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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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