Small Business Contracting: Opportunities Exist to Further Improve HUBZone Oversight
Released: 2015-02-12T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Small firms participating in SBA's HUBZone program received about $4 billion in federal contracts in fiscal year 2013. The program's purpose is to stimulate economic development in economically distressed areas. A certified HUBZone firm is eligible for federal contracting benefits, including limited competition awards such as sole-source and set-aside contracts. GAO previously reported on weaknesses in SBA's internal controls and problems with ensuring that only eligible firms participate in the program. GAO was asked to examine the steps SBA has taken to address these issues. This report (1) describes HUBZone designations and how SBA communicates with interested parties about the program, and (2) examines SBA's certification and recertification processes for firms.

To address these objectives, GAO analyzed statutory provisions, SBA documents, and federal procurement data. GAO also interviewed SBA and representatives from applicant firms (certified, decertified, and denied) and local economic development agencies located in four HUBZones selected for geographic diversity.

section_title: What GAO Found
paragraphs: The Small Business Administration (SBA) designates economically distressed areas as Historically Underutilized Business Zones (HUBZone), based on demographic data such as unemployment and poverty rates, but lacks an effective way to communicate program changes to small businesses. The designations apply to areas such as nonmetropolitan counties and census tracts and are subject to periodic changes as economic conditions change. Small businesses in HUBZones can apply for certification to participate in the program. HUBZones that lose their qualifying status due to changes in economic conditions become “redesignated” and undergo a 3-year transition period. In 2015, 3,417 redesignated areas will lose their HUBZone status. There are 578 firms in those areas (see table below). SBA relies on website updates and broadcast e-mails to inform firms about program changes, and consequently not all affected may be informed about the changes before their resultant decertification. SBA has initiated efforts to improve notification of program changes, but its communications may not reach all affected firms and do not specify when the status of areas might change or what firms are located in those areas. As a result, some firms in the program lack timely awareness of information that could affect their eligibility.

SBA has addressed weaknesses in its certification process that GAO previously identified, but lacks key controls for its recertification process. For instance, to receive certification SBA now requires all firms to provide documentation to show they meet the eligibility requirements. SBA also conducts site visits at selected firms based on, for example, the amount of federal contracts they received. However, SBA does not require firms seeking recertification to submit any information to verify their continued eligibility or provide guidance on when staff should request or verify documentation for recertification. Instead, it relies on firms attesting that they continue to meet the program's eligibility requirements. By not routinely requiring and reviewing key supporting documentation from recertification applicants, SBA is missing an additional opportunity to reduce the risk that ineligible firms obtain HUBZone contracts.

section_title: What GAO Recommends
paragraphs: SBA should (1) establish a mechanism to better ensure firms are notified of changes that could affect their participation in the program, and (2) assess the recertification process and implement additional controls, such as criteria and guidance for a risk-based approach to requesting and verifying information during recertification. SBA agreed with both recommendations.

section_title: Letter
paragraphs: The Small Business Administration (SBA) administers the Historically  Underutilized Business Zone (HUBZone) program, which was created in  1997. The program’s purpose is to stimulate economic development in  economically distressed communities by providing federal contracting  preferences to small businesses located in HUBZone areas that employ  residents of the areas. As of June, 2014, there were more than 18,500  HUBZones and about 5,200 firms in the program.

The contracting preferences that a certified HUBZone firm (one that  meets program requirements) can receive include limited competition  awards such as sole-source and set-aside contracts. A certified firm also  can receive a price evaluation preference of 10 percent in full and open  competition if the apparent successful offering firm is not a small  business. In addition, HUBZone firms can receive awards without set- asides (through open competition), through a small business set-aside, or  a set-aside through other programs. For example, a HUBZone firm that  also qualifies as a service-disabled veteran-owned small business could  receive an award under the Service-Disabled Veteran-Owned Small  Business program. In fiscal year 2013, federal agencies awarded prime  contracts valued at about $4 billion to HUBZone firms that were certified  as of June 2014. Federal agencies are responsible for trying to meet an  annual statutory goal for awarding contracts to HUBZone firms (3 percent  of all prime contracts and subcontracts).

We and SBA’s Office of Inspector General (OIG) previously have reported  on the need for SBA to strengthen its internal controls and fraud  prevention to ensure only eligible firms participate in the program. We  identified a number of internal control-related deficiencies in the  HUBZone program. For example, we identified problems with the  mechanisms that SBA used to certify and monitor firms and that SBA was  not following its policy of recertifying firms every 3 years (a certified firm  can participate in the program as long as it remains eligible and is  recertified).

You requested that we review the HUBZone program to examine steps  SBA has taken to address the issues we previously identified and some  potential changes in the program. This report (1) describes how  HUBZone designations change and how SBA communicates these  changes to interested parties, and (2) examines SBA’s certification and  recertification processes for firms, including the extent to which SBA has  implemented procedures to address recommendations previously made  to improve these processes. In addition, in the appendixes to this report  we present information about selected characteristics of HUBZones and  certified firms, how potential changes to designation criteria would affect  the number of HUBZones, and summary data related to HUBZone  application processing.

To address our objectives, we reviewed prior GAO and SBA OIG reports,  applicable statutes and regulations, and SBA documents, including its  Standard Operating Procedures (SOP), and interviewed SBA staff and  representatives from the HUBZone Contractors National Council—a  HUBZone trade association. We used SBA’s Dynamic Small Business  Search (DSBS) database and federal procurement data from the Federal  Procurement Data System-Next Generation (FPDS-NG) to analyze the  number of firms in different types of HUBZones and the number and  amount of federal contracts awarded to the firms in fiscal year 2013. We  analyzed data from the Census Bureau’s American Community Survey  (ACS) and unemployment data from the Bureau of Labor Statistics (BLS).  After reviewing related documentation or interviewing knowledgeable  agency officials, we deemed the DSBS, FPDS-NG, Census, BLS, and  SBA data sufficiently reliable for the purposes of describing the  characteristics of HUBZones, participating firms, and their contracting. To  examine SBA’s certification and recertification processes and the extent  to which SBA addressed previous recommendations, we reviewed SBA’s  policies and procedures for certification, recertification, and monitoring of  firms. We reviewed a purposive sample of 39 HUBZone applications  submitted in fiscal year 2013 to test the extent to which SBA followed its  processes. We reviewed and summarized available SBA analyses for  certification and recertification activities from January 2013 through  September 2014. For our sample of 39 applications, we also reviewed  data (related to SBA’s documentation and processing of applications)  extracted from the HUBZone Certification Tracking System (HCTS). To  discuss SBA’s certification and recertification processes and outreach  efforts, we also selected a purposive sample of 16 HUBZone firms, four  local economic development agencies, and one Native American Tribe  located in four HUBZones we selected for geographic diversity and range  of experiences. Of those entities, we interviewed representatives from  eight firms and two local economic development agencies (11 entities did  not respond to our requests for interviews or declined to speak with us).  We reviewed documentation about SBA’s efforts to keep certified firms  informed about the program. We also used data from HCTS to analyze  industry, application status, and processing times of applications received  from fiscal years 2008 through 2013. We assessed the reliability of the  HCTS data we used by reviewing related documentation, interviewing  knowledgeable officials, and electronic testing of the data, and found  them to be sufficiently reliable for the analysis we report, but there were  some internal inconsistencies that limited our reporting. Appendix I  contains additional information on our scope and methodology.

We conducted this performance audit from April 2014 to February 2015 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.
subsections: section_title: Background
paragraphs: There are four types of HUBZones. Initially, the HUBZone Act of 1997  (which established the HUBZone program) identified qualifying areas as qualified census tracts, which are determined by the area’s poverty  rate or household income; qualified nonmetropolitan counties, which are determined by the  area’s unemployment rate or median household income; and   lands within the external boundaries of an Indian reservation, based  on the areas meeting certain criteria.

In subsequent years, Congress expanded the criteria for HUBZones to  add bases closed under various base closure acts and include counties in  difficult development areas outside of the continental United States as  part of the qualified nonmetropolitan counties.

To be certified to participate in the HUBZone program, a firm must meet  the following criteria: when combined with its affiliates, be small by SBA size standards; be at least 51 percent owned and controlled by U.S. citizens; have its principal office—the location where the greatest number of  employees perform their work—located in a HUBZone; and have at least 35 percent of its employees reside in a HUBZone.

section_title: HUBZone Designations Can Change Relatively Frequently but SBA Communications May Not Reach All Affected Firms
paragraphs: HUBZone designations can change with some frequency. However,  SBA’s communications to firms about programmatic changes, including  changes to the HUBZone map (area designations), generally have not  been targeted or specific to individual firms that would be affected by the  changes.
subsections: section_title: Designations for HUBZone Areas Regularly Change
paragraphs: SBA updates the HUBZone designations regularly based on whether they  meet statutory criteria (such as having certain income levels or poverty or  unemployment rates). SBA generally uses data from other federal  agencies to determine if areas still qualify for the HUBZone program. SBA  reassesses the status of nonmetropolitan counties more frequently than it  reassesses the status of census tracts. For example, SBA updates the  nonmetropolitan county designations each January to incorporate median  household income data generated from ACS and each May to incorporate  updated unemployment rates from BLS. In contrast, SBA historically has  reassessed the status of qualified census tracts at multiyear intervals,  such as every 5 years, using the census tract designations that the  Department of Housing and Urban Development (HUD) uses for another  program. See appendix II for more information about the specific criteria  for each type of HUBZone area.

In 2001, Congress extended the eligibility of census tracts and  nonmetropolitan counties that lost HUBZone eligibility because of  changes in income levels or poverty or unemployment rates. These  areas—labeled redesignated areas—remain eligible for 3 years after “the  date on which the census tract or nonmetropolitan county ceased to be so  qualified.” During the 3-year period, firms in those areas can continue to  apply to and participate in the program and receive contracting  preferences. In 2004, Congress revised the definition of redesignated  areas to allow areas to retain eligibility for 3 years or until the public  release of data from the 2010 decennial census, whichever was later.  Consequently, all of the areas that were redesignated between 2001 and  October 2008 received an extension of their 3-year redesignation  period. With the release of 2010 Census data in October 2011, a large  number of previously redesignated HUBZone areas that had received the  extensions lost their designation, including 333 nonmetropolitan counties.  In total, 2,396 of the more than 8,000 HUBZone certified firms at the  beginning of fiscal year 2012 were decertified when these changes took  effect because their principal office was no longer located in a HUBZone.  (We discuss decertification in more detail later in this report.) The  redesignations for 3,417 HUBZones will expire in 2015, largely because  of the end of the approximately 3,400 census tracts that were  redesignated in 2012. Finally, redesignated areas also may requalify for  the program during their extended eligibility period. For example, after  receiving the most recent unemployment data from BLS, SBA may  change a nonmetropolitan county’s designation from redesignated to  qualified.

Qualified and redesignated areas generally are spread throughout the  United States (see fig. 1). The map suggests that more qualified  HUBZones are in the West and Southwest, but that is in part reflective of  the larger geographic size of the nonmetropolitan counties in those  regions. The map also suggests a higher concentration of areas within  redesignated HUBZones in the East Coast and Midwest. For information  about the characteristics of the HUBZones and differences in economic  conditions (for example, as indicated by poverty and unemployment  rates) among redesignated, qualified, and nonqualified areas, see  appendix II.

According to our analysis, 83 percent of certified firms are located in a  qualified area (see table 1). Most of the firms (578) that are located in a  redesignated HUBZone are located in areas that will have their  designations expire in 2015. When the redesignation status of an area  expires, HUBZone firms in that area lose their program certification  unless they relocate their principal office or, in some cases, their  employees move to another HUBZone.

section_title: SBA’s Communications about HUBZone Program Changes May Not Have Reached All Affected Firms
paragraphs: Generally, SBA relies on information posted on its website to  communicate with interested parties about the HUBZone program. For  instance, the HUBZone website includes links to the HUBZone map,  frequently asked questions, and guidance to help firms apply for and  maintain their certification. Firms can use the map of HUBZone areas to  determine if an address or a particular area is designated as a HUBZone.  More specifically, the website contains links to underlying data tables for  the HUBZone map, and provides a potential applicant or program  participant the ability to determine if a specific address is in a qualified  HUBZone. Firms also can access a help desk by e-mail to get status  information, help in resolving technical difficulties, or individualized  assistance; obtain eligibility assistance through a twice-weekly interactive  forum; and request a 15-minute appointment with a HUBZone analyst to  discuss topics such as HUBZone policies and procedures, initial  documents, or HUBZone applications. However, according to SBA  officials, firms are primarily responsible for keeping themselves informed  about the program so that they can remain eligible.
subsections: section_title: SBA’s Review of the Accuracy of HUBZone Maps
paragraphs: In our June 2008 report, we found that SBA’s HUBZone map contained  ineligible areas and had not been updated to include eligible areas. As a  result, ineligible small businesses had participated in the program, and  eligible businesses had not been able to participate. Consequently, we  recommended that SBA take steps to correct and update the map used to  identify HUBZone areas and implement procedures to ensure that the  map would be updated with the most recently available data on a more  frequent basis.

In response to our recommendation, SBA modified its contract with its  mapping vendor to enable more frequent updating of the HUBZone map  (annually). SBA officials stated that the accuracy of the map is checked  twice after each upgrade, first by the mapping vendor and second by an  SBA employee.

section_title: SBA Notifications about Program Changes May Not Reach All Affected Firms
paragraphs: SBA’s communications to firms about programmatic changes, including  changes to the HUBZone map (area designations), generally have not  been targeted or specific to individual firms and may not have reached all  affected firms. Since February 2013, SBA has used a broadcast e-mail  (which simultaneously sends the same message to multiple recipients) to  distribute information about the program, including changes to the  HUBZone maps. According to SBA officials, the e-mail list initially  included all certified firms, but firms certified since the list was created  have not been automatically added to the list. They and other interested  parties must sign up (subscribe) to receive the e-mails through SBA’s  website, and as a result not all certified firms may have done so.

Through fiscal year 2014, SBA sent 13 e-mails through the system,  covering topics such as changes made to the maps or the expiration of  redesignated nonmetropolitan counties. Of the 13 e-mails, 9 focused on  map-related issues. For example, a September 2014 e-mail notified  subscribers that redesignations for 102 nonmetropolitan counties would  expire on October 1, 2014. SBA also noted that there were 109 firms with  principal offices in a county with expiring status. The e-mail included a link  to the HUBZone map and a spreadsheet that showed the status of every  county in January and May 2014, and encouraged firms to check their  area’s status. However, the e-mail did not identify the firms with principal  offices in the counties that would lose redesignated status or identify the  specific counties.

Furthermore, according to SBA officials, SBA began using a revised  certification letter in October 2014 that includes links to the program’s  website and regulations, but unlike the previous certification letter that  SBA sent to firms it does not include information on whether the firm is in  a redesignated area or when that status will expire. According to  HUBZone program policy, the approval letter should include language  notifying the newly qualified firm of the possible expiration of the  HUBZone. According to SBA officials, the only time that a firm would be  directly notified that it was located in a redesignated area would be when  it received a notice of proposed decertification after the status of the area  expired. (We discuss the certification process later in the report.)  Federal internal control standards require that management ensure there  are adequate means of communicating with, and obtaining information  from, external stakeholders that may have a significant impact on the  agency achieving its goals.

In a May 2008 report, SBA’s Office of Advocacy stated that although  HUBZone staff had been described as helpful and informative, there did  not seem to be any systematic outreach or promotion of the program  beyond responding to inquiries. In October 2014, SBA announced the  development of a new initiative (Destination: HUB) that is intended to  promote and support HUBZone firms in federal contracting opportunities.  The initiative will consist of three major components; first, an in-depth  examination of successes and needs in the program; second, an analysis  of best practices for successful public-private partnerships; and third, the  launch of a broad grassroots educational initiative at the regional and  national levels.

SBA officials said that SBA does not include a list of firms in the e-mails it  sends because it wants every firm to be proactive and check its eligibility  status. According to SBA officials, SBA’s responsibility is to evaluate a  firm’s initial compliance and its ongoing eligibility (through recertifications,  program examinations, and protests); firms have a responsibility to  ensure that they remain eligible for the program. But the combination of  relatively frequent changes to HUBZone designations, SBA’s generally  nonspecific communications to firms as illustrated by its certification letter,  and the incomplete addressee list for the broadcast e-mails have  increased the possibility that not all certified firms affected by such  changes receive information about the changes or are made aware in a  timely fashion of any effects on their program eligibility. We recognize that  small businesses participating in the HUBZone program should be  responsible for determining their eligibility, and they appear to have the  ability to contact SBA to receive information specific to their situation.  However, given the information SBA has at its disposal and the large  number of HUBZone firms, SBA is in a position to better inform firms of  changes affecting program eligibility.

section_title: SBA Has Improved Its Certification Reviews but Actions Related to Recertification Were Limited
subsections: section_title: Revised Certification Process Includes a Full Document Review, Which Helps to Ensure That Only Eligible Firms Participate in the Program
paragraphs: SBA revised its certification process in response to our June 2008  recommendation, and now requires firms to provide documentation and  reviews this documentation to determine their eligibility for the HUBZone  program. As we reported in 2008, at that time SBA relied on data that  firms entered in the online application system and performed limited  verification of the self-reported information. Although agency staff had the  discretion to request additional supporting documentation, SBA did not  have specific guidance or criteria for such requests. We recommended  that SBA develop and implement guidance to more routinely and  consistently obtain supporting documentation upon application. The  agency agreed with our recommendation and, according to SBA officials,  since fiscal year 2009 SBA has required all firms to provide supporting  documentation for information they enter in SBA’s online application  system. SBA then performs a full-document review on all applications as  part of its initial certification process.

The current initial certification process comprises multiple steps (see fig.  2). For instance, after firms verify that the information they entered was  complete and accurate, administrative staff request supporting  documents from the applicant, including a lease agreement, map of  employees’ home addresses, personal and business tax returns, and  payroll records. According to SBA officials, one staff reviews and  analyzes the documents provided and makes a recommendation for the  application and a second staff reviews the analysis and  recommendation. Once a recommendation has been made, the  HUBZone program director performs a final review before making a final  determination. At the end of the process, SBA sends a signed letter to the  applicant stating either that the firm is certified, or the basis for denial if  the firm did not qualify. See appendix IV for summary statistics related to  SBA’s review of initial applications.

Our review of 39 application files SBA received from October 1, 2012,  through September 30, 2013, indicates that SBA conducts full  documentation review of the applications submitted by firms seeking  certification. For the 29 applications that were approved or denied, SBA  staff prepared an analysis to support their recommendation to approve or  deny the application. For 18 of the 29 applications, SBA staff followed  up with the applicant to obtain additional documentation; 12 of these  applicants provided the documents and were approved, and the  remaining 6 were denied because they did not. Our review of the  approval and denial letters relating to the 29 application files confirmed  that the final determination and the effective dates entered into the  system were the same.

We also found that SBA has not updated its SOP since 2009 when it  began making changes to its certification processes, but expects to do so  by the end of March 2015. Based on SBA’s response to a recent OIG  recommendation, the agency had planned to complete the update by  September 2014. The current SOP was last updated in November 2007  and therefore does not contain information about the full document  review. According to SBA officials, to guide staff reviewing HUBZone  certification packages, SBA currently uses guidance it developed that is  specific to addressing situations that may arise during certification  reviews. For example, the guidance discusses how to designate an  employee of a HUBZone firm as located at a principal office when a  person works an equal amount of time in a principal office and a  secondary office. The guidance also includes language that should be  included in a final e-mail request to the applicant firm when the analyst  determines that SBA needs to obtain clarification, additional documents,  or both to complete its review of the application package. According to  SBA officials, SBA had delayed updating the SOP because the agency  intended to revise the HUBZone regulations first and then incorporate  those changes into the SOP.

HUBZone trade association representatives told us that SBA has not  always clearly communicated information about its review process to  program applicants. They stated that the lack of clarity about SBA’s  certification review process likely could be solved through more education  and communication. For example, they noted that after SBA changed the  definition of an employee in May 2010 from an individual who was  required to work 30 hours per week to an individual who worked 40 hours  per month, the agency required that applicant firms provide  documentation verifying that the employee worked during the previous  month. However, according to the representatives, SBA then changed its  interpretation to require that the employee worked during the period  during which the application was submitted but did not communicate the  change to the industry. According to SBA officials, SBA discusses the  period that an employee must work in its frequently asked questions.  While SBA defined an employee in its frequently asked questions, we did  not find information related to the period that an employee must work to  meet the eligibility requirement.

SBA officials told us that the agency again reviews the eligibility of some  firms—generally, already certified firms—by conducting site visits to a  select number of firms every year. In June 2008, we reported that SBA  rarely conducted site visits during program examinations to verify a firm’s  information and recommended that the agency conduct more frequent  site visits. In response to that recommendation, according to SBA  officials, SBA now conducts site visits on 10 percent of its portfolio of  certified firms every year. According to the officials, the site visits are  based on established criteria (such as the amount of HUBZone contract  awards the firm has received) or done on an as-needed basis in  connection with the review of an initial certification application or after  receipt of a protest. SBA officials told us that SBA uses a pass/fail  system to describe the outcome of a site visit. In fiscal years 2013 and  2014, the officials told us that SBA selected 511 and 550 firms,  respectively, for site visits. In fiscal 2013, SBA noted that 81 percent of  the firms passed the site visit and 19 percent failed. For fiscal year 2014,  SBA noted that 88 percent of the firms passed and 12 percent failed.  According to SBA officials, SBA sends a notice of proposed  decertification to firms that fail a site visit. (We discuss decertification in  the next section.)

section_title: SBA May Propose Firms for Decertification If Eligibility Requirements Are Not Met
paragraphs: Once a firm is approved for participation in the HUBZone program, SBA  may decertify the firm if SBA determines that the firm is no longer eligible  for the program or if SBA is unable to verify the firm’s continuing  eligibility. For example, firms in redesignated areas are proposed for  decertification and are provided an opportunity to establish continued  eligibility following the expiration of the area’s redesignated status. For  instance, a firm could prove its continued eligibility by showing that it had  relocated its principal office to a qualified HUBZone area. These firms are  ultimately decertified if they do not respond to the notice of proposed  decertification by indicating that they are still eligible. According to SBA  officials, the decertification process typically consists of three steps.

SBA e-mails a notice of proposed decertification to the firm and allows  the firm 30 days to respond.   If the firm does not respond, SBA sends the notice of proposed  decertification to the firm by certified mail.   If the firm does not respond to the certified notice within 30 days, SBA  then decertifies the firm on the following day.

Decertification also can occur in two other ways. A firm voluntarily can  decertify if the firm determines that it no longer meets the program’s  eligibility requirements. SBA also can immediately decertify a firm during  the protest process if, according to SBA officials, SBA determines that the  firm did not meet the eligibility requirements at the time of bid and award,  or at the time of protest if the contract had not yet been awarded. From  fiscal year 2010 through fiscal year 2013, SBA reported 124 protests of  HUBZone contracts, of which 46 (37 percent) were dismissed, 41 (33  percent) were sustained, and 37 (30 percent) were denied.

SBA noted that it decertified 4,660 firms from fiscal year 2010 through  fiscal year 2013. The vast majority of decertifications occurred from fiscal  years 2010 through 2012. According to SBA officials, in fiscal year 2009,  before conducting a legacy portfolio review, SBA asked firms to confirm  their compliance with the program requirements or to voluntarily withdraw  from the program. The officials told us there were approximately 14,000  HUBZone firms that needed to validate their compliance with the program  eligibility requirements. At that time, SBA notified the firms that the  agency planned to conduct a full document review in 2009 or early 2010  to confirm compliance. According to SBA officials, many firms voluntarily  withdrew from the program as a part of this effort. As shown in figure 3,  our analysis of SBA data (for applications received from fiscal year 2010  through fiscal year 2013 for firms that were later decertified) showed that  firms most frequently were decertified because their principal offices were  not located in a HUBZone.SBA also decertified about 2 percent of firms  that applied to the program during that period because they did not meet  the 35 percent employee residency requirement.

Representatives from the HUBZone trade association noted that the  employee residency requirement of 35 percent can make it difficult for a  firm to stay in compliance with the program’s regulations. For example,  according to the representatives, initiating and obtaining a contract may  take a long time and maintaining many employees on the payroll without  a contract can become a major overhead expense for firms. Furthermore,  for smaller firms, losing one or two employees could result in  noncompliance with the residency requirement. If firms do not maintain  enough HUBZone-resident employees on payroll, they eventually lose  their certification.

section_title: SBA Recertification Process Again Has Become Backlogged and Does Not Require Supporting Documentation
subsections: section_title: Recurring Backlog of Recertifications
paragraphs: HUBZone recertifications once again have become backlogged.  According to HUBZone regulations, firms wishing to remain in the  program without any interruption must recertify their continued eligibility to  SBA within 30 calendar days after the third anniversary of their date of  certification and each subsequent 3-year period. In June 2008, we  reported that many firms were in the program for more than 3 years  without being recertified. 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 March 2009, we determined that SBA  eliminated the backlog of recertifications by hiring contract staff, but had  yet to implement necessary procedures to ensure that future  recertifications were completed in a timely fashion. At that time, SBA  officials stated that their ongoing business process reengineering would  include an assessment of the recertification process. Subsequently, in  July 2012 SBA provided data illustrating that the backlog had not  reoccurred and that they had recently obtained approval to replace those  contract staff with 10 full-time equivalent (FTE) staff who would perform  all future recertifications. We believed at that time that these steps would  address the intent of our recommendation. However, SBA did not hire the  10 staff that were to replace the contract staff because, according to SBA  officials, part of its funding authority was rescinded in 2013. As a result,  according to SBA officials, as of September 2014 they faced a 1-year  backlog for recertifying firms—that is, the agency was still recertifying  firms that had their 3-year anniversaries in 2013.

SBA’s current backlog indicates that it does not have processes in place  to ensure that recertifications are completed in a timely fashion. SBA’s  current process for recertifying firms involves manual sorting of data from  HCTS to identify firms whose 3-year anniversary is upcoming. Based on  our analysis of SBA information for the most recent notification of firms,  SBA notified almost 53 percent (375) of the firms past the deadline (that  is, more than 30 days past the firms’ 3-year anniversary). We identified  three firms that were last recertified in 2009. Similarly, one firm with which  we spoke said it received the SBA notification 3 or more months after the  3-year anniversary.

According to SBA officials, the recertification backlog is due in part to  limitations with HCTS and resource constraints. According to SBA  officials, the recertification module in HCTS was designed to electronically  review and approve recertification applications submitted online and alert  SBA when it identified significant differences in the information firms  submitted for recertification, but has not worked as intended. As a result,  the officials said that SBA has to manually identify firms that are due for  recertification and only does so twice a year. According to agency  officials, SBA began processing recertifications in batches in fiscal year  2013 because the agency lacked sufficient staff to do it more often. As a  result of this batching schedule, in some instances SBA has been  notifying firms almost 6 months after their 3-year anniversary date. The  officials also told us that they have chosen not to allow firms to initiate the  recertification process, which would enable firms to recertify in a more  timely way. They said that having a process in which firms would submit  e-mails within 30 calendar days after their 3-year anniversary date would  be inefficient due to the additional steps required. For instance, officials  said that they would have to manually sort through the e-mails and  remove any firms that were not due for recertification.

According to agency officials, SBA has requested funding in its fiscal year  2016 budget to enhance the current system. With this funding, SBA plans  to investigate fixes for the recertification process. For example, these  fixes may allow firms to submit recertification applications on their  anniversary date and HCTS internal logic would ascertain compliance.  For those that were noncompliant, the system could be configured to  notify program staff that the recertification had to be reviewed or  decertification proposed. However, it is not clear whether SBA will receive  additional funding in fiscal year 2016 or changes can be made to HCTS  that would allow the system to ascertain compliance with the program  requirements. In the interim, SBA officials noted that the agency’s goal in  2015 is to notify firms and process the recertifications on a monthly basis.

While SBA’s intention is to conduct more timely recertifications, its limited  efforts since 2008 to prevent backlogs have not been successful. Until  SBA makes it a priority to address ongoing challenges with its  recertification process and can develop an effective approach to recertify  firms in a timely manner, the agency will continue to face reoccurring  backlogs and risks associated with ineligible firms participating in the  program.

section_title: SBA Relies on Firms’ Attestations of Continued Eligibility
paragraphs: SBA relies on firms’ attestations of continued eligibility and generally does  not request supporting documentation during recertification. SBA officials  told us that SBA currently only requires that firms submit a notarized  recertification form stating that their eligibility information is accurate.  However, internal control standards for the federal government call for  ongoing monitoring of program activity and indicate that federal agencies  should have control activities in place, such as verification, to ensure  compliance with program requirements. According to SBA officials, they  do not believe they need to request supporting documentation from  recertifying firms because all firms currently in the program have  undergone a full document review, either when the firm initially applied or  through the full document review SBA completed of its legacy portfolio  review in fiscal year 2012, as previously discussed. While SBA officials  noted that they have the authority to ask for supporting documentation  when recertifying a firm, they have not done so. The SOP notes that  agency staff may request and consider additional information, but it does  not specify what circumstances warrant a request for supporting  documentation. As previously noted, SBA officials said that the  recertification process is affected by resource constraints. But as a result,  SBA lacks reasonable assurance that only qualified firms are allowed to  continue in the HUBZone program and receive preferential contracting  treatment.

Moreover, while SBA’s review of its legacy portfolio represented a  comprehensive effort, it was a one-time review and took place between  fiscal years 2010 and 2012. The characteristics of firms and the status of  HUBZone areas—the bases for program eligibility—can often change,  and need to be monitored. For example, the size of a firm and the  residency location of its employees can change in 3 years. In addition,  monitoring processes can take resource constraints into account. In  March 2009, we found 10 of 19 firms we examined to be egregiously out  of compliance with HUBZone program requirements and recommended  that SBA consider incorporating a risk-based mechanism for conducting  unannounced site visits as part of the screening and monitoring  process. Such a risk-based approach could be applied to SBA’s  recertification process to review and verify information from firms that  appear to pose the most risk to the program.

section_title: Conclusions
paragraphs: Since we reported on the HUBZone program in 2008, SBA has  implemented a number of actions both to better ensure that only eligible  firms participate in the HUBZone program and address weaknesses with  internal controls that we and the OIG identified. The frequency of changes  to HUBZone designations present challenges for both firms and SBA.  While SBA uses a number of mechanisms to communicate with firms  about changes to HUBZone designations, these methods are insufficient  as they are at a general level and not all firms may receive them. The  communications are not specific to firms or HUBZone areas (for example,  broadcast e-mails). Additionally, not all certified firms may be on the  broadcast e-mail subscription list. As a result, not all firms may be aware  of changes that would affect their continuing program eligibility.

SBA has strengthened its internal controls for initial HUBZone  certifications but missed opportunities to address weaknesses in controls  related to the recertification of firms. The current recertification process  has a number of issues that continue to limit its effectiveness. First, SBA  again has a significant backlog in processing recertifications and has not  implemented a sustainable process. Second, SBA requires firms to wait  until being notified before beginning recertification, but routinely notifies  firms too late for the firms to meet the deadline established in HUBZone  regulations. Finally, the current recertification process requires no  supporting documentation—in effect, firms self-certify. SBA officials noted  that resource constraints prevent a full documentation review of all  recertifications and that staff can request supporting documentation (but  SBA does not have guidance on when staff should request or verify  documentation). While the backlog and inability of firms to start the  process are concerns, the greater issue is the lack of ongoing eligibility  review and verification during recertification.

section_title: Recommendations for Executive Action
paragraphs: To improve SBA’s administration and oversight of the HUBZone program  and reduce the risk that firms that no longer meet program eligibility  criteria receive HUBZone contracts, the Administrator of SBA should take  the following two actions:

Establish a mechanism to better ensure that firms are notified of  changes to HUBZone designations that may affect their participation  in the program, such as ensuring that all certified firms and newly  certified firms are signed up for the broadcast e-mail system or  including more specific information in certification letters about how  location in a redesignated area can affect their participation in the  program.

Conduct an assessment of the recertification process and implement  additional controls, such as developing criteria and guidance on using  a risk-based approach to requesting and verifying firm information,  allowing firms to initiate the recertification process, and ensuring that  sufficient staff will be dedicated to the effort so that a significant  backlog in recertifications does not recur.

section_title: Agency Comments
paragraphs: We sent a draft of this report to SBA for its review and comment. In  response, SBA provided written comments, which are reproduced in  appendix VI. SBA agreed with our recommendations and outlined steps it  has taken or plans to take to address them. SBA stated that it has been  analyzing existing resources to implement our recommendation on  notifying firms of changes that could affect their participation in the  program. SBA also said that by July 2015, it plans to implement an  enhanced mechanism to better inform all certified and newly certified  firms of HUBZone designation changes or, at least, explain how being in  a redesignated area could affect program participation. In response to our  recommendation on assessing the recertification process and  implementing additional controls, SBA stated that it will assess the current  process. In addition, SBA stated that by September 30, 2015, it plans to  identify improvements to reduce the risk of fraud, waste, and abuse.

If you or your staff have any questions concerning this report, please  contact me at (202) 512-8678 or shearw@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made major contributions to  this report are listed in appendix VII.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report examines the Historically Underutilized Business Zone  (HUBZone) program of the Small Business Administration (SBA). More  specifically, the report (1) describes HUBZone designations and how SBA  communicates with interested parties about the program, and (2)  examines SBA’s certification and recertification processes for firms,  including the extent to which SBA has implemented procedures to  address recommendations previously made to improve these processes.  In addition, we present information about selected characteristics of  HUBZones, effects of hypothetical changes to criteria on HUBZone  designations, HUBZone application processing, and selected  characteristics of HUBZone firms in appendixes II, III, IV, and V,  respectively.

To address both objectives, including how SBA notifies and  communicates with interested parties about the HUBZone program, we  reviewed previous GAO and SBA Office of Inspector General (OIG)  reports; applicable statutes and regulations; and SBA documents,  including Standard Operating Procedures, internal policy guidance for  staff, process work guidelines, checklist of required documents, criteria  used to select firms to undergo site visits, outreach and communication  materials, goaling report, Congressional Budget and Performance report,  and a new initiative that SBA created intended to boost HUBZones in the  federal marketplace. We interviewed SBA staff and representatives from  the HUBZone Contractors National Council—the HUBZone trade  association.

We also interviewed representatives from local economic development  agencies and from HUBZone firms. We selected a purposive sample of16  HUBZone firms. To ensure a range of HUBZone firms, our sample  included 8 firms that were currently certified, 4 firms that had been denied  entry into the program, and 4 firms that were once certified but had been  decertified. Of the 16 firms, we interviewed 8, the findings from which  cannot be generalized to the overall population of firms that have applied  to the HUBZone program. To identify the firms, we relied on a multistage  sampling approach:

To select firms that were certified, we first selected four states, one  from each of the four regions of the United States—West, Midwest,  Northeast, and South. We used 2013 unemployment rates from the  Bureau of Labor Statistics to select two states with higher  unemployment rates and two states with unemployment rates lower  than the U.S. average rate. To ensure a mix of rural and urban  states, we used 2010 Census data and calculated the percentage of  each state that was rural and picked some states that had higher  concentrations of rural areas. We also picked some states that had a  large number of HUBZone certified firms, according to the Dynamic  Small Business Search (DSBS) database, to ensure we had a  sufficient number of firms from which to select firms to interview.

We selected one county from each of the four states based on the  number of certified firms located in each county that had been  awarded federal contracts and firms that had not been awarded  contracts in fiscal years 2010 through 2013 based on Federal  Procurement Data System-Next Generation (FPDS-NG) data. We  also considered the number of contracts awarded to the firms and the  dollar amount of the contracts in fiscal year 2013 based on FPDS-NG  data. In addition, we selected the county from each state that had a  mix of certified firms with and without contracts and that had a high  number of contracts awarded to firms in the county in fiscal year 2013,  as compared with other counties in the state. For one state, we  selected the county with the second-highest number of contracts  because it represented a redesignated nonmetropolitan area.

Within the selected counties, we selected four certified firms that had  been certified in 2009 or later and had been awarded the most  contracts among firms in the county from fiscal years 2010 through  2013. Based on the oldest certification date, we also selected four  firms that had not received any contracts.

Finally, we used applicant data from SBA’s HUBZone Certification  Tracking System (HCTS) to select four firms that were denied entry  into the program and four firms that were decertified. We used the  same four U.S. regions and randomly selected two firms from each  region, one for each of the two categories.

To examine how SBA designates HUBZones, selected characteristics of  the areas, and how potential changes to designation criteria would affect  HUBZones and firms, we reviewed applicable statutes and regulations,  such as the HUBZone Act of 1997. We also reviewed prior GAO,  Congressional Research Service, and SBA OIG reports on the HUBZone  program. We accessed the list of qualified and redesignated areas from  SBA’s HUBZone website and plotted them using Mapinfo. We also  downloaded the list of certified firms as of June 16, 2014, and plotted  those firms into their corresponding HUBZones. According to SBA  officials, firms may have more than one profile and address in DSBS and  there is no way within the system to identify which address represents a  principal office. Consequently, the numbers we report are based on the  addresses in the DSBS profiles. We were unable to plot 573 firms in a  HUBZone. For the firms we could plot, we matched these certified firms  with federal procurement data from FPDS-NG to identify the number and  amount of contracts that the firms received from fiscal year 2010 to fiscal  year 2013. We used these data sources to identify characteristics of the  different HUBZone types, such as the number of firms in the different  HUBZone types as well as the contract dollars those firms received. To  identify economic characteristics of the different HUBZone types, we  reviewed selected economic indicators, such as the poverty and  unemployment rates, and the median housing income and housing value  for the different HUBZone types. We used data from the Census Bureau’s  American Community Survey (ACS) and unemployment data from the  Bureau of Labor Statistics (BLS). After reviewing related documentation  or interviewing knowledgeable agency officials, we deemed the DSBS,  FPDS-NG, Census Bureau, BLS, and SBA data sufficiently reliable for the  purposes of describing the characteristics of HUBZones, participating  firms, and their contracting. To determine the impact of hypothetical  changes to HUBZone criteria, we reviewed county-level unemployment  data from BLS. We applied different criteria to the data to determine the  impact that the changes would have on the number of eligible counties,  by state. For example, we used a 5- and 10-year average unemployment  rate instead of the 1-year rate that SBA currently uses to determine the  eligibility for nonmetropolitan counties. To determine the impact of the  statutory 20 percent cap imposed on census tracts as part of the Low- Income Housing Tax Credit (LIHTC) program, we analyzed 2014 data  from the Department of Housing and Urban Development (HUD) and  applied the algorithm that HUD uses to determine if a census tract  qualifies, and then stopped applying the criteria prior to the imposition of  the 20 percent cap. We compared the number of areas that would  qualify under both scenarios.

To examine SBA’s certification and recertification processes for firms and  the extent to which SBA addressed previous recommendations, we  reviewed SBA’s certification and recertification processes for certifying  firms, including its policies and procedures for certifying and monitoring  firms. To test whether SBA had implemented procedures to help ensure  that only eligible firms participate in the program, we reviewed a  purposive sample of 39 application case files. To select these files, we  used data from HCTS to identify the universe of applications SBA  received from October 1, 2012, to September 30, 2013. We grouped  these files into four outcome categories—approved, denied, withdrawn,  and decertified and randomly selected 10 from each category. We  reviewed these case files and collected information using a data  collection instrument (DCI) to gather information such as whether SBA  staff prepared an analysis summary; analyzed information, including  supporting documentation, to determine if the applicants met the program  eligibility requirements; sent follow-up communications to request  additional documentation; and performed a second review before making  a final determination on the application. We also determined the date on  which the application was received and the date of final determination.  The findings from this limited review of 39 case files cannot be  generalized to the overall population of applications received in fiscal year  2013.

We developed the DCI after reviewing SBA’s regulations, its description  of the HUBZone current certification process, and the HUBZone policy  guidance, document request checklist, and process work guidelines. Two  GAO team members independently entered information from one sample  case file using the DCI and compared the results. After the two team  members agreed on the final fields to be used in the DCI, they entered  information from the case files into the DCI. A third staff member verified  the accuracy of the entries.

Using HCTS data, we analyzed data about firms for which applications  were received from fiscal years 2008 through 2013, by year of receipt, to  determine (1) the number of applications approved, denied, or withdrawn;  (2) the number of firms that had been recertified; (3) the number that had  been decertified; (4) the length of time it took SBA to approve  applications; and (5) the reasons firms were decertified. We also  analyzed HCTS data to examine the characteristics of HUBZone  applicant firms, including the industry codes and number of employees. A  copy of the HCTS data was originally provided to GAO in Oracle format  and was the most current version as of July 2014. These data were then  read in using SAS software to allow for analysis. Before conducting the  analysis, a GAO data analyst reviewed the data for inconsistencies and  completeness. As a part of this work, inconsistencies related to the  effective dates of different processes were discovered. We determined  that the data were sufficiently reliable for the analysis we report by  reviewing related documentation, interviewing knowledgeable officials,  and electronic testing of the data, but there were internal inconsistencies  that limited our reporting. Specifically, in some cases, there were  conflicting outcomes or dates that appeared to be out of sequence or  illogical. In particular, the dates associated with events in the certification  review processes were found to be unreliable. To clarify, GAO met with  SBA and learned that the inconsistencies were related to manual data  entry processes that were required since fiscal year 2006 because of  deficiencies discovered in the software related to the recertification  module in HCTS. We concluded that while the actual outcomes were  reliable enough to report, the data that relied on the effective dates of  these outcomes were not sufficiently reliable to report.

To identify the eligibility-related reasons for decertification, we analyzed  the reason field contained in HCTS for applications received from 2010 to  2013 that were later decertified. Because a large percentage of these  applications had “other” for their recorded reason, we conducted a review  of the comments field to code for the possible other reasons. To conduct  that review, the GAO data analyst did a string search of the text using  keywords such as “35 percent” and “principal office” and identified one  additional category and added additional cases to existing reasons. An  analyst reviewed a subset of the coding to ensure accuracy.

To determine whether SBA implemented procedures to help ensure that  only eligible firms continue to participate in the program, we assessed  SBA’s recertification process. We reviewed SBA’s regulations on  recertification and information from HCTS relating to firms’ certification  anniversary dates and SBA’s e-mail notification for firms to recertify. We  assessed the reliability of the data on these processes by interviewing  officials knowledgeable about the data and performing electronic data  testing to detect errors in completeness and reasonableness. We  determined that they were sufficiently reliable for the purpose of  identifying the amount of time between a firm’s prior certification and  SBA’s notice about recertification. We compared SBA’s certification and  recertification processes with federal internal control standards for  collecting documentation and verifying information.

We conducted this performance audit from April 2014 to February 2015 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.

section_title: Appendix II: Characteristics of HUBZones
paragraphs: There are four different types of qualified HUBZone areas as defined by  federal statute.

Qualified census tracts. The qualified census tracts are the same as  those determined by HUD for the LIHTC program. The current criteria  are any census tract that is designated by HUD and, for the most  recent year for which census data are available on household income  in such tract, has (1) at least 50 percent of households with income  below 60 percent of the median gross income of the MSA (in  metropolitan census tracts) or for all nonmetropolitan areas of the  state (in nonmetropolitan census tracts) or (2) a poverty rate of at  least 25 percent. The LIHTC program limits the amount of qualified  census tracts in any MSA or PMSA so that they together do not  contain more than 20 percent of the total population of the MSA or  PMSA. As such, it is possible for a tract to meet one or both of the  criteria, but not be designated as a qualified census tract.

Qualified nonmetropolitan county. A qualified nonmetropolitan  county is any county that was not located in an MSA at the time of the  most recent census. To qualify, the (1) median household income for  the county must be less than 80 percent of the nonmetropolitan state  median household income, based on the most recent data available  from the Bureau of the Census; or (2) the unemployment rate is not  less than 140 percent of the average unemployment rate for the  United States or for the state in which such county is located,  whichever is less, based on the most recent data available from the  Secretary of Labor. SBA uses a 5-year median income, as determined  through the ACS. The most recent update reflected data from 2008- 2012. The unemployment rate is derived from data released annually  by BLS and is typically sent to SBA during May, June, or July.  Additionally, nonmetropolitan counties can qualify if they include a  difficult development area, as designated by HUD, within Alaska,  Hawaii, or any territory or possession of the United States outside of  the 48 contiguous states.

Qualified Indian land. Lands within the boundaries of Indian  reservations may qualify as a HUBZone area. The Bureau of Indian  Affairs provides data delineating these areas.

Qualified base closure area. HUBZone eligibility is extended for 5  years to lands within the external boundaries of a military installation  closed through a privatization process under the authority of various  base closure laws. The military base’s HUBZone eligibility  commences on the effective date of the law (Dec. 8, 2004) if the  military base already was closed at that time, or on the date of formal  closure if the military base was still operational at that time. According  to SBA officials, no HUBZone firms are located in these areas  because it is very difficult for firms to meet the 35 percent residency  requirement. Additionally, the SBA officials noted that, according to  statute, the areas are only eligible for 5 years from the date of base  closure, and it may take several years before the area is able to  receive business leases, leaving applicant firms with only 1 to 2 years  of eligibility.

According to our analysis, about 2,600 of the approximately 5,200  certified firms were in a qualified or redesignated census tract, as of June  2014 (see table 2). Additionally, about 12 percent of the firms were  located simultaneously in at least two types of HUBZones. Most  commonly, firms were located in both a qualified census tract and  qualified nonmetropolitan county (311 firms) or a qualified census tract  and Indian land (107 firms). However, about 88 percent of HUBZones— including all the base realignment and closure areas—did not contain any  certified firms (that we could geographically code).

In fiscal year 2013, certified firms received, on average, about $789,000  through HUBZone contracts. Firms in qualified census tracts received  about $1 million in contracts, with those in redesignated areas receiving  about $300,000 more, each. Firms in all redesignated areas were  obligated almost $800 million in federal contracts in fiscal year 2013.  Overall, 211 firms comprised the top 10 percent, in terms of the size of  contracts received, while almost 4,300 comprised the bottom 10 percent.

As shown in figure 4, there are certified firms in all 50 states. In general,  counties in the West had more certified firms, on average, than counties  elsewhere in the United States.

As shown in table 3, California, New York, and Texas had the largest  number of qualified areas. California, Oklahoma, Texas, and Virginia all  had more than 200 certified firms, with California having the most (477).
subsections: section_title: Economic Characteristics of HUBZones
paragraphs: Our analysis of the economic conditions of qualified and redesignated  areas as of 2012 found that redesignated areas had, on average,  economic conditions between those of qualified and nonqualified areas.  For example, as shown in figure 5, qualified census tracts had poverty  and unemployment rates of 32 percent and 14 percent, respectively,  while nonqualified census tracts had poverty and unemployment rates of  11 percent and 8 percent, respectively. In contrast, the poverty rate in  redesignated census tracts was 24 percent while the unemployment rate  was 12 percent.

As shown in figure 6, a similar pattern exists for qualified, redesignated,  and nonqualified nonmetropolitan counties.

As shown in table 4, our analysis of various economic indicators for  qualified, redesignated, and non-HUBZone areas found that qualified  areas had, on average, higher poverty and unemployment rates, and  lower median household income and housing values then either  redesignated or non-HUBZone areas. Redesignated areas had, on  average, economic indicators between those of qualified and not qualified  areas.

As shown in figure 7, about 55 percent of qualified census tracts had  poverty rates of 30 percent or more. In contrast, almost 76 percent of  redesignated census tracts had poverty rates between 10 percent and  29.9 percent. Similarly, almost 72 percent of qualified census tracts had  unemployment rates greater than 10 percent, whereas about 40 percent  of redesignated areas and 70 percent of nonqualified areas had  unemployment rates of less than 10 percent.

Similarly, our analysis of various nonmetropolitan counties found that  redesignated areas had, on average, economic indicators between those  of qualified and not qualified areas (see table 5). However, redesignated  nonmetropolitan counties had a lower average median housing value  than either qualified or not-qualified HUBZone counties.

As shown in figure 8, about 16 percent of qualified nonmetropolitan  counties had poverty rates of at least 30 percent. In contrast, less than 1  percent of redesignated or nonqualified nonmetropolitan counties had a  poverty rate of at least 30 percent. Similarly, 22 percent of qualified areas  had an unemployment rate of at least 15 percent, while about 7 percent of  redesignated counties and 1 percent of nonqualified counties had a  similar level.

section_title: Appendix III: Impact of Hypothetical Changes to HUBZone Criteria on HUBZone Designations
paragraphs: We applied hypothetical changes to selected statutory criteria for  designating HUBZones to illustrate how such changes could affect the  number of eligible areas. As we reported in 2008, establishing new  HUBZone areas could provide economic benefits to these new areas, but  also could result in diffusion—decreased targeting of areas of greatest  economic distress—by lessening the competitive advantage upon which  small businesses may rely to thrive in economically distressed  communities.
subsections: section_title: Impact of Adjustments in the Unemployment Rate Used
paragraphs: As discussed earlier in this report, one of the ways in which a  nonmetropolitan county can qualify as a HUBZone is based on its  unemployment rate. More specifically, the unemployment rate for the  nonmetropolitan county must not be less than 140 percent of the average  unemployment rate for the United States or for the state in which the  county is located, whichever is less, based on the most recent data  available from the Department of Labor.Adjustments could make this  definition more uniform across all of the states.

Under the current definition, two counties in different states with the same  unemployment rate would not necessarily both qualify as HUBZones,  depending on the unemployment rate of the state in which they are  located. In general, every county in a state with an unemployment rate  less than the U.S. average would qualify as a HUBZone if its  unemployment rate was at least 140 percent of the state’s (even if it was  less than the U.S. average). In contrast, counties in states with  unemployment rates higher than the U.S. average must have an  unemployment rate at least equal to 140 percent of the U.S. average to  qualify as a HUBZone.

We analyzed the impact on the number of nonmetropolitan counties that  could qualify under a variety of adjustments to the current definition.

Current definition. Under the current definition, 424 nonmetropolitan  counties would qualify as a HUBZone.

Lowest state unemployment rate. If 140 percent of the lowest state  unemployment rate (2.9 percent) was applied to all counties and  states, almost 1,700 counties would qualify. Under this scenario, for  example, Texas would go from 16 qualified nonmetropolitan counties  to almost 150.

Highest state unemployment rate. If 140 percent of the highest  state unemployment rate (9.8 percent) was applied to all counties and  states, there would only be 54 qualified nonmetropolitan counties  nationwide. Thirty-four states would not have any qualified  nonmetropolitan counties, while Kentucky and Mississippi would have  the most, with 9 each.

Applying U.S. average unemployment rate. If 140 percent of the  U.S. average unemployment rate (7.4 percent) was applied uniformly  to all counties and states, 301 nonmetropolitan counties would qualify.

Average of all state unemployment rates. If 140 percent of the  average of all state unemployment rates (6.8 percent) was used,  about 450 counties would qualify. Under this scenario, states with  relatively high unemployment rates would have additional  nonmetropolitan counties (such as Georgia, which would have 17  additional qualifying counties), while states with relatively low  unemployment rates would have fewer qualifying counties (such as  Virginia, which would have 20 fewer).

In addition to comparing all nonmetropolitan counties against the same  unemployment rate, the qualifying criteria could be changed from the  current standard (data from 1 year) to use a 5- or 10-year average  unemployment rate to determine if a nonmetropolitan county qualified for  the program. Such a change could minimize the wide variations that can  occur by using the 1-year rates. For example, the average unemployment  rates that equaled 140 percent of the U.S. unemployment rate ranged  from 6.4 percent in 2006 and 2007 to 13.4 percent in 2010. Similarly, the  difference between the states with the highest and lowest unemployment  rates ranged from 6 percentage points in 2004 to about 14 percentage  points in 2010. However, using a 5- or 10-year average unemployment  rate would result in fewer counties qualifying as a HUBZone.

Using a 5-year unemployment rate. If a 5-year average  unemployment rate were used, 345 nonmetropolitan counties would  qualify. With the change from 1- to 5-year, additional counties in 6  states would become eligible, while the number of eligible counties in  21 states would decrease. The net number of affected counties would  range from 6 added to 15 eliminated.

Using a 10-year unemployment rate. If a 10-year average  unemployment rate were used, 377 nonmetropolitan counties would  qualify. Under this adjustment, 10 states would have more counties  eligible and 18 would have fewer. See figures 9 and 10 for a summary  of the impact of each potential change on the number of qualified  nonmetropolitan counties.

As shown in table 6, the impact of the hypothetical changes on the  number of qualified nonmetropolitan counties in the individual states  varies.

section_title: Impact of Removing Limit in Census Tracts
paragraphs: Currently, HUBZone-qualified census tracts are those census tracts  designated by HUD. Statutory provisions governing the LIHTC program  limit the amount of qualified census tracts in any MSA or PMSA to no  more than 20 percent of the total population of the MSA or PMSA.  Consequently, some census tracts that may qualify for the HUBZone  program based on the area’s median household income or poverty rate  might not be designated as qualified census tracts because of the  population cap, and are therefore not included in the HUBZone program.

Our analysis of data HUD used for its 2014 designations found that about  2,400 more census tracts would qualify as HUBZone areas if the 20  percent cap were not in place, an increase of 15 percent from the current  number of qualified tracts. Eight states or territories would have at least  20 percent more qualified areas if all eligible tracts were included.

section_title: Appendix IV: Summary Data Relating to HUBZone Application Processing
paragraphs: According to our analysis of data for applications received by SBA during  fiscal years 2008-2013, the number of applications submitted by firms  declined significantly from 2009 through 2011 (from a high of about 4,500  in 2009 to under 1,500 in 2013). Since 2009, the application approval  rate also declined. For example, SBA approved about 32 percent of the  approximately 4,000 applications submitted in 2010 (shortly after the new  process was implemented), while it approved almost 53 percent of the  approximately 3,000 applications submitted in 2008 under the previous  process (see table 7 and fig. 11). In general, a higher percentage of  applications have been withdrawn since SBA implemented the revised  process—more than 50 percent of applications for every year except  2013. According to SBA officials, firms can withdraw an application or  SBA can close it if it is believed that the firm will not meet program  requirements.

According to SBA officials, SBA’s goal is to process an application within  90 days. Our analysis of SBA data found that it took SBA more than 90  days to process most of the applications approved since fiscal year 2008.  As shown in table 8, of the applications SBA received in fiscal years  2008-2013, about 27 percent were processed in 90 or fewer days while  73 percent took more than 90 days to process. SBA reported that in  fiscal years 2013 and 2014 it took an average of 103 and 123 days,  respectively, to process any application regardless of outcome.

According to the officials, SBA has completed a review of its certification  process and plans to implement changes to improve and more accurately  reflect its processing time. For example, according to SBA officials, SBA  has been considering requiring that the program analyst, instead of  administrative staff, request supporting documentation from the applicant  firms. Furthermore, the official explained that SBA has been considering  changing when it starts calculating the processing time. Currently, SBA  begins to calculate the processing time when a high-ranking official from  the firm electronically validates the application. However, SBA cannot  begin its review until it receives supporting documents from the firm,  which can take weeks. Consequently, SBA has been considering  changing the start date to when it receives the supporting documents.

section_title: Appendix V: Characteristics of HUBZone Certified Firms as of 2014
paragraphs: According to our analysis of SBA data for approved applications  submitted during fiscal years 2008-2013, HUBZone firms vary in size and  types of services and products provided.

Number of employees. The number of employees at HUBZone firms  ranged from 1 to 496, with a median of 4 employees for all years  except 2009 and 2010, in which the median was 5.   Industries in which firms operated. Table 9 lists the top 10  industries based on the number and percentage of approved  HUBZone firm applications.

section_title: Appendix VI: Comments from the Small Business Administration

section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact above, Harry Medina (Assistant Director), Daniel  Newman (Analyst-in-Charge), Pamela Davidson, Cynthia Grant, Julia  Kennon, Yola Lewis, John McGrail, John Mingus, Marc Molino, Caroline  Neidhold, Gloria Proa and Barbara Roesmann made key contributions to  this report.


Question-summary annotations: questions: question: How is the SBA's designation of HUBZones lacking in its communication with the community?
answer: The Small Business Administration (SBA) designates economically distressed areas as Historically Underutilized Business Zones (HUBZone), based on demographic data such as unemployment and poverty rates, but lacks an effective way to communicate program changes to small businesses.

question: How is the designation defined?
answer: The designations apply to areas such as nonmetropolitan counties and census tracts and are subject to periodic changes as economic conditions change.

question: How is the transition back from a HUBZone status handled?
answer: HUBZones that lose their qualifying status due to changes in economic conditions become “redesignated” and undergo a 3-year transition period.
child_questions: question: How is the notification process flawed?
answer: SBA relies on website updates and broadcast e-mails to inform firms about program changes, and consequently not all affected may be informed about the changes before their resultant decertification. SBA has initiated efforts to improve notification of program changes, but its communications may not reach all affected firms and do not specify when the status of areas might change or what firms are located in those areas. As a result, some firms in the program lack timely awareness of information that could affect their eligibility.

questions: question: How has the SBA responded to GAO reports?
answer: SBA has addressed weaknesses in its certification process that GAO previously identified, but lacks key controls for its recertification process.

question: How is the recertification process flawed?
answer: However, SBA does not require firms seeking recertification to submit any information to verify their continued eligibility or provide guidance on when staff should request or verify documentation for recertification.
child_questions: question: How does the SBA properly implement some aspects of recertification?
answer: For instance, to receive certification SBA now requires all firms to provide documentation to show they meet the eligibility requirements. SBA also conducts site visits at selected firms based on, for example, the amount of federal contracts they received.

question: Why is the lack of proper controls on recertification a risk for the SBA?
answer: By not routinely requiring and reviewing key supporting documentation from recertification applicants, SBA is missing an additional opportunity to reduce the risk that ineligible firms obtain HUBZone contracts.

questions: question: How does the HUBZone program aim to help distressed areas?
answer: The program's purpose is to stimulate economic development in economically distressed areas.
child_questions: question: Why might a firm want to become HUBZone certified?
answer: A certified HUBZone firm is eligible for federal contracting benefits, including limited competition awards such as sole-source and set-aside contracts.

question: To what extent is the process of certifying firms controlled?
answer: GAO previously reported on weaknesses in SBA's internal controls and problems with ensuring that only eligible firms participate in the program.
child_questions: question: How has oversight over the certification process increased?
answer: GAO was asked to examine the steps SBA has taken to address these issues. This report (1) describes HUBZone designations and how SBA communicates with interested parties about the program, and (2) examines SBA's certification and recertification processes for firms.