Small Business Administration: Status of Efforts to Address Previous Recommendations on the HUBZone Program
Published: 2009-03-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony discusses the Small Business Administration's (SBA) Historically Underutilized Business Zone (HUBZone) program. Created in 1997, the HUBZone program provides federal contracting assistance to small businesses located in economically distressed communities, or HUBZone areas, with the intent of stimulating economic development in those areas. In fiscal year 2007, federal agencies awarded contracts valued at about $8 billion to HUBZone firms. Firms that participate in the program must be located in a HUBZone and employ residents of HUBZones to facilitate the goal of bringing capital and employment opportunities to distressed areas. My statement today is based on work we performed to update the status of recommendations we made in our June 2008 report on the HUBZone program and reiterated in a July 2008 testimony. These recommendations called for SBA to improve its controls over the HUBZone program and assess the program's effectiveness. Specifically, this testimony discusses SBA's progress in (1) ensuring that the HUBZone map is accurate; (2) developing and implementing guidance to ensure that participating firms are eligible; (3) eliminating the backlog of recertifications; (4) formalizing and adhering to time frames for decertifying ineligible firms; and (5) developing measures and implementing plans to assess the effectiveness of the program.
section_title: What GAO Found
paragraphs: At the time of the July 2008 testimony and in subsequent correspondence we received from SBA, we observed that the agency did not recognize the commitment required to address the HUBZone program's deficiencies and implement our recommendations. SBA officials told us that they recognize the commitment required to implement our recommendations. Consistent with this recognition, SBA is now working with a contractor to re-engineer its HUBZone program. In summary, SBA has initiated some steps to address the HUBZone program's deficiencies and implement our recommendations.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the Small Business  Administration’s (SBA) Historically Underutilized Business Zone  (HUBZone) program. Created in 1997, the HUBZone program provides  federal contracting assistance to small businesses located in economically  distressed communities, or HUBZone areas, with the intent of stimulating  economic development in those areas. In fiscal year 2007, federal agencies  awarded contracts valued at about $8 billion to HUBZone firms. Firms that  participate in the program must be located in a HUBZone and employ  residents of HUBZones to facilitate the goal of bringing capital and  employment opportunities to distressed areas.
My statement today is based on work we performed to update the status of  recommendations we made in our June 2008 report on the HUBZone  program and reiterated in a July 2008 testimony. These recommendations  called for SBA to improve its controls over the HUBZone program and  assess the program’s effectiveness. Specifically, in my testimony, I will  discuss SBA’s progress in (1) ensuring that the HUBZone map is accurate;  (2) developing and implementing guidance to ensure that participating  firms are eligible; (3) eliminating the backlog of recertifications; (4)  formalizing and adhering to time frames for decertifying ineligible firms;  and (5) developing measures and implementing plans to assess the  effectiveness of the program.
To determine SBA’s progress in implementing our recommendations, we  obtained and reviewed related agency documentation. We also conducted  random queries of its Web-based HUBZone map to assess its accuracy.  Finally, we interviewed SBA program officials and contractors to  determine the status of plans to improve controls over the program and  assess its effectiveness. We conducted this performance audit from  January 2009 through March 2009 in accordance with generally accepted  government auditing standards. Those standards require that we plan and  perform the audit to obtain sufficient, appropriate evidence to provide a  reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
At the time of the July 2008 testimony and in subsequent correspondence  we received from SBA, we observed that the agency did not recognize the  commitment required to address the HUBZone program’s deficiencies and  implement our recommendations. SBA officials told us that they recognize  the commitment required to implement our recommendations. Consistent  with this recognition, SBA is now working with a contractor to re-engineer  its HUBZone program.
In summary, SBA has initiated some steps to address the HUBZone  program’s deficiencies and implement our recommendations. Specifically,  In our last report we found that SBA’s HUBZone map was inaccurate and  we recommended that the agency fix the inaccuracies and ensure that the  map remains accurate. SBA, through its mapping contractor, updated its  HUBZone map in September 2008. However, SBA does not have a process  in place to ensure that the map remains accurate. Agency officials stated  that a contractor is conducting business process re-engineering that will  include a focus on its mapping processes. However, the re-engineering  efforts are in the early stages.
In our June 2008 report, we stated that SBA’s mechanisms for certifying  and monitoring firms provided limited assurance that only eligible firms  participated in the program. We recommended that SBA develop and  implement guidance to more routinely and consistently obtain supporting  documentation and conduct more frequent site visits to ensure that firms  are eligible. SBA has made limited progress in ensuring that participating  firms are eligible for the HUBZone program. SBA issued a guide for  analysts to use when reviewing applications to ensure that they  consistently request supporting documentation. Further, since July 2008,  SBA has requested supporting documentation from each new applicant.  While SBA has not conducted more frequent site visits to verify the  information it receives from firms, SBA officials stated that they do plan to  conduct site visits of all HUBZone firms that received a contract in fiscal  year 2007 during fiscal year 2009. As of March 2009, SBA conducted 7 site  visits of those firms.
Our June 2008 report stated that SBA had not followed its policy of  recertifying firms (that is, the process through which SBA can monitor  firms’ continued eligibility) every three years and as a result there was a  backlog of more than 4,600 firms that had went unmonitored for more  than three years. We recommended that the agency eliminate the backlog  and take the necessary steps to ensure recertifications are completed in a  more timely fashion. In September 2008, SBA eliminated the backlog of  recertifications by hiring additional staff but has yet to implement  necessary procedures to ensure that future recertifications are completed  in a timely fashion. SBA officials stated that the ongoing business process  re-engineering will include an assessment of the recertification process.
In our last report we also found that SBA lacked a formal policy on time  frames for decertifying firms (that is, removing ineligible firms from the  list of certified firms) and that many firms were not decertified within its  informal goal of 60 days. We recommended that SBA formalize its 60-day  goal and adhere to it. The agency has formalized a specific time frame for  decertifying firms, but it is not clear whether staff are adhering to the  policy. In December 2008, SBA issued a procedural notice that formalized  a 60-day time frame for processing firms for decertification. Because SBA  formalized the time frame recently, we were unable to verify whether staff  were adhering to it.
In June 2008 we also found that SBA had not implemented plans to assess  the effectiveness of the HUBZone program and we recommended that SBA  develop performance measures and implement plans to assess its  effectiveness. SBA has not begun to assess the effectiveness of the  HUBZone program. In August 2008, SBA issued a notice of methodology in  the Federal Register for measuring the impact of the HUBZone program.  However, the proposed methodology was not well developed. For  example, it did not incorporate expert input or a previous study conducted  by SBA’s Office of Advocacy. We do not believe that this effort was a  useful process to address our recommendation.
subsections: section_title: Background
paragraphs: 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 census tracts,  nonmetropolitan counties, Indian reservations, redesignated areas (that is,  census tracts or nonmetropolitan counties that no longer meet the criteria  but remain eligible until after the release of the 2010 decennial census  data), and base closure areas.
To be certified to participate in the HUBZone program, a firm must meet  the following four criteria:    must be small by SBA size standards;   must be at least 51 percent owned and controlled by U.S. citizens;    principal office—the location where the greatest number of employees  perform their work—must be located in a HUBZone; and    at least 35 percent of the full-time (or full-time equivalent) employees must  reside in a HUBZone.
There are more than 14,000 HUBZone areas, and as of January 2009, 9,300  certified firms participated in the HUBZone program. More than 4,200  HUBZone firms obtained approximately $8.1 billion in federal contracts in  fiscal year 2007. The annual federal contracting goal for HUBZone small  businesses is 3 percent of all prime contract awards—contracts that are  awarded directly by an agency.
section_title: SBA Updated Its HUBZone Map but Has Not Implemented Procedures to Ensure That It Remains Accurate
paragraphs: SBA relies on its map to publicize HUBZone areas and to determine, in  part, whether firms are eligible for the program. Our June 2008 report  found problems with SBA’s HUBZone map. First, the map included 50  metropolitan counties as difficult development areas that did not meet this  or any other criterion for inclusion as a HUBZone area. As a result of  these errors, from October 2006 through March 2008, federal agencies  obligated about $5 million through HUBZone set-aside contracts to 12  firms located in these ineligible areas. In addition, we found that the  HUBZone map had not been updated since August 2006. Our analysis of  2007 Bureau of Labor Statistics unemployment data indicated that 27  additional nonmetropolitan counties should have been identified on the  map, allowing qualified firms in these areas to participate in the program.  Because firms are not likely to receive information on the HUBZone status  of areas from other sources, firms in the 27 areas would have believed  from the map that they were ineligible to participate in the program and  could not benefit from contracting incentives that certification provides.
In our June 2008 report, we recommended that SBA take immediate steps  to correct and update the map and implement procedures to ensure that it  is updated with the most recently available data on a more frequent basis.  In response to our recommendation, SBA stated that, through a contract,  the map was updated in September 2008. However, SBA has not  implemented procedures to ensure that the map remains accurate. SBA  officials stated it is currently re-engineering its internal processes, which  include its mapping efforts, and plans to develop a competitive  procurement that will include test plans and technical support for future  map updates. Because SBA is in the early stages of both efforts, the map  may not remain accurate. Therefore, if the map is not regularly updated,  ineligible small businesses may be able to participate in the program,  while eligible businesses may not be able to participate.
section_title: SBA Has Made Limited Progress in Ensuring the Eligibility of Firms
paragraphs: In June 2008, we reported that the policies and procedures upon which  SBA relies to certify firms provided limited assurance that only eligible  firms participated in the HUBZone program. Specifically, we found that,  for certification and recertification, firms self-reported information on  their applications. Rather than providing specific guidance or criteria for  when HUBZone program staff should request supporting documentation,  SBA’s policy allowed the staff to determine what circumstances warranted  a request for supporting documentation. Internal control standards for  federal agencies require that agencies collect and maintain documentation  and verify information to support their programs; however, we found that  SBA requested documentation or conducted site visits of firms to validate  the self-reported data in limited instances. Our analysis of the 125  applications submitted in September 2007 showed that SBA requested  supporting documentation for 36 percent of the applications and  conducted one site visit. As a follow-on to our previous fraud  investigation, we also identified cases of fraud and abuse in the program  and examined actions SBA has taken to establish an effective fraud  prevention system; we are publicly reporting the results of this  investigation today in a separate publication.
To improve its ability to ensure that only eligible firms participate in the  program, we recommended in our June 2008 report that SBA develop and  implement guidance to more routinely and consistently obtain supporting  documentation upon application and conduct more frequent site visits, as  appropriate, to ensure that firms applying for certification are eligible.  Subsequent to our report and testimony, SBA issued a desktop guide for  analysts to use when they review applications. This guide provides  examples of the types of documents to request and when to request them.  In addition, since July 2008, SBA officials stated that they have been  consistently collecting supporting documentation from each new  applicant. However, the agency has not conducted more frequent site  visits to verify the information firms submit. SBA officials stated that they  do plan to conduct site visits of all HUBZone firms that received a contract  in fiscal year 2007 during fiscal year 2009. As of March 2009, SBA  conducted 7 site visits of those firms. Because of SBA’s limited progress,  ineligible firms may still be able to participate in the HUBZone program  and receive federal contracts based on their HUBZone certification.
section_title: SBA Eliminated Its Backlog of Recertifications but Has Not Established a Process or Procedures to Prevent Future Backlogs
paragraphs: In our June 2008 report, we noted that SBA did not follow its own policy of  recertifying all firms every 3 years. We found that SBA failed to recertify  4,655 of the 11,370 firms (more than 40 percent) that had been in the  program for more than 3 years. Of the 4,655 firms that should have been  recertified, 689 had been in the program for more than 6 years. According  to HUBZone program officials, the agency lacked sufficient staff to  complete the recertifications. As a result of the backlog, the periods during  which some firms went unmonitored and reviewed for eligibility were  longer than SBA policy allowed, increasing the risk that ineligible firms  were participating in the program.
We recommended that SBA establish a specific time frame for eliminating  the backlog of recertifications and take the necessary steps to ensure that  recertifications were completed in a more timely fashion in the future. In  response to our recommendation, SBA temporarily obtained additional  staff for the HUBZone program and eliminated the backlog by September  30, 2008. However, SBA has not implemented processes or procedures to  ensure that future recertifications will be completed in a more timely  fashion. SBA officials stated that its ongoing business process re- engineering includes an assessment of the recertification process.  However, as of March 2009, SBA has made limited progress in this effort.  As a result, there is still an increased risk that ineligible firms may  continue to participate in the program.
section_title: SBA Has Formalized a Specific Time frame for Decertifying Firms
paragraphs: Our July 2008 report also noted that SBA did not have a policy that  included specific time frames for processing decertifications—the  determinations subsequent to recertification reviews or examinations that  firms are no longer eligible to participate in the HUBZone program. We  found that although SBA did not have written guidance for the  decertification time frame, the HUBZone program office had negotiated an  informal (unwritten) goal of 60 days with the SBA Inspector General in  2006. From fiscal years 2004 through 2007, SBA failed to resolve proposed  decertifications within its goal of 60 days for more than 3,200 firms. While  SBA’s timeliness had improved, in 2007 more than 400 (or about 33  percent) of decertifications were not resolved in a timely manner. As a  consequence of generally not meeting its 60-day goal, lags in the  processing of decertifications increased the risk of ineligible firms  participating in the program.
In our report, we recommended that SBA formalize and adhere to a  specific time frame for processing firms proposed for decertification. In  response, SBA issued a procedural notice in December 2008 that  formalized the 60-day time frame for processing decertifications. Because  SBA recently formalized this time frame, we were unable to verify whether  SBA staff are adhering to it.
section_title: SBA Has Not Developed Measures or Implemented Plans to Assess the Effectiveness of the HUBZone Program
paragraphs: In June 2008, we reported that SBA had taken limited steps to assess the  effectiveness of the HUBZone program. We found that SBA’s three  performance measures for the HUBZone program were not directly linked  to the program’s mission of stimulating economic development and  creating jobs in economically distressed communities. The Office of  Management and Budget also noted in its 2005 Program Assessment  Rating Tool (PART) that SBA needed to develop baseline measures for  some of its HUBZone performance measures and encouraged SBA to focus  on more outcome-oriented measures that better evaluate the results of the  program. In addition, the PART assessment documented plans that SBA  had to conduct an analysis of the economic impact of the HUBZone  program on a community-by-community basis using data from the 2000  and 2010 decennial census. However, SBA officials indicated that the  agency lacked the resources necessary to develop baseline measures or to  assess the results of the program.
In our report, we recommended that SBA further develop measures and  implement plans to assess the effectiveness of the HUBZone program. In  addition, in May 2008, after the completion of the audit work for our June  2008 report, SBA’s Office of Advocacy (Advocacy) issued a report  assessing the economic impacts of the HUBZone program. In our view,  the Advocacy’s report could provide, in part, a foundation for further  assessments. In August 2008, in response to our recommendation, SBA  published a Notice of Methodology in the Federal Register for measuring  the economic impact of the HUBZone program. Rather than conducting a  comprehensive effort that considered relevant literature, input from  experts in economics and performance measurement, and the  methodological contributions of the Advocacy’s evaluation, SBA officials  planned to rely on public comments to refine the planned methodology.  Two comment letters were submitted. Based on our review, we do not  believe this effort was a sound process for developing measures to assess  the effectiveness of the program. During subsequent discussions we held  with agency staff about this issue, they stated that they have initiated a  new effort to address this issue. However, because the agency has not  evaluated the HUBZone program’s benefits, SBA continues to lack key  information that could help it better manage the program and inform the  Congress of its results.
Madam Chairwoman, this concludes my prepared statement. I would be  happy to answer any questions at this time.
section_title: Contacts and Acknowledgments
paragraphs: For further information on this testimony, please contact William B. Shear  at (202) 512-8678 or shearw@gao.gov. Individuals making key  contributions to this testimony included Paige Smith (Assistant Director),  Triana Bash, Tania Calhoun, Julia Kennon, and Terence Lam.
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