than 3,200 firms. While SBA's timeliness has improved, in
2007, more than 400 (or about 33 percent) were not resolved in a timely
manner. As a consequence of generally not meeting its 60-day goal, lags
in the processing of decertifications have increased the risk of
ineligible firms participating in the program.
Table 1: Summary of SBA's Efforts to Decertify Ineligible Firms for the
HUBZone Program, Fiscal Years 2004-2007:
Firms proposed for decertification[B];
2004: 559;
2005: 1,390;
2006: 2,428;
2007[A]: 1,227.
Withdrawn by SBA;
2004: 24;
2005: 18;
2006: 8;
2007[A]: 14.
Firms actually decertified;
2004: 314;
2005: 1,082;
2006: 2,032;
2007[A]: 890.
Firms that retained certification;
2004: 217;
2005: 288;
2006: 370;
2007[A]: 183.
Cases that have not been resolved;
2004: 4;
2005: 2;
2006: 18;
2007[A]: 140.
Number of firms proposed for decertification but not resolved within 60
days;
2004: 473;
2005: 1,306;
2006: 1,057;
2007[A]: 408.
Source: GAO analysis of data from HUBZone Certification Tracking System
(as of Jan. 22, 2008).
[A] SBA conducted 3,134 recertifications and program examinations,
which are often precursors to proposals for decertification, in fiscal
year 2007, which was 832 less than the previous year.
[B] Firms that are proposed for decertification have the ability to
challenge that proposed outcome through a due-process mechanism. These
data are based on the year that SBA proposed the firm for
decertification.
[End of table]
In our June 2008 report, we recommended that SBA formalize and adhere
to a specific time frame for processing firms proposed for
decertification in the future. In response, SBA noted that it would
issue new procedures to clarify and formalize the decertification
process and its timelines. SBA stated that the new decertification
procedures would establish a 60 calendar day deadline to complete any
proposed decertification.
SBA Has Not Implemented Plans to Assess the Effectiveness of the
HUBZone Program and Most Agencies Have Not Met Contracting Goals:
Our June 2008 report also found that SBA has taken limited steps to
assess the effectiveness of the HUBZone program. SBA's three
performance measures for the HUBZone program do not directly measure
the effect of the program on communities. Moreover, federal agencies
did not meet the government-wide contracting goal for the HUBZone
program in fiscal years 2003 through 2006 (the most recent years for
which goaling data are available).
SBA Has Limited Performance Measures and Has Not Implemented Plans to
Evaluate the Effectiveness of the Program:
While SBA has some measures in place to assess the performance of the
HUBZone program, the agency has not implemented its plans to conduct an
evaluation of the program's benefits. According to the Government
Performance and Results Act of 1993, federal agencies are required to
identify results-oriented goals and measure performance toward the
achievement of their goals. We previously have reported on the
attributes of effective performance measures, and reported that for
performance measures to be useful in assessing program performance,
they should be linked or aligned with program goals and cover the
activities that an entity is expected to perform to support the intent
of the program.[Footnote 22]
According to SBA's fiscal year 2007 Annual Performance Report, the
three performance measures for the HUBZone program were: (1) the number
of small businesses assisted (which SBA defines as the number of
applications approved and the number of recertifications processed),
(2) the annual value of federal contracts awarded to HUBZone firms, and
(3) the number of program examinations completed. These measures
provide some data on program activity and measure contract dollars
awarded to HUBZone firms.[Footnote 23] However, they do not directly
measure the program's effect on firms (such as growth in employment or
changes in capital investment) or directly measure the program's effect
on the communities in which the firms are located (for instance,
changes in median household income or poverty levels).
Similarly, the Office of Management and Budget (OMB) noted in its 2005
Program Assessment Rating Tool (PART) that SBA needed to develop
baseline measures for some of its HUBZone performance measures and
encouraged SBA to focus on more outcome-oriented measures that better
evaluate the results of the program.[Footnote 24] The PART assessment
also documented plans that SBA had to conduct an analysis of the
economic impact of the HUBZone program on a community-by-community
basis using data from the 2000 and 2010 decennial census. However, SBA
officials indicated that the agency has not devoted resources to
implement either of these strategies for assessing the results of the
program. Yet by not evaluating the HUBZone program's benefits, SBA
lacks key information that could help it better manage the program and
inform the Congress of its results.
As part of our work, we conducted site visits to four HUBZone areas
(Lawton, Oklahoma; Lowndes County, Georgia; and Long Beach and Los
Angeles, California) to better understand to what extent stakeholders
perceived that the HUBZone program generated benefits. For all four
HUBZone areas, the perceived benefits of the program varied, with some
firms indicating they have been able to win contracts and expand their
firms and others indicating they had not realized any benefits from the
program. Officials representing economic development entities varied in
their knowledge of the program, with some stating they lacked
information on the program's effect that could help them inform small
businesses of its potential benefits.
In our report, we recommended that SBA further develop measures and
implement plans to assess the effectiveness of the HUBZone program. In
its response to this recommendation, SBA stated that it would develop
an assessment tool to measure the economic benefits that accrue to
areas in the HUBZone program and that the HUBZone program would then
issue periodic reports accompanied by the underlying data.
Most Federal Agencies Did Not Meet Their Contracting Goals for the
HUBZone Program:
Although contracting dollars awarded to HUBZone firms have increased
since fiscal year 2003--when the statutory goal of awarding 3 percent
of federally funded contract dollars to HUBZone firms went into effect-
-federal agencies collectively still have not met that goal.[Footnote
25] According to data from SBA's goaling reports, for the four fiscal
years from 2003 through 2006, the percentage of prime contracting
dollars awarded to HUBZone firms increased, with the total for fiscal
year 2006 at just above 2 percent (see table 2).
Table 2: HUBZone Percentage of Total Prime Contracting Dollars Eligible
for Small Business Awards, Fiscal Years 2003-2006:
Fiscal year: 2003;
Total prime contracting dollars (in billions): $277.5;
Prime contracting dollars awarded to HUBZone firms (in billions): $3.4;
Governmentwide goal for percentage of small-business-eligible prime
contracting dollars awarded to HUBZone firms: 3%;
Percentage of total small-business-eligible prime contracting dollars
awarded to HUBZone firms: 1.23%.
Fiscal year: 2004;
Total prime contracting dollars (in billions): $299.9;
Prime contracting dollars awarded to HUBZone firms (in billions): $4.8;
Governmentwide goal for percentage of small-business-eligible prime
contracting dollars awarded to HUBZone firms: 3%;
Percentage of total small-business-eligible prime contracting dollars
awarded to HUBZone firms: 1.60%.
Fiscal year: 2005;
Total prime contracting dollars (in billions): $320.3;
Prime contracting dollars awarded to HUBZone firms (in billions): $6.2;
Governmentwide goal for percentage of small-business-eligible prime
contracting dollars awarded to HUBZone firms: 3%;
Percentage of total small-business-eligible prime contracting dollars
awarded to HUBZone firms: 1.93%.
Fiscal year: 2006;
Total prime contracting dollars (in billions): $340.2;
Prime contracting dollars awarded to HUBZone firms (in billions): $7.2;
Governmentwide goal for percentage of small-business-eligible prime
contracting dollars awarded to HUBZone firms: 3%;
Percentage of total small-business-eligible prime contracting dollars
awarded to HUBZone firms: 2.11%.
Source: Report on Annual Procurement Preference Goaling Achievements
(FY 2003) and Small Business Goaling Reports (FY 2004-2006).
Note: Fiscal year 2006 is the most recent year for which SBA has
published a small business goaling report.
[End of table]
In fiscal year 2006, 8 of 24 federal agencies met their HUBZone goals.
[Footnote 26] Of the 8 agencies, 4 had goals higher than the 3 percent
requirement and were able to meet the higher goals. Of the 16 agencies
not meeting their HUBZone goal, 10 awarded less than 2 percent of their
small business-eligible contracting dollars to HUBZone firms.
Madam Chairwoman, this concludes my prepared statement. I would be
happy to answer any questions at this time.
Contacts and Acknowledgments:
For further information on this testimony, please contact William B.
Shear at (202) 512-8678 or shearw@gao.gov. Individuals making key
contributions to this testimony included Paige Smith (Assistant
Director), Triana Bash, Tania Calhoun, Bruce Causseaux, Alison Gerry,
Cindy Gilbert, Julia Kennon, Terence Lam, Tarek Mahmassani, John
Mingus, Marc Molino, Barbara Roesmann, and Bill Woods.
[End of section]
Footnotes:
[1] GAO, Small Business Administration: Additional Actions Are Needed
to Certify and Monitor HUBZone Businesses and Assess Program Results,
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-643] (Washington,
D.C.: Jun. 17, 2008).
[2] HUBZone Act of 1997, Pub. L. No. 105-135, Title VI, § 602(a), 111
Stat. 2592, 2627 (1997).
[3] The low-income-housing tax credit program aims to increase the
availability of low-income housing by providing a tax credit to owners
of newly constructed or substantially rehabilitated low-income rental
housing.
[4] Difficult development areas have high construction, land, and
utility costs relative to area median income, and HUD designates new
difficult development areas annually using a process that compares
these costs. Only those difficult development areas located in
nonmetropolitan counties in Alaska, Hawaii, and the U.S. territories
and possessions are eligible for the program.
[5] SBA's size standards are almost always stated either as the average
employment or average annual receipts of a business concern and vary by
industry.
[6] Qualified HUBZone firms also can be owned and controlled by Alaskan
Native Corporations, Indian tribal governments, community development
corporations, and agricultural cooperatives.
[7] While a small business must have its principal office in a HUBZone
area, it does not have to limit its work to that HUBZone. Certified
HUBZone businesses can bid on and receive federal contracts for work to
be performed anywhere; that is, HUBZone contracts are not limited to
HUBZone areas.
[8] Because the boundaries of qualified HUBZone areas can overlap, some
geographical areas qualify for multiple designations.
[9] HUBZones in Native America Act of 2000, Pub. L. No. 106-554, Title
VI, Subtitle A, § 604, 114 Stat. 2763, 2763A-698 (2000).
[10] Small Business Reauthorization and Manufacturing Assistance Act of
2004, Pub. L. No. 108-447, Div. K, ch. 3, subtitle E, § 152(c), 118
Stat. 2809, 3457 (2004).
[11] Of the 50 counties, 47 were in Puerto Rico, 2 were in Alaska, and
1 in Hawaii. Puerto Rico consists of 78 municipios, which are the
equivalent of counties; the 47 difficult development areas on the
HUBZone map cover about half of Puerto Rico.
[12] SBA officials told us that, in September 2006, SBA began the
process of having the contractor update the map. However, this update
never occurred.
[13] For example, the Georgia Secretary of State's Web site contains a
search feature that provides information such as the principal office
address for firms incorporated in Georgia.
[14] Until the online recertification system became available in 2005,
the annual recertification process consisted of firms e-mailing HUBZone
program officials a statement that the firms continued to meet the
eligibility criteria.
[15] These are results of GAO analysis of data from the HUBZone
Certification Tracking System.
[16] The HUBZone status protest process allows SBA, contracting
officers, or any interested party to protest the qualified HUBZone
status of any awardee or apparent awardee of a federal contract. An
interested party is any firm that submits an offer for a specific
HUBZone contract or submits an offer in full and open competition and
whose opportunity for award will be affected by a price evaluation
preference given to a qualified HUBZone firm.
[17] Before fiscal year 2004, program examinations were conducted on an
as-needed basis.
[18] These are results of GAO analysis of data from the HUBZone
Certification Tracking System (as of Jan. 22, 2008).
[19] These are results of GAO analysis of data from the HUBZone
Certification Tracking System (as of Jan. 22, 2008).
[20] SBA officials generally limit their recertification reviews to the
information provided by firms but can request documentation or conduct
site visits.
[21] In May 2006, the SBA IG found that firms proposed for
decertification as a result of 2004 program examinations were not
processed timely and therefore recommended that the HUBZone program
office set a maximum timeframe for decertifying firms and removing them
from the SBA list once they no longer meet the eligibility criteria.
See SBA Inspector General, HUBZone Program Examination and
Recertification Processes, Report Number 6-23 (Washington, D.C.: May
23, 2006).
[22] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-143] and
GAO, Small Business Administration: Additional Measures Needed to
Assess 7(a) Loan Program's Performance, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-07-769] (Washington, D.C.: July
13, 2007).
[23] Our assessment of the databases that contain information on the
agency's performance measures--the HUBZone Certification Tracking
System and Federal Procurement Data System-Next Generation--concluded
that these data were sufficiently reliable for the purposes of
reporting on services provided to HUBZone firms and contracts awarded
to HUBZone firms.
[24] OMB's PART evaluation rates programs on four critical elements--
program purpose and design, strategic planning, program management, and
program results/accountability. The answers to questions in each of the
four sections result in a numeric score for each section from 0 to 100
(100 being the best). These scores are then combined to achieve an
overall qualitative rating of Effective, Moderately Effective,
Adequate, or Ineffective.
[25] The HUBZone Act established participation goals for certified
firms starting with fiscal year 1999. The fiscal year 1999 goal was 1
percent of the year's total value of prime contract awards, and the
fiscal year 2000 goal was 1.5 percent. The act increased the goal by
one-half percent each year, reaching 3 percent in fiscal year 2003 and
each fiscal year thereafter.
[26] We limited our analysis to the 24 agencies that SBA assessed
through its Small Business Procurement Scorecards, which provide an
assessment of federal achievement in prime contracting to small
businesses by the 24 Chief Financial Officers Act agencies.
[End of section]
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