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entitled 'Small Business Administration: Response to the Gulf Coast 
Hurricanes Highlights Need for Enhanced Disaster Preparedness' which 
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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. EST: 

Wednesday, February 14, 2007: 

Small Business Administration: 

Response to the Gulf Coast Hurricanes Highlights Need for Enhanced 
Disaster Preparedness: 

Statement of William B. Shear, Director: 
Financial Markets and Community Investment: 

GAO-07-484T: 

GAO Highlights: 

Highlights of GAO-07-484T, a testimony before the Committee on Small 
Business, House of Representatives 

Why GAO Did This Study: 

The Small Business Administration (SBA) helps individuals and 
businesses recover from disasters such as hurricanes through its 
Disaster Loan Program. SBA faced an unprecedented demand for disaster 
loan assistance following the 2005 Gulf Coast hurricanes (Katrina, 
Rita, and Wilma), which resulted in extensive property damage and loss 
of life. In the aftermath of these disasters, concerns were expressed 
regarding the timeliness of SBA's disaster assistance. 

GAO initiated work and completed two reports under the Comptroller 
General's authority to conduct evaluations and determine how well SBA 
provided victims of the Gulf Coast hurricanes with timely assistance. 
This testimony, which is based on these two reports, discusses (1) 
challenges SBA experienced in providing victims of the Gulf Coast 
hurricanes with timely assistance, (2) factors that contributed to 
these challenges, and (3) steps SBA has taken since the Gulf Coast 
hurricanes to enhance its disaster preparedness. 

GAO visited the Gulf Coast region, reviewed SBA planning documents, and 
interviewed SBA officials. 

What GAO Found: 

GAO identified several significant system and logistical challenges 
that SBA experienced in responding to the Gulf Coast hurricanes that 
undermined the agency’s ability to provide timely disaster assistance 
to victims. For example, the limited capacity of SBA’s automated loan 
processing system—the Disaster Credit Management System 
(DCMS)—restricted the number of staff who could access the system at 
any one time to process disaster loan applications. In addition, SBA 
staff who could access DCMS initially encountered multiple system 
outages and slow response times in completing loan processing tasks. 
SBA also faced challenges training and supervising the thousands of 
mostly temporary employees the agency hired to process loan 
applications and obtaining suitable office space for its expanded 
workforce. As of late May 2006, SBA processed disaster loan 
applications, on average, in about 74 days compared with its goal of 
within 21 days. 

While the large volume of disaster loan applications that SBA received 
clearly affected its capacity to provide timely disaster assistance to 
Gulf Coast hurricane victims, GAO’s two reports found that the absence 
of a comprehensive and sophisticated planning process beforehand likely 
limited the efficiency of the agency's initial response. For example, 
in designing the capacity of DCMS, SBA primarily relied on historical 
data such as the number of loan applications that the agency received 
after the 1994 Northridge, California, earthquake—the most severe 
disaster that the agency had previously encountered. SBA did not 
consider disaster scenarios that were more severe or use the 
information available from disaster simulations (developed by federal 
agencies) or catastrophe models (used by insurance companies to 
estimate disaster losses). SBA also did not adequately monitor the 
performance of a DCMS contractor or completely stress test the system 
prior to its implementation. Moreover, SBA did not engage in 
comprehensive disaster planning prior to the Gulf Coast hurricanes for 
other logistical areas, such as workforce planning or space 
acquisition, at either the headquarters or field office levels. 

In the aftermath of the Gulf Coast hurricanes, SBA has planned or 
initiated several measures that officials said would enhance the 
agency’s capacity to respond to future disasters. For example, SBA has 
completed an expansion of DCMS’s user capacity to support a minimum of 
8,000 concurrent users as compared with just 1,500 for the Gulf Coast 
hurricanes. Additionally, SBA initiated steps to increase the 
availability of trained and experienced disaster staff and redesigned 
its process for reviewing loan applications and disbursing funds. 
However, SBA has not established a time line for completing key 
elements of its disaster management plan, such as cross-training agency 
staff not typically involved in disaster assistance to provide back up 
support in an emergency. SBA also has not (1) assessed whether its 
disaster planning process could benefit from the supplemental use of 
disaster simulations or catastrophe models and (2) developed a long-
term strategy to obtain suitable office space for its disaster staff. 
While SBA agreed with GAO’s report recommendations to address these 
concerns, it remains to be seen how comprehensive the agency’s final 
disaster plan will be and how the agency will respond to a future 
disaster. 

What GAO Recommends: 

GAO recommends that SBA take several steps to improve its disaster 
preparedness, and SBA agreed with these recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-484T]. 

To view the full product, including the scope and methodology, click on 
the link above. 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 have the opportunity to be here today to discuss the 
Small Business Administration's (SBA) response to the 2005 Gulf Coast 
hurricanes (Katrina, Rita, and Wilma), which caused more than 1,400 
deaths and more than $80 billion of estimated property damages. While 
SBA is generally known for the financial support it provides to small 
businesses, the agency also plays a critical, if less publicized role, 
in assisting the victims of natural and other disasters. Specifically, 
SBA provides financial assistance through its Disaster Loan Program to 
help homeowners, renters, and businesses of all sizes recover from 
disasters such as earthquakes, hurricanes, and terrorist attacks. Due 
to the damage associated with the Gulf Coast hurricanes, SBA faced 
unprecedented demand for its disaster loan services and, 9 months 
following the hurricanes, had approved nearly 150,000 such loans 
totaling nearly $10 billion. However, concerns have been expressed that 
SBA's response to the hurricanes was slow, leaving many disaster 
victims without the timely assistance that they needed. 

My statement today is based on two reports that we issued under the 
Comptroller General's authority to initiate reviews of federal 
programs. The first report, which was released in July 2006, discussed 
SBA's planning for and implementation of the Disaster Credit Management 
System (DCMS), which the agency uses to process disaster loan 
applications.[Footnote 1] The second report, which is being released 
today, discusses SBA's disaster planning for other logistical areas, 
such as hiring and training a capable workforce and acquiring necessary 
office space.[Footnote 2] I note that these reports are part of a 
larger effort by GAO to assist Congress in assessing the response of 
federal, state, and local agencies to the Gulf Coast hurricanes and to 
identify steps that such organizations could take to improve the 
provision of assistance and services to the victims of future 
disasters.[Footnote 3] 

In my testimony, I will discuss (1) challenges SBA experienced in 
providing victims of the Gulf Coast hurricanes with timely assistance, 
(2) factors that contributed to these challenges, and (3) steps SBA has 
taken since the Gulf Coast hurricanes to enhance its disaster 
preparedness. 

To address these objectives, we visited the Gulf Coast region, reviewed 
documents related to SBA's acquisition and implementation of DCMS, 
reviewed reports that discuss disaster planning, analyzed relevant SBA 
planning documentation, and interviewed disaster planning experts and 
SBA officials in headquarters and field offices. We conducted the work 
on our reports from November 2005 through January 2007 and in 
accordance with generally accepted government auditing standards. 

In summary: 

* We identified several significant system and logistical challenges 
SBA experienced in responding to victims of the Gulf Coast hurricanes 
that compromised the agency's ability to provide timely disaster 
assistance. First, due to DCMS's limited capacity, the number of staff 
who could concurrently access the system to process disaster loans was 
restricted. Further, SBA staff who were able to access DCMS often 
encountered system outages and slow response times. Second, SBA faced 
challenges in training and supervising thousands of mostly temporary 
employees hired to process loan applications and encountered 
difficulties in obtaining suitable office space for the expanded 
workforce. As a result of these and other challenges, SBA averaged 
about 74 days to process disaster loan applications, as of late May 
2006, compared with the agency's goal of processing applications within 
21 days. 

* While the unprecedented volume of disaster loan applications clearly 
affected SBA's capacity to provide timely assistance to Gulf Coast 
hurricane victims, the absence of a comprehensive and sophisticated 
planning process beforehand likely limited the efficiency of the 
agency's initial response. For example, in designing the maximum user 
capacity of DCMS, SBA primarily relied on historical data such as the 
number of loan applications that it received after the 1994 Northridge, 
California, earthquake--the most severe disaster that the agency had 
previously encountered. SBA did not consider any disaster scenarios 
that were more severe or use the information available from disaster 
simulations or catastrophe models to help design DCMS's 
capacity.[Footnote 4] SBA also did not adequately monitor a DCMS 
contractor or completely stress test DCMS prior to its implementation. 
Moreover, SBA did not engage in comprehensive disaster planning for 
other logistical issues, such as workforce or space acquisition 
planning, prior to the Gulf Coast hurricanes at either the headquarters 
or field office levels. 

* In the aftermath of the Gulf Coast hurricanes, SBA has planned or 
initiated several measures that officials said would enhance the 
agency's capacity to respond to future disasters. For example, SBA 
officials said that the agency has completed an expansion of DCMS's 
user capacity to support a minimum of 8,000 concurrent users as 
compared with 1,500 concurrent users supported for the Gulf Coast 
hurricanes. Additionally, SBA initiated measures or established plans 
to address the logistical challenges that it faced in responding to the 
disasters, such as taking steps to increase the availability of trained 
and experienced disaster staff. However, we have also identified 
several apparent limitations in SBA' disaster planning process, 
including that the agency has not established time lines for completing 
key elements of the plan, assessed whether the supplemental use of 
simulations and models would enhance the planning process, and 
developed a long-term strategy to obtain suitable office space in a 
disaster situation. 

We recommended in our July 2006 report that SBA take several actions to 
enhance DCMS, such as reassessing the system's maximum user capacity in 
light of information available from catastrophe risk modeling firms and 
disaster simulations. As I discussed earlier, SBA officials said that 
DCMS's capacity has been enhanced. We also recommended that SBA 
strengthen its DCMS contractor oversight and further stress test the 
system. In the report we are releasing today, we recommended, among 
other things, that SBA develop time frames for completing key elements 
of its disaster management plan. SBA agreed with these recommendations. 
However, it remains to be seen how comprehensive the agency's final 
disaster management plan will be and how it will help SBA respond to a 
future disaster. 

Background: 

SBA was established by the Small Business Act of 1953 to fulfill the 
role of several agencies that previously assisted small businesses 
affected by the Great Depression and, later, by wartime competition. 
SBA's stated purpose is to promote small business development and 
entrepreneurship through business financing, government contracting, 
and technical assistance programs. In addition, SBA serves as a small 
business advocate, working with other federal agencies to, among other 
things, reduce regulatory burdens on small businesses. 

SBA also provides low-interest, long-term loans to individuals and 
businesses to assist them with disaster recovery through its Disaster 
Loan Program--the only form of SBA assistance not limited to small 
businesses. Homeowners, renters, businesses of all sizes, and nonprofit 
organizations can apply for physical disaster loans for permanent 
rebuilding and replacement of uninsured or underinsured disaster- 
damaged property. Small businesses can also apply for economic injury 
disaster loans to obtain working capital funds until normal operations 
resume after a disaster declaration. SBA's Disaster Loan Program 
differs from the Federal Emergency Management Agency's (FEMA) 
Individuals and Households Program (IHP). For example, a key element of 
SBA's Disaster Loan Program is that the disaster victim must have 
repayment ability before a loan can be approved whereas FEMA makes 
grants under the IHP that do not have to be repaid.[Footnote 5] 
Further, FEMA grants are generally for minimal repairs and, unlike SBA 
disaster loans, are not designed to help restore the home to its 
predisaster condition. 

In January 2005, SBA began using DCMS to process all new disaster loan 
applications. SBA intended for DCMS to help it move toward a paperless 
processing environment by automating many of the functions staff 
members had performed manually under its previous system. These 
functions include both obtaining referral data from FEMA and credit 
bureau reports, as well as completing and submitting loss verification 
reports from remote locations. 

DCMS's Limited Capacity and Difficulties in Other Logistical Areas 
Impeded SBA's Response to the Gulf Coast Hurricanes: 

Our July 2006 report identified several significant limitations in 
DCMS's capacity and other system and procurement deficiencies that 
likely contributed to the challenges that SBA faced in providing timely 
assistance to Gulf Coast hurricane victims as follows: 

* First, due to limited capacity, the number of SBA staff who could 
access DCMS at any one time to process disaster loans was restricted. 
Without access to DCMS, the ability of SBA staff to process disaster 
loan applications in an expeditious manner was diminished. 

* Second, SBA experienced instability with DCMS during the initial 
months following Hurricane Katrina, as users encountered multiple 
outages and slow response times in completing loan processing tasks. 
According to SBA officials, the longest period of time DCMS was 
unavailable to users due to an unscheduled outage was 1 business day. 
These unscheduled outages and other system-related issues slowed 
productivity and affected SBA's ability to provide timely disaster 
assistance. 

* Third, ineffective technical support and contractor oversight 
contributed to the DCMS instability that SBA staff initially 
encountered in using the system. Specifically, a DCMS contractor did 
not monitor the system as required or notify the agency of incidents 
that could increase system instability. Further, the contractor 
delivered computer hardware for DCMS to SBA that did not meet contract 
specifications. 

In the report that we are releasing today, we identified other 
logistical challenges that SBA experienced in providing disaster 
assistance to Gulf Coast hurricane victims. For example, SBA moved 
urgently to hire more than 2,000 mostly temporary employees at its Ft. 
Worth, Texas disaster loan processing center through newspaper and 
other advertisements (the facility increased from about 325 staff in 
August 2005 to 2,500 in January 2006). SBA officials said that ensuring 
the appropriate training and supervision of this large influx of 
inexperienced staff proved very difficult. Prior to Hurricane Katrina, 
SBA had not maintained the status of its disaster reserve corps, which 
was a group of potential voluntary employees trained in the agency's 
disaster programs. According to SBA, the reserve corps, which had been 
instrumental in allowing the agency to provide timely disaster 
assistance to victims of the September 11, 2001 terrorist attacks, 
shrank from about 600 in 2001 to less than 100 in August 2005.[Footnote 
6] 

Moreover, SBA faced challenges in obtaining suitable office space to 
house its expanded workforce. For example, SBA's facility in Ft. Worth 
only had the capacity to house about 500 staff whereas the agency hired 
more than 2,000 mostly temporary staff to process disaster loan 
applications. While SBA was able to identify another facility in Ft. 
Worth to house the remaining staff, it had not been configured to serve 
as a loan processing center. SBA had to upgrade the facility to meet 
its requirements. Fortunately, in 2005, SBA was also able to quickly 
reestablish a loan processing facility in Sacramento, California, that 
had been previously slated for closure under an agency reorganization 
plan. The facility in Sacramento was available because its lease had 
not yet expired, and its staff was responsible for processing a 
significant number of Gulf Coast hurricane related disaster loan 
applications. 

As a result of these and other challenges, SBA developed a large 
backlog of applications during the initial months following Hurricane 
Katrina. This backlog peaked at more than 204,000 applications 4 months 
after Hurricane Katrina. By late May 2006, SBA took about 74 days on 
average to process disaster loan applications, compared with the 
agency's goal of within 21 days. 

Unprecedented Loan Application Volume and SBA's Limited Disaster 
Planning Contributed to Challenges in Providing Timely Assistance to 
Hurricane Victims: 

As we stated in our July 2006 report, the sheer volume of disaster loan 
applications that SBA received was clearly a major factor contributing 
to the agency's challenges in providing timely assistance to Gulf Coast 
hurricane. As of late May 2006, SBA had issued 2.1 million loan 
applications to hurricane victims, which was four times the number of 
applications issued to victims of the 1994 Northridge, California, 
earthquake, the previous single largest disaster that the agency had 
faced. Within 3 months of Hurricane Katrina making landfall, SBA had 
received 280,000 disaster loan applications or about 30,000 more 
applications than the agency received over a period of about 1 year 
after the Northridge earthquake. 

However, our two reports on SBA's response to the Gulf Coast hurricanes 
also found that the absence of a comprehensive and sophisticated 
planning process contributed to the challenges that the agency 
faced.[Footnote 7] For example, in designing DCMS, SBA used the volume 
of applications received during the Northridge, California, earthquake 
and other historical data as the basis for planning the maximum number 
of concurrent agency users that the system could accommodate. SBA did 
not consider the likelihood of more severe disaster scenarios and, in 
contrast to insurance companies and some government agencies, use the 
information available from catastrophe models or disaster simulations 
to enhance its planning process. Since the number of disaster loan 
applications associated with the Gulf Coast hurricanes greatly exceeded 
that of the Northridge earthquake, DCMS's user capacity was not 
sufficient to process the surge in disaster loan applications in a 
timely manner. 

Additionally, SBA did not adequately monitor the performance of a DCMS 
contractor or stress test the system prior to its implementation. In 
particular, SBA did not verify that the contractor provided the agency 
with the correct computer hardware specified in its contract. SBA also 
did not completely stress test DCMS prior to implementation to ensure 
that the system could operate effectively at maximum capacity. If SBA 
had verified the equipment as required or conducted complete stress 
testing of DCMS prior to implementation, its capacity to process Gulf 
Coast related disaster loan applications may have been enhanced. 

In the report we are releasing today, we found that SBA did not engage 
in comprehensive disaster planning for other logistical areas--such as 
workforce or space acquisition planning--prior to the Gulf Coast 
hurricanes at either the headquarters or field office levels. For 
example, SBA had not taken steps to help ensure the availability of 
additional trained and experienced staff such as (1) cross-training 
agency staff not normally involved in disaster assistance to provide 
backup support or (2) maintaining the status of the disaster reserve 
corps as I previously discussed. In addition, SBA had not thoroughly 
planned for the office space requirements that would be necessary in a 
disaster the size of the Gulf Coast hurricanes. While SBA had developed 
some estimates of staffing and other logistical requirements, it 
largely relied on the expertise of agency staff and previous disaster 
experiences--none of which reached the magnitude of the Gulf Coast 
hurricanes--and, as was the case with DCMS planning, did not leverage 
other planning resources, including information available from disaster 
simulations or catastrophe models. 

SBA Has Taken Steps to Better Prepare for Future Disasters, but Their 
Effectiveness Remains to Be Seen: 

In our July 2006 report, we recommended that SBA take several steps to 
enhance DCMS, such as reassessing the system's capacity in light of the 
Gulf Coast hurricane experience and reviewing information from disaster 
simulations and catastrophe models. We also recommended that SBA 
strengthen its DCMS contractor oversight and further stress test the 
system. SBA agreed with these recommendations. I note that SBA has 
completed an effort to expand DCMS's capacity. SBA officials said that 
DCMS can now support a minimum of 8,000 concurrent agency users as 
compared with only 1,500 concurrent users for the Gulf Coast 
hurricanes. Additionally, SBA has awarded a new contract for the 
project management and information technology support for DCMS. The 
contractor is responsible for a variety of DCMS tasks on SBA's behalf 
including technical support, software changes and hardware upgrades, 
and supporting all information technology operations associated with 
the system. 

In the report we are releasing today, we identified other measures that 
SBA has planned or implemented to better prepare for and respond to 
future disasters. These steps include appointing a single individual to 
coordinate the agency's disaster preparedness planning and coordination 
efforts, enhancing systems to forecast the resource requirements to 
respond to disasters of varying scenarios, and redesigning the process 
for reviewing applications and disbursing loan proceeds.[Footnote 8] 
Additionally, SBA has planned or initiated steps to help ensure the 
availability of additional trained and experienced staff in the event 
of a future disaster. According to SBA officials, these steps include 
cross-training staff not normally involved in disaster assistance to 
provide back up support, reaching agreements with private lenders to 
help process a surge in disaster loan applications, and reestablishing 
the disaster reserve corps with 750 individuals as of January 2007. 

However, the report also discusses apparent limitations we found in 
SBA's disaster planning processes. For example, SBA has not established 
a time line for completing the key elements of its disaster management 
plan, such as cross-training nondisaster staff to provide back up 
support. In addition, SBA has not assessed whether the agency could 
leverage outside resources to enhance its disaster planning and 
preparation efforts, such as information available from disaster 
simulations and catastrophe models.[Footnote 9] Finally, SBA had not 
established a long-term process to help ensure that it could acquire 
suitable office space to house an expanded workforce to respond to a 
future disaster. 

To strengthen SBA capacity to respond to a future disaster, the report 
recommends that SBA: 

* develop time frames for completing key elements of the disaster 
management plan (and a long-term strategy for acquiring adequate office 
space); and: 

* direct staff involved in developing the disaster plan to continue 
assessing whether the use of disaster simulations or catastrophe models 
would enhance the agency's overall disaster planning process. 

SBA agreed to implement each of these recommendations. However, it 
remains to be seen how comprehensive SBA's final disaster management 
plan will be and how effectively the agency will respond to a future 
disaster. 

Madam Chairwoman, this concludes my prepared statement. I would be 
happy to answer any questions at this time. 

GAO Contact and Staff Acknowledgments: 

For further information on this testimony, please contact William B. 
Shear at (202) 512-8678 or Shearw@gao.gov. Contact points for our 
Offices of Congressional Affairs and Public Affairs may be found on the 
last page of this statement. Individuals making key contributions to 
this testimony included Wesley Phillips, Assistant Director; Marshall 
Hamlett; Barbara S. Oliver; and Cheri Truett. 

FOOTNOTES 

[1] GAO, Small Business Administration: Actions Needed to Provide More 
Timely Disaster Assistance, GAO-06-860 (Washington, D.C.: July 28, 
2006). 

[2] GAO, Small Business Administration: Additional Steps Needed to 
Enhance Agency Preparedness for Future Disasters, GAO-07-114 
(Washington, D.C.: Feb. 14, 2007). 

[3] See, for example, GAO, Catastrophic Disasters: Enhanced Leadership, 
Capabilities, and Accountability Controls Will Improve the 
Effectiveness of the Nation's Preparedness, Response, and Recovery 
System, GAO-06-618 (Washington, D.C.: Sept. 6, 2006). 

[4] Federal agencies and other organizations have developed assessments 
of the potential destructive consequences of varying disaster 
scenarios, which are intended to help federal, state, and local 
agencies enhance their disaster planning. Moreover, many insurance 
companies and state entities that provide catastrophe insurance 
coverage currently use computer programs offered by several modeling 
firms to estimate the financial consequences of various natural 
catastrophe scenarios. 

[5] FEMA grants are also not available to businesses. 

[6] SBA's disaster reserve corps consists of individuals, including 
retirees and students, who have backgrounds in the agency's disaster 
assistance programs (e.g., finance and customer support) and who are 
willing to work on a temporary basis for the agency in an emergency 
situation. Such individuals must agree to relocate within 40 hours of 
notification of a disaster situation where their services are required 
by SBA. 

[7] The report we are issuing today (GAO-07-114) discusses the need for 
federal agencies and other organizations to engage in comprehensive 
disaster planning based on previous GAO work, reports by other 
investigative organizations, and the views of disaster planning 
experts. 

[8] As described in the report we are issuing today (GAO-07-114), SBA 
faced a significant backlog in disbursing the funds associated with 
approved disaster loans in July 2006. SBA has redesigned the loan 
review and disbursement process in such a way that agency officials 
believe disbursement performance has been improved significantly. 

[9] SBA has contacted FEMA for more information about a catastrophe 
model that FEMA has developed. 

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