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.  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.  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.
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; the company must be at least 51 percent owned and controlled by U.S.  citizens; the company’s 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 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.
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.”  A 2004 statute permitted these same areas to remain qualified  until the release date of the 2010 census data.   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.
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.  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.  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.  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.  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).  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.  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.  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.  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.  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.  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.  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.
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.
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.  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.  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.  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).
In fiscal year 2006, 8 of 24 federal agencies met their HUBZone goals.  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.
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Summary:
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.