SBA Improved Communications to Firms about Changes to HUBZone Designations but Had Not Fully Implemented GAO’s Recommendation

As of August 2016, SBA had taken some actions to address but had not  yet fully implemented our recommendation on better informing firms about  programmatic changes that could affect their eligibility. In our February  2015 report, we described how HUBZone designations can change with  some frequency. Areas that lose their designation begin a 3-year  “redesignation” period during which firms in those areas can continue to  apply to and participate in the program and receive contracting  preferences. After the 3 years, firms in these areas lose their HUBZone  certified firm status and the associated federal contracting award  preferences. However, we found that SBA’s communications to firms about  programmatic changes (including redesignation) generally had not been  targeted or specific to firms that would be affected by the changes. Consequently, we recommended that SBA establish a mechanism to  better ensure that firms are notified of changes to HUBZone designations  that may affect their participation in the program. In response to the recommendation, SBA has improved notifications to  newly certified firms. As we reported in March 2016, SBA revised its  certification letters to firms. However, we found in March 2016 that SBA had not yet  implemented changes to ensure that all currently certified firms are  notified of changes that could affect their program eligibility. As of August 2016, SBA had plans to improve its notifications to all firms. Additionally, SBA officials told us that the agency intends to  develop a technology solution similar to SBA One—a database now used  to process loan applications—to include the HUBZone program to help  collect information and documents from existing firms and address this  recommendation. SBA expects to implement this solution by spring 2017. SBA Has Taken Some Steps to Address GAO’s Recommendation to Strengthen the Recertification Process

We found in February 2015 that SBA had addressed weaknesses in its  certification process that we previously identified. However, as of August  2016, SBA had not yet taken steps to fully address our recommendation  related to the HUBZone firm recertification process. In February 2015, we  reported that SBA had changed its certification process to require all  applicant firms to provide documentation supporting their eligibility and to  require agency staff to perform a full document review to determine firms’  eligibility for the program. Additionally, SBA had conducted site visits on  10 percent of its portfolio of certified firms every year in response to a  prior GAO June 2008 recommendation. Second, in 2015 we found that SBA relied on firms’ attestations of  continued eligibility and generally did not request supporting  documentation. Consequently, we recommended that SBA reassess 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 would be dedicated to the effort so that  significant backlogs would not recur. For example, instead of manually identifying firms  for recertification twice a year, SBA automated the notification process,  enabling notices to be sent daily for firms to respond to and attest that  they continued to meet the eligibility requirements for the program. According to SBA officials, this change should ultimately help eliminate  the backlog by September 30, 2016. However, as we discussed in our March 2016 report, SBA had not  implemented additional controls (such as guidance for when to request  supporting documents) for the recertification process because SBA  officials believe that any potential risk of fraud would be mitigated by site  visits to firms. Based on  data that SBA provided, the agency visited about 10 percent of certified  firms each year during fiscal years 2013–2015. SBA’s reliance on site  visits alone would not mitigate the recertification weaknesses that were  the basis for our recommendation. And as we stated in  2015 and reiterated in 2016, the characteristics of firms and the status of  HUBZone areas—the bases for program eligibility—often can change,  and need to be monitored. This is a work of the U.S. government and is not subject to copyright protection in the  United States.
Why GAO Did This Study

The purpose of the HUBZone program is to stimulate economic development in economically distressed areas. SBA certified HUBZone firms are eligible for federal contracting benefits, including limited competition awards such as sole-source and set-aside contracts. Small firms in SBA's HUBZone program had almost $6.6 billion in obligations on active federal contracts for calendar year 2015.
This testimony includes a discussion of (1) how SBA communicates changes in HUBZone designations to firms, including how SBA addressed GAO's 2015 recommendation to improve this process, and (2) SBA's certification and recertification processes for firms, including how SBA addressed GAO's 2015 recommendation to improve recertification.
GAO relied on the work supporting its February 2015 report on SBA's oversight of the program ( GAO-15-234 ) and its March 2016 report on actions taken in response to GAO recommendations ( GAO-16-4232R ), as well as July and August 2016 interviews with SBA officials on efforts the agency had undertaken to implement GAO's recommendations.

What GAO Found

As of August 2016, the Small Business Administration (SBA) had taken steps to better inform firms about changes in the designations of Historically Underutilized Business Zones (HUBZones) but had not yet fully implemented GAO's February 2015 recommendation to improve this process.
SBA primarily designates economically distressed areas as HUBZones, based on demographic data such as unemployment and poverty rates. The designations include certain census tracts and counties and are subject to periodic changes as economic conditions change. HUBZones that lose qualifying status due to changes in economic conditions become “redesignated” and undergo a 3-year transition period. After the 3-year period, HUBZone certified firms in these areas can no longer apply to and participate in the program and receive contracting preferences.
GAO found in February 2015 that SBA's communications to firms about programmatic changes (including redesignation) generally were not specific to affected firms and thus some firms might not have been informed they would lose eligibility. GAO recommended SBA better ensure firms were notified of changes that might affect program participation.
In response, SBA revised its approval letters to newly certified firms to include information about the consequences of redesignation (if applicable). But as of August 2016, SBA had not yet implemented changes to help ensure all currently certified firms would be notified of changes that could affect their program eligibility. SBA officials recently told GAO the agency intended to develop a technology solution by spring 2017 to help address GAO's recommendations.
While SBA made changes to its certification and recertification processes, SBA had not fully addressed GAO's recommendation on recertification of firms. To receive initial certification, SBA requires all firms to provide documentation to show they meet the eligibility requirements. SBA also conducts site visits at selected firms (for example, based on the amount of federal contracts received). According to HUBZone regulations, firms wishing to remain in the program without any interruption must recertify their continued eligibility to SBA within 30 days after the third anniversary of their certification date and each subsequent 3-year period. But in 2015, GAO found SBA did not require firms seeking recertification to submit any information to verify continued eligibility and instead relied on firms' attestations of continued eligibility. GAO also found SBA had a backlog for recertifying firms. GAO recommended in February 2015 that SBA implement additional controls for recertification, including criteria for requesting and verifying firm information, and ensuring sufficient staffing for the process so that significant backlogs would not recur. As of August 2016, SBA had plans to eliminate the backlog, but had not issued guidance on requesting supporting documents. SBA officials stated that any potential risk of fraud during recertification would be mitigated by SBA's site visits of firms. But as GAO stated in 2015 and reiterated in 2016, SBA only conducts site visits to about 10 percent of certified firms on an annual basis and characteristics of firms often can change, therefore relying on site visits is not adequate to mitigate this risk.