Small Business Administration: Response to the Gulf Coast Hurricanes Highlights Need for Enhanced Disaster Preparedness
Published: 2007-07-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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. While SBA has taken steps to enhance its capacity to respond to potential disasters, the process is ongoing and continued commitment and actions by agency managers are necessary. As of July 2006, SBA officials said that the agency had 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. Further, in June 2007, SBA released a disaster plan. While GAO has not evaluated the process SBA followed in developing its plan, consistent with recommendations in GAO reports, the plan states that SBA is incorporating catastrophe models into its planning process, an effort which appears to be at an early stage. GAO encourages SBA to actively pursue the use of catastrophe models and other initiatives that may further enhance its capacity to better respond to future disasters.

section_title: Letter
paragraphs: I am pleased 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. The  second report, which was released in February, discusses SBA’s disaster  planning for other logistical areas, such as hiring and training a capable  workforce and acquiring necessary office space. 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.
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.
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. 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.
While SBA has taken steps to enhance its capacity to respond to potential  disasters, the process is ongoing and continued commitment and actions  by agency managers are necessary. As of July 2006, SBA officials said that  the agency had 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. Further, in June  2007, SBA released a disaster plan. While we have not evaluated the  process SBA followed in developing its plan, consistent with  recommendations in our reports, the plan states that SBA is incorporating  catastrophe models into its planning process, an effort that appears to be  at an early stage. SBA’s plan also anticipates using 400 staff who are not  normally involved in disaster assistance programs to provide back-up  support in an emergency. SBA officials said about half of these individuals  will be trained as of the end of this month with the remainder trained by  this Fall. We encourage SBA to actively pursue this and other initiatives  that may further enhance its capacity to better respond to future disasters,  and we will monitor SBA’s efforts to implement our recommendations.
subsections: section_title: Background
paragraphs: 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. 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.
section_title: DCMS’s Limited Capacity and Difficulties in Other Logistical Areas Impeded SBA’s Response to the Gulf Coast Hurricanes
paragraphs: 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 released in February, 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.
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.
section_title: Unprecedented Loan Application Volume and SBA’s Limited Disaster Planning Contributed to Challenges in Providing Timely Assistance to Hurricane Victims
paragraphs: 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. 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 issued in February, 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.
section_title: SBA Has Taken Steps to Better Prepare for Disasters, but Continued Commitment and Actions Are Necessary
paragraphs: 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 released in February, we identified other measures that SBA  had 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, redesigning the process for reviewing  applications and disbursing loan proceeds, and enhancing its long-term  capacity to acquire adequate facilities in an emergency. Additionally, SBA  had 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 Active Reserve Corps, which  had reached about 630 individuals as of June 2007.
While SBA has taken a variety of steps to enhance its capacity to respond  to disasters, I note that these efforts are ongoing and continued  commitment and actions by agency managers are necessary. In June 2007,  SBA released a plan for responding to disasters. While we have not  evaluated the process SBA followed in developing its plan, according to  the SBA plan, the agency is incorporating catastrophe models into its  disaster planning processes as we recommended in both reports. For  example, the plan states that SBA is using FEMA’s catastrophe model,  which is referred to as HAZUS, in its disaster planning activities. Further,  based on information provided by SBA, the agency is also exploring the  use of models developed by private companies to assist in its disaster  planning efforts. These efforts to incorporate catastrophe models into the  disaster planning process appear to be at an early stage.
SBA’s plan also anticipates further steps to ensure an adequate workforce  is available to respond to a disaster, including training and using 400 non- disaster program office staff to assist in responding to the 2007 hurricane  season and beyond. According to SBA officials, about 200 of these staff  members will be trained in reviewing loan applications and providing  customer service by the end of this month and the remainder will be  trained by this Fall. We encourage SBA to actively pursue initiatives that  may further enhance its capacity to better respond to future disasters, and  we will monitor SBA’s efforts to implement our recommendations.
Mr. Chairman, this concludes my prepared statement. I would be happy to  answer any questions at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: 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; Triana Bash; Alison Gerry;  Marshall Hamlett; Barbara S. Oliver; and Cheri Truett.
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