Small Business Administration
Status of Efforts to Address Previous Recommendations on the HUBZone Program Gao ID: GAO-09-532T March 25, 2009This testimony discusses 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. My statement today is based on work we performed to update the status of recommendations we made in our June 2008 report on the HUBZone program and reiterated in a July 2008 testimony. These recommendations called for SBA to improve its controls over the HUBZone program and assess the program's effectiveness. Specifically, this testimony discusses SBA's progress in (1) ensuring that the HUBZone map is accurate; (2) developing and implementing guidance to ensure that participating firms are eligible; (3) eliminating the backlog of recertifications; (4) formalizing and adhering to time frames for decertifying ineligible firms; and (5) developing measures and implementing plans to assess the effectiveness of the program.
At the time of the July 2008 testimony and in subsequent correspondence we received from SBA, we observed that the agency did not recognize the commitment required to address the HUBZone program's deficiencies and implement our recommendations. SBA officials told us that they recognize the commitment required to implement our recommendations. Consistent with this recognition, SBA is now working with a contractor to re-engineer its HUBZone program. In summary, SBA has initiated some steps to address the HUBZone program's deficiencies and implement our recommendations.
GAO-09-532T, Small Business Administration: Status of Efforts to Address Previous Recommendations on the HUBZone Program
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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 2:00 p.m. EDT:
Wednesday, March 25, 2009:
Small Business Administration:
Status of Efforts to Address Previous Recommendations on the HUBZone
Program:
Statement of William B. Shear, Director:
Financial Markets and Community Investment:
GAO-09-532T:
[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.
My statement today is based on work we performed to update the status
of recommendations we made in our June 2008 report on the HUBZone
program and reiterated in a July 2008 testimony.[Footnote 1] These
recommendations called for SBA to improve its controls over the HUBZone
program and assess the program's effectiveness. Specifically, in my
testimony, I will discuss SBA's progress in (1) ensuring that the
HUBZone map is accurate; (2) developing and implementing guidance to
ensure that participating firms are eligible; (3) eliminating the
backlog of recertifications; (4) formalizing and adhering to time
frames for decertifying ineligible firms; and (5) developing measures
and implementing plans to assess the effectiveness of the program.
To determine SBA's progress in implementing our recommendations, we
obtained and reviewed related agency documentation. We also conducted
random queries of its Web-based HUBZone map to assess its accuracy.
Finally, we interviewed SBA program officials and contractors to
determine the status of plans to improve controls over the program and
assess its effectiveness. We conducted this performance audit from
January 2009 through March 2009 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.
At the time of the July 2008 testimony and in subsequent correspondence
we received from SBA, we observed that the agency did not recognize the
commitment required to address the HUBZone program's deficiencies and
implement our recommendations. SBA officials told us that they
recognize the commitment required to implement our recommendations.
Consistent with this recognition, SBA is now working with a contractor
to re-engineer its HUBZone program.
In summary, SBA has initiated some steps to address the HUBZone
program's deficiencies and implement our recommendations. Specifically,
* In our last report we found that SBA's HUBZone map was inaccurate and
we recommended that the agency fix the inaccuracies and ensure that the
map remains accurate. SBA, through its mapping contractor, updated its
HUBZone map in September 2008. However, SBA does not have a process in
place to ensure that the map remains accurate. Agency officials stated
that a contractor is conducting business process re-engineering that
will include a focus on its mapping processes. However, the re-
engineering efforts are in the early stages.
* In our June 2008 report, we stated that SBA's mechanisms for
certifying and monitoring firms provided limited assurance that only
eligible firms participated in the program. We recommended that SBA
develop and implement guidance to more routinely and consistently
obtain supporting documentation and conduct more frequent site visits
to ensure that firms are eligible. SBA has made limited progress in
ensuring that participating firms are eligible for the HUBZone program.
SBA issued a guide for analysts to use when reviewing applications to
ensure that they consistently request supporting documentation.
Further, since July 2008, SBA has requested supporting documentation
from each new applicant. While SBA has not conducted more frequent site
visits to verify the information it receives from firms, SBA officials
stated that they do plan to conduct site visits of all HUBZone firms
that received a contract in fiscal year 2007 during fiscal year 2009.
As of March 2009, SBA conducted 7 site visits of those firms.
* Our June 2008 report stated that SBA had not followed its policy of
recertifying firms (that is, the process through which SBA can monitor
firms' continued eligibility) every three years and as a result there
was a backlog of more than 4,600 firms that had went unmonitored for
more than three years. We recommended that the agency eliminate the
backlog and take the necessary steps to ensure recertifications are
completed in a more timely fashion. In September 2008, SBA eliminated
the backlog of recertifications by hiring additional staff but has yet
to implement necessary procedures to ensure that future
recertifications are completed in a timely fashion. SBA officials
stated that the ongoing business process re-engineering will include an
assessment of the recertification process.
* In our last report we also found that SBA lacked a formal policy on
time frames for decertifying firms (that is, removing ineligible firms
from the list of certified firms) and that many firms were not
decertified within its informal goal of 60 days. We recommended that
SBA formalize its 60-day goal and adhere to it. The agency has
formalized a specific time frame for decertifying firms, but it is not
clear whether staff are adhering to the policy. In December 2008, SBA
issued a procedural notice that formalized a 60-day time frame for
processing firms for decertification. Because SBA formalized the time
frame recently, we were unable to verify whether staff were adhering to
it.
* In June 2008 we also found that SBA had not implemented plans to
assess the effectiveness of the HUBZone program and we recommended that
SBA develop performance measures and implement plans to assess its
effectiveness. SBA has not begun to assess the effectiveness of the
HUBZone program. In August 2008, SBA issued a notice of methodology in
the Federal Register for measuring the impact of the HUBZone program.
However, the proposed methodology was not well developed. For example,
it did not incorporate expert input or a previous study conducted by
SBA's Office of Advocacy. We do not believe that this effort was a
useful process to address our recommendation.
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 census
tracts, nonmetropolitan counties, Indian reservations, redesignated
areas (that is, census tracts or nonmetropolitan counties that no
longer meet the criteria but remain eligible until after the release of
the 2010 decennial census data), and base closure areas.[Footnote 3]
To be certified to participate in the HUBZone program, a firm must meet
the following four criteria:
* must be small by SBA size standards;[Footnote 4]
* must be at least 51 percent owned and controlled by U.S. citizens;
[Footnote 5]
* principal office--the location where the greatest number of employees
perform their work--must be located in a HUBZone; and:
* at least 35 percent of the full-time (or full-time equivalent)
employees must reside in a HUBZone.
There are more than 14,000 HUBZone areas, and as of January 2009, 9,300
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 Updated Its HUBZone Map but Has Not Implemented Procedures to
Ensure That It Remains Accurate:
SBA relies on its map to publicize HUBZone areas and to determine, in
part, whether firms are eligible for the program. Our June 2008 report
found problems with SBA's HUBZone map. First, the map included 50
metropolitan counties as difficult development areas that did not meet
this or any other criterion for inclusion as a HUBZone area.[Footnote
6] As a result of these errors, 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. In addition,
we found that the HUBZone map had not been updated since August 2006.
[Footnote 7] Our analysis of 2007 Bureau of Labor Statistics
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 stated that, through a
contract, the map was updated in September 2008. However, SBA has not
implemented procedures to ensure that the map remains accurate. SBA
officials stated it is currently re-engineering its internal processes,
which include its mapping efforts, and plans to develop a competitive
procurement that will include test plans and technical support for
future map updates. Because SBA is in the early stages of both efforts,
the map may not remain accurate. Therefore, if the map is not regularly
updated, ineligible small businesses may be able to participate in the
program, while eligible businesses may not be able to participate.
SBA Has Made Limited Progress in Ensuring the Eligibility of Firms:
In June 2008, we reported that the policies and procedures upon which
SBA relies to certify firms provided limited assurance that only
eligible firms participated in the HUBZone program. Specifically, we
found that, for certification and recertification, firms self-reported
information on their applications. Rather than providing specific
guidance or criteria for when HUBZone program staff should request
supporting documentation, SBA's policy allowed the staff to determine
what circumstances warranted a request for supporting documentation.
Internal control standards for federal agencies require that agencies
collect and maintain documentation and verify information to support
their programs; however, we found that SBA requested documentation or
conducted site visits of firms to validate the self-reported data in
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. As a
follow-on to our previous fraud investigation, we also identified cases
of fraud and abuse in the program and examined actions SBA has taken to
establish an effective fraud prevention system; we are publicly
reporting the results of this investigation today in a separate
publication.[Footnote 8]
To improve its ability to ensure that only eligible firms participate
in the program, we recommended in our June 2008 report 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. Subsequent to our report and testimony, SBA
issued a desktop guide for analysts to use when they review
applications. This guide provides examples of the types of documents to
request and when to request them. In addition, since July 2008, SBA
officials stated that they have been consistently collecting supporting
documentation from each new applicant. However, the agency has not
conducted more frequent site visits to verify the information firms
submit. SBA officials stated that they do plan to conduct site visits
of all HUBZone firms that received a contract in fiscal year 2007
during fiscal year 2009. As of March 2009, SBA conducted 7 site visits
of those firms. Because of SBA's limited progress, ineligible firms may
still be able to participate in the HUBZone program and receive federal
contracts based on their HUBZone certification.
SBA Eliminated Its Backlog of Recertifications but Has Not Established
a Process or Procedures to Prevent Future Backlogs:
In our June 2008 report, we noted that SBA did not follow its own
policy of recertifying all firms every 3 years.[Footnote 9] We found
that SBA failed to recertify 4,655 of the 11,370 firms (more than 40
percent) that had been in the program for more than 3 years.[Footnote
10] Of the 4,655 firms that should have been recertified, 689 had been
in the program for more than 6 years. According to HUBZone program
officials, the agency lacked sufficient staff to complete the
recertifications. As a result of the backlog, the periods during which
some firms went unmonitored and reviewed for eligibility were longer
than SBA policy allowed, increasing the risk that ineligible firms were
participating in the program.
We recommended that SBA establish a specific time frame for eliminating
the backlog of recertifications and take the necessary steps to ensure
that recertifications were completed in a more timely fashion in the
future. In response to our recommendation, SBA temporarily obtained
additional staff for the HUBZone program and eliminated the backlog by
September 30, 2008. However, SBA has not implemented processes or
procedures to ensure that future recertifications will be completed in
a more timely fashion. SBA officials stated that its ongoing business
process re-engineering includes an assessment of the recertification
process. However, as of March 2009, SBA has made limited progress in
this effort. As a result, there is still an increased risk that
ineligible firms may continue to participate in the program.
SBA Has Formalized a Specific Time frame for Decertifying Firms:
Our July 2008 report also noted that SBA did not have a policy that
included specific time frames for processing decertifications--the
determinations subsequent to recertification reviews or examinations
that firms are no longer eligible to participate in the HUBZone
program. We found that although SBA did not have written guidance for
the decertification time frame, the HUBZone program office had
negotiated an informal (unwritten) goal of 60 days with the SBA
Inspector General in 2006. 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 had improved, in 2007
more than 400 (or about 33 percent) of decertifications were not
resolved in a timely manner. As a consequence of generally not meeting
its 60-day goal, lags in the processing of decertifications increased
the risk of ineligible firms participating in the program.
In our report, we recommended that SBA formalize and adhere to a
specific time frame for processing firms proposed for decertification.
In response, SBA issued a procedural notice in December 2008 that
formalized the 60-day time frame for processing decertifications.
Because SBA recently formalized this time frame, we were unable to
verify whether SBA staff are adhering to it.
SBA Has Not Developed Measures or Implemented Plans to Assess the
Effectiveness of the HUBZone Program:
In June 2008, we reported that SBA had taken limited steps to assess
the effectiveness of the HUBZone program. We found that SBA's three
performance measures for the HUBZone program were not directly linked
to the program's mission of stimulating economic development and
creating jobs in economically distressed communities.[Footnote 11] The
Office of Management and Budget also 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 12] In addition, the PART assessment
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 lacked the resources necessary to develop
baseline measures or to assess the results of the program.
In our report, we recommended that SBA further develop measures and
implement plans to assess the effectiveness of the HUBZone program. In
addition, in May 2008, after the completion of the audit work for our
June 2008 report, SBA's Office of Advocacy (Advocacy) issued a report
assessing the economic impacts of the HUBZone program.[Footnote 13] In
our view, the Advocacy's report could provide, in part, a foundation
for further assessments. In August 2008, in response to our
recommendation, SBA published a Notice of Methodology in the Federal
Register for measuring the economic impact of the HUBZone program.
[Footnote 14] Rather than conducting a comprehensive effort that
considered relevant literature, input from experts in economics and
performance measurement, and the methodological contributions of the
Advocacy's evaluation, SBA officials planned to rely on public comments
to refine the planned methodology. Two comment letters were submitted.
Based on our review, we do not believe this effort was a sound process
for developing measures to assess the effectiveness of the program.
During subsequent discussions we held with agency staff about this
issue, they stated that they have initiated a new effort to address
this issue. However, because the agency has not evaluated the HUBZone
program's benefits, SBA continues to lack key information that could
help it better manage the program and inform the Congress of its
results.
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, Julia Kennon, and Terence Lam.
[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/products/GAO-08-643] (Washington, D.C.:
Jun. 17, 2008) and GAO, Small Business Administration: Additional
Actions Are Needed to Certify and Monitor HUBZone Businesses and Assess
Program Results, [hyperlink, http://www.gao.gov/products/GAO-08-975T]
(Washington, D.C.: Jul. 17, 2008). Also see GAO, HUBZone Program: SBA's
Control Weaknesses Expose the Government to Fraud and Abuse,
[hyperlink, http://www.gao.gov/products/GAO-08-964T] (Washington, D.C.:
Jul. 17, 2008).
[2] HUBZone Act of 1997, Pub L. No. 105-135, Title VI, Section 602(a),
111 Stat. 2592, 2627 (1997).
[3] See [hyperlink, http://www.gao.gov/products/GAO-08-643] for a
definition of each type of area.
[4] 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.
[5] Qualified HUBZone firms also can be owned and controlled by Alaskan
Native Corporations, Indian tribal governments, community development
corporations, and agricultural cooperatives.
[6] Because the boundaries of qualified HUBZone areas can overlap, some
geographical areas qualify for multiple designations.
[7] SBA officials told us that, in September 2006, SBA began the
process of having its contractor update the map but as of June 2008 the
update had not occurred.
[8] GAO, HUBZone Program: Fraud and Abuse Identified in Four
Metropolitan Areas, [hyperlink, http://www.gao.gov/products/GAO-09-440]
(Washington, D.C.: Mar. 25, 2009).
[9] SBA officials generally limited their recertification reviews to
the information provided by firms but can request documentation or
conduct site visits.
[10] These are results of GAO analysis of data from the HUBZone
Certification Tracking System (as of Jan. 22, 2008).
[11] 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.
[12] 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 numeric scores 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.
[13] H. Beale and N. Deas, The HUBZone Program Report (Washington,
D.C.: May 2008). SBA's Office of Advocacy is independent of the SBA
Administrator.
[14] See Notice of Methodology for Measuring the Economic Impact of the
HUBZone Program, 73 Fed. Reg. 46698 (Aug. 11, 2008).
[End of section]
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