Small Business Administration: Additional Actions Are Needed to Certify and Monitor HUBZone Businesses and Assess Program Results
Released: 2008-07-16T00:00:00

Letter

Background

The HUBZone program was established by the HUBZone Act of 1997 to stimulate economic development through increased employment and capital investment by providing federal contracting preferences to small businesses in economically distressed communities or HUBZone areas. The types of areas in which HUBZones may be located are defined by law and consist of the following: Qualified census tracts. A qualified census tract has the meaning given the term by Congress for the low-income-housing tax credit program. The list of qualified census tracts is maintained and updated by the Department of Housing and Urban Development (HUD). As currently defined, qualified census tracts have either 50 percent or more of their households with incomes below 60 percent of the area median gross income or have a poverty rate of at least 25 percent. The population of all census tracts that satisfy one or both of these criteria cannot exceed 20 percent of the area population. Qualified census tracts may be in metropolitan or nonmetropolitan areas. HUD designates qualified census tracts periodically as new decennial census data become available or as metropolitan area definitions change.

Qualified nonmetropolitan counties. Qualified nonmetropolitan counties are those that, based on the most recent decennial census data, are not located in a metropolitan statistical area and in which 1. the median household income is less than 80 percent of the nonmetropolitan state median household income; 2. the unemployment rate is not less than 140 percent of the average unemployment rate for either the nation or the state (whichever is lower); or 3. a difficult development area is located.

The definition of a difficult development area is similar to that of a qualified census tract in that it comes from the tax code’s provision for the low-income-housing tax credit program. For the low-income-housing tax credit program, difficult development areas can be located in both metropolitan and nonmetropolitan counties; however, for the HUBZone program, they can only be located in nonmetropolitan counties in Alaska, Hawaii, and the U.S. territories and possessions.

Qualified Indian reservations. A HUBZone-qualified Indian reservation has the same meaning as the term Indian Country as defined in another federal statute, with some exceptions. These are all lands within the limits of any Indian reservation, all dependent Indian communities within U.S. borders, and all Indian allotments. In addition, portions of the state of Oklahoma qualify because they meet the Internal Revenue Service’s definition of “former Indian reservations in Oklahoma.”

Redesignated areas. Redesignated areas are census tracts or nonmetropolitan counties that no longer meet the economic criteria but remain eligible until after the release of the 2010 decennial census data.

Base closure areas. Areas within the external boundaries of former military bases that were closed by the Base Realignment and Closure Act (BRAC) qualify for HUBZone status for a 5-year period from the date of formal closure.

In order for a firm to be certified to participate in the HUBZone program, it must meet the following criteria: the company must be small by SBA size standards; the company must be at least 51 percent owned and controlled by U.S. citizens; the company’s principal office—the location where the greatest number of employees perform their work—must be located in a HUBZone; and at least 35 percent of the company’s full-time (or full-time equivalent) employees must reside in a HUBZone.

As of February 2008, 12,986 certified firms participated in the HUBZone program (see fig. 1). Over 4,200 HUBZone firms obtained approximately $8.1 billion in federal contracts in fiscal year 2007.

A certified HUBZone firm is eligible for federal contracting benefits, including “sole source” contracts, set-aside contracts, and a price evaluation preference. A contracting officer can award a sole source contract to a HUBZone firm if, among other things, the officer does not have a reasonable expectation that two or more qualified HUBZone firms will submit offers and the anticipated award price of the proposed contract, including options, will not exceed $5.5 million for manufacturing contracts or $3.5 million for all other contracts. If a contracting officer has a reasonable expectation that at least two qualified HUBZone firms will submit offers and an award can be made at a fair market price, the contract shall be awarded on the basis of competition restricted to qualified HUBZone firms. Contracting officers also can award a contract to a HUBZone firm through “full and open competition.” In these circumstances, HUBZone firms are given a price evaluation preference of up to 10 percent if the apparent successful offering firm is not a small business. That is, the price offered by a qualified HUBZone firm shall be deemed as lower than the price offered by another firm (other than another small business) if the price is not more than 10 percent higher than the price offered by the firm with the lowest offer.

As of October 1, 2000, all federal agencies were required to meet the HUBZone program’s contracting goals. Currently, the annual federal contracting goal for HUBZone small businesses is 3 percent of all prime contract awards—contracts awarded directly by an agency. In the HUBZone Act of 1997, Congress increased the overall federal contracting goal for small businesses from 20 percent to 23 percent to address concerns that the HUBZone contracting requirement would reduce federal contracts for non-HUBZone small businesses. Each year, SBA issues a small business goaling report that documents each department’s achievement of small business contracting goals.

SBA administers the HUBZone program, and the HUBZone program office at SBA headquarters is responsible for certifying firms, publishing a list of HUBZone-certified firms, monitoring certified firms to ensure continuing eligibility, and decertifying firms that no longer meet eligibility requirements. A HUBZone liaison at each of SBA’s 68 district offices is responsible for conducting program examinations—investigations that verify the accuracy of information supplied by firms during the certification process, as well as current eligibility status. HUBZone liaisons also handle program marketing and outreach to the economic development and small business communities. Federal agencies are responsible for trying to meet the HUBZone contracting goal and for enforcing the contracts awarded to HUBZone firms. Each federal agency has an Office of Small and Disadvantaged Business Utilization (OSDBU), or an equivalent office, that helps the agency employ special contracting programs and monitor the agency’s overall small business and special contracting goals.

In addition to the HUBZone program, SBA has other contracting assistance programs. The 8(a) program is a business development program for firms owned by citizens who are socially and economically disadvantaged. SBA provides technical assistance, such as business counseling, to these firms. While the 8(a) program offers a broad range of assistance to socially and economically disadvantaged firms, the Small Disadvantaged Business (SDB) program is intended only to convey benefits in federal procurement to disadvantaged businesses. All 8(a) firms automatically qualify for SDB certification, and federal agencies are subject to an annual SDB contracting goal of 5 percent of all federal contracting dollars. Small businesses also can be certified as service- disabled veteran-owned, and the contracting goal for these firms is 3 percent of all federal contracting dollars.

SBA Relies on Federal Law to Identify HUBZone Areas, but Its Map Is Inaccurate and the Economic Characteristics of Designated Areas Vary Widely

SBA relies on federal law to identify qualified HUBZone areas, but its HUBZone map is inaccurate and the economic characteristics of HUBZone areas vary widely. The map that SBA uses to publicize HUBZone areas contains ineligible areas and has not been updated to include eligible areas. As a result, ineligible small businesses have participated in the program, and eligible businesses have not been able to participate. A series of statutory changes has resulted in an increase in the number and types of HUBZone areas. HUBZone program officials noted that such an expansion could diffuse (or limit) the economic benefits of the program. We found that different types of HUBZone areas varied in the degree to which they could be characterized as economically distressed (as measured by indicators such as poverty and unemployment rates).

Recent Legislation Increased the Number and Types of HUBZone Areas

In recent years, amendments to the HUBZone Act and other statutes have increased the number and type of HUBZone areas. The original HUBZone Act of 1997 defined a HUBZone as any area within a qualified census tract, a qualified nonmetropolitan county, or lands within the boundaries of a federally recognized Indian reservation. Qualified census tracts were defined as having the meaning given the term in the tax code at the time— areas in which 50 percent or more of the households had incomes below 60 percent of the area median gross income. Qualified nonmetropolitan areas were counties with low median household income or high levels of unemployment.

However, subsequent legislation revised the definitions of the original categories and expanded the HUBZone definition to include new types of qualified areas (see fig. 2). A 2000 statute (1) defined Indian reservation to include lands covered by the Bureau of Indian Affairs’ phrase Indian Country and (2) allowed all lands within the jurisdictional areas of an Oklahoma Indian tribe to be eligible for the program. The 2000 statute also amended the HUBZone area definition to allow census tracts or nonmetropolitan counties that ceased to be qualified to remain qualified for a further 3-year period as “redesignated areas.” Also in 2000, Congress changed the definition of a qualified census tract in the tax code by adding a poverty rate criterion; that is, a qualified census tract could be either an area of low income or high poverty.

A 2004 statute revised the definition of redesignated areas to permit them to remain qualified until the release date of the 2010 census data. In that same statute, Congress determined that areas within the external boundaries of former military bases closed by BRAC would qualify for HUBZone status for a 5-year period from the date of formal closure. In addition, Congress revised the definition of qualified nonmetropolitan counties to permit eligibility based on a county’s unemployment rate relative to either the state or the national unemployment rate, whichever was lower. Finally, in 2005, Congress expanded the definition of qualified nonmetropolitan county to include “difficult development areas” in Alaska, Hawaii, and the U.S. territories. These areas have high construction, land, and utility costs relative to area median income.

Subsequent to the statutory changes, the number of HUBZone areas grew from 7,895 in calendar year 1999 to 14,364 in 2006. As shown in figure 2, the December 15, 2000, change to the definition of a qualified census tract—a provision of the low-income-housing tax credit program— resulted in the biggest increase in the number of qualified HUBZone areas. SBA’s data show that, as of 2006, there were 12,218 qualified census tracts, 1,301 nonmetropolitan counties, 651 Indian Country areas, 82 BRAC areas, and 112 difficult development areas (see fig. 3).

SBA’s Web Map Inaccurately Identifies Eligible Areas

SBA program staff employ no discretion in identifying HUBZone areas because the areas are defined by federal statute, but SBA has not always designated these areas correctly on the SBA Web map. To identify and map HUBZone areas, SBA relies on a mapping contractor and data from other executive agencies (see fig. 4). When a HUBZone designation changes or more current data become available, SBA alerts the contractor. The contractor retrieves the data from the designated federal agencies, such as HUD, the Bureau of Labor Statistics (BLS), and the Census Bureau. Most HUBZone area designation data are publicly available (and widely used by researchers and the general public), with the exception of the Indian Country designation.

Once the changes to the HUBZone areas are mapped, the contractor sends the maps back to SBA. SBA performs a series of checks to ensure that the HUBZone areas are mapped correctly and then the contractor places the maps and associated HUBZone area information on SBA’s Web site.

Essentially, the map is SBA’s primary interface with small businesses to determine if they are located in a HUBZone and can apply for HUBZone certification. SBA officials stated that they primarily rely on firms to identify HUBZone areas that have been misidentified or incorrectly mapped. Based on client input, SBA estimated that from 1 percent to 2 percent of firms searching the map as part of the application process report miscodings. SBA’s mapping contractor researches these claims each month.

During the course of our review, we identified two problems with SBA’s HUBZone map. First, the map includes some areas that do not meet the statutory definition of a HUBZone area. As noted previously, counties containing difficult development areas are only eligible in their entirety for the HUBZone program if they are not located in a metropolitan statistical area. However, we found that SBA’s HUBZone map includes 50 metropolitan counties as difficult development areas that do not meet this or any other criteria for inclusion as a HUBZone area. Nearly all of these incorrectly designated HUBZone areas are in Puerto Rico. When we raised this issue with SBA officials, they told us they had provided a definition of difficult development areas that was consistent with the statutory language used by the agency’s mapping contractor in December 2005. However, according to SBA, the mapping contactor failed to properly follow SBA’s guidance when adding difficult development areas to the map in 2006. According to SBA officials, the agency is in the process of acquiring additional mapping services and will immediately re-evaluate all difficult development areas once that occurs. As a result of these errors, ineligible firms have obtained HUBZone certification and received federal contracts. As of December 2007, there were 344 certified HUBZone firms located in ineligible areas in these 50 counties. Further, from October 2006 through March 2008, federal agencies obligated about $5 million through HUBZone set-aside contracts to 12 firms located in these ineligible areas.

Second, while SBA’s policy is to have its contractor update the HUBZone map as needed, the map has not been updated since August 2006. Since that time, additional data such as unemployment rates from BLS have become available. According to SBA officials, the update was delayed because SBA awarded the contract for management of the HUBZone system to a new prime contractor, which is still in the process of establishing a relationship with the current mapping subcontractor. Although SBA officials told us they are working to have the contractor update the mapping system, no subcontract was in place as of May 2008.

While an analysis of the 2008 list of qualified census tracts showed that the number of tracts had not changed since the map was last updated, our analysis of 2007 BLS unemployment data indicated that 27 additional nonmetropolitan counties should have been identified on the map. Because firms are not likely to receive information on the HUBZone status of areas from other sources, firms in the 27 areas would have believed from the map that they were ineligible to participate in the program and could not benefit from contracting incentives that certification provides.

Having an out-of-date map led SBA, in one instance, to mistakenly identify a HUBZone area. When asked by a congressman to research whether Jackson County, Michigan, qualified in its entirety as a HUBZone area, an SBA official used a manual process to determine the county’s eligibility because the map was out of date. The official mistakenly concluded that the county was eligible. After that determination, the congressman publicized Jackson County’s status, but SBA, after further review, had to rescind its HUBZone status 1 week later. Had the information been processed under the standard mapping procedures, the mapping system software would have identified the area as a metropolitan county and noted that it did not meet the criteria to be a HUBZone, as only nonmetropolitan counties qualify in their entirety. In this case, the lack of regular updates led to program officials using a manual process that resulted in an incorrect determination.

HUBZone Areas Vary with Respect to Characteristics Associated with Economic Distress

Qualified HUBZone areas experience a range of economic conditions. HUBZone program officials told us that the growth in the number of HUBZone areas is a concern for two reasons. First, they stated that expansion can diffuse the impact or potential impact of the program on existing HUBZone areas. Specifically, they noted that as the program becomes less targeted and contracting dollars more dispersed, the program could have less of an impact on individual HUBZone areas. We recognize that establishing new HUBZone areas can potentially provide economic benefits for these areas by helping them attract firms that make investments and employ HUBZone residents. However, diffusion—less targeting to areas of greatest economic distress—could occur with such an expansion. Based on 2000 census data, about 69 million people (out of 280 million nationwide) lived in the more than 14,000 HUBZones. Considering that HUBZone firms are encouraged to locate in HUBZone areas and compete for federal contracts (thus facilitating employment and investment growth), the broad extent of eligible areas can lessen the very competitive advantage that businesses may rely on to thrive in economically distressed communities. Second, while HUBZone program officials thought that the original designations resulted in HUBZone areas that were economically distressed, they questioned whether some of the later categories—such as redesignated and difficult development areas— met the definition of economic distress.

To determine the economic characteristics of HUBZones, we compared different types of HUBZone areas and analyzed various indicators associated with economic distress. We found a marked difference in the economic characteristics of two types of HUBZone areas: (1) census tracts and nonmetropolitan counties that continue to meet the eligibility criteria and (2) the redesignated areas that do not meet the eligibility criteria but remain statutorily eligible until the release of the 2010 census data. For example, approximately 60 percent of metropolitan census tracts (excluding redesignated tracts) had a poverty rate of 30 percent or more, while approximately 4 percent of redesignated metropolitan census tracts had a poverty rate of 30 percent or more (see fig. 5). In addition, about 75 percent of metropolitan census tracts (excluding redesignated tracts) had a median household income that was less than 60 percent of the metropolitan area median household income; in contrast, about 10 percent of redesignated metropolitan census tracts met these criteria. (For information on the economic characteristics of nonmetropolitan census tracts, see app. III.)

Similarly, we found that about 46 percent of nonmetropolitan counties (excluding redesignated counties) had a poverty rate of 20 percent or more, while 21 percent of redesignated nonmetropolitan counties had a poverty rate of 20 percent or more (see fig. 6). Also, about 54 percent of nonmetropolitan counties (excluding redesignated counties) had a median housing value that was less than 80 percent of the state nonmetropolitan median housing value; in contrast, about 32 percent of redesignated counties met these criteria.

Overall, difficult development areas appear to be less economically distressed than metropolitan census tracts and nonmetropolitan counties (see fig. 7). For example, 6 of 28 difficult development areas (about 21 percent) had poverty rates of 20 percent or more. In contrast, about 93 percent of metropolitan census tracts (excluding redesignated areas) and about 46 percent of nonmetropolitan counties (excluding redesignated areas) met this criterion. See appendix III for additional details on the economic characteristics of Indian Country areas and additional analyses illustrating the economic diversity among qualified HUBZone areas.

In expanding the types of HUBZone areas, the definition of economic distress has been broadened to include measures that were not in place in the initial statute. For example, one new type of HUBZone area—difficult development areas—consists of areas with high construction, land, and utility costs relative to area income, and such areas could include neighborhoods not normally considered economically distressed. As a result, the expanded HUBZone criteria now allow for HUBZone areas that are less economically distressed than the areas that were initially designated. Such an expansion could diffuse the benefits to be derived from steering businesses to economically distressed areas.

SBA Has Limited Controls to Ensure That Only Eligible Firms Participate in the HUBZone Program

The policies and procedures upon which SBA relies to certify and monitor firms provide limited assurance that only eligible firms participate in the HUBZone program. Internal control standards for federal agencies state that agencies should document and verify information that they collect on their programs. However, SBA obtains supporting documentation from firms in limited instances and rarely conducts site visits to verify the information that firms provide in their initial application and during periodic recertifications—a process through which SBA can monitor firms’ continued eligibility. In addition, SBA does not follow its own policy of recertifying all firms every 3 years—which can lengthen the time a firm goes unmonitored and its eligibility is unreviewed—and has a backlog of more than 4,600 firms to recertify. Furthermore, SBA largely has not met its informal goal of 60 days for removing firms deemed ineligible from its list of certified firms. We found that of the more than 3,600 firms that were proposed for decertification in fiscal years 2006 and 2007, more than 1,400 were not processed within 60 days. As a result, there is an increased risk that ineligible firms may participate in the program and have opportunities to receive federal contracts based on HUBZone certification.

SBA Largely Relies on Self- Reported Data for HUBZone Certifications and Recertifications, Increasing the Risk That Ineligible Firms Can Participate

To certify and recertify HUBZone firms, SBA relies on data that firms enter in its online application system; however, the agency largely does not verify the self-reported information.

SBA’s Certification and Recertification Processes Are Similar

The certification and recertification processes are similar. Firms apply for HUBZone certification using an online application system, which employs automated logic steps to screen out ineligible firms based on the information entered on the application. For example, firms enter information such as their total number of employees and number of employees that reside in a HUBZone. Based on this information, the system then calculates whether the number of employees residing in a HUBZone equals 35 percent or more of total employees, the required level for HUBZone eligibility.

HUBZone program staff review the applications to determine if more information is required. While SBA’s policy states that supporting documentation normally is not required, it notes that agency staff may request and consider such documentation, as necessary. No specific guidance or criteria are provided to program staff for this purpose; rather, the policy allows staff to determine what circumstances warrant a request for supporting documentation. In determining whether additional information is required, HUBZone program officials stated that they generally consult sources such as firms’ or state governments’ Web sites that contain information on firms incorporated in the state. In addition, HUBZone program officials stated that they can check information such as a firm’s address using the Central Contractor Registration (CCR) database. According to HUBZone program officials, they are in the process of obtaining Dun and Bradstreet’s company information (such as principal address, number of employees, and revenue) to cross-check some application data. While these data sources are used as a cross- check, the data they contain are also self-reported.

The number of applications submitted by firms grew by more than 40 percent from fiscal year 2000 to fiscal year 2007, and the application approval rate varied. For example, as shown in table 1, 1,527 applications were submitted in fiscal year 2000, and SBA approved 1,510 applications (about 99 percent). In fiscal year 2007, 2,204 applications were submitted, and SBA approved 1,721 (about 78 percent). Of the 2,204 applications submitted in fiscal year 2007, 383 (about 17 percent) were withdrawn. Either the firms themselves or SBA staff can withdraw an application if it is believed the firm will not meet program requirements. HUBZone program staff noted that they withdraw applications for firms that could, if they made some minor modifications, be eligible. Otherwise, firms would have to wait 1 year before they could reapply. The remaining 100 applications (about 5 percent) submitted in fiscal year 2007 were declined because the firms did not meet the HUBZone eligibility requirements. See appendix IV for details on the characteristics of current HUBZone firms.

To ensure the continued eligibility of certified HUBZone firms, SBA requires firms to resubmit an application. That is, to be recertified, firms re-enter information in the online application system, and HUBZone program officials review it. In 2004, SBA changed the recertification period from an annual recertification to every 3 years. According to HUBZone program officials, they generally limit their reviews to comparing resubmitted information to the original application. The officials added that significant changes from the initial application can trigger a request for additional information or documentation. If concerns about eligibility are raised during the recertification process, SBA will propose decertification or removal from the list of eligible HUBZone firms. Firms that are proposed for decertification can challenge that proposed outcome through a due-process mechanism. SBA ultimately decertifies firms that do not challenge the proposed decertification and those that cannot provide additional evidence that they continue to meet the eligibility requirements. For example, as shown in table 2, SBA began 3,278 recertifications in fiscal year 2006 and had completed decertification of 1,699 firms as of January 22, 2008. Although SBA does not systematically track the reasons why firms are decertified, HUBZone program officials noted that many firms do not respond to SBA’s request for updated information. We discuss this issue and others related to the timeliness of the recertification and decertification processes later in this report.

We found that SBA verifies the information it receives from firms in limited instances. In accord with SBA’s policy, HUBZone program staff request documentation from firms and conduct site visits when they feel it is warranted. The HUBZone Certification Tracking System does not readily provide information on the extent to which SBA requests documentation from firms or conducts site visits; therefore, we conducted reviews of applications and recertifications. Specifically, we reviewed the 125 applications and 15 recertifications submitted or begun in September 2007. For the applications submitted in September 2007, HUBZone program staff requested additional information but not supporting documentation for 10 (8 percent) of the applications; requested supporting documentation for 45 (36 percent) of the applications; and conducted one site visit.

After reviewing supporting documentation for the 45 applications, SBA ultimately approved 19 (about 42 percent). Of the remaining 26 applications, 21 (about 47 percent of the 45 applications) were withdrawn by either SBA or the firm, and 5 (about 11 percent of the 45 applications) were denied by SBA. For the 15 firms that SBA began recertifying in September 2007, HUBZone program staff requested information and documentation from 2 firms and did not conduct any site visits.

In the instances when SBA approved an application without choosing to request additional information or documentation (about 50 percent of our application sample), HUBZone program staff generally recorded in the HUBZone system that their determination was based on the information in the application and that SBA was relying on the firm’s certification that all information was true and correct. In requesting additional information, HUBZone staff asked such questions as the approximate number of employees and type of work performed at each of the firm’s locations.

When requesting supporting documentation, HUBZone staff requested items such as copies of driver’s licenses or voter’s registration cards for the employees that were HUBZone residents and a rental/lease agreement or deed of trust for the principal office.

Internal control standards for federal agencies and programs require that agencies collect and maintain documentation and verify information to support their programs. The documentation also should provide evidence of accurate and appropriate controls for approvals, authorizations, and verifications. For example, in addition to automated edits and checks, conducting site visits to physically verify information provided by firms can help control the accuracy and completeness of transactions or other events.

According to HUBZone program officials, they did not more routinely verify the information because they generally relied on their automated processes and status protest process. For instance, they said they did not request documentation to support each firm’s application because the application system employs automated logic steps to screen out ineligible firms. For example, as previously noted, the application system calculates the percentage of a firm’s employees that reside in a HUBZone and screens out firms that do not meet the 35 percent requirement. But the automated application system would not necessarily screen out applicants that submit false information to obtain a HUBZone certification. HUBZone program officials also stated that it is not necessary to conduct site visits of HUBZone firms because firms self-police the program through the HUBZone status protest process. However, relatively few protests have occurred in recent years. In addition, officials from SBA’s HUBZone office did not indicate a reliable mechanism HUBZone firms could use to identify information that could be used in a status protest. For example, it is unclear how a firm in one state would know enough about a firm in another state, such as its principal office location or employment of HUBZone residents, to question its qualified HUBZone status.

Rather than obtaining supporting documentation during certification and recertification on a more regular basis, SBA waits until it is conducting examinations of a small percentage of firms to consistently request supporting documentation. The 1997 statute that created the HUBZone program authorized SBA to conduct program examinations of HUBZone firms. Since fiscal year 2004, SBA’s policy has been to conduct program examinations on 5 percent of firms each year. Over the years, SBA has developed a standard process for conducting these examinations. SBA uses three selection factors to determine which firms will be examined each year. After firms have been selected for a program examination, SBA field staff request documentation from them to support their continued eligibility for the program. For instance, they request documents such as payroll records to evaluate compliance with the requirement that 35 percent or more of employees reside in a HUBZone and documents such as organization charts and lease agreements to document that the firm’s principal office is located in a HUBZone. After reviewing this documentation, the field staff recommend to SBA headquarters whether the firm should remain in the program. As shown in table 3, in fiscal years 2004 through 2006 nearly two-thirds of firms SBA examined were decertified, and in fiscal year 2007, 430 of 715 firms (about 60 percent) were decertified or proposed for decertification. The number of firms decertified includes firms that the agency determined to be ineligible, and were decertified, and firms that requested to be decertified.

Because SBA limits its program examinations to 5 percent of firms each year, firms can be in the program for years without being examined. For example, we found that 2,637 of the 3,348 firms (approximately 79 percent) that had been in the program for 6 years or more had not been examined. In addition to performing program examinations on a limited number of firms, HUBZone program officials rarely conduct site visits during program examinations to verify a firm’s information. When reviewing the 11 program examinations that began in September 2007, we found that SBA did not conduct any site visits to verify the documentation provided.

As a result of SBA’s limited application of internal controls when certifying and monitoring HUBZone firms, the agency has limited assurances that only eligible firms participated in the program. By not obtaining documentation and conducting site visits on a more routine basis during the certification process, SBA cannot be sure that only eligible firms are part of the program. And while SBA’s examination process involves a more extensive review of documentation, it cannot be relied upon to ensure that only eligible firms participate in the program because it involves only 5 percent of firms in any given year.

Because SBA Has Not Complied with Its Policy of Recertifying Firms Every 3 Years, Some Firms Went Unmonitored for Longer Periods, and SBA Has Not Specified Time Frames for Eliminating the Large Backlog

As previously noted, since 2004, SBA’s policies have required the agency to recertify all HUBZone firms every 3 years. Recertification presents another opportunity for SBA to review information from firms and thus help monitor program activity. However, SBA has failed to recertify 4,655 of the 11,370 firms (more than 40 percent) that have been in the program for more than 3 years. Of the 4,655 firms that should have been recertified, 689 have been in the program for more than 6 years.

SBA officials stated that the agency lacked sufficient staff to comply with its recertification policy. According to SBA officials, staffing levels have been relatively low in recent years. In fiscal year 2002, the HUBZone program office, which is located in SBA headquarters in Washington, D.C., had 12 full-time equivalent staff. By fiscal year 2006, the number had dropped to 8 and remained at that level as of March 2008. Of the 8, 3 conduct recertifications on a part-time basis.

SBA hired a contractor in December 2007 to help conduct recertifications, using the same process that SBA staff currently use. According to the contract, SBA estimates that the contractor will conduct 3,000 recertifications in fiscal year 2008; in subsequent years, SBA has the option to direct the contractor to conduct, on average, 2,450 recertifications annually for the next 4 years. Although SBA has contracted for these additional resources, the agency lacks specific time frames for eliminating the backlog. As a result of the backlog, the periods during which some firms go unmonitored and are not reviewed for eligibility are longer than SBA policy allows, increasing the risk that ineligible firms may be participating in the program.

SBA Lacks a Formal Policy on Time Frames for Decertifying Firms, Which Provides Ineligible Firms with an Opportunity to Obtain Contracts

While SBA policies for the HUBZone program include procedures for certifications, recertifications, and program examinations, they do not specify a time frame for processing decertifications—which occur subsequent to recertification reviews or examinations and determine that firms are no longer eligible to participate in the HUBZone program. If SBA suspects that a firm no longer meets standards or fails to respond to notification of a recertification or program examination, SBA makes a determination and, if found ineligible, removes the firm from its list of certified HUBZone firms. Although SBA does not have written guidance for the decertification time frame, the HUBZone program office negotiated an informal (unwritten) goal of 60 days with the SBA Inspector General (IG) in 2006.

In recent years, SBA ultimately decertified the vast majority of firms proposed for decertification but, as shown in table 4, has not met its 60- day goal consistently. From fiscal years 2004 through 2007, SBA failed to resolve proposed decertifications within its goal of 60 days for more than 3,200 firms. However, SBA’s timeliness has improved. For example, in 2006, SBA did not resolve proposed decertifications in a timely manner for more than 1,000 firms (about 44 percent). In 2007, over 400 (or about 33 percent) were not resolved in a timely manner. SBA staff acknowledged that lags in processing decertifications were problematic and attributed them to limited staffing. SBA plans to use its contract staff to address this problem after the backlog of recertifications is eliminated.

In addition, we and the SBA Inspector General found that SBA does not routinely track the reasons why firms are decertified. According to SBA officials, a planned upgrade to the HUBZone data system will allow SBA to track this information. While SBA does not currently track the specific reasons why firms are decertified, our analysis of HUBZone system data shows that firms were primarily decertified because firms either did not submit the recertification form or did not respond to SBA’s notification. According to HUBZone officials, firms may fail to respond because they are no longer in business or are no longer interested in participating in the program. But firms also may not be responding because they no longer meet the eligibility requirements. Tracking the various reasons why firms are decertified could help SBA take appropriate action against firms that misrepresent their HUBZone eligibility status.

While we were unable to determine how many firms were awarded HUBZone contracts after they were proposed for decertification, our analysis showed that 90 of the firms proposed for decertification in fiscal years 2004 through 2007 received HUBZone set-aside dollars after being decertified. However, some of these firms may have been awarded the contracts before they were decertified. As a consequence of generally not meeting its 60-day goal, lags in the processing of decertifications have increased the risk of ineligible firms participating in the program.

SBA Has Not Implemented Plans to Assess the Effectiveness of the HUBZone Program, and Most Agencies Have Not Met Contracting Goals

SBA has taken limited steps to assess the effectiveness of the HUBZone program. While SBA has a few performance measures in place that provide some data on program outputs, such as the number of certifications and examinations, the measures do not directly link to the program’s mission. SBA has plans for assessing the program’s effectiveness but has not devoted resources to implement such plans. Although Congress’s goal is for agencies to award 3 percent of their annual contracting dollars to qualifying firms located in HUBZones, most federal agencies did not meet the goal for fiscal year 2006—the total for federal agencies reached approximately 2 percent. Factors such as conflicting guidance on how to consider the various small business programs when awarding contracts and a lack of HUBZone firms with the necessary expertise may have affected the ability of federal agencies to meet their HUBZone goals.

SBA Has Limited Performance Measures and Has Not Implemented Plans to Evaluate the Effectiveness of the Program

While SBA has some measures in place to assess the performance of the HUBZone program, the agency has not implemented its plans to conduct an evaluation of the program’s benefits. According to the Government Performance and Results Act (GPRA) of 1993, federal agencies are required to identify results-oriented goals and measure performance toward the achievement of their goals. We have previously reported on the attributes of effective performance measures. We noted that for performance measures to be useful in assessing program performance, they should be linked or aligned with program goals and cover the activities that an organization is expected to perform to support the intent of the program.

We reviewed SBA’s performance measures for the HUBZone program and found that although the measures related to the core activity of the program (providing federal contracting assistance), they were not directly linked to the program’s mission of stimulating economic development and creating jobs in economically distressed communities. According to SBA’s fiscal year 2007 Annual Performance Report, the three performance measures were: number of small businesses assisted (which SBA defines as the number of applications approved and the number of recertifications processed), annual value of federal contracts awarded to HUBZone firms, and number of program examinations completed.

The three measures provide some data on program activity, such as the number of certifications and program examinations and contract dollars awarded to HUBZone firms. However, they do not directly measure the program’s effect on firms (such as growth in employment or changes in capital investment) or directly measure the program’s effect on the communities in which the firms are located (for instance, changes in median household income or poverty levels).

While SBA’s performance measures for the HUBZone program do not link directly to the program’s mission, the agency has made attempts to assess the effect of the program on firms. In fiscal years 2005 and 2006, SBA conducted surveys of HUBZone firms. According to SBA data on the surveys, HUBZone firms responding to the 2005 survey reported they had hired a total of 11,461 employees as a result of their HUBZone certification, and HUBZone firms responding to the 2006 survey reported they had hired a total of 12,826 employees (see table 5). Based on the firms that responded to the 2005 survey, the total capital investment increase in HUBZone firms as a result of firm certification was approximately $523.8 million as of August 31, 2005. As of September 12, 2006, the total capital investment increase based on firms responding to the 2006 survey was approximately $372.6 million. SBA did not conduct this survey in fiscal year 2007, but officials stated that they planned to conduct a similar survey during fiscal year 2008.

However, the survey results have several limitations. For instance, the 2005 and 2006 surveys appear to have had an approximate response rate of 33 percent and 27 percent, respectively, which may increase the risk that survey results are not representative of all HUBZone firms. It also is unclear whether the survey results were reliable because SBA did not provide detailed guidance on how to define terms such as capital investment, which may have led to inconsistent responses. Finally, while the surveys measured increased employment and capital investment by firms—which provided limited assessment of, and could be linked to, the program’s effect on individual firms—they did not provide data that showed the effect of the program on the communities in which they were located. Since the purpose of the HUBZone program is to stimulate economic development in economically distressed communities, useful performance measures should be linked to this purpose.

Similarly, the Office of Management and Budget (OMB) noted in its 2005 Program Assessment Rating Tool (PART) that SBA needed to develop baseline measures for some of its HUBZone performance measures and encouraged SBA to focus on more outcome-oriented measures that more effectively evaluate the results of the program. Although OMB gave the HUBZone program an assessment rating of “moderately effective,” it stated that SBA had limited data on, and had conducted limited assessments of, the program’s effect. The assessment also emphasized the importance of systematic evaluation of the program as a basis for programmatic improvement.

The PART assessment also documented plans that SBA had to conduct an analysis of the economic impact of the HUBZone program on a community-by-community basis using data from the 2000 and 2010 decennial census. SBA stated its intent to assess the program’s effect in individual communities by comparing changes in socioeconomic data over time. Variables that the program office planned to consider included median household income, average educational levels, and residential/commercial real estate values. Additionally, in a mandated 2002 report to Congress, SBA identified potential measures to more effectively assess the HUBZone program. These measures included assessing full- time jobs created in HUBZone areas and the larger areas of which they were a part, the amount of investment-related expenditures in HUBZone areas and the larger areas of which they were a part, and changes in construction permits and home loans in HUBZone areas. While SBA has recognized the need to assess the results of the HUBZone program, SBA officials indicated that the agency has not devoted resources to implement either of these strategies for assessing the results of the program. Yet by not evaluating the HUBZone program’s benefits, SBA lacks key information that could help it better manage the program and inform Congress of its results.

We also conducted site visits to four HUBZone areas (Lawton, Oklahoma; Lowndes County, Georgia; and Long Beach and Los Angeles, California) to better understand to what extent stakeholders perceived that the HUBZone program generated benefits. For all four HUBZone areas, the perceived benefits of the program varied, with some firms indicating they have been able to win contracts and expand their firms and others indicating they had not realized any benefits from the program. Officials representing economic development entities varied in their knowledge of the program, with some stating they lacked information on the program’s effect that could help them inform small businesses of its potential benefits. (See appendix V for more information on our site visits.)

Most Federal Agencies Did Not Meet Their Contracting Goals for the HUBZone Program

Although contracting dollars awarded to HUBZone firms have increased since fiscal year 2003—when the statutory goal of awarding 3 percent of federally funded contract dollars to HUBZone firms went into effect— federal agencies collectively still have not met that goal. According to data from SBA’s goaling reports, for fiscal years 2003 through 2006, the percentage of prime contracting dollars awarded to HUBZone firms increased but was still about one-third short of the statutory goal for fiscal year 2006 (see table 6).

In fiscal year 2006, 8 of 24 federal agencies met their HUBZone goals. Of the 8 agencies, 4 had goals higher than the 3 percent requirement and were able to meet the higher goals. Of the 16 agencies not meeting their HUBZone goal, 10 awarded less than 2 percent of their small-business- eligible contracting dollars to HUBZone firms. According to SBA’s most recent guidance on the goaling process, agencies are required to submit a report explaining why goals were not met, along with a plan for corrective action.

Federal agencies may not have met their HUBZone goals for various reasons, which include uncertainty about how to properly apply federal contracting preferences. For instance, federal contracting officials reported facing conflicting guidance about the order in which the various small business programs—the HUBZone program, the 8(a) program, and the service-disabled veteran-owned small business program—should be considered when awarding contracts. The 2007 Report of the Acquisition Advisory Panel concluded that contracting officers need definitive guidance on the priority for applying the various small business contracting preferences to specific acquisitions. The report stated that each program has its own statutory and regulatory requirements. It also noted that both SBA and the Federal Acquisition Regulatory Council (FAR Council) have attempted to interpret these provisions but that their respective regulations conflict with each other. According to the report, in general, SBA’s regulations provide for parity among most of the programs and give discretion to the contracting officer by stating that the contracting officer should consider setting aside the requirement for 8(a), HUBZone, or service-disabled veteran-owned firms’ participation before considering setting aside the requirement as a small business set-aside. However, according to the report, the FAR currently conflicts with SBA’s regulations by providing that, before deciding to set aside an acquisition for small businesses, HUBZone firms, or service-disabled veteran-owned small firms, the contracting officer should review the acquisition for offering under the 8(a) program.

Officials at three of the four agencies we interviewed (Commerce, DHS, and SSA) regarding the awarding of contracts to small businesses stated that contracting officers occasionally faced uncertainty when applying the guidelines on awarding contracts under these programs. In March 2008, a proposal to amend the FAR was published with the purpose of ensuring that the FAR clearly reflects SBA’s interpretation of the Small Business Act and SBA’s interpretation of its regulations about the order of precedence that applies when deciding whether to satisfy a requirement through award under these various types of small business programs. Among other things, the proposed rule is intended to make clear that there is no order of precedence among the 8(a), HUBZone, or service-disabled veteran-owned small business programs. The proposed rule stated that SBA believes that, among other factors, progress in fulfilling the various small business goals should be considered in making a decision as to which program is to be used for an acquisition.

Federal contracting officials from the four agencies also explained that it was sometimes difficult to identify HUBZone firms with the required expertise to fulfill contracts. For example, DHS acquisition officials stated that market research that their contracting officers conducted sometimes indicated there were no qualified HUBZone firms in industries in which DHS awarded contracts. Specifically, a contracting officer in the U.S. Coast Guard’s Maintenance and Logistics Command explained that for contracts requiring specialized types of ship-repair work, the Coast Guard sometimes could not find sufficient numbers of HUBZone firms with the capacity and expertise to perform the work in the time frame required. SSA officials also stated that the agency awards most of its contracts to firms in the information technology industry and that contracting officers at times have had difficulty finding qualified HUBZone firms operating in this industry due to the amount of infrastructure and technical expertise required. Officials representing the Defense Threat Reduction Agency (an agency within DOD) also stated they often have difficulty finding qualified HUBZone firms that can fulfill their specialized technology needs. Lastly, Commerce officials explained that a review of the top 25 North American Industry Classification System (NAICS) codes under which the agency awarded contracts in fiscal year 2007 showed that fewer than 100 HUBZone firms operated in 13 of these 25 industries, including 5 industries that had fewer than 5 firms operating. They noted that these small numbers increased the difficulty of locating qualified HUBZone firms capable of meeting Commerce’s requirements. We did not validate the statements made by these federal contracting officials related to the difficulty they face in awarding contracts to HUBZone firms.

Finally, according to contracting officers we interviewed, the availability of sole-source contracting under SBA’s 8(a) program could make the 8(a) program more appealing than the HUBZone program. Through sole-source contracting, contracting officers have more flexibility in awarding contracts directly to an 8(a) firm without competition. According to U.S. Coast Guard contracting officers we interviewed, this can save 1 to 2 months when trying to award a contract. Sole-source contracts are available to HUBZone program participants but only when the contracting officer does not have a reasonable expectation that two or more qualified HUBZone firms will submit offers. Contracting officers we interviewed regarding HUBZone sole-source contracts stated that this is rarely the case. In fiscal year 2006, $5.8 billion (about 44 percent) of all dollars obligated to small business 8(a) firms were awarded through 8(a) sole- source contracts. In contrast, about 1 percent of the contracts awarded to HUBZone firms were HUBZone sole-source contracts.

Identifying Contract Dollars Awarded Based on a Particular Designation Is Difficult Because Dollars Can Be Counted under Multiple Socioeconomic Subcategories

Because agencies can count contracting dollars awarded to small businesses under more than one socioeconomic subcategory, it can be difficult to identify how many contract dollars firms received based on a particular designation. Small businesses can qualify for contracts under multiple socioeconomic programs. For example, if a HUBZone certified firm was owned by a service-disabled veteran, it could qualify for contracts set aside for HUBZone firms, as well as for contracts set aside for service-disabled veteran-owned businesses. The contracting dollars awarded to this firm would count toward both of these programs’ contracting goals.

We reviewed FPDS-NG data on contracts awarded to HUBZone firms in fiscal year 2006. We found that approximately 45 percent of contracts awarded to HUBZone firms were not set aside for any particular socioeconomic program (see fig. 8). The next largest percentage, about 23 percent, were 8(a) sole-source contracts awarded to HUBZone firms that also participated in SBA’s 8(a) business development program. These firms did not have any competitors for the contracts awarded. HUBZone set-aside contracts, or contracts for which only HUBZone firms can compete, accounted for about 11 percent of the dollars awarded to HUBZone firms.

This ability to count contracts toward multiple socioeconomic goals makes it difficult to determine how HUBZone certification may have played a role in winning a contract, especially when considering the limited amount of contract dollars awarded to HUBZone firms relative to the HUBZone goal. It can also make it more difficult to isolate the effect of HUBZone program status on economic conditions in a community.

Conclusions

The map contained on the HUBZone Web site is the primary means of disseminating HUBZone information. The map offers small businesses an easy and readily accessible way of determining whether they can apply for HUBZone certification. However, those positive attributes have been undermined because the map reflects inaccurate and out-of-date information. In particular, as of May 2008, SBA’s HUBZone map included 50 ineligible areas and excluded 27 eligible areas. As a result, ineligible small businesses have been able to participate in the program, while eligible businesses have not been able to participate. By working with its contractors to eliminate inaccuracies and more frequently updating the map, SBA will help ensure that only eligible firms have opportunities to participate in the program.

Although SBA relies on federal law to identify HUBZone areas, statutory changes over time have resulted in more areas being eligible for the program. Specifically, revisions to the statutory definition of HUBZone areas since 1999 have nearly doubled the number of areas and created areas that can be characterized as less economically distressed than areas designated under the original statutory criteria. While establishing new HUBZone areas could provide economic benefits to these new areas, as the program becomes less targeted and contracting dollars more dispersed, the program could have less of an effect on individual HUBZone areas. Such an expansion could diffuse the benefits that could be derived by steering businesses to economically distressed areas. Given the potential for erosion of the intended economic benefits of the program, further assessment of the criteria used to determine eligible HUBZone areas, in relation to overall program outcomes, may be warranted.

The mechanisms that SBA uses to certify and monitor firms provide limited assurance that only eligible firms participate in the program. SBA does not currently have guidance on precisely when HUBZone program staff should request documentation from firms to support the information reported on their application, and it verifies information reported by firms at application or during recertification in limited instances. Also, SBA does not follow its policy of recertifying all firms every 3 years. Further, SBA lacks a formal policy on how quickly it needs to make a final determination on decertifying firms that may no longer be eligible for the program. From fiscal years 2004 through 2007, SBA failed to resolve proposed decertifications within its informal goal of 60 days for more than 3,200 firms. More routinely obtaining supporting documentation upon application and conducting more frequent site visits would represent a more efficient and consistent use of SBA’s limited resources. It could help ensure that firms applying for application are truly eligible, thereby reducing the need to spend a substantial amount of resources during any decertification process. In addition, an SBA effort to consistently follow its current policy of recertifying firms every 3 years, and to formalize and adhere to a specific time frame for decertifying firms, would help prevent ineligible firms from obtaining HUBZone contracts.

By not evaluating the HUBZone program’s benefits, SBA lacks key information that could help it better manage the program and inform Congress of its results. SBA has some measures to assess program performance, but they are not linked to the program’s mission and thus do not measure the program’s effect on the communities in which HUBZone firms are located. While SBA identified several strategies for assessing the program’s effect and conducted limited surveys, it has not devoted resources to conduct a comprehensive program evaluation of the program’s effect on communities. We recognize the challenges associated with evaluating the economic effect of the program, such as isolating the role that HUBZone certification plays in obtaining federal contracts and generating benefits for communities. Because contract dollars awarded to firms in one small business program also could represent part of the dollars awarded in other programs, contract dollars awarded to HUBZone firms at best represent a broad indicator of program influence on a community’s economic activity. In addition, the varying levels of economic distress among HUBZone areas can further complicate such an evaluation. Despite these challenges, completing an evaluation would offer several benefits to the agency and the HUBZone program, including determining how well it is working across various communities, especially those that suffer most from economic distress. Such an evaluation is particularly critical in light of the expansion in the number of HUBZone areas, the potential for erosion of the intended economic benefits of the program from such expansion, and the wide variation in the economic characteristics of these areas.

Recommendations for Executive Action

To improve SBA’s administration and oversight of the HUBZone program, we recommend that the Administrator of SBA take the following actions: Take immediate steps to correct and update the map that is used to identify HUBZone areas and implement procedures to ensure that the map is updated with the most recently available data on a more frequent basis.

Develop and implement guidance to more routinely and consistently obtain supporting documentation upon application and conduct more frequent site visits, as appropriate, to ensure that firms applying for certification are eligible.

Establish a specific time frame for eliminating the backlog of recertifications and ensure that this goal is met, using either SBA or contract staff, and take the necessary steps to ensure that recertifications are completed in a more timely fashion in the future.

Formalize and adhere to a specific time frame for processing firms proposed for decertification in the future.

Further develop measures and implement plans to assess the effectiveness of the HUBZone program that take into account factors such as (1) the economic characteristics of the HUBZone area and (2) contracts being counted under multiple socioeconomic subcategories.

Agency Comments and Our Evaluation

We requested SBA’s comments on a draft of this report, and the Associate Administrator for Government Contracting, and Business Development provided written comments that are presented in appendix II. SBA agreed with our recommendations and outlined steps that it plans to take to address each recommendation.

First, SBA stated that it recognizes the valid concerns we raised concerning the HUBZone map and noted that efforts are under way to improve the data and procedures used to produce this important tool. Specifically, SBA plans to issue a new contract to administer the HUBZone map and anticipates that the maps will be updated and available no later than August 29, 2008. Further, SBA stated that, during the process of issuing the new contract, the HUBZone program would issue new internal procedures to ensure that the map is continually updated.

Second, SBA stated that it appreciates our concern about the need to obtain supporting documents in a more consistent manner. In line with its efforts to formalize HUBZone processes, the agency noted that it was formulating procedures that would provide sharper guidance as to when supporting documentation and site visits would be required. Specifically, SBA plans to identify potential areas of concern during certification that would mandate additional documentation and site visits.

Third, SBA noted that the HUBZone program had obtained additional staff to work through the backlog of pending recertifications and stated that this effort would be completed by September 30, 2008. Further, to ensure that recertifications will be handled in a more timely manner, SBA stated that the HUBZone program has made dedicated staffing changes and will issue explicit changes to procedures.

Fourth, SBA stated that it is aware of the need to improve the effectiveness and consistency of the decertification process. SBA noted that it would issue new procedures to clarify and formalize the decertification process and its timelines. Among other things, SBA stated that the new decertification procedure would establish a 60-day deadline to complete any proposed decertification.

Finally, SBA acknowledged that using HUBZone performance measures in a more systematized way to evaluate the program’s effectiveness would be beneficial and would provide important new information to improve and focus the HUBZone program. Therefore, SBA stated that it would develop an assessment tool to measure the economic benefits that accrue to areas in the HUBZone program and that the HUBZone program would then issue periodic reports accompanied by the underlying data.

We also provided copies of the draft report to Commerce, DOD, DHS, and SSA. All four agencies responded that they had no comments.

As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Ranking Member, House Committee on Small Business, other interested congressional committees, and the Administrator of the Small Business Administration. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about 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. Key contributors to this report are listed in appendix VI.

Appendix I: Objectives, Scope, and Methodology

To review the Small Business Administration’s (SBA) administration and oversight of the HUBZone program, we examined (1) the criteria and process that SBA uses to identify and map HUBZone areas and the economic characteristics of such areas; (2) the mechanisms that SBA uses to ensure that only eligible small businesses participate in the HUBZone program; and (3) the actions SBA has taken to assess the results of the program and the extent to which federal agencies have met their HUBZone contracting goals.

To identify the criteria that SBA uses to identify HUBZone areas, we reviewed applicable statutes, regulations, and agency documents. Because the HUBZone program also uses statutory definitions from the Department of Housing and Urban Development’s (HUD) low-income-housing tax credit program, we reviewed the statutes and regulations underlying the definitions of a qualified census tract and difficult development area. To determine the process that SBA uses to identify HUBZone areas, we interviewed SBA officials and the contractor that developed and maintains the HUBZone map on SBA’s Web site. We also reviewed the policies and procedures the contractor follows when mapping HUBZone areas. Using historical data provided by SBA’s mapping contractor, we determined how the number of HUBZone areas has changed over time. We also used these historical data to determine if SBA had complied with its policy of asking the contractor to update the map every time the HUBZone area definition changed or new data used to designate HUBZone areas (for example, HUD’s lists of difficult development areas and unemployment data from the Bureau of Labor Statistics or BLS) became available. To assess the accuracy of the current HUBZone map, we compared the difficult development areas on the map with the statutory definition of a difficult development area. We also compared HUD’s 2008 list of qualified census tracts to the areas designated on the map and analyzed 2007 unemployment data from BLS (the most recent available) to determine if all of the nonmetropolitan counties that met the HUBZone eligibility criteria were on the map.

Once we identified the current HUBZone areas, we used 2000 census data (the most complete data set available) to examine the economic characteristics of these areas. The 2000 census data are sample estimates and are, therefore, subject to sampling error. To test the impact of these errors on the classification of HUBZone areas, we simulated the potential results by allowing the estimated value to change within the sampling error distribution of the estimate and then reclassified the results. As a result of these simulations, we determined that the sampling error of the estimates had no material impact on our findings. For metropolitan and nonmetropolitan-qualified census tracts, nonmetropolitan counties, and difficult development areas in the 50 states and District of Columbia, we looked at common indicators of economic distress—poverty rate, unemployment rate, median household income, and median housing value. In measuring median household income and median housing value, we compared each HUBZone with the metropolitan area (for metropolitan-qualified census tracts) in which it was located or with the state nonmetropolitan area (for nonmetropolitan-qualified census tracts, nonmetropolitan counties, and difficult development areas) to put the values into perspective. We limited our analysis of Indian Country to poverty and unemployment rates because Indian lands vary in nature; therefore, no one unit of comparison worked for all areas when reporting median housing income and median housing value. We could not examine the economic characteristics of base closure areas because they do not coincide with areas for which census data are collected.

To further examine the economic characteristics of qualified HUBZone areas, we analyzed the effect of hypothetical changes to the economic criteria used to designate qualified census tracts and nonmetropolitan counties. (We report the results of this analysis in app. III.) First, we adjusted the economic criteria used to designate qualified census tracts: (1) a poverty rate of at least 25 percent or (2) 50 percent or more of the households with incomes below 60 percent of each area’s median gross income. Second, we adjusted the criteria used to designate nonmetropolitan counties: (1) a median household income of less than 80 percent of the median household income for the state nonmetropolitan area or (2) an unemployment rate not less than 140 percent of the state or national unemployment rate (whichever is lower). In both cases, we made the criteria more stringent as well as less stringent. We assessed the reliability of the census and BLS data we used to determine the economic characteristics of HUBZone areas by reviewing information about the data and performing electronic data testing to detect errors in completeness and reasonableness. We determined that the data were sufficiently reliable for the purposes of this report.

To determine how SBA ensures that only eligible small businesses participate in the HUBZone program, we reviewed policies and procedures established by SBA for certifying and monitoring HUBZone firms and internal control standards for federal agencies. We also interviewed SBA headquarters and field officials regarding the steps they take to certify and monitor HUBZone firms. We then assessed the actions that SBA takes to help ensure that only eligible firms participate against its policies and procedures and selected internal controls. In examining such compliance, we analyzed data downloaded from the HUBZone Certification Tracking System (the information system used to manage the HUBZone program) as of January 22, 2008, to determine the extent of SBA monitoring. Specifically, we analyzed the data to determine (1) the number of applications submitted in fiscal years 2000 through 2007 and their resolution; (2) the number of recertifications that SBA performed in fiscal years 2005 through 2007 and their results; (3) the number of recertifications conducted of HUBZone firms based on the number of years firms had been in the program; (4) the number of program examinations that SBA performed in fiscal years 2004 through 2007 and their results; (5) the number of program examinations conducted of HUBZone firms based on the number of years firms had been in the program; and (6) the number of firms proposed for decertification in fiscal years 2004 through 2007. We also analyzed Federal Procurement Data System-Next Generation (FPDS-NG) data to determine the extent to which firms that had been proposed for decertification or had actually been decertified had obtained federal contracts.

Because the HUBZone Certification Tracking System does not readily provide information on the extent to which SBA requests documentation from firms or conducts site visits during certification and monitoring, we conducted reviews of all 125 applications, 15 recertifications, and 11 program examinations begun in September 2007 and completed by January 22, 2008 (the date of the data set). For applications, we selected those that were logged into the system in September 2007. For recertifications and program examinations, we selected those cases where the firm had acknowledged receipt of the notice that they had been selected for review in September 2007; we chose September 2007 because most of the cases had been processed by January 22, 2008. Further, we analyzed (1) FPDS-NG data for fiscal year 2006 (the most recent year available at the time of our analysis) and (2) Dynamic Small Business Source System (DSBSS) data as of December 12, 2007, to identify select characteristics of businesses that participated in the program. DSBSS contains information on firms that have registered in the Central Contractor Registration system (a database that contains information on all potential federal contractors) as small businesses. We assessed the reliability of the HUBZone Certification Tracking System, FPDS-NG, and DSBSS data we used by reviewing information about the data and performing electronic data testing to detect errors in completeness and reasonableness. We determined that the data were sufficiently reliable for the purposes of this report.

To determine the measures that SBA has in place to assess the results of the HUBZone program, we reviewed SBA’s performance reports and other agency documents. We then compared SBA’s performance measures for the HUBZone program to our guidance on the attributes of effective performance measures. To determine the extent to which federal agencies have met their contracting goals, we (1) analyzed data from FPDS-NG and (2) reviewed SBA reports on agency contracting goals and accomplishments, such as federal contracting dollars awarded by agency for the various small business programs, for fiscal years 2003 through 2006. We also reviewed Federal Acquisition Regulation and SBA guidance and other relevant documentation. In addition, we interviewed small business and contracting officials at a nongeneralizable sample of agencies (the Departments of Commerce, Defense, Homeland Security and the Social Security Administration) to determine what factors affect federal agencies’ ability to meet HUBZone contracting goals. We selected agencies that received a range of scores as reported in SBA’s fiscal year 2006 Small Business Procurement Scorecard and awarded varying amounts of contracts to HUBZone firms.

To explore benefits that the program may have generated for selected firms and communities, we visited a nongeneralizable sample of four HUBZone areas: Lawton, Oklahoma; Lowndes County, Georgia; and Long Beach and Los Angeles, California. In selecting these areas, we considered geographic dispersion, the type of HUBZone area, and the dollar amount of contracts awarded to HUBZone firms. During each site visit, we interviewed officials from the SBA district office, the Chamber of Commerce, a small business development center, and certified HUBZone firms, with the exception of the city of Long Beach, where we did not meet with the Chamber of Commerce.

We conducted this performance audit from August 2007 to June 2008 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.

Appendix II: Comments from the Small Business Administration

Appendix III: Economic Characteristics of HUBZone Areas

In this appendix, we provide information on the economic characteristics of three types of HUBZone areas: (1) qualified census tracts, which have 50 percent or more of their households with incomes below 60 percent of the area median gross income or have a poverty rate of at least 25 percent and cannot contain more than 20 percent of the area population; (2) qualified Indian reservations, which include lands covered by a federal statutory definition of “Indian Country;” and (3) qualified nonmetropolitan counties, or those having a median household income of less than 80 percent of the median household income for the state nonmetropolitan area or an unemployment rate that is not less than 140 percent of the state average unemployment rate or the national average unemployment rate (whichever is lower). Other types of HUBZone areas are base closure areas and difficult development areas.

First, we report economic data for those HUBZone areas that are nonmetropolitan-qualified census tracts and Indian Country areas. Second, to further illustrate the economic diversity among qualified HUBZone areas, we provide data on the effect of hypothetical changes to the economic criteria used to designate metropolitan-qualified census tracts and nonmetropolitan counties.

Based on poverty rates, nonmetropolitan-qualified census tracts appear to be as economically distressed as metropolitan-qualified census tracts. About 99 percent of nonmetropolitan census tracts (excluding redesignated areas, which no longer meet the economic criteria but by statute remain eligible until after the release of the 2010 decennial census data) had a poverty rate of 20 percent or more (see fig. 9). Similarly, about 93 percent of metropolitan census tracts (excluding redesignated areas) met this criterion. However, there are some differences between the economic characteristics of nonmetropolitan- and metropolitan-qualified census tracts. For example, 402 of the 1,272 nonmetropolitan census tracts (about 32 percent) had housing values that were less than 60 percent of the area median housing value, while 57 percent of metropolitan census tracts had housing values that met this criterion.

Overall, we found that qualified Indian Country areas tend to be economically distressed (see fig. 10). For example, 310 of the 651 Indian Country areas (about 48 percent) had poverty rates of 20 percent or more. In addition, Indian Country areas had much higher rates of unemployment than any other type of HUBZone area. For example, 160 Indian Country areas (about 25 percent) had unemployment rates of 20 percent or more. In contrast, metropolitan census tracts and nonmetropolitan counties (excluding redesignated areas) had unemployment rates that met this same criterion of about 18 percent and just less than 2 percent, respectively.

As discussed above, qualified HUBZone areas are economically diverse; therefore, adjustments to the qualifying criteria could affect the number and type of eligible areas. Qualified census tracts must meet at least one of two economic criteria: (1) have a poverty rate of at least 25 percent or (2) be an area in which 50 percent or more of the households have incomes below 60 percent of the area’s median gross income. By using a poverty rate of 10 percent or more for metropolitan census tracts, however, 14,258 additional metropolitan census tracts could be eligible for the program (an increase of about 143 percent), depending on whether they met the other eligibility requirements (see table 7). In contrast, by using a poverty rate of 40 percent or more for metropolitan census tracts, the number of metropolitan census tracts (those tracts that currently meet eligibility criteria and those that are redesignated) could decrease from 9,959 to 2,270 (a decrease of about 77 percent).

Qualified nonmetropolitan counties are also determined by two economic criteria: (1) a median household income of less than 80 percent of the median household income for the state nonmetropolitan area or (2) an unemployment rate not less than 140 percent of the state or national unemployment rate (whichever is lower). By using a county median household income of less than 90 percent of the median household income for the state nonmetropolitan area, 29 additional nonmetropolitan counties could be eligible for the program (see table 8). By using a county median household income of less than 70 percent of the median household income for the state nonmetropolitan area, the number of eligible HUBZone- qualified nonmetropolitan counties could decrease from 1,162 to 43 (about 96 percent).

Appendix IV: Characteristics of HUBZone Firms as of 2007

To examine the characteristics of HUBZone firms, we analyzed data from SBA’s Dynamic Small Business Source System (DSBSS) as of December 12, 2007. DSBSS contains information on firms that have registered as small businesses in the Central Contractor Registration system (a database that contains information on all potential federal contractors). With the exception of information on the firms’ HUBZone, 8(a), and Small Disadvantaged Business certifications, the data in the system are self- reported. We found that HUBZone firms vary in size, ownership, types of services and products provided, and additional small business designations leveraged. Specifically, our analysis showed the following: The size of HUBZone firms varies. We chose two measures to describe the size of HUBZone firms—number of employees and average gross revenue. The average number of staff at HUBZone firms was 24. However, half of HUBZone firms had 6 or fewer employees. The average gross revenue for HUBZone firms was almost $3.5 million per year. However, half of HUBZone firms earned $600,000 or less annually.

Ownership status is diverse. Approximately 30 percent of HUBZone firm owners were women, while 37 percent were minorities. Table 9 breaks out the owners of HUBZone firms based on race and ethnicity.

HUBZone firms operate in a variety of industries as defined by North American Industry Classification System (NAICS) codes, and many operate in multiple industries. Table 10 lists the top 10 industries in which HUBZone firms operated and the number of HUBZone firms that provided a service or product related to that industry.

HUBZone firms often have other small business designations. Although the majority of HUBZone firms had only the HUBZone designation, 32 percent had one additional designation, which was most often the service-disabled, veteran-owned designation. Table 11 shows the extent to which HUBZone firms had other small business designations.

Appendix V: Details of Site Visits to HUBZone Areas

We conducted site visits to four HUBZone areas—Lawton, Oklahoma; Lowndes County, Georgia; and Long Beach and Los Angeles, California— to better understand to what extent benefits have been generated by the HUBZone program. These four areas represent various types of HUBZone areas (see table 12), and we found that the perceived benefits of the HUBZone program varied across these locations. The majority of the individuals we interviewed indicated that their firms had received some benefit from HUBZone certification. In most cases, they cited as a benefit the ability to compete for and win contracts, which in some cases had allowed firms to expand or become more competitive. However, representatives of a few firms indicated they had not been able to win any contracts through the program, which made it difficult to realize any benefits. We also asked local economic development and Chamber of Commerce officials if they were familiar with the HUBZone program. We found varying levels of familiarity with the program, and some officials representing economic development entities stated they lacked information on the program’s effect that could help them inform small businesses of its potential benefits.

Various representatives of HUBZone firms with whom we spoke stated that the HUBZone program provided advantages. The majority of representatives of HUBZone firms we interviewed stated that HUBZone certification had provided them with an additional opportunity to bid on federally funded contracts. Additionally, some of the business owners we interviewed who had received contracts stated that winning contracts through the HUBZone program had allowed their firm to grow (for example, to hire employees or expand operations). Representatives from two HUBZone firms located in Lawton, Oklahoma, that had received contracts through their HUBZone certification stated that the primary benefits associated with their HUBZone certification had been winning contracts that allowed them to hire additional employees and continue to build a reputation for their firms, which in turn had placed them in a better position to compete for additional contracts. Representatives of a HUBZone firm located in Valdosta, Georgia, stated that they had utilized the HUBZone program to obtain more contracts for their construction firm. They added that the program had allowed their firm to enter the federal government contracting arena, which provided additional opportunities aside from private-sector construction contracts. Representatives from three HUBZone firms in Los Angeles stated that they had won contracts through the program and had been able to build a stronger reputation for their firms by completing those contracts. Representatives of two of these firms also stated that the contracts they won through the program had helped their firms to grow and hire additional employees. For example, representatives from one HUBZone firm we interviewed stated that the firm had hired 10 to 15 full-time employees partly as a result of obtaining HUBZone contracts.

However, representatives of some HUBZone firms stated that the program has not generated any particular benefits for their firm. For example, representatives of two HUBZone firms in Lawton, Oklahoma, and one HUBZone firm in Valdosta, Georgia, stated that their HUBZone certification had resulted in no contracts or not enough contracts to provide opportunities to “grow” their firm. They noted that the HUBZone certification alone was not sufficient when competing for federally funded contracts, particularly because—based on their experience—few contracts were set aside for HUBZone firms. Our interviewees indicated that they planned to stay in the program but were unlikely to see any benefits unless additional contracts were set aside for HUBZone firms. A representative from one HUBZone firm located in Long Beach, California, stated that her HUBZone firm had not been awarded any contracts directly through the program, but because of the firm’s HUBZone status, it had been able to perform work as a subcontractor on contracts that had HUBZone subcontracting goals. However, her firm had not grown or expanded employment through the program.

We also found that, while some local economic development and Chamber of Commerce officials with whom we spoke were familiar with the HUBZone program, others were not. For example, in Lawton, Oklahoma, local economic development and Chamber of Commerce officials were familiar with the program and its requirements, largely because the city of Lawton has been designated a HUBZone area. In Valdosta, Georgia, Chamber of Commerce officials and officials from various economic development authorities were not familiar with the program and its requirements, but the small business development center official we interviewed was familiar with the program. In Long Beach and Los Angeles, California, most of the small business development center and economic development officials with whom we met also were relatively unfamiliar with the program, its goals, and how small businesses could use the program. Finally, officials representing economic development entities in Lowndes County, Georgia, and Los Angeles, California, stated that they lacked information on the program’s impact that could help them inform small businesses of its potential benefits.

Appendix VI: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

In addition to the contact named above, Paige Smith (Assistant Director), Triana Bash, Tania Calhoun, Bruce Causseaux, Alison Gerry, Cindy Gilbert, Julia Kennon, Terence Lam, Tarek Mahmassani, John Mingus, Marc Molino, Barbara Roesmann, and Bill Woods made key contributions to this report.