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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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