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entitled 'Small Business Contracting: Opportunities Exist to Further 
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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

February 2015: 

Small Business Contracting: 

Opportunities Exist to Further Improve HUBZone Oversight: 

GAO-15-234: 

GAO Highlights: 

Highlights of GAO-15-234, a report to congressional requesters. 

Why GAO Did This Study: 

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

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

What GAO Found: 

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

Table: Number of Firms and Amount of Contracts Received for Firms in 
HUBZone Areas in Fiscal Year (FY) 2013, by Designation Status: 

Qualified areas: 
Number of certified firms, as of June 2014: 
Total: 4,318; 
Percent: 83%; 
Amount of contract obligations to firms in area (FY13): 
Total: $3,295,006,042; 
Percent: 81%. 

Redesignated until 2014: 
Number of certified firms, as of June 2014: 
Total: 146; 
Percent: ; 
Amount of contract obligations to firms in area (FY13): 
Total: $24,467,606; 
Percent: 1%. 

Redesignated until 2015: 
Number of certified firms, as of June 2014: 
Total: 578; 
Percent: 1; 
Amount of contract obligations to firms in area (FY13): 
Total: $702,784,535; 
Percent: 17%. 

Redesignated until 2016: 
Number of certified firms, as of June 2014: 
Total: 69; 
Percent: ; 
Amount of contract obligations to firms in area (FY13): 
Total: $28,832,221; 
Percent: 1%. 

Redesignated until 2017: 
Number of certified firms, as of June 2014: 
Total: 78; 
Percent: ; 
Amount of contract obligations to firms in area (FY13): 
Total: $40,477,929; 
Percent: 1%. 

Total: 
Number of certified firms, as of June 2014: 
Total: 5,189; 
Percent: 100%;
Amount of contract obligations to firms in area (FY13): 
Total: $4,091,568,333; 
Percent: 100%. 

Source: GAO analysis of SBA data. | GAO-15-234. 

[End of table] 

SBA has addressed weaknesses in its certification process that GAO 
previously identified, but lacks key controls for its recertification 
process. For instance, to receive certification SBA now requires all 
firms to provide documentation to show they meet the eligibility 
requirements. SBA also conducts site visits at selected firms based 
on, for example, the amount of federal contracts they received.
However, SBA does not require firms seeking recertification to submit 
any information to verify their continued eligibility or provide 
guidance on when staff should request or verify documentation for 
recertification. Instead, it relies on firms attesting that they 
continue to meet the program's eligibility requirements. By not 
routinely requiring and reviewing key supporting documentation from
recertification applicants, SBA is missing an additional opportunity 
to reduce the risk that ineligible firms View GAO-15-234. For more 
information, obtain HUBZone contracts. 

What GAO Recommends: 

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

View [hyperlink, http://www.gao.gov/products/GAO-15-234]. For more 
information, contact William B.Shear at (202) 512-8678 or 
shearw@gao.gov. 

Contents: 

Letter: 

Background: 

HUBZone Designations Can Change Relatively Frequently but SBA 
Communications May Not Reach All Affected Firms: 

SBA Has Improved Its Certification Reviews but Actions Related to 
Recertification Were Limited: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Characteristics of HUBZones: 

Appendix III: Impact of Hypothetical Changes to HUBZone Criteria on 
HUBZone Designations: 

Appendix IV: Summary Data Relating to HUBZone Application Processing: 

Appendix V: Characteristics of HUBZone Certified Firms as of 2014: 

Appendix VI: Comments from the Small Business Administration: 

Appendix VII: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Number of Firms, and Number and Amount of Contracts Received 
for Firms in HUBZone Areas in Fiscal Year (FY) 2013, by Designation 
Status: 

Table 2: Selected Characteristics of HUBZones, by Type: 

Table 3: Number of HUBZones, Certified Firms, and Contract 
Obligations, by State, as of June 2014: 

Table 4: Comparison of Selected Economic Indicators for Census Tracts 
(HUBZone and Non-HUBZone), as of 2012: 

Table 5: Comparison of Selected Economic Indicators for 
Nonmetropolitan Counties (HUBZone and Non-HUBZone), as of 2012: 

Table 6: Number of Nonmetropolitan Counties by State That Would 
Qualify If Different Unemployment Rates Were Used: 

Table 7: Number and Status of Applications for HUBZone Program 
Submitted in Fiscal Years 2008-2013: 

Table 8: Processing Time for Applications Submitted in Fiscal Years 
2008-2013: 

Table 9: Top 10 Industries, Based on HUBZone Firm Applications 
Approved in Fiscal Years 2008-2013: 

Figures: 

Figure 1: Locations and Number of HUBZones, Including Redesignated 
Areas, as of June 2014: 

Figure 2: HUBZone Application Review Process: 

Figure 3: Reasons for HUBZone Decertifications for Firms That Applied 
in Fiscal Years 2010-2013: 

Figure 4: Density of Certified HUBZones Firms (by County), as of June 
2014: 

Figure 5: Comparison of Unemployment and Poverty Rates by Census Tract 
HUBZone Eligibility Status, as of 2012: 

Figure 6: Comparison of Unemployment and Poverty Rates by 
Nonmetropolitan County HUBZone Eligibility Status, as of 2012: 

Figure 7: Comparison of Selected Economic Indicators for Census Tracts 
(HUBZone and Non-HUBZone), as of 2012: 

Figure 8: Comparison of Selected Economic Indicators for 
Nonmetropolitan Counties, by Qualification Status, as of 2012: 

Figure 9: Effect on Nonmetropolitan Counties of Using Different 
Unemployment Criteria: 

Figure 10: Map of Nonmetropolitan Counties under Different 
Unemployment Criteria: 

Figure 11: Status of Applications for HUBZone Program Submitted in 
Fiscal Years 2008-2013, by Percentage: 

Abbreviations: 

ACS: American Community Survey: 

BLS: Bureau of Labor Statistics: 

DCI: data collection instrument: 

DSBS: Dynamic Small Business Search: 

FPDS-NG: Federal Procurement Data System-Next Generation: 

FTE: full-time equivalent: 

HCTS: HUBZone Certification Tracking System: 

HUBZone: Historically Underutilized Business Zone: 

HUD: Department of Housing and Urban Development: 

LIHTC: Low-Income Housing Tax Credit: 

MSA: Metropolitan Statistical Area: 

OIG: Office of Inspector General: 

PMSA: Primary Metropolitan Statistical Area: 

SBA: Small Business Administration: 

SOP: Standard Operating Procedures: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

February 12, 2015: 

The Honorable Benjamin L. Cardin: 
Ranking Member: 
Committee on Small Business and Entrepreneurship: 
United States Senate: 

The Honorable Maria Cantwell: 
United States Senate: 

The Small Business Administration (SBA) administers the Historically 
Underutilized Business Zone (HUBZone) program, which was created in 
1997.[Footnote 1] The program's purpose is to stimulate economic 
development in economically distressed communities by providing 
federal contracting preferences to small businesses located in HUBZone 
areas that employ residents of the areas. As of June, 2014, there were 
more than 18,500 HUBZones and about 5,200 firms in the program. 

The contracting preferences that a certified HUBZone firm (one that 
meets program requirements) can receive include limited competition 
awards such as sole-source and set-aside contracts. A certified firm 
also can receive a price evaluation preference of 10 percent in full 
and open competition if the apparent successful offering firm is not a 
small business. In addition, HUBZone firms can receive awards without 
set-asides (through open competition), through a small business set-
aside, or a set-aside through other programs. For example, a HUBZone 
firm that also qualifies as a service-disabled veteran-owned small 
business could receive an award under the Service-Disabled Veteran-
Owned Small Business program. In fiscal year 2013, federal agencies 
awarded prime contracts valued at about $4 billion to HUBZone firms 
that were certified as of June 2014.[Footnote 2] Federal agencies are 
responsible for trying to meet an annual statutory goal for awarding 
contracts to HUBZone firms (3 percent of all prime contracts and 
subcontracts).[Footnote 3] 

We and SBA's Office of Inspector General (OIG) previously have 
reported on the need for SBA to strengthen its internal controls and 
fraud prevention to ensure only eligible firms participate in the 
program.[Footnote 4] We identified a number of internal control-
related deficiencies in the HUBZone program. For example, we 
identified problems with the mechanisms that SBA used to certify and 
monitor firms and that SBA was not following its policy of 
recertifying firms every 3 years (a certified firm can participate in 
the program as long as it remains eligible and is recertified). 
[Footnote 5] 

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

To address our objectives, we reviewed prior GAO and SBA OIG reports, 
applicable statutes and regulations, and SBA documents, including its 
Standard Operating Procedures (SOP), and interviewed SBA staff and 
representatives from the HUBZone Contractors National Council--a 
HUBZone trade association. We used SBA's Dynamic Small Business Search 
(DSBS) database and federal procurement data from the Federal 
Procurement Data System-Next Generation (FPDS-NG) to analyze the 
number of firms in different types of HUBZones and the number and 
amount of federal contracts awarded to the firms in fiscal year 2013. 
[Footnote 6] We analyzed data from the Census Bureau's American 
Community Survey (ACS) and unemployment data from the Bureau of Labor 
Statistics (BLS). After reviewing related documentation or 
interviewing knowledgeable agency officials, we deemed the DSBS, FPDS-
NG, Census, BLS, and SBA data sufficiently reliable for the purposes 
of describing the characteristics of HUBZones, participating firms, 
and their contracting. To examine SBA's certification and 
recertification processes and the extent to which SBA addressed 
previous recommendations, we reviewed SBA's policies and procedures 
for certification, recertification, and monitoring of firms. We 
reviewed a purposive sample of 39 HUBZone applications submitted in 
fiscal year 2013 to test the extent to which SBA followed its 
processes.[Footnote 7] We reviewed and summarized available SBA 
analyses for certification and recertification activities from January 
2013 through September 2014. For our sample of 39 applications, we 
also reviewed data (related to SBA's documentation and processing of 
applications) extracted from the HUBZone Certification Tracking System 
(HCTS). To discuss SBA's certification and recertification processes 
and outreach efforts, we also selected a purposive sample of 16 
HUBZone firms, four local economic development agencies, and one 
Native American Tribe located in four HUBZones we selected for 
geographic diversity and range of experiences. Of those entities, we 
interviewed representatives from eight firms and two local economic 
development agencies (11 entities did not respond to our requests for 
interviews or declined to speak with us). We reviewed documentation 
about SBA's efforts to keep certified firms informed about the 
program. We also used data from HCTS to analyze industry, application 
status, and processing times of applications received from fiscal 
years 2008 through 2013. We assessed the reliability of the HCTS data 
we used by reviewing related documentation, interviewing knowledgeable 
officials, and electronic testing of the data, and found them to be 
sufficiently reliable for the analysis we report, but there were some 
internal inconsistencies that limited our reporting. Appendix I 
contains additional information on our scope and methodology. 

We conducted this performance audit from April 2014 to February 2015 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

There are four types of HUBZones. Initially, the HUBZone Act of 1997 
(which established the HUBZone program) identified qualifying areas as: 

* qualified census tracts, which are determined by the area's poverty 
rate or household income;[Footnote 8] 

* qualified nonmetropolitan counties, which are determined by the 
area's unemployment rate or median household income; and: 

* lands within the external boundaries of an Indian reservation, based 
on the areas meeting certain criteria.[Footnote 9] 

In subsequent years, Congress expanded the criteria for HUBZones to 
add bases closed under various base closure acts and include counties 
in difficult development areas outside of the continental United 
States as part of the qualified nonmetropolitan counties.[Footnote 10] 

To be certified to participate in the HUBZone program, a firm must 
meet the following criteria: [Footnote 11] 

* when combined with its affiliates, be small by SBA size standards; 
[Footnote 12] 

* be at least 51 percent owned and controlled by U.S. citizens; 
[Footnote 13] 

* have its principal office--the location where the greatest number of 
employees perform their work--located in a HUBZone;[Footnote 14] and: 

* have at least 35 percent of its employees reside in a HUBZone. 
[Footnote 15] 

HUBZone Designations Can Change Relatively Frequently but SBA 
Communications May Not Reach All Affected Firms: 

HUBZone designations can change with some frequency. However, SBA's 
communications to firms about programmatic changes, including changes 
to the HUBZone map (area designations), generally have not been 
targeted or specific to individual firms that would be affected by the 
changes. 

Designations for HUBZone Areas Regularly Change: 

SBA updates the HUBZone designations regularly based on whether they 
meet statutory criteria (such as having certain income levels or 
poverty or unemployment rates). SBA generally uses data from other 
federal agencies to determine if areas still qualify for the HUBZone 
program. SBA reassesses the status of nonmetropolitan counties more 
frequently than it reassesses the status of census tracts. For 
example, SBA updates the nonmetropolitan county designations each 
January to incorporate median household income data generated from ACS 
and each May to incorporate updated unemployment rates from BLS. 
[Footnote 16] In contrast, SBA historically has reassessed the status 
of qualified census tracts at multiyear intervals, such as every 5 
years, using the census tract designations that the Department of 
Housing and Urban Development (HUD) uses for another program.[Footnote 
17] See appendix II for more information about the specific criteria 
for each type of HUBZone area. 

In 2001, Congress extended the eligibility of census tracts and 
nonmetropolitan counties that lost HUBZone eligibility because of 
changes in income levels or poverty or unemployment rates.[Footnote 
18] These areas--labeled redesignated areas--remain eligible for 3 
years after "the date on which the census tract or nonmetropolitan 
county ceased to be so qualified." During the 3-year period, firms in 
those areas can continue to apply to and participate in the program 
and receive contracting preferences. In 2004, Congress revised the 
definition of redesignated areas to allow areas to retain eligibility 
for 3 years or until the public release of data from the 2010 
decennial census, whichever was later.[Footnote 19] Consequently, all 
of the areas that were redesignated between 2001 and October 2008 
received an extension of their 3-year redesignation period.[Footnote 
20] With the release of 2010 Census data in October 2011, a large 
number of previously redesignated HUBZone areas that had received the 
extensions lost their designation, including 333 nonmetropolitan 
counties. In total, 2,396 of the more than 8,000 HUBZone certified 
firms at the beginning of fiscal year 2012 were decertified when these 
changes took effect because their principal office was no longer 
located in a HUBZone. (We discuss decertification in more detail later 
in this report.) The redesignations for 3,417 HUBZones will expire in 
2015, largely because of the end of the approximately 3,400 census 
tracts that were redesignated in 2012. Finally, redesignated areas 
also may requalify for the program during their extended eligibility 
period. For example, after receiving the most recent unemployment data 
from BLS, SBA may change a nonmetropolitan county's designation from 
redesignated to qualified. 

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

Figure 1: Qualified and Redesignated HUBZone Areas: 

[Refer to PDF for image: interactive graphic: illustrated U.S. map] 

Directions: Hover over either legend item to see the isolated view of 
that HUBZone area. 

Depicted on the map: 
Qualified HUBZone Areas: 
Redesignated HUBZone Areas. 

Sources: GAO (analysis), Small Business Administration (data), and 
MapInfo (map). GAO-15-234. 

[End of figure] 

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

Table 1: Number of Firms, and Number and Amount of Contracts Received 
for Firms in HUBZone Areas in Fiscal Year (FY) 2013, by Designation 
Status: 

Qualified areas; 
Number of certified firms, as of June 2014: 
Total: 4,318; 
Percent: 83%; 
Number of contracts awarded to firms in area (FY13): 
Total: 11,042; 
Percent: 80%; 
Amount of contract obligations to firms in area (FY13): 
Total: $3,295,006,042; 
Percent: 81%. 

Redesignated until 2014; 
Number of certified firms, as of June 2014: 
Total: 146; 
Percent: 3%; 
Number of contracts awarded to firms in area (FY13): 
Total: 566; 
Percent: 4%; 
Amount of contract obligations to firms in area (FY13): 
Total: $24,467,606; 
Percent: 1%. 

Redesignated until 2015; 
Number of certified firms, as of June 2014: 
Total: 578; 
Percent: 11%; 
Number of contracts awarded to firms in area (FY13): 
Total: 1,934; 
Percent: 14%; 
Amount of contract obligations to firms in area (FY13): 
Total: 702,784,535; 
Percent: 17%. 

Redesignated until 2016; 
Number of certified firms, as of June 2014: 
Total: 69; 
Percent: 1%; 
Number of contracts awarded to firms in area (FY13): 
Total: 74; 
Percent: 1%; 
Amount of contract obligations to firms in area (FY13): 
Total: $28,832,221; 
Percent: 1%. 

Redesignated until 2017; 
Number of certified firms, as of June 2014: 
Total: 78; 
Percent: 2%; 
Number of contracts awarded to firms in area (FY13): 
Total: 113; 
Percent: 1%; 
Amount of contract obligations to firms in area (FY13): 
Total: 40,477,929; 
Percent: 1%. 

Total; 
Number of certified firms, as of June 2014: 
Total: 5,189; 
Percent: 100%; 
Number of contracts awarded to firms in area (FY13): 
Total: 13,729; 
Percent: 100%; 
Amount of contract obligations to firms in area (FY13): 
Total: $4,091,568,333; 
Percent: 100%. 

Source: GAO analysis of SBA data. GAO-15-234. 

Notes: Percentages may not sum to 100 percent due to rounding. 

[End of table] 

SBA's Communications about HUBZone Program Changes May Not Have 
Reached All Affected Firms: 

Generally, SBA relies on information posted on its website to 
communicate with interested parties about the HUBZone program. For 
instance, the HUBZone website includes links to the HUBZone map, 
frequently asked questions, and guidance to help firms apply for and 
maintain their certification. Firms can use the map of HUBZone areas 
to determine if an address or a particular area is designated as a 
HUBZone. More specifically, the website contains links to underlying 
data tables for the HUBZone map, and provides a potential applicant or 
program participant the ability to determine if a specific address is 
in a qualified HUBZone. Firms also can access a help desk by e-mail to 
get status information, help in resolving technical difficulties, or 
individualized assistance; obtain eligibility assistance through a 
twice-weekly interactive forum; and request a 15-minute appointment 
with a HUBZone analyst to discuss topics such as HUBZone policies and 
procedures, initial documents, or HUBZone applications. However, 
according to SBA officials, firms are primarily responsible for 
keeping themselves informed about the program so that they can remain 
eligible. 

SBA's Review of the Accuracy of HUBZone Maps: 

In our June 2008 report, we found that SBA's HUBZone map contained 
ineligible areas and had not been updated to include eligible 
areas.[Footnote 21] As a result, ineligible small businesses had 
participated in the program, and eligible businesses had not been able 
to participate. Consequently, we recommended that SBA take steps to 
correct and update the map used to identify HUBZone areas and 
implement procedures to ensure that the map would be updated with the 
most recently available data on a more frequent basis. 

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

SBA Notifications about Program Changes May Not Reach All Affected 
Firms: 

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

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

Furthermore, according to SBA officials, SBA began using a revised 
certification letter in October 2014 that includes links to the 
program's website and regulations, but unlike the previous 
certification letter that SBA sent to firms it does not include 
information on whether the firm is in a redesignated area or when that 
status will expire. According to HUBZone program policy, the approval 
letter should include language notifying the newly qualified firm of 
the possible expiration of the HUBZone.[Footnote 22] According to SBA 
officials, the only time that a firm would be directly notified that 
it was located in a redesignated area would be when it received a 
notice of proposed decertification after the status of the area 
expired.[Footnote 23] (We discuss the certification process later in 
the report.) Federal internal control standards require that 
management ensure there are adequate means of communicating with, and 
obtaining information from, external stakeholders that may have a 
significant impact on the agency achieving its goals.[Footnote 24] 

In a May 2008 report, SBA's Office of Advocacy stated that although 
HUBZone staff had been described as helpful and informative, there did 
not seem to be any systematic outreach or promotion of the program 
beyond responding to inquiries.[Footnote 25] In October 2014, SBA 
announced the development of a new initiative (Destination: HUB) that 
is intended to promote and support HUBZone firms in federal 
contracting opportunities. The initiative will consist of three major 
components; first, an in-depth examination of successes and needs in 
the program; second, an analysis of best practices for successful 
public-private partnerships; and third, the launch of a broad 
grassroots educational initiative at the regional and national levels. 

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

SBA Has Improved Its Certification Reviews but Actions Related to 
Recertification Were Limited: 

Revised Certification Process Includes a Full Document Review, Which 
Helps to Ensure That Only Eligible Firms Participate in the Program: 

SBA revised its certification process in response to our June 2008 
recommendation, and now requires firms to provide documentation and 
reviews this documentation to determine their eligibility for the 
HUBZone program.[Footnote 26] As we reported in 2008, at that time SBA 
relied on data that firms entered in the online application system and 
performed limited verification of the self-reported information. 
Although agency staff had the discretion to request additional 
supporting documentation, SBA did not have specific guidance or 
criteria for such requests. We recommended that SBA develop and 
implement guidance to more routinely and consistently obtain 
supporting documentation upon application. The agency agreed with our 
recommendation and, according to SBA officials, since fiscal year 2009 
SBA has required all firms to provide supporting documentation for 
information they enter in SBA's online application system. SBA then 
performs a full-document review on all applications as part of its 
initial certification process. 

The current initial certification process comprises multiple steps 
(see figure 2). For instance, after firms verify that the information 
they entered was complete and accurate, administrative staff request 
supporting documents from the applicant, including a lease agreement, 
map of employees' home addresses, personal and business tax returns, 
and payroll records. According to SBA officials, one staff reviews and 
analyzes the documents provided and makes a recommendation for the 
application and a second staff reviews the analysis and 
recommendation.[Footnote 27] Once a recommendation has been made, the 
HUBZone program director performs a final review before making a final 
determination. At the end of the process, SBA sends a signed letter to 
the applicant stating either that the firm is certified, or the basis 
for denial if the firm did not qualify. See appendix IV for summary 
statistics related to SBA's review of initial applications. 

Figure 2: HUBZone Application Review Process: 

[Refer to PDF for image: illustration] 

Firm: HUBZone application submitted online to SBA; 
Firm representative verifies accuracy and completeness: 
SBA Administrative staff requests supporting documentation from Firm; 
Applicant provides requested documentation (if no documentation 
provided, application is denied). 
SBA: Case assigned to a program analyst, who performs review, 
research, and analysis and makes a recommendation; 
At each level of review, additional documentation could be requested 
from the firm or the previous reviewer; 
Second-level reviewer evaluates and reviews analysis and 
recommendation; 
HUBZone program director or designee reviews recommendation; 
The firm may need to provide additional information during the review 
process. Failure to do so in a timely manner could result in a denied 
application; 
Final determination issued by SBA. 

Source: GAO analysis of Small Business Administration information. 
GAO-15-234. 

[End of figure] 

Our review of 39 application files SBA received from October 1, 2012, 
through September 30, 2013, indicates that SBA conducts full 
documentation review of the applications submitted by firms seeking 
certification.[Footnote 28] For the 29 applications that were approved 
or denied, SBA staff prepared an analysis to support their 
recommendation to approve or deny the application.[Footnote 29] For 18 
of the 29 applications, SBA staff followed up with the applicant to 
obtain additional documentation; 12 of these applicants provided the 
documents and were approved, and the remaining 6 were denied because 
they did not.[Footnote 30] Our review of the approval and denial 
letters relating to the 29 application files confirmed that the final 
determination and the effective dates entered into the system were the 
same. 

We also found that SBA has not updated its SOP since 2009 when it 
began making changes to its certification processes, but expects to do 
so by the end of March 2015. Based on SBA's response to a recent OIG 
recommendation, the agency had planned to complete the update by 
September 2014.[Footnote 31] The current SOP was last updated in 
November 2007 and therefore does not contain information about the 
full document review. According to SBA officials, to guide staff 
reviewing HUBZone certification packages, SBA currently uses guidance 
it developed that is specific to addressing situations that may arise 
during certification reviews. For example, the guidance discusses how 
to designate an employee of a HUBZone firm as located at a principal 
office when a person works an equal amount of time in a principal 
office and a secondary office. The guidance also includes language 
that should be included in a final e-mail request to the applicant 
firm when the analyst determines that SBA needs to obtain 
clarification, additional documents, or both to complete its review of 
the application package. According to SBA officials, SBA had delayed 
updating the SOP because the agency intended to revise the HUBZone 
regulations first and then incorporate those changes into the SOP. 

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

SBA officials told us that the agency again reviews the eligibility of 
some firms--generally, already certified firms--by conducting site 
visits to a select number of firms every year. In June 2008, we 
reported that SBA rarely conducted site visits during program 
examinations to verify a firm's information and recommended that the 
agency conduct more frequent site visits.[Footnote 32] In response to 
that recommendation, according to SBA officials, SBA now conducts site 
visits on 10 percent of its portfolio of certified firms every year. 
According to the officials, the site visits are based on established 
criteria (such as the amount of HUBZone contract awards the firm has 
received) or done on an as-needed basis in connection with the review 
of an initial certification application or after receipt of a protest. 
[Footnote 33] SBA officials told us that SBA uses a pass/fail system 
to describe the outcome of a site visit. In fiscal years 2013 and 
2014, the officials told us that SBA selected 511 and 550 firms, 
respectively, for site visits. In fiscal 2013, SBA noted that 81 
percent of the firms passed the site visit and 19 percent failed. For 
fiscal year 2014, SBA noted that 88 percent of the firms passed and 12 
percent failed. According to SBA officials, SBA sends a notice of 
proposed decertification to firms that fail a site visit. (We discuss 
decertification in the next section.) 

SBA May Propose Firms for Decertification If Eligibility Requirements 
Are Not Met: 

Once a firm is approved for participation in the HUBZone program, SBA 
may decertify the firm if SBA determines that the firm is no longer 
eligible for the program or if SBA is unable to verify the firm's 
continuing eligibility.[Footnote 34] For example, firms in 
redesignated areas are proposed for decertification and are provided 
an opportunity to establish continued eligibility following the 
expiration of the area's redesignated status. For instance, a firm 
could prove its continued eligibility by showing that it had relocated 
its principal office to a qualified HUBZone area. These firms are 
ultimately decertified if they do not respond to the notice of 
proposed decertification by indicating that they are still eligible. 
According to SBA officials, the decertification process typically 
consists of three steps. 

* SBA e-mails a notice of proposed decertification to the firm and 
allows the firm 30 days to respond. 

* If the firm does not respond, SBA sends the notice of proposed 
decertification to the firm by certified mail. 

* If the firm does not respond to the certified notice within 30 days, 
SBA then decertifies the firm on the following day. 

Decertification also can occur in two other ways. A firm voluntarily 
can decertify if the firm determines that it no longer meets the 
program's eligibility requirements. SBA also can immediately decertify 
a firm during the protest process if, according to SBA officials, SBA 
determines that the firm did not meet the eligibility requirements at 
the time of bid and award, or at the time of protest if the contract 
had not yet been awarded.[Footnote 35] From fiscal year 2010 through 
fiscal year 2013, SBA reported 124 protests of HUBZone contracts, of 
which 46 (37 percent) were dismissed, 41 (33 percent) were sustained, 
and 37 (30 percent) were denied.[Footnote 36] 

SBA noted that it decertified 4,660 firms from fiscal year 2010 
through fiscal year 2013. The vast majority of decertifications 
occurred from fiscal years 2010 through 2012. According to SBA 
officials, in fiscal year 2009, before conducting a legacy portfolio 
review, SBA asked firms to confirm their compliance with the program 
requirements or to voluntarily withdraw from the program.[Footnote 37] 
The officials told us there were approximately 14,000 HUBZone firms 
that needed to validate their compliance with the program eligibility 
requirements. At that time, SBA notified the firms that the agency 
planned to conduct a full document review in 2009 or early 2010 to 
confirm compliance. According to SBA officials, many firms voluntarily 
withdrew from the program as a part of this effort. As shown in figure 
3, our analysis of SBA data (for applications received from fiscal 
year 2010 through fiscal year 2013 for firms that were later 
decertified) showed that firms most frequently were decertified 
because their principal offices were not located in a 
HUBZone.[Footnote 38]SBA also decertified about 2 percent of firms 
that applied to the program during that period because they did not 
meet the 35 percent employee residency requirement. 

Figure 3: Reasons for HUBZone Decertifications for Firms That Applied 
in Fiscal Years 2010-2013: 

[Refer to PDF for image: pie-chart] 

Eligibility other than principal office[A]: 2.1%; 
Other[B]: 14.3%; 
Voluntary decertification or did not respond[C]: 26.6%; 
Principal office not in HUBZone[D]: 57.0%. 

Source: GAO analysis of Small Business Administration data. GAO-15-234. 

[A] This category includes 18 cases in which firms were decertified 
solely because they did not meet the requirement for employee 
residency and another 4 that were not small businesses. 

[B] This category includes 144 cases that did not have any reason 
listed, and 5 "others" that a review of the comment fields revealed 
were mostly no longer in business. 

[C] In 278 cases, we derived these reasons from the comment notes 
because the reason for the decertification was coded as "other." 

[D] In addition to the 174 cases that only listed principal office as 
the reason, this category includes the 415 cases in which a voluntary 
decertification was listed as a second reason in the comments field 
that we reviewed and another 6 cases in which not meeting the employee 
eligibility requirement was indicated as a second reason. 

[End of figure] 

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

SBA Recertification Process Again Has Become Backlogged and Does Not 
Require Supporting Documentation: 

Recurring Backlog of Recertifications: 

HUBZone recertifications once again have become backlogged. According 
to HUBZone regulations, firms wishing to remain in the program without 
any interruption must recertify their continued eligibility to SBA 
within 30 calendar days after the third anniversary of their date of 
certification and each subsequent 3-year period.[Footnote 40] In June 
2008, we reported that many firms were in the program for more than 3 
years without being recertified.[Footnote 41] We recommended that SBA 
establish a specific time frame for eliminating the backlog of 
recertifications and take the necessary steps to ensure that 
recertifications were completed in a more timely fashion in the 
future. In March 2009, we determined that SBA eliminated the backlog 
of recertifications by hiring contract staff, but had yet to implement 
necessary procedures to ensure that future recertifications were 
completed in a timely fashion.[Footnote 42] At that time, SBA 
officials stated that their ongoing business process reengineering 
would include an assessment of the recertification process. 
Subsequently, in July 2012 SBA provided data illustrating that the 
backlog had not reoccurred and that they had recently obtained 
approval to replace those contract staff with 10 full-time equivalent 
(FTE) staff who would perform all future recertifications. We believed 
at that time that these steps would address the intent of our 
recommendation. However, SBA did not hire the 10 staff that were to 
replace the contract staff because, according to SBA officials, part 
of its funding authority was rescinded in 2013. As a result, according 
to SBA officials, as of September 2014 they faced a 1-year backlog for 
recertifying firms--that is, the agency was still recertifying firms 
that had their 3-year anniversaries in 2013. 

SBA's current backlog indicates that it does not have processes in 
place to ensure that recertifications are completed in a timely 
fashion. SBA's current process for recertifying firms involves manual 
sorting of data from HCTS to identify firms whose 3-year anniversary 
is upcoming. Based on our analysis of SBA information for the most 
recent notification of firms, SBA notified almost 53 percent (375) of 
the firms past the deadline (that is, more than 30 days past the 
firms' 3-year anniversary).[Footnote 43] We identified three firms 
that were last recertified in 2009. Similarly, one firm with which we 
spoke said it received the SBA notification 3 or more months after the 
3-year anniversary. 

According to SBA officials, the recertification backlog is due in part 
to limitations with HCTS and resource constraints. According to SBA 
officials, the recertification module in HCTS was designed to 
electronically review and approve recertification applications 
submitted online and alert SBA when it identified significant 
differences in the information firms submitted for recertification, 
but has not worked as intended.[Footnote 44] As a result, the 
officials said that SBA has to manually identify firms that are due 
for recertification and only does so twice a year. According to agency 
officials, SBA began processing recertifications in batches in fiscal 
year 2013 because the agency lacked sufficient staff to do it more 
often.[Footnote 45] As a result of this batching schedule, in some 
instances SBA has been notifying firms almost 6 months after their 3-
year anniversary date. The officials also told us that they have 
chosen not to allow firms to initiate the recertification process, 
which would enable firms to recertify in a more timely way. They said 
that having a process in which firms would submit e-mails within 30 
calendar days after their 3-year anniversary date would be inefficient 
due to the additional steps required. For instance, officials said 
that they would have to manually sort through the e-mails and remove 
any firms that were not due for recertification. 

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

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

SBA Relies on Firms' Attestations of Continued Eligibility: 

SBA relies on firms' attestations of continued eligibility and 
generally does not request supporting documentation during 
recertification. SBA officials told us that SBA currently only 
requires that firms submit a notarized recertification form stating 
that their eligibility information is accurate. However, internal 
control standards for the federal government call for ongoing 
monitoring of program activity and indicate that federal agencies 
should have control activities in place, such as verification, to 
ensure compliance with program requirements.[Footnote 46] According to 
SBA officials, they do not believe they need to request supporting 
documentation from recertifying firms because all firms currently in 
the program have undergone a full document review, either when the 
firm initially applied or through the full document review SBA 
completed of its legacy portfolio review in fiscal year 2012, as 
previously discussed. While SBA officials noted that they have the 
authority to ask for supporting documentation when recertifying a 
firm, they have not done so. The SOP notes that agency staff may 
request and consider additional information, but it does not specify 
what circumstances warrant a request for supporting documentation. As 
previously noted, SBA officials said that the recertification process 
is affected by resource constraints. But as a result, SBA lacks 
reasonable assurance that only qualified firms are allowed to continue 
in the HUBZone program and receive preferential contracting treatment. 

Moreover, while SBA's review of its legacy portfolio represented a 
comprehensive effort, it was a one-time review and took place between 
fiscal years 2010 and 2012. The characteristics of firms and the 
status of HUBZone areas--the bases for program eligibility--can often 
change, and need to be monitored. For example, the size of a firm and 
the residency location of its employees can change in 3 years. In 
addition, monitoring processes can take resource constraints into 
account. In March 2009, we found 10 of 19 firms we examined to be 
egregiously out of compliance with HUBZone program requirements and 
recommended that SBA consider incorporating a risk-based mechanism for 
conducting unannounced site visits as part of the screening and 
monitoring process.[Footnote 47] Such a risk-based approach could be 
applied to SBA's recertification process to review and verify 
information from firms that appear to pose the most risk to the 
program. 

Conclusions: 

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

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

Recommendations for Executive Action: 

To improve SBA's administration and oversight of the HUBZone program 
and reduce the risk that firms that no longer meet program eligibility 
criteria receive HUBZone contracts, the Administrator of SBA should 
take the following two actions: 

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

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

Agency Comments: 

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

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

Signed by: 

William B. Shear: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

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

To address both objectives, including how SBA notifies and 
communicates with interested parties about the HUBZone program, we 
reviewed previous GAO and SBA Office of Inspector General (OIG) 
reports; applicable statutes and regulations; and SBA documents, 
including Standard Operating Procedures, internal policy guidance for 
staff, process work guidelines, checklist of required documents, 
criteria used to select firms to undergo site visits, outreach and 
communication materials, goaling report, Congressional Budget and 
Performance report, and a new initiative that SBA created intended to 
boost HUBZones in the federal marketplace.[Footnote 48] We interviewed 
SBA staff and representatives from the HUBZone Contractors National 
Council--the HUBZone trade association. 

We also interviewed representatives from local economic development 
agencies and from HUBZone firms. We selected a purposive sample of16 
HUBZone firms. To ensure a range of HUBZone firms, our sample included 
8 firms that were currently certified, 4 firms that had been denied 
entry into the program, and 4 firms that were once certified but had 
been decertified.[Footnote 49] Of the 16 firms, we interviewed 8, the 
findings from which cannot be generalized to the overall population of 
firms that have applied to the HUBZone program. To identify the firms, 
we relied on a multistage sampling approach: 

* To select firms that were certified, we first selected four states, 
one from each of the four regions of the United States--West, Midwest, 
Northeast, and South. We used 2013 unemployment rates from the Bureau 
of Labor Statistics to select two states with higher unemployment 
rates and two states with unemployment rates lower than the U.S. 
average rate.[Footnote 50] To ensure a mix of rural and urban states, 
we used 2010 Census data and calculated the percentage of each state 
that was rural and picked some states that had higher concentrations 
of rural areas. We also picked some states that had a large number of 
HUBZone certified firms, according to the Dynamic Small Business 
Search (DSBS) database, to ensure we had a sufficient number of firms 
from which to select firms to interview. 

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

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

* Finally, we used applicant data from SBA's HUBZone Certification 
Tracking System (HCTS) to select four firms that were denied entry 
into the program and four firms that were decertified. We used the 
same four U.S. regions and randomly selected two firms from each 
region, one for each of the two categories.[Footnote 51] 

To examine how SBA designates HUBZones, selected characteristics of 
the areas, and how potential changes to designation criteria would 
affect HUBZones and firms, we reviewed applicable statutes and 
regulations, such as the HUBZone Act of 1997.[Footnote 52] We also 
reviewed prior GAO, Congressional Research Service, and SBA OIG 
reports on the HUBZone program.[Footnote 53] We accessed the list of 
qualified and redesignated areas from SBA's HUBZone website and 
plotted them using Mapinfo.[Footnote 54] We also downloaded the list 
of certified firms as of June 16, 2014, and plotted those firms into 
their corresponding HUBZones.[Footnote 55] According to SBA officials, 
firms may have more than one profile and address in DSBS and there is 
no way within the system to identify which address represents a 
principal office. Consequently, the numbers we report are based on the 
addresses in the DSBS profiles.[Footnote 56] We were unable to plot 
573 firms in a HUBZone.[Footnote 57] For the firms we could plot, we 
matched these certified firms with federal procurement data from FPDS-
NG to identify the number and amount of contracts that the firms 
received from fiscal year 2010 to fiscal year 2013. We used these data 
sources to identify characteristics of the different HUBZone types, 
such as the number of firms in the different HUBZone types as well as 
the contract dollars those firms received. To identify economic 
characteristics of the different HUBZone types, we reviewed selected 
economic indicators, such as the poverty and unemployment rates, and 
the median housing income and housing value for the different HUBZone 
types. We used data from the Census Bureau's American Community Survey 
(ACS) and unemployment data from the Bureau of Labor Statistics 
(BLS).[Footnote 58] After reviewing related documentation or 
interviewing knowledgeable agency officials, we deemed the DSBS, FPDS-
NG, Census Bureau, BLS, and SBA data sufficiently reliable for the 
purposes of describing the characteristics of HUBZones, participating 
firms, and their contracting. To determine the impact of hypothetical 
changes to HUBZone criteria, we reviewed county-level unemployment 
data from BLS. We applied different criteria to the data to determine 
the impact that the changes would have on the number of eligible 
counties, by state. For example, we used a 5-and 10-year average 
unemployment rate instead of the 1-year rate that SBA currently uses 
to determine the eligibility for nonmetropolitan counties. To 
determine the impact of the statutory 20 percent cap imposed on census 
tracts as part of the Low-Income Housing Tax Credit (LIHTC) program, 
we analyzed 2014 data from the Department of Housing and Urban 
Development (HUD) and applied the algorithm that HUD uses to determine 
if a census tract qualifies, and then stopped applying the criteria 
prior to the imposition of the 20 percent cap.[Footnote 59] We 
compared the number of areas that would qualify under both scenarios. 

To examine SBA's certification and recertification processes for firms 
and the extent to which SBA addressed previous recommendations, we 
reviewed SBA's certification and recertification processes for 
certifying firms, including its policies and procedures for certifying 
and monitoring firms. To test whether SBA had implemented procedures 
to help ensure that only eligible firms participate in the program, we 
reviewed a purposive sample of 39 application case files.[Footnote 60] 
To select these files, we used data from HCTS to identify the universe 
of applications SBA received from October 1, 2012, to September 30, 
2013. We grouped these files into four outcome categories--approved, 
denied, withdrawn, and decertified and randomly selected 10 from each 
category.[Footnote 61] We reviewed these case files and collected 
information using a data collection instrument (DCI) to gather 
information such as whether SBA staff prepared an analysis summary; 
analyzed information, including supporting documentation, to determine 
if the applicants met the program eligibility requirements; sent 
follow-up communications to request additional documentation; and 
performed a second review before making a final determination on the 
application. We also determined the date on which the application was 
received and the date of final determination. The findings from this 
limited review of 39 case files cannot be generalized to the overall 
population of applications received in fiscal year 2013. 

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

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

To identify the eligibility-related reasons for decertification, we 
analyzed the reason field contained in HCTS for applications received 
from 2010 to 2013 that were later decertified.[Footnote 62] Because a 
large percentage of these applications had "other" for their recorded 
reason, we conducted a review of the comments field to code for the 
possible other reasons.[Footnote 63] To conduct that review, the GAO 
data analyst did a string search of the text using keywords such as 
"35 percent" and "principal office" and identified one additional 
category and added additional cases to existing reasons. An analyst 
reviewed a subset of the coding to ensure accuracy. 

To determine whether SBA implemented procedures to help ensure that 
only eligible firms continue to participate in the program, we 
assessed SBA's recertification process. We reviewed SBA's regulations 
on recertification and information from HCTS relating to firms' 
certification anniversary dates and SBA's e-mail notification for 
firms to recertify.[Footnote 64] We assessed the reliability of the 
data on these processes by interviewing officials knowledgeable about 
the data and performing electronic data testing to detect errors in 
completeness and reasonableness. We determined that they were 
sufficiently reliable for the purpose of identifying the amount of 
time between a firm's prior certification and SBA's notice about 
recertification. We compared SBA's certification and recertification 
processes with federal internal control standards for collecting 
documentation and verifying information.[Footnote 65] 

We conducted this performance audit from April 2014 to February 2015 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Characteristics of HUBZones: 

There are four different types of qualified HUBZone areas as defined 
by federal statute. 

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

* Qualified nonmetropolitan county. A qualified nonmetropolitan county 
is any county that was not located in an MSA at the time of the most 
recent census. To qualify, the (1) median household income for the 
county must be less than 80 percent of the nonmetropolitan state 
median household income, based on the most recent data available from 
the Bureau of the Census; or (2) the unemployment rate is not less 
than 140 percent of the average unemployment rate for the United 
States or for the state in which such county is located, whichever is 
less, based on the most recent data available from the Secretary of 
Labor. SBA uses a 5-year median income, as determined through the ACS. 
The most recent update reflected data from 2008-2012. The unemployment 
rate is derived from data released annually by BLS and is typically 
sent to SBA during May, June, or July. Additionally, nonmetropolitan 
counties can qualify if they include a difficult development area, as 
designated by HUD, within Alaska, Hawaii, or any territory or 
possession of the United States outside of the 48 contiguous states. 
[Footnote 66] 

* Qualified Indian land. Lands within the boundaries of Indian 
reservations may qualify as a HUBZone area.[Footnote 67] The Bureau of 
Indian Affairs provides data delineating these areas. 

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

According to our analysis, about 2,600 of the approximately 5,200 
certified firms were in a qualified or redesignated census tract, as 
of June 2014 (see table 2).[Footnote 68] Additionally, about 12 
percent of the firms were located simultaneously in at least two types 
of HUBZones. Most commonly, firms were located in both a qualified 
census tract and qualified nonmetropolitan county (311 firms) or a 
qualified census tract and Indian land (107 firms). However, about 88 
percent of HUBZones--including all the base realignment and closure 
areas--did not contain any certified firms (that we could 
geographically code). 

Table 2: Selected Characteristics of HUBZones, by Type: 

HUBZone type: Census tracts: Qualified; 
Number of areas, as of June 2014: 13,635; 
Number of certified firms, as of June 2014: 2,077; 
Percent of type with 0 certified firms: 90%; 
Percent of type with five or more certified firms: 0; 
Number of contracts awarded to firms in area, FY13: 7,081; 
Amount of contract obligations firms in area, FY13 (dollars in 
millions): $2,124. 

HUBZone type: Census tracts: Redesignated; 
Number of areas, as of June 2014: 3,377; 
Number of certified firms, as of June 2014: 520; 
Percent of type with 0 certified firms: 92%; 
Percent of type with five or more certified firms: 1%; 
Number of contracts awarded to firms in area, FY13: 1,842; 
Amount of contract obligations firms in area, FY13 (dollars in 
millions): $695. 

HUBZone type: Nonmetropolitan counties: Qualified; 
Number of areas, as of June 2014: 546; 
Number of certified firms, as of June 2014: 1,641; 
Percent of type with 0 certified firms: 40%; 
Percent of type with five or more certified firms: 17%; 
Number of contracts awarded to firms in area, FY13: 2,407; 
Amount of contract obligations firms in area, FY13 (dollars in 
millions): $784. 

HUBZone type: Nonmetropolitan counties: Redesignated; 
Number of areas, as of June 2014: 250; 
Number of certified firms, as of June 2014: 351; 
Percent of type with 0 certified firms: 51%; 
Percent of type with five or more certified firms: 11%; 
Number of contracts awarded to firms in area, FY13: 845; 
Amount of contract obligations firms in area, FY13 (dollars in 
millions): $101. 

HUBZone type: Qualified Indian land; 
Number of areas, as of June 2014: 618; 
Number of certified firms, as of June 2014: 600; 
Percent of type with 0 certified firms: 83%; 
Percent of type with five or more certified firms: 4%; 
Number of contracts awarded to firms in area, FY13: 1,554; 
Amount of contract obligations firms in area, FY13 (dollars in 
millions): $387. 

HUBZone type: Qualified base closure area; 
Number of areas, as of June 2014: 115; 
Number of certified firms, as of June 2014: 0; 
Percent of type with 0 certified firms: 100; 
Percent of type with five or more certified firms: 0; 
Number of contracts awarded to firms in area, FY13: 0; 
Amount of contract obligations firms in area, FY13 (dollars in 
millions): 0. 

HUBZone type: Total; 
Number of areas, as of June 2014: 18,541; 
Number of certified firms, as of June 2014: 5,189; 
Percent of type with 0 certified firms: 88%; 
Percent of type with five or more certified firms: 1%; 
Number of contracts awarded to firms in area, FY13: 13,729; 
Amount of contract obligations firms in area, FY13 (dollars in 
millions): $4,092. 

Source: GAO analysis of SBA data. GAO-15-234. 

Notes: Totals may not sum due to rounding; FY refers to fiscal year. 

[End of table] 

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

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

Figure 4: Density of Certified HUBZones Firms (by County), as of June 
2014: 

[Refer to PDF for image: illustrated U.S. map] 

Densities depicted: 
1; 
2 to 4; 
5 to 10; 
More than 10. 

Sources: GAO (analysis), Small Business Administration (data), and 
MapInfo (map). GAO-15-234. 

[End of figure] 

As shown in table 3, California, New York, and Texas had the largest 
number of qualified areas. California, Oklahoma, Texas, and Virginia 
all had more than 200 certified firms, with California having the most 
(477). 

Table 3: Number of HUBZones, Certified Firms, and Contract 
Obligations, by State, as of June 2014: 

Alabama; Number of qualified areas: 405; Number of certified firms: 
104; 
Amount obligated, FY13: 78,586,364. 

Alaska; 
Number of qualified areas: 280; 
Number of certified firms: 159; 
Amount obligated, FY13: $$88,487,940. 

American Samoa; 
Number of qualified areas: 17; 
Number of certified firms: 0; 
Amount obligated, FY13: $0. 

Arizona; 
Number of qualified areas: 378; 
Number of certified firms: 77; 
Amount obligated, FY13: $41,299,272. 

Arkansas; 
Number of qualified areas: 203; 
Number of certified firms: 35; 
Amount obligated, FY13: $10,483,902. 

California; 
Number of qualified areas: 2,079; 
Number of certified firms: 477; 
Amount obligated, FY13: $564,100,738. 

Colorado; 
Number of qualified areas: 264; 
Number of certified firms: 79; 
Amount obligated, FY13: $15,829,213. 

Connecticut; 
Number of qualified areas: 188; 
Number of certified firms: 17; 
Amount obligated, FY13: $1,442,952. 

Delaware; 
Number of qualified areas: 27; 
Number of certified firms: 3; 
Amount obligated, FY13: $466,705. 

District of Colombia; 
Number of qualified areas: 109; 
Number of certified firms: 155; 
Amount obligated, FY13: $109,485,403. 

Florida; 
Number of qualified areas: 809; 
Number of certified firms: 186; 
Amount obligated, FY13: $234,340,665. 

Georgia; 
Number of qualified areas: 560; 
Number of certified firms: 162; 
Amount obligated, FY13: $174,072,543. 

Guam; 
Number of qualified areas: 28; 
Number of certified firms: 167; 
Amount obligated, FY13: $128,964,221. 

Hawaii; 
Number of qualified areas: 88; 
Number of certified firms: 71; 
Amount obligated, FY13: $75,766,553. 

Idaho; 
Number of qualified areas: 51; 
Number of certified firms: 89; 
Amount obligated, FY13: $83,909,574. 

Illinois; 
Number of qualified areas: 744; 
Number of certified firms: 76; 
Amount obligated, FY13: $19,892,482. 

Indiana; 
Number of qualified areas: 330; 
Number of certified firms: 30; 
Amount obligated, FY13: $2,707,780. 

Iowa; 
Number of qualified areas: 104; 
Number of certified firms: 22; 
Amount obligated, FY13: $13,017,698. 

Kansas; 
Number of qualified areas: 128; 
Number of certified firms: 18; 
Amount obligated, FY13: $14,463,737. 

Kentucky; 
Number of qualified areas: 374; 
Number of certified firms: 73; 
Amount obligated, FY13: $82,357,023. 

Louisiana; 
Number of qualified areas: 430; 
Number of certified firms: 86; 
Amount obligated, FY13: $41,587,386. 

Maine; 
Number of qualified areas: 42; 
Number of certified firms: 15; 
Amount obligated, FY13: $5,495,869. 

Maryland; 
Number of qualified areas: 276; 
Number of certified firms: 161; 
Amount obligated, FY13: $139,008,297. 

Massachusetts; 
Number of qualified areas: 368; 
Number of certified firms: 49; 
Amount obligated, FY13: $54,448,247. 

Michigan; 
Number of qualified areas: 701; 
Number of certified firms: 185; 
Amount obligated, FY13: $116,704,791. 

Minnesota; 
Number of qualified areas: 204; 
Number of certified firms: 41; 
Amount obligated, FY13: $8,308,223. 

Mississippi; 
Number of qualified areas: 257; 
Number of certified firms: 105; 
Amount obligated, FY13: $54,023,857. 

Missouri; 
Number of qualified areas: 326; 
Number of certified firms: 66; 
Amount obligated, FY13: $36,285,986. 

Montana; 
Number of qualified areas: 82; 
Number of certified firms: 145; 
Amount obligated, FY13: $10,606,722. 

Nebraska; 
Number of qualified areas: 111; 
Number of certified firms: 27; 
Amount obligated, FY13: $28,582,530. 

Nevada; 
Number of qualified areas: 128; 
Number of certified firms: 47; 
Amount obligated, FY13: $48,513,669. 

New Hampshire; 
Number of qualified areas: 24; 
Number of certified firms: 28; 
Amount obligated, FY13: $16,120,234. 

New Jersey; 
Number of qualified areas: 387; 
Number of certified firms: 37; 
Amount obligated, FY13: $23,556,400. 

New Mexico; 
Number of qualified areas: 171; 
Number of certified firms: 80; 
Amount obligated, FY13: $67,873,829. 

New York; 
Number of qualified areas: 1,296; 
Number of certified firms: 105; 
Amount obligated, FY13: $178,704,178. 

North Carolina; 
Number of qualified areas: 512; 
Number of certified firms: 159; 
Amount obligated, FY13: $80,755,973. 

North Dakota; 
Number of qualified areas: 62; 
Number of certified firms: 19; 
Amount obligated, FY13: $6,323,891. 

Northern Mariana Islands; 
Number of qualified areas: 13; 
Number of certified firms: 8; 
Amount obligated, FY13: $205,331. 

Ohio; 
Number of qualified areas: 816; 
Number of certified firms: 155; 
Amount obligated, FY13: $97,311,847. 

Oklahoma; 
Number of qualified areas: 321; 
Number of certified firms: 335; 
Amount obligated, FY13: $278,823,395. 

Oregon; 
Number of qualified areas: 133; 
Number of certified firms: 165; 
Amount obligated, FY13: $41,318,162. 

Pennsylvania; 
Number of qualified areas: 828; 
Number of certified firms: 82; 
Amount obligated, FY13: $26,148,010. 

Puerto Rico; 
Number of qualified areas: 340; 
Number of certified firms: 24; 
Amount obligated, FY13: $29,650,270. 

Rhode Island; 
Number of qualified areas: 60; 
Number of certified firms: 4; 
Amount obligated, FY13: $13,029,555. 

South Carolina; 
Number of qualified areas: 302; 
Number of certified firms: 110; 
Amount obligated, FY13: $47,818,818. 

South Dakota; 
Number of qualified areas: 69; 
Number of certified firms: 20; 
Amount obligated, FY13: $5,363,314. 

Tennessee; 
Number of qualified areas: 419; 
Number of certified firms: 130; 
Amount obligated, FY13: $137,520,766. 

Texas; 
Number of qualified areas: 1,518; 
Number of certified firms: 249; 
Amount obligated, FY13: $292,180,004. 

Utah; 
Number of qualified areas: 92; 
Number of certified firms: 23; 
Amount obligated, FY13: $38,299,082. 

Vermont; 
Number of qualified areas: 19; 
Number of certified firms: 13; 
Amount obligated, FY13: $3,365,441. 

Virgin Islands; 
Number of qualified areas: 14; 
Number of certified firms: 21; 
Amount obligated, FY13: $749,173. 

Virginia; 
Number of qualified areas: 342; 
Number of certified firms: 242; 
Amount obligated, FY13: $311,491,440. 

Washington; 
Number of qualified areas: 269; 
Number of certified firms: 146; 
Amount obligated, FY13: $44,970,704. 

West Virginia; 
Number of qualified areas: 183; 
Number of certified firms: 50; 
Amount obligated, FY13: $48,611,616. 

Wisconsin; 
Number of qualified areas: 240; 
Number of certified firms: 39; 
Amount obligated, FY13: $17,988,294. 

Wyoming; 
Number of qualified areas: 20; 
Number of certified firms: 18; 
Amount obligated, FY13: $148,266. 

Total; 
Number of qualified areas: 18,541; 
Number of certified firms: 5,189; 
Amount obligated, FY13: $4,091,568,333. 

Source: GAO analysis of SBA data. GAO-15-234. 

Note: FY refers to fiscal year. 

[End of table] 

Economic Characteristics of HUBZones: 

Our analysis of the economic conditions of qualified and redesignated 
areas as of 2012 found that redesignated areas had, on average, 
economic conditions between those of qualified and nonqualified areas. 
For example, as shown in figure 5, qualified census tracts had poverty 
and unemployment rates of 32 percent and 14 percent, respectively, 
while nonqualified census tracts had poverty and unemployment rates of 
11 percent and 8 percent, respectively. In contrast, the poverty rate 
in redesignated census tracts was 24 percent while the unemployment 
rate was 12 percent. 

Figure 5: Comparison of Unemployment and Poverty Rates by Census Tract 
HUBZone Eligibility Status, as of 2012: 

[Refer to PDF for image: vertical bar graph] 

Poverty rate: 
HUBZone Qualified Census tracts: 32%; 
Redesignated Census tracts: 24%; 
Non-HUBZone Census tracts: 11%. 

Unemployment rate: 	
HUBZone Qualified Census tracts: 14%; 
Redesignated Census tracts: 12%; 
Non-HUBZone Census tracts: 8%. 

Source: GAO analysis of Bureau of Labor Statistics and American 
Community Survey data. GAO-15-234. 

[End of figure] 

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

Figure 6: Comparison of Unemployment and Poverty Rates by 
Nonmetropolitan County HUBZone Eligibility Status, as of 2012: 

[Refer to PDF for image: vertical bar graph] 

Poverty rate: 
HUBZone Qualified Census tracts: 22%; 
Redesignated Census tracts: 19%; 
Non-HUBZone Census tracts: 16%. 

Unemployment rate: 	
HUBZone Qualified Census tracts: 12%; 
Redesignated Census tracts: 11%; 
Non-HUBZone Census tracts: 8%. 

Source: GAO analysis of Bureau of Labor Statistics and American 
Community Survey data. GAO-15-234. 

[End of figure] 

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

Table 4: Comparison of Selected Economic Indicators for Census Tracts 
(HUBZone and Non-HUBZone), as of 2012: 

HUBZone qualified census tracts; 
Percent in poverty: 31.5%; 
Unemployment rate: 13.9%; 
Average median household income: $32,200; 
Average median housing value: $158,701. 

Redesignated census tracts; 
Percent in poverty: 23.6%; 
Unemployment rate: 12%; 
Average median household income: $40,383; 
Average median housing value: $207,738. 

Non-HUBZone census tracts; 
Percent in poverty: 11%; 
Unemployment rate: 8.3%; 
Average median household income: $63,643; 
Average median housing value: $243,259. 

Source: American Community Survey (data). GAO-15-234. 

Note: ACS is an ongoing survey that covers topics such as the social, 
economic, demographic, and housing characteristics of the U.S. 
population. The 5-year estimates from ACS represent data collected 
over a period of time. The primary advantage of using multiyear 
estimates is the increased statistical reliability of the data for 
less populated areas and small population subgroups. The most recent 5-
year estimate covers 2008-2012. 

[End of table] 

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

Figure 7: Comparison of Selected Economic Indicators for Census Tracts 
(HUBZone and Non-HUBZone), as of 2012: 

[Refer to PDF for image: series of horizontal bar graphs] 

Poverty rate by census tracts: 
Qualified census tracts: 
Less than 10%: 
Number: 553; 
Percentage: 3.6%; 
10.0 - 19.9%: 
Number: 1,809; 
Percentage: 11.8%; 
20.0 - 29.9%: 
Number: 4,487; 
Percentage: 29.3%; 
30.0 - 39.9%: 
Number: 4,617; 
Percentage: 30.1%; 
40% or more: 
Number: 3,857; 
Percentage: 25.2%; 
Redesignated census tracts: 
Less than 10%: 
Number: 62; 
Percentage: 5.3%[A] 
10.0 - 19.9%: 
Number: 324; 
Percentage: 27.9%; 
20.0 - 29.9%: 
Number: 555; 
Percentage: 47.8%; 
30.0 - 39.9%: 
Number: 173; 
Percentage: 14.9%[A]; 
40% or more: 
Number: 48; 
Percentage: 4.1%[A]; 
Non-HUBZone census tracts: 
Less than 10%: 
Number: 28,054; 
Percentage: 50.4%; 
10.0 - 19.9%: 
Number: 20,580; 
Percentage: 37.0%; 
20.0 - 29.9%: 
Number: 6,120; 
Percentage: 11.0%; 
30.0 - 39.9%: 
Number: 775; 
Percentage: 1.4%; 
40% or more: 
Number: 152; 
Percentage: 0.3%[A]. 

Unemployment rate by census tracts: 
Qualified census tracts: 
Less than 5%: 
Number: 899; 
Percentage: 5.9%; 
5.0 - 9.9%: 
Number: 3,419; 
Percentage: 22.4%; 
10.0 - 14.9%: 
Number: 4,329; 
Percentage: 28.4%; 
15.0 - 19.9%: 
Number: 3,197; 
Percentage: 20.9%; 
20% or more: 
Number: 3,422; 
Percentage: 22.4%; 
Redesignated census tracts: 
Less than 5%: 
Number: 102; 
Percentage: 9.0%[A]; 
5.0 - 9.9%: 
Number: 349; 
Percentage: 30.6%; 
10.0 - 14.9%: 
Number: 349
Percentage: 30.6%; 
15.0 - 19.9%: 
Number: 204
Percentage: 17.9%; 
20% or more: 
Number: 135; 
Percentage: 11.9%[A]; 
Non-HUBZone census tracts: 
Less than 5%: 
Number: 12,096; 
Percentage: 21.7%; 
5.0 - 9.9%: 
Number: 26,877; 
Percentage: 48.3%; 
10.0 - 14.9%: 
Number: 12,313; 
Percentage: 22.1%; 
15.0 - 19.9%: 
Number: 3,385; 
Percentage: 6.1%; 
20% or more: 
Number: 977; 
Percentage: 1.8%. 

Ratio of income to state average by census tracts: 
Qualified census tracts: 
Less than 40%: 
Number: 2,256; 
Percentage: 14.7%; 
40.0 - 49.9%: 
Number: 2,807; 
Percentage: 18.3%; 
50.0 - 59.9%: 
Number: 3,411; 
Percentage: 22.3%; 
60.0 - 69.9%: 
Number: 2,941; 
Percentage: 19.2%; 
70% or more: 
Number: 3,901; 
Percentage: 25.5%; 
Redesignated census tracts: 
Less than 40%: 
Number: 11; 
Percentage: 1.0%[A]; 
40.0 - 49.9%: 
Number: 74; 
Percentage: 6.4%[A]; 
50.0 - 59.9%: 
Number: 207; 
Percentage: 18.0%; 
60.0 - 69.9%: 
Number: 254; 
Percentage: 22.0%; 
70% or more: 
Number: 606; 
Percentage: 52.6%; 
Non-HUBZone census tracts: 
Less than 40%: 
Number: 28; 
Percentage: 0.1%[A]; 
40.0 - 49.9%: 
Number: 172; 
Percentage: 0.3%[A]; 
50.0 - 59.9%: 
Number: 1,042; 
Percentage: 1.9%; 
60.0 - 69.9%: 
Number: 2,991; 
Percentage: 5.4%; 
70% or more: 
Number: 51,573; 
Percentage: 92.4%. 

Ratio of home value to state average by census tracts: 
Qualified census tracts: 
Less than 40%: 
Number: 2,397; 
Percentage: 16.1%; 
40.0 - 49.9%: 
Number: 2,070; 
Percentage: 13.9%; 
50.0 - 69.9%: 
Number: 2,220; 
Percentage: 14.9%; 
60.0 - 69.9%: 
Number: 1,994; 
Percentage: 13.4%; 
70% or more: 
Number: 6,225; 
Percentage: 41.8%; 
Redesignated census tracts: 
Less than 40%: 
Number: 124; 
Percentage: 11.1%; 
40.0 - 49.9%: 
Number: 110; 
Percentage: 9.8%[A]; 
50.0 - 69.9%: 
Number: 153; 
Percentage: 13.7%; 
60.0 - 69.9%: 
Number: 136; 
Percentage: 12.1%[A]; 
70% or more: 
Number: 597; 
Percentage: 53.3%; 
Non-HUBZone census tracts: 
Less than 40%: 
Number: 1,569; 
Percentage: 2.8%; 
40.0 - 49.9%: 
Number: 2,149; 
Percentage: 3.9%; 
50.0 - 69.9%: 
Number: 3,352; 
Percentage: 6.0%; 
60.0 - 69.9%: 
Number: 4,677; 
Percentage: 8.4%; 
70% or more: 
Number: 43,839; 
Percentage: 78.9%. 

Source: American Community Survey (data). GAO-15-234. 

[A] Estimated number of tracts have 90 percent confidence intervals no 
wider than +/-31 tracts. All other tract estimates have 90% confidence 
intervals within +/-10% of the estimate itself. All percentage 
estimates have 90 percent confidence intervals within +/-percentage 
points of the estimate itself. 

[End of figure] 

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

Table 5: Comparison of Selected Economic Indicators for 
Nonmetropolitan Counties (HUBZone and Non-HUBZone), as of 2012: 

HUBZone qualified counties; 
Percent in poverty: 22.2%; 
Unemployment rate: 11.9%; 
Average median household income: $36,193; 
Average median housing value: $104,515. 

Redesignated counties; 
Percent in poverty: 18.5%; 
Unemployment rate: 10.7%; 
Average median household income: $40,030; 
Average median housing value: $95,794. 

Non-HUBZone counties; 
Percent in poverty: 15.8%; 
Unemployment rate: 8.1%; 
Average median household income: $44,410; 
Average median housing value: $115,026. 

Source: American Community Survey (data). GAO-15-234. 

[End of table] 

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

Figure 8: Comparison of Selected Economic Indicators for 
Nonmetropolitan Counties, by Qualification Status, as of 2012: 

[Refer to PDF for image: series of horizontal bar graphs] 

Poverty rate by non-metropolitan counties: 
Qualified nonmetropolitan counties: 
Less than 10%: 
Number: 15; 
Percentage: 2.9%[A]; 
10.0 - 19.9%: 
Number: 202; 
Percentage: 38.5%; 
20.0 - 29.9%: 
Number: 225; 
Percentage: 42.9%; 
30.0 - 39.9%: 
Number:69; 
Percentage: 13.2%[A]; 
40% or more: 
Number: 13; 
Percentage: 2.5%[A]; 
Redesignated nonmetropolitan counties: 
Less than 10%: 
Number: 16; 
Percentage: 6.4%[A] 
10.0 - 19.9%: 
Number: 145; 
Percentage: 58.0%; 
20.0 - 29.9%: 
Number: 87; 
Percentage: 34.8%; 
30.0 - 39.9%: 
Number: 2; 
Percentage: 0.8%[A]; 
40% or more: 
Number: 0; 
Percentage: 0.0%; 
Non-HUBZone nonmetropolitan counties: 
Less than 10%: 
Number: 187; 
Percentage: 14.6%; 
10.0 - 19.9%: 
Number: 865; 
Percentage: 67.6%; 
20.0 - 29.9%: 
Number: 223; 
Percentage: 17.4%; 
30.0 - 39.9%: 
Number: 4; 
Percentage: 0.3%[A]; 
40% or more: 
Number: 0; 
Percentage: 0%. 

Unemployment rate by non-metropolitan counties: 
Qualified nonmetropolitan counties: 
Less than 5%: 
Number: 36; 
Percentage: 6.9%[A]; 
5.0 - 9.9%: 
Number: 165; 
Percentage: 31.6%; 
10.0 - 14.9%: 
Number: 206; 
Percentage: 39.5%; 
15.0 - 19.9%: 
Number: 92; 
Percentage: 17.6%[A]; 
20% or more: 
Number: 23; 
Percentage: 4.4%[A]; 
Redesignated nonmetropolitan counties: 
Less than 5%: 
Number: 42; 
Percentage: 17.0%[A]; 
5.0 - 9.9%: 
Number: 96; 
Percentage: 38.9%[A]; 
10.0 - 14.9%: 
Number: 92; 
Percentage: 37.2%[A]; 
15.0 - 19.9%: 
Number: 15; 
Percentage: 6.1%[A]; 
20% or more: 
Number: 2; 
Percentage: 0.8%[A]; 
Non-HUBZone nonmetropolitan counties: 
Less than 5%: 
Number: 0; 
Percentage: 0%; 
5.0 - 9.9%: 
Number: 1; 
Percentage: 0.1%[A]; 
10.0 - 14.9%: 
Number: 2; 
Percentage: 0.2%[A]; 
15.0 - 19.9%: 
Number: 55; 
Percentage: 4.3%[A]; 
20% or more: 
Number: 1,222; 
Percentage: 95.5%. 

Ratio of income to state non-metropolitan areas average by non-
metropolitan counties: 
Qualified nonmetropolitan counties: 
Less than 40%: 
Number: 1; 
Percentage: 0.2%[A]; 
40.0 - 49.9%: 
Number: 15; 
Percentage: 2.9%[A]; 
50.0 - 59.9%: 
Number: 75; 
Percentage: 14.3%[A]; 
60.0 - 69.9%: 
Number: 144; 
Percentage: 27.5%; 
70% or more: 
Number: 289; 
Percentage: 55.2%; 
Redesignated nonmetropolitan counties: 
Less than 40%: 
Number: 0; 
Percentage: 0%; 
40.0 - 49.9%: 
Number: 0; 
Percentage: 0%]; 
50.0 - 59.9%: 
Number: 2; 
Percentage: 0.8%[A]; 
60.0 - 69.9%: 
Number: 29; 
Percentage: 11.6%[A]; 
70% or more: 
Number: 219; 
Percentage: 87.6%; 
Non-HUBZone nonmetropolitan counties: 
Less than 5%: 
Number: 0; 
Percentage: 0%; 
5.0 - 9.9%: 
Number: 1; 
Percentage: 0.1%[A]; 
10.0 - 14.9%: 
Number: 2; 
Percentage: 0.2%[A]; 
15.0 - 19.9%: 
Number: 55; 
Percentage: 4.3%[A]; 
20% or more: 
Number: 1,222; 
Percentage: 95.5%. 

Ratio of home value to state nonmetropolitan areas average by 
nonmetropolitan counties: 
Qualified nonmetropolitan counties: 
Less than 40%: 
Number: 47; 
Percentage: 9.0%[A]; 
40.0 - 49.9%: 
Number: 99; 
Percentage: 18.9%; 
50.0 - 59.9%: 
Number: 111; 
Percentage: 22.1%; 
60.0 - 69.9%: 
Number: 114; 
Percentage: 21.8%; 
70% or more: 
Number: 152; 
Percentage: 29.1%; 
Redesignated nonmetropolitan counties: 
Less than 40%: 
Number: 10; 
Percentage: 4.0%[A]; 
40.0 - 49.9%: 
Number: 42; 
Percentage: 16.8%[A]; 
50.0 - 59.9%: 
Number: 49; 
Percentage: 19.6%[A]; 
60.0 - 69.9%: 
Number: 49; 
Percentage: 19.6%[A]; 
70% or more: 
Number: 100; 
Percentage: 40.0%; 
Non-HUBZone nonmetropolitan counties: 
Less than 40%: 
Number: 53; 
Percentage: 4.1%; 
40.0 - 49.9%: 
Number: 117; 
Percentage: 9.1%; 
50.0 - 69.9%: 
Number: 223; 
Percentage: 17.4%; 
60.0 - 69.9%: 
Number: 245; 
Percentage: 19.1%; 
70% or more: 
Number: 642; 
Percentage: 50.2%. 

Source: American Community Survey (data). GAO-15-234. 

[A] Estimated number of counties have 90 percent confidence intervals 
no wider than +/-13 counties. All other county estimates have 90% 
confidence intervals within +/-10% of the estimate itself. All 
percentage estimates have 90 percent confidence intervals within +/- 
percentage points of the estimate itself. 

[End of figure] 

[End of section] 

Appendix III: Impact of Hypothetical Changes to HUBZone Criteria on 
HUBZone Designations: 

We applied hypothetical changes to selected statutory criteria for 
designating HUBZones to illustrate how such changes could affect the 
number of eligible areas. As we reported in 2008, establishing new 
HUBZone areas could provide economic benefits to these new areas, but 
also could result in diffusion--decreased targeting of areas of 
greatest economic distress--by lessening the competitive advantage 
upon which small businesses may rely to thrive in economically 
distressed communities.[Footnote 69] 

Impact of Adjustments in the Unemployment Rate Used: 

As discussed earlier in this report, one of the ways in which a 
nonmetropolitan county can qualify as a HUBZone is based on its 
unemployment rate. More specifically, the unemployment rate for the 
nonmetropolitan county must not be less than 140 percent of the 
average unemployment rate for the United States or for the state in 
which the county is located, whichever is less, based on the most 
recent data available from the Department of Labor.[Footnote 
70]Adjustments could make this definition more uniform across all of 
the states. 

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

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

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

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

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

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

* Average of all state unemployment rates. If 140 percent of the 
average of all state unemployment rates (6.8 percent) was used, about 
450 counties would qualify.[Footnote 71] Under this scenario, states 
with relatively high unemployment rates would have additional 
nonmetropolitan counties (such as Georgia, which would have 17 
additional qualifying counties), while states with relatively low 
unemployment rates would have fewer qualifying counties (such as 
Virginia, which would have 20 fewer). 

In addition to comparing all nonmetropolitan counties against the same 
unemployment rate, the qualifying criteria could be changed from the 
current standard (data from 1 year) to use a 5-or 10-year average 
unemployment rate to determine if a nonmetropolitan county qualified 
for the program.[Footnote 72] Such a change could minimize the wide 
variations that can occur by using the 1-year rates. For example, the 
average unemployment rates that equaled 140 percent of the U.S. 
unemployment rate ranged from 6.4 percent in 2006 and 2007 to 13.4 
percent in 2010. Similarly, the difference between the states with the 
highest and lowest unemployment rates ranged from 6 percentage points 
in 2004 to about 14 percentage points in 2010. However, using a 5-or 
10-year average unemployment rate would result in fewer counties 
qualifying as a HUBZone. 

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

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

Figure 9: Effect on Nonmetropolitan Counties of Using Different 
Unemployment Criteria: 

[Refer to PDF for image: vertical bar graph] 

Number of counties: 

Current definition: 424; 
Lowest state rate: 1,692; 
Highest state rate: 54; 
U.S. average: 301; 
Average state rate: 451; 
5-year unemployment: 345; 
10-year unemployment: 377. 
	
Source: GAO analysis. GAO-15-234. 

[End of figure] 

Figure 10: Map of Nonmetropolitan Counties under Different 
Unemployment Criteria: 

[Refer to PDF for image: 7 illustrated U.S. maps] 

Current definition: 1 year unemployment; 
Lowest rate; 
Highest rate; 
U.S. average; 
State average; 
5 year unemployment; 
10 year unemployment. 

Source: MapInfo. GAO-15-234. 

[End of figure] 

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

Table 6: Number of Nonmetropolitan Counties by State That Would 
Qualify If Different Unemployment Rates Were Used: 

State: Alabama; 
Current definition (1-year rate): 12; 
Lowest state rate applied to all states: 38; 
Highest state rate applied to all states: 1; 
U.S. average: 6; 
Average state rate: 11; 
5-year average: 13; 
10-year average: 14. 

State: Alaska; 
Current definition (1-year rate): 12; 
Lowest state rate applied to all states: 25; 
Highest state rate applied to all states: 5; 
U.S. average: 9; 
Average state rate: 11; 
5-year average: 11; 
10-year average: 12. 

State: Arizona; 
Current definition (1-year rate): 3; 
Lowest state rate applied to all states: 7; 
Highest state rate applied to all states: 3; 
U.S. average: 3; 
Average state rate: 3; 
5-year average: 3; 
10-year average: 3. 

State: Arkansas; 
Current definition (1-year rate): 11; 
Lowest state rate applied to all states: 55; 
Highest state rate applied to all states: 0; 
U.S. average: 11; 
Average state rate: 15; 
5-year average: 9; 
10-year average: 12. 

State: California; 
Current definition (1-year rate): 13; 
Lowest state rate applied to all states: 21; 
Highest state rate applied to all states: 1; 
U.S. average: 13; 
Average state rate: 15; 
5-year average: 14; 
10-year average: 13. 

State: Colorado; 
Current definition (1-year rate): 5; 
Lowest state rate applied to all states: 41; 
Highest state rate applied to all states: 0; 
U.S. average: 3; 
Average state rate: 5; 
5-year average: 3; 
10-year average: 3. 

State: Connecticut; 
Current definition (1-year rate): 0; 
Lowest state rate applied to all states: 1; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 0; 
5-year average: 0; 
10-year average: 0. 

State: Delaware; 
Current definition (1-year rate): 0; 
Lowest state rate applied to all states: 0; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 0; 
5-year average: 0; 
10-year average: 0. 

State: Florida; 
Current definition (1-year rate): 1; 
Lowest state rate applied to all states: 23; 
Highest state rate applied to all states: 0; 
U.S. average: 1; 
Average state rate: 1; 
5-year average: 1; 
10-year average: 1. 

State: Georgia; 
Current definition (1-year rate): 33; 
Lowest state rate applied to all states: 85; 
Highest state rate applied to all states: 6; 
U.S. average: 33; 
Average state rate: 50; 
5-year average: 26; 
10-year average: 17. 

State: Hawaii; 
Current definition (1-year rate): 1; 
Lowest state rate applied to all states: 2; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 0; 
5-year average: 1; 
10-year average: 1. 

State: Idaho; 
Current definition (1-year rate): 8; 
Lowest state rate applied to all states: 31; 
Highest state rate applied to all states: 0; 
U.S. average: 5; 
Average state rate: 6; 
5-year average: 6; 
10-year average: 7. 

State: Illinois; 
Current definition (1-year rate): 17; 
Lowest state rate applied to all states: 62; 
Highest state rate applied to all states: 0; 
U.S. average: 17; 
Average state rate: 28; 
5-year average: 2; 
10-year average: 5. 

State: Indiana; 
Current definition (1-year rate): 0; 
Lowest state rate applied to all states: 48; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 3; 
5-year average: 1; 
10-year average: 1. 

State: Iowa; 
Current definition (1-year rate): 3; 
Lowest state rate applied to all states: 61; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 0; 
5-year average: 2; 
10-year average: 2. 

State: Kansas; 
Current definition (1-year rate): 2; 
Lowest state rate applied to all states: 40; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 0; 
5-year average: 2; 
10-year average: 0. 

State: Kentucky; 
Current definition (1-year rate): 30; 
Lowest state rate applied to all states: 85; 
Highest state rate applied to all states: 9; 
U.S. average: 30; 
Average state rate: 40; 
5-year average: 20; 
10-year average: 25. 

State: Louisiana; 
Current definition (1-year rate): 7; 
Lowest state rate applied to all states: 29; 
Highest state rate applied to all states: 1; 
U.S. average: 3; 
Average state rate: 7; 
5-year average: 7; 
10-year average: 7. 

State: Maine; 
Current definition (1-year rate): 2; 
Lowest state rate applied to all states: 11; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 2; 
5-year average: 2; 
10-year average: 3. 

State: Maryland; 
Current definition (1-year rate): 1; 
Lowest state rate applied to all states: 5; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 1; 
5-year average: 1; 
10-year average: 1. 

State: Massachusetts; 
Current definition (1-year rate): 0; 
Lowest state rate applied to all states: 3; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 0; 
5-year average: 0; 
10-year average: 0. 

State: Michigan; 
Current definition (1-year rate): 35; 
Lowest state rate applied to all states: 57; 
Highest state rate applied to all states: 5; 
U.S. average: 35; 
Average state rate: 42; 
5-year average: 30; 
10-year average: 40. 

State: Minnesota; 
Current definition (1-year rate): 10; 
Lowest state rate applied to all states: 53; 
Highest state rate applied to all states: 0; 
U.S. average: 1; 
Average state rate: 1; 
5-year average: 5; 
10-year average: 10. 

State: Mississippi; 
Current definition (1-year rate): 29; 
Lowest state rate applied to all states: 65; 
Highest state rate applied to all states: 9; 
U.S. average: 29; 
Average state rate: 39; 
5-year average: 21; 
10-year average: 32. 

State: Missouri; 
Current definition (1-year rate): 2; 
Lowest state rate applied to all states: 81; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 2; 
5-year average: 4; 
10-year average: 3. 

State: Montana; 
Current definition (1-year rate): 8; 
Lowest state rate applied to all states: 38; 
Highest state rate applied to all states: 2; 
U.S. average: 4; 
Average state rate: 6; 
5-year average: 8; 
10-year average: 8. 

State: Nebraska; 
Current definition (1-year rate): 3; 
Lowest state rate applied to all states: 14; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 0; 
5-year average: 2; 
10-year average: 1. 

State: Nevada; 
Current definition (1-year rate): 5; 
Lowest state rate applied to all states: 12; 
Highest state rate applied to all states: 0; 
U.S. average: 5; 
Average state rate: 6; 
5-year average: 5; 
10-year average: 2. 

State: New Hampshire; 
Current definition (1-year rate): 0; 
Lowest state rate applied to all states: 7; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 0; 
5-year average: 0; 
10-year average: 0. 

State: New Jersey; 
Current definition (1-year rate): 0; 
Lowest state rate applied to all states: 0; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 0; 
5-year average: 0; 
10-year average: 0. 

State: New Mexico; 
Current definition (1-year rate): 2; 
Lowest state rate applied to all states: 25; 
Highest state rate applied to all states: 2; 
U.S. average: 2; 
Average state rate: 2; 
5-year average: 2; 
10-year average: 2. 

State: New York; 
Current definition (1-year rate): 0; 
Lowest state rate applied to all states: 24; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 1; 
5-year average: 0; 
10-year average: 0. 

State: North Carolina; 
Current definition (1-year rate): 14; 
Lowest state rate applied to all states: 54; 
Highest state rate applied to all states: 2; 
U.S. average: 14; 
Average state rate: 27; 
5-year average: 16; 
10-year average: 13. 

State: North Dakota; 
Current definition (1-year rate): 13; 
Lowest state rate applied to all states: 13; 
Highest state rate applied to all states: 0; 
U.S. average: 1; 
Average state rate: 1; 
5-year average: 8; 
10-year average: 10. 

State: Ohio; 
Current definition (1-year rate): 8; 
Lowest state rate applied to all states: 50; 
Highest state rate applied to all states: 0; 
U.S. average: 8; 
Average state rate: 15; 
5-year average: 8; 
10-year average: 12. 

State: Oklahoma; 
Current definition (1-year rate): 6; 
Lowest state rate applied to all states: 42; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 1; 
5-year average: 3; 
10-year average: 3. 

State: Oregon; 
Current definition (1-year rate): 8; 
Lowest state rate applied to all states: 23; 
Highest state rate applied to all states: 0; 
U.S. average: 8; 
Average state rate: 10; 
5-year average: 8; 
10-year average: 9. 

State: Pennsylvania; 
Current definition (1-year rate): 1; 
Lowest state rate applied to all states: 30; 
Highest state rate applied to all states: 0; 
U.S. average: 1; 
Average state rate: 1; 
5-year average: 1; 
10-year average: 1. 

State: Rhode Island; 
Current definition (1-year rate): 0; 
Lowest state rate applied to all states: 0; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 0; 
5-year average: 0; 
10-year average: 0. 

State: South Carolina; 
Current definition (1-year rate): 9; 
Lowest state rate applied to all states: 20; 
Highest state rate applied to all states: 2; 
U.S. average: 9; 
Average state rate: 14; 
5-year average: 15; 
10-year average: 16. 

State: South Dakota; 
Current definition (1-year rate): 10; 
Lowest state rate applied to all states: 19; 
Highest state rate applied to all states: 0; 
U.S. average: 3; 
Average state rate: 3; 
5-year average: 9; 
10-year average: 9. 

State: Tennessee; 
Current definition (1-year rate): 29; 
Lowest state rate applied to all states: 53; 
Highest state rate applied to all states: 2; 
U.S. average: 29; 
Average state rate: 39; 
5-year average: 20; 
10-year average: 25. 

State: Texas; 
Current definition (1-year rate): 16; 
Lowest state rate applied to all states: 148; 
Highest state rate applied to all states: 3; 
U.S. average: 7; 
Average state rate: 12; 
5-year average: 14; 
10-year average: 10. 

State: Utah; 
Current definition (1-year rate): 4; 
Lowest state rate applied to all states: 14; 
Highest state rate applied to all states: 0; 
U.S. average: 1; 
Average state rate: 1; 
5-year average: 4; 
10-year average: 4. 

State: Vermont; 
Current definition (1-year rate): 1; 
Lowest state rate applied to all states: 10; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 0; 
5-year average: 1; 
10-year average: 1. 

State: Virginia; 
Current definition (1-year rate): 29; 
Lowest state rate applied to all states: 53; 
Highest state rate applied to all states: 0; 
U.S. average: 1; 
Average state rate: 9; 
5-year average: 24; 
10-year average: 25. 

State: Washington; 
Current definition (1-year rate): 5; 
Lowest state rate applied to all states: 18; 
Highest state rate applied to all states: 0; 
U.S. average: 5; 
Average state rate: 6; 
5-year average: 4; 
10-year average: 5. 

State: West Virginia; 
Current definition (1-year rate): 9; 
Lowest state rate applied to all states: 34; 
Highest state rate applied to all states: 0; 
U.S. average: 2; 
Average state rate: 8; 
5-year average: 6; 
10-year average: 6. 

State: Wisconsin; 
Current definition (1-year rate): 7; 
Lowest state rate applied to all states: 46; 
Highest state rate applied to all states: 1; 
U.S. average: 2; 
Average state rate: 7; 
5-year average: 3; 
10-year average: 3. 

State: Wyoming; 
Current definition (1-year rate): 0; 
Lowest state rate applied to all states: 16; 
Highest state rate applied to all states: 0; 
U.S. average: 0; 
Average state rate: 0; 
5-year average: 0; 
10-year average: 0. 

State: Total; 
Current definition (1-year rate): 424; 
Lowest state rate applied to all states: 1,692; 
Highest state rate applied to all states: 54; 
U.S. average: 301; 
Average state rate: 451; 
5-year average: 345; 
10-year average: 377. 

Source: GAO. GAO-15-234. 

[End of table] 

Impact of Removing Limit in Census Tracts: 

Currently, HUBZone-qualified census tracts are those census tracts 
designated by HUD.[Footnote 73] Statutory provisions governing the 
LIHTC program limit the amount of qualified census tracts in any MSA 
or PMSA to no more than 20 percent of the total population of the MSA 
or PMSA.[Footnote 74] Consequently, some census tracts that may 
qualify for the HUBZone program based on the area's median household 
income or poverty rate might not be designated as qualified census 
tracts because of the population cap, and are therefore not included 
in the HUBZone program. 

Our analysis of data HUD used for its 2014 designations found that 
about 2,400 more census tracts would qualify as HUBZone areas if the 
20 percent cap were not in place, an increase of 15 percent from the 
current number of qualified tracts.[Footnote 75] Eight states or 
territories would have at least 20 percent more qualified areas if all 
eligible tracts were included. 

[End of section] 

Appendix IV: Summary Data Relating to HUBZone Application Processing: 

According to our analysis of data for applications received by SBA 
during fiscal years 2008-2013, the number of applications submitted by 
firms declined significantly from 2009 through 2011 (from a high of 
about 4,500 in 2009 to under 1,500 in 2013).[Footnote 76] Since 2009, 
the application approval rate also declined. For example, SBA approved 
about 32 percent of the approximately 4,000 applications submitted in 
2010 (shortly after the new process was implemented), while it 
approved almost 53 percent of the approximately 3,000 applications 
submitted in 2008 under the previous process (see table 7 and figure 
11). In general, a higher percentage of applications have been 
withdrawn since SBA implemented the revised process--more than 50 
percent of applications for every year except 2013.[Footnote 77] 
According to SBA officials, firms can withdraw an application or SBA 
can close it if it is believed that the firm will not meet program 
requirements.[Footnote 78] 

Table 7: Number and Status of Applications for HUBZone Program 
Submitted in Fiscal Years 2008-2013: 

Applications submitted; 
2008: 2,977; 
2009: 4,511; 
2010: 4,051; 
2011: 3,259; 
2012: 2,015; 
2013: 1,425. 

Application approved (percent); 
2008: 1,568 (52.7%); 
2009: 1,368 (30.3%); 
2010: 1,314 (32.4%); 
2011: 898 (27.6%); 
2012: 694 (34.4%); 
2013: 535 (37.5%). 

Applications withdrawn (percent); 
2008: 1,276 (42.9%); 
2009: 2,409 (53.4%); 
2010: 2,098 (51.8%); 
2011: 1,965 (60.3%); 
2012: 1,144 (56.8%); 
2013: 468 (32.8%). 

Applications denied (percent); 
2008: 133 (4.5%); 
2009: 734 (16.3%); 
2010: 639 (15.8%); 
2011: 396 (12.2%); 
2012: 177 (8.8%); 
2013: 422 (29.6%). 

Source: GAO analysis of Small Business Administration data. GAO-15-234. 

[End of table] 

Figure 11: Status of Applications for HUBZone Program Submitted in 
Fiscal Years 2008-2013, by Percentage: 

[Refer to PDF for image: stacked vertical bar graph] 

Fiscal year: 2008; 
Application approved: 52.7%; 
Applications withdrawn: 42.9%; 
Applications declined: 4.5%. 

Fiscal year: 2009; 
Application approved: 30.3%; 
Applications withdrawn: 53.4%; 
Applications declined: 16.3%. 

Fiscal year: 2010; 
Application approved: 32.4%; 
Applications withdrawn: 51.8%; 
Applications declined: 15.8%. 

Fiscal year: 2011; 
Application approved: 27.6%; 
Applications withdrawn: 60.3%; 
Applications declined: 12.2%. 

Fiscal year: 2012; 
Application approved: 34.4%; 
Applications withdrawn: 56.8%; 
Applications declined: 8.8%. 

Fiscal year: 2013; 
Application approved: 37.5%; 
Applications withdrawn: 32.9%; 
Applications declined: 29.6%. 

Source: GAO analysis of Small Business Administration data. GAO-15-234. 

[End of figure] 

According to SBA officials, SBA's goal is to process an application 
within 90 days. Our analysis of SBA data found that it took SBA more 
than 90 days to process most of the applications approved since fiscal 
year 2008. As shown in table 8, of the applications SBA received in 
fiscal years 2008-2013, about 27 percent were processed in 90 or fewer 
days while 73 percent took more than 90 days to process.[Footnote 79] 
SBA reported that in fiscal years 2013 and 2014 it took an average of 
103 and 123 days, respectively, to process any application regardless 
of outcome.[Footnote 80] 

Table 8: Processing Time for Applications Submitted in Fiscal Years 
2008-2013: 

90 or fewer days (Percent): 
2008: 765 (48.8%); 
2009[A]: 19 (1.4%); 
2010: 206 (15.7%); 
2011: 339 (37.8%); 
2012: 315 (45.4%); 
2013: 56 (10.5%); 
Total: 1,700 (26.7%). 

More than 90 days (Percent): 
2008: 803 (51.2%); 
2009[A]: 1,349 (98.6%); 
2010: 1,108 (84.3%); 
2011: 559 (62.3%); 
2012: 379 (54.6%); 
2013: 479 (89.5%); 
Total: 4,677 (73.3%). 

Source: GAO analysis of Small Business Administration data. GAO-15-234. 

[A] SBA began implementing its full document review during fiscal year 
2009. 

[End of table] 

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

[End of section] 

Appendix V: Characteristics of HUBZone Certified Firms as of 2014: 

* According to our analysis of SBA data for approved applications 
submitted during fiscal years 2008-2013, HUBZone firms vary in size 
and types of services and products provided.[Footnote 81] 

* Number of employees. The number of employees at HUBZone firms ranged 
from 1 to 496, with a median of 4 employees for all years except 2009 
and 2010, in which the median was 5. 

* Industries in which firms operated. Table 9 lists the top 10 
industries based on the number and percentage of approved HUBZone firm 
applications.[Footnote 82] 

Table 9: Top 10 Industries, Based on HUBZone Firm Applications 
Approved in Fiscal Years 2008-2013: 

Industry (North American Industry Classification System code): 
Commercial and institutional building construction; 
Number of applications: 624; 
Percentage of applications: 9.8%. 

Industry (North American Industry Classification System code): 
Highway, street, and bridge construction; 
Number of applications: 275; 
Percentage of applications: 4.3%. 

Industry (North American Industry Classification System code): 
Engineering services; 
Number of applications: 250; 
Percentage of applications: 3.9%. 

Industry (North American Industry Classification System code): Site 
preparation contractors; 
Number of applications: 240; 
Percentage of applications: 3.8%. 

Industry (North American Industry Classification System code): Other 
heavy and civil engineering construction; 
Number of applications: 197; 
Percentage of applications: 3.1%. 

Industry (North American Industry Classification System code): 
Administrative management and general management consulting services; 
Number of applications: 193; 
Percentage of applications: 3.0%. 

Industry (North American Industry Classification System code): 
Electrical contractors and other wiring installation contractors; 
Number of applications: 178; 
Percentage of applications: 2.8%. 

Industry (North American Industry Classification System code): Support 
activities for forestry; 
Number of applications: 154; 
Percentage of applications: 2.4%. 

Industry (North American Industry Classification System code): Water 
and sewer line and related structures construction; 
Number of applications: 128; 
Percentage of applications: 2.0%. 

Industry (North American Industry Classification System code): Machine 
shops; 
Number of applications: 124; 
Percentage of applications: 1.9%. 

Source: GAO analysis of Small Business Administration data. GAO-15-234. 

Note: Analysis based on the number of applications approved by SBA 
from fiscal year 2008 through fiscal year 2013, as recorded in HCTS. 
According to SBA officials, the industry code is only recorded for 
approved applications. 

[End of table] 

[End of section] 

Appendix VI: Comments from the Small Business Administration: 

U.S. Small Business Administration: 
Washington, D.C. 20416: 

January 13, 2015: 

William B. Shear: 
Director: 
Financial Markets and Community Investment: 
U.S. Government Accounting Office: 
Washington. DC 20548: 

Dear Mr. Shear: 

Thank you for providing, the U.S. Small Business Administration (SHA) 
with a copy or the Government Accountability Office (GAO) report 
titled "Opportunities Exist to Further Improve HUBZone Oversight."
In this report, GAO recommends that SBA should (1) establish a 
mechanism to better ensure firms are notified of changes that could 
affect their participation in the program, and (2) assess the 
recertification process and implement additional controls, such as 
criteria and guidance for a risk-based approach to requesting and 
verifying information during recertification. 

SBA agrees with the recommendations provided in the GAO report. 
Specifically: 

* GAO recommends 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, such as ensuring that all
certified firms and newly certified firms are signed up for the 
broadcast e-mail system or including more specific information in 
certification letters about how location in a redesignated area can 
affect their participation in the program. 

SBA is analyzing existing resources and by July 2015, SBA will 
implement an enhanced mechanism to better inform all certified firms 
and newly certified firms of HUB Zone designation changes or, at least,
explain how a redesignated area can affect their participation in the 
program. 

* GAO recommends that SBA conduct an assessment of the current 
recertification process and implement additional controls to reduce 
the risk that firms that no longer meet program eligibility criteria 
receive HUBZone contracts, such as developing criteria and guidance on 
using a risk-based approach to requesting and verifying firm 
information during the recertification process, allowing firms to 
initiate the recertification process, and ensuring that there is 
sufficient staff dedicated to the effort so that a significant backlog 
in recertifications does not recur. 

SBA will conduct an assessment of the current recertification process. 
By September 30, 2015, it will identify areas of improvement in order 
to further reduce the risk of fraud waste and abuse. SBA continues to 
exercise its regulatory authority to investigate firms when it cannot 
verify a qualified HUBZone SBC's eligibility or determines that the 
concern is no longer eligible for the Program (13 CFR 126.503). 

Thank you for the opportunity to comment on this report. 

Sincerely, 

Signed by: 

John A. Shoraka: 
Associate Administrator: 
Office of Government Contracting and Business Development: 

[End of section] 

Appendix VII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

William B. Shear, (202) 512-8678 or shearw@gao.gov: 

Staff Acknowledgments: 

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

[End of section] 

Footnotes: 

[1] HUBZone Act of 1997, Pub. L. No. 105-135, Title VI, 111 Stat. 
2592, 2627-38 (1997). 

[2] A prime contract is awarded directly by a procuring agency to the 
bidder or offeror (prime contractor). See appendix I for additional 
information on the calculations presented in the report. 

[3] 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. 

[4] GAO, Small Business Administration: Undercover Tests Show HUBZone 
Program Remains Vulnerable to Fraud and Abuse, [hyperlink, 
http://www.gao.gov/products/GAO-10-920T] (Washington, D.C.: July 28, 
2010); Small Business Administration: Undercover Tests Show HUBZone 
Program Remains Vulnerable to Fraud and Abuse, [hyperlink, 
http://www.gao.gov/products/GAO-10-759] (Washington, D.C.: June 25, 
2010); HUBZone Program: Fraud and Abuse Identified in Four 
Metropolitan Areas, [hyperlink, 
http://www.gao.gov/products/GAO-09-440] (Washington, D.C.: Mar. 25, 
2009); HUBZone Program: Fraud and Abuse Identified in Four 
Metropolitan Areas, [hyperlink, 
http://www.gao.gov/products/GAO-09-519T] (Washington, D.C.: Mar. 25, 
2009); Small Business Administration: Status of Efforts to Address 
Previous Recommendations on the HUBZone Program, [hyperlink, 
http://www.gao.gov/products/GAO-09-532T] (Washington, D.C.: Mar. 25, 
2009); HUBZone Program: SBA's Control Weaknesses Exposed the 
Government to Fraud and Abuse, [hyperlink, 
http://www.gao.gov/products/GAO-08-964T] (Washington, D.C.: July 17, 
2008); Small Business Administration: Additional Actions Are Needed to 
Certify and Monitor HUBZone Businesses and Assess Program Results, 
[hyperlink, http://www.gao.gov/products/GAO-08-975T] (Washington, 
D.C.: July 17, 2008); and Small Business Administration: Additional 
Actions Are Needed to Certify and Monitor HUBZone Businesses and 
Assess Program Results, [hyperlink, 
http://www.gao.gov/products/GAO-08-643] (Washington, D.C.: June 17, 
2008). Also see Small Business Administration, Office of Inspector 
General, Opportunities Exist to Further Improve Quality and Timeliness 
of HUBZone Certifications, 14-03 (Washington, D.C.: Nov. 19, 2013); 
and HUBZone Program Examination and Recertification Processes, 6-23 
(Washington, D.C.: May 23, 2006). 

[5] For example, see [hyperlink, 
http://www.gao.gov/products/GAO-08-643]. 

[6] DSBS offers an electronic search engine for contracting officers 
and serves as a marketing tool for small businesses that register with 
the system. It contains the profiles of thousands of small firms. 

[7] Our universe of 1,425 firms (based on applications submitted in 
fiscal year 2013) consisted of 528 firms that were approved, 418 that 
were denied, 470 that were withdrawn, and 9 that were decertified. The 
39 files we reviewed included 19 applications that were initially 
approved, 10 that were denied, and 10 that were withdrawn. Included in 
the 19 approved applications were all 9 firms that had been 
decertified (in the pool of 1,425 firms). 

[8] Qualified census tracts are those tracts designated by the 
Secretary of the Department of Housing and Urban Development for the 
Low-Income Housing Tax Credit program. 

[9] HUBZone Act of 1997 (Title VI of the Small Business 
Reauthorization Act of 1997, Pub. L. No. 105-135). 

[10] Difficult development areas have high construction, land, and 
utility costs relative to area median income. The areas are designated 
annually using a process that compares these costs. Consolidated 
Appropriations Act, 2005 Pub. L. 108-447, Div. K, § 152, 118 Stat. 
3456-58 (2004), and Safe, Accountable, Flexible, Efficient 
Transportation Equity Act: A Legacy for Users, Pub. L. 109-59, § 
10203, 119 Stat. 1933-34 (2005). 

[11] Different rules apply for Indian Tribal governments, Alaska 
Native Corporations, Community Development Corporations, and small 
agricultural cooperatives. For example, potentially eligible firms can 
be wholly owned by one or more Indian Tribal governments; wholly owned 
by a corporation that is wholly owned by one or more Indian Tribal 
governments; partly owned by one or more Indian Tribal governments and 
all other owners are owned or controlled by U.S. citizens or small 
business concerns; or partly owned by a corporation that is wholly 
owned by one or more Indian Tribal Governments, and all other owners 
are U.S. citizens or small business concerns. See Title 13 of the Code 
of Federal Regulations, Part 126. 

[12] The firm, with its affiliates, must meet the size standard 
corresponding to its primary industry classification as defined in 13 
CFR Part 121. SBA's size standards vary by industry and are almost 
always stated as the average number of employees or average annual 
receipts of a business. 

[13] Qualified HUBZone firms also can be owned and controlled by 
Alaska Native Corporations, Indian Tribal governments, community 
development corporations, and agricultural cooperatives. 

[14] While a certified HUBZone business must have its principal office 
in a HUBZone area, it can bid on and receive federal contracts for 
work to be performed anywhere; that is, HUBZone contracts are not 
limited to performance in HUBZone areas. 

[15] SBA defines an employee as an individual employed on a full-time, 
part-time, or other basis, so long as that individual works a minimum 
of 40 hours per month. This includes employees obtained from a 
temporary employee agency, leasing concern, or through a union 
agreement or co-employed pursuant to a professional employer 
organization agreement. 

[16] The Census Bureau collects income data as part of its annual ACS. 
The data are collected over a 5-year period and published on a rolling 
basis each year. The most recent update, reflecting the 2008-2012 ACS 
median household income data, was released in December 2013. 

[17] The definition of qualified census tracts for HUBZone is the same 
as that for the Low-Income Housing Tax Credit (LIHTC) program and HUD 
designates qualified census tracts for purposes of the LIHTC program. 
Historically, HUD updated the designations every 5 years, but in 
October 2014 HUD announced that it was establishing a new method for 
determining qualified census tracts. The revised methodology 
incorporates 3 years of ACS estimates, but HUD has not announced how 
frequently it will determine qualified census tracts in future years. 

[18] Congress initially created redesignated areas in the Consolidated 
Appropriations Act, 2001, Pub. L. No. 106-554, Appendix I, § 613, 114 
Stat. 2763, 2763A-700 (2001). 

[19] The data were released October 1, 2011. See Small Business 
Reauthorization and Assistance Act of 2004, Pub. L. No. 108-447, Div. 
K, § 152(c), 118 Stat. 2809, 3457 (2004). 

[20] Areas that were redesignated after October 2008 were only 
eligible for a 3-year redesignation period. 

[21] [hyperlink, http://www.gao.gov/products/GAO-08-643]. 

[22] Of the 39 firms in our review, 6 were located in a redesignated 
area. For each of the 6 firms (which were approved for certification), 
the analyst noted in the file that the firm was located in a 
redesignated area and the approval letter to each firm included 
language about the location in a redesignated area. However, these 
files used the previous version of the approval letter. 

[23] Half of the firms with which we talked were not very familiar 
with or were confused about the redesignation process, even when they 
were potentially affected by those processes. 

[24] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[25] Henry Beale and Nicola Deas, The HUBZone Program Report, prepared 
at the request of the Small Business Administration Office of 
Advocacy, May 2008. 

[26] [hyperlink, http://www.gao.gov/products/GAO-08-643]. 

[27] SBA officials stated that, as part of their review of 
applications, SBA staff may perform additional independent research 
(such as a search of firms' websites or state government websites that 
contain information on firms incorporated in the state) to help ensure 
that applicants meet the eligibility requirements. 

[28] Our universe of 1,425 firms (based on applications submitted in 
fiscal year 2013) consisted of 528 firms that were approved, 418 that 
were denied, 470 that were withdrawn, and 9 that were decertified. The 
39 files we reviewed included 19 applications that were initially 
approved, 10 that were denied, and 10 that were withdrawn. Included in 
the 19 approved applications were all 9 firms that had been 
decertified (in the pool of 1,425 firms). 

[29] Twenty-nine of the 39 files had documentation of a full document 
review. Generally, an applicant firm may withdraw its application 
before submitting documentation; therefore, the 10 applications that 
were withdrawn did not undergo a document review. Similarly, according 
to SBA officials, some applications that are denied may not undergo a 
document review because the applicant firm did not provide 
documentation to SBA. 

[30] A representative of one of the eight firms with whom we spoke 
noted that while the firm's application was under review by SBA, the 
firm did not receive any communication from SBA. However, when SBA 
contacted the firm requesting clarification or additional 
documentation, the firm was given only a couple of days to provide the 
requested information or would have its application denied. 

[31] OIG Report No.14-03. The OIG noted that the SOP was outdated and 
required that firms self-certify that they meet the program 
eligibility requirement although the process had changed to require a 
full documentation review. As a result, the OIG recommended that SBA 
update the HUBZone guidance based on the current certification 
process, which includes conducting a full review of supporting 
documentation. 

[32] [hyperlink, http://www.gao.gov/products/GAO-08-643]. 

[33] Other criteria that SBA uses to select firms for site visits 
include whether the firm was awarded a contract but was not visited in 
the prior year, awarded a contract and visited in the prior year, and 
certified in the previous fiscal year but had not received a contract 
award. The HUBZone protest process allows SBA, contracting officers, 
or any interested party to protest the qualified HUBZone status of an 
awardee or apparent awardee of a federal HUBZone contract. 

[34] Agency officials stated that SBA also may decertify a firm if the 
firm fails to respond to the notice of proposed decertification. 

[35] SBA requires that firms meet the eligibility requirement at the 
time of bid and when a contract is awarded. The HUBZone protest 
process allows SBA, contracting officers, or any interested party to 
protest the qualified HUBZone status of an awardee or apparent awardee 
of a federal contract. An interested party must submit its protest by 
close of business on the fifth business day after notification by the 
contracting officer of the apparent successful offeror. According to 
SBA officials, protests often revolve around the location of the 
firm's principal office or the requirement for employee residency in 
the HUBZone. Protested firms are allowed 5 business days to submit 
information in response to the protest before SBA makes a 
determination to decertify. 

[36] In comparison, for fiscal years 2010 through 2013, SBA reported 
345 protests for Service Disabled Veteran-Owned Small Business 
contracts of which 210 (61 percent) were dismissed, 61 (18 percent) 
were sustained, and 74 (22 percent) were denied. According to SBA 
officials, a denied protest occurs when SBA determines that the 
protested company is eligible for the award and the program. 

[37] According to agency officials, the legacy portfolio review was 
conducted to validate that firms certified before SBA implemented full 
document review complied with the program's eligibility requirements. 

[38] We only reviewed the decertifications of applications SBA 
received between fiscal years 2010 and 2013 because SBA conducted its 
legacy portfolio review of firms that were certified prior to the 
fiscal year 2009 policy change that required a full document review 
for initial certification. According to agency officials, this legacy 
portfolio review resulted in the decertification of numerous firms. 
Applications received in 2014 likely would not have been decertified 
as of July 2014.There were 1,044 firms that applied in fiscal years 
2010-2013 that became decertified. More than 70 percent (746) of these 
firms applied in 2010. Our review of 39 files found that of the 9 
firms that were decertified, SBA decertified 6 because the firm's 
principal office was no longer located in a qualified HUBZone. Three 
firms voluntarily decertified (2 because they no longer met the 
requirement for employee residency and 1 because it went out of 
business). 

[39] Under SBA's regulations, a HUBZone certified firm must ensure 
that at least 35 percent of its employees reside in a HUBZone and that 
it will "attempt to maintain" that level during the performance of any 
HUBZone contract it receives. Firms that fall below the 35 percent 
threshold are encouraged to voluntarily withdraw from the program, and 
can have an otherwise successful award protested and overturned. 

[40] 13 CFR §126.500. 

[41] [hyperlink, http://www.gao.gov/products/GAO-08-643]. 

[42] [hyperlink, http://www.gao.gov/products/GAO-09-532T]. 

[43] SBA provided a list of the 714 firms that received a 
recertification reminder in May 2014. 

[44] As part of the recertification process, firms submit an update of 
the information submitted in their previous application for 
certification. 

[45] Agency officials stated that as of fiscal year 2013, the program 
office was authorized 18 FTEs. Recently, four positions were vacated 
but the office was authorized to fill only two positions. As of 
October 2014, the program office had 16 FTEs. 

[46] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[47] [hyperlink, http://www.gao.gov/products/GAO-09-440]. 

[48] The goaling report documents the achievements made towards 
awarding contracts to small businesses by each federal agency. In 
addition to reporting contracting information for the HUBZone program, 
the goaling report includes the total number and amount of eligible 
small business actions, the amounts that were small business actions, 
as well as the number and amount of contracts awarded through SBA's 
other small business contracting programs (Small Disadvantaged 
Businesses, 8(a), Veteran-Owned Small Businesses, Service Disabled 
Veteran-Owned Small Businesses, and Women Owned Small Businesses). 
Also see GAO, Small Business Administration: Undercover Tests Show 
HUBZone Program Remains Vulnerable to Fraud and Abuse, [hyperlink, 
http://www.gao.gov/products/GAO-10-920T] (Washington, D.C.: July 28, 
2010); Small Business Administration: Undercover Tests Show HUBZone 
Program Remains Vulnerable to Fraud and Abuse, [hyperlink, 
http://www.gao.gov/products/GAO-10-759] (Washington, D.C.: June 25, 
2010); HUBZone Program: Fraud and Abuse Identified in Four 
Metropolitan Areas, [hyperlink, 
http://www.gao.gov/products/GAO-09-440] (Washington, D.C.: Mar. 25, 
2009); HUBZone Program: Fraud and Abuse Identified in Four 
Metropolitan Areas, [hyperlink, 
http://www.gao.gov/products/GAO-09-519T] (Washington, D.C.: Mar. 25, 
2009); Small Business Administration: Status of Efforts to Address 
Previous Recommendations on the HUBZone Program, [hyperlink, 
http://www.gao.gov/products/GAO-09-532T] (Washington, D.C.: Mar. 25, 
2009); HUBZone Program: SBA's Control Weaknesses Exposed the 
Government to Fraud and Abuse, [hyperlink, 
http://www.gao.gov/products/GAO-08-964T] (Washington, D.C.: July 17, 
2008); Small Business Administration: Additional Actions Are Needed to 
Certify and Monitor HUBZone Businesses and Assess Program Results, 
[hyperlink, http://www.gao.gov/products/GAO-08-975T] (Washington, 
D.C.: July 17, 2008); and Small Business Administration: Additional 
Actions Are Needed to Certify and Monitor HUBZone Businesses and 
Assess Program Results, [hyperlink, 
http://www.gao.gov/products/GAO-08-643] (Washington, D.C.: June 17, 
2008). Also see Small Business Administration, Office of Inspector 
General, Opportunities Exist to Further Improve Quality and Timeliness 
of HUBZone Certifications, 14-03 (Washington, D.C.: Nov. 19, 2013) and 
HUBZone Program Examination and Recertification Processes, 6-23 
(Washington, D.C.: May 23, 2006). 

[49] Of the 16 firms and representatives from the 4 economic 
development agencies and 1 Native American Tribe that we selected, we 
spoke with 8 firms and representatives from two of the four economic 
development agencies. Of the 8 firms we interviewed, 6 firms were 
currently certified, 1 firm had been denied, and 1 firm decertified. 
Of the remaining 11 entities, 2 declined to meet with us, 3 did not 
have a working telephone number, and 6 did not respond to our request. 

[50] The U.S. unemployment rate in 2013 was 7.4 percent. The selected 
states had unemployment rates ranging from 5.3 to 8.9 percent. 

[51] There were no decertified firms from the Northeast region. 
Therefore, we selected 2 decertified firms from the Midwest region, 
which had the largest number of decertified firms. 

[52] HUBZone Act of 1997, Pub. L. No. 105-135, Title VI, 111 Stat. 
2592, 2627-36 (1997). 

[53] Congressional Research Service, Small Business Administration 
HUBZone Program, CRS R41268 (Washington, D.C.: Dec.17, 2013); and GAO, 
Small Business Administration: Undercover Tests Show HUBZone Program 
Remains Vulnerable to Fraud and Abuse, [hyperlink, 
http://www.gao.gov/products/GAO-10-920T] (Washington, D.C.: July 28, 
2010); Small Business Administration: Undercover Tests Show HUBZone 
Program Remains Vulnerable to Fraud and Abuse, [hyperlink, 
http://www.gao.gov/products/GAO-10-759] (Washington, D.C.: June 25, 
2010); HUBZone Program: Fraud and Abuse Identified in Four 
Metropolitan Areas, [hyperlink, 
http://www.gao.gov/products/GAO-09-440] (Washington, D.C.: Mar. 25, 
2009); HUBZone Program: Fraud and Abuse Identified in Four 
Metropolitan Areas, [hyperlink, 
http://www.gao.gov/products/GAO-09-519T] (Washington, D.C.: Mar. 25, 
2009); Small Business Administration: Status of Efforts to Address 
Previous Recommendations on the HUBZone Program, [hyperlink, 
http://www.gao.gov/products/GAO-09-532T] (Washington, D.C.: Mar. 25, 
2009); HUBZone Program: SBA's Control Weaknesses Exposed the 
Government to Fraud and Abuse, [hyperlink, 
http://www.gao.gov/products/GAO-08-964T] (Washington, D.C.: July 17, 
2008); Small Business Administration: Additional Actions Are Needed to 
Certify and Monitor HUBZone Businesses and Assess Program Results, 
[hyperlink, http://www.gao.gov/products/GAO-08-975T] (Washington, 
D.C.: July 17, 2008 and Small Business Administration: Additional 
Actions Are Needed to Certify and Monitor HUBZone Businesses and 
Assess Program Results, [hyperlink, 
http://www.gao.gov/products/GAO-08-643] (Washington, D.C.: June 17, 
2008). Also see Small Business Administration, Office of Inspector 
General, Opportunities Exist to Further Improve Quality and Timeliness 
of HUBZone Certifications, 14-03 (Washington, D.C.: Nov. 19, 2013); 
and HUBZone Program Examination and Recertification Processes, 6-23 
(Washington, D.C.: May 23, 2006). 

[54] The HUBZone designations were last updated on May 1, 2014. The 
lists of qualified and redesignated areas, by HUBZone type, are posted 
on SBA's website at [hyperlink, 
https://www.sba.gov/content/hubzone-maps]. 

[55] The list of firms was accessed through DSBS at [hyperlink, 
http://dsbs.sba.gov/]. DSBS offers an electronic search engine for 
contracting officers and serves as a marketing tool for small 
businesses that register with the system. It contains the profiles of 
thousands of small firms. We were unable to locate 573 firms within 
qualified HUBZones. According to HUBZone regulations, the only office 
location which must be located in a HUBZone is the location where the 
greatest number of employees perform their work. The 573 firms were 
excluded from the analysis. 

[56] We identified 456 firms that had more than one profile listed in 
DSBS. For example, one firm had 13 different profiles in DSBS while a 
second had 10 profiles. 

[57] The 573 firms received 834 contracts and $396,182,258 in contract 
obligations in fiscal year 2013. 

[58] ACS is an ongoing survey on topics such as social, economic, 
demographic, and housing characteristics of the U.S. population. The 5-
year estimates from ACS are "period" estimates that represent data 
collected over a period of time. The primary advantage of using 
multiyear estimates is the increased statistical reliability of the 
data for less populated areas and small population subgroups. The most 
recent 5-year estimate covers 2008-2012. Because ACS data are based on 
probability samples, estimates are formed using the appropriate 
estimation weights provided with each survey's data. Because each of 
these samples follows a probability procedure based on random 
selection, they represent only one of a large number of samples that 
could have been drawn. Since each sample could have provided different 
estimates, we express our confidence in the precision of our 
particular sample's results as a 90 percent confidence interval. This 
is the interval that would contain the actual population value for 90 
percent of the samples we could have drawn. 

[59] The statutory provisions governing the LIHTC program limit the 
amount of qualified census tracts in any Metropolitan Statistical Area 
(MSA) or Primary Metropolitan Statistical Area (PMSA) so that they 
together do not contain more than 20 percent of the total population 
of the MSA or PMSA. 

[60] Our universe of 1,425 firms (based on applications submitted in 
fiscal year 2013) consisted of 528 firms that were approved, 418 that 
were denied, 470 that were withdrawn, and 9 that were decertified. The 
39 files we reviewed included 19 applications that were initially 
approved, 10 that were denied, and 10 that were withdrawn. Included in 
the 19 approved applications were all 9 firms that had been 
decertified among the 1,425 firms. 

[61] While decertification is not one of the outcomes of an initial 
application, it is an event that occurs when a certified firm no 
longer meets the program eligibility requirements. 

[62] We only reviewed the decertifications of firms from which SBA 
received applications from fiscal years 2010 through 2013 because SBA 
conducted its legacy portfolio review in fiscal 2010, which resulted 
in the decertification of numerous firms. Applications submitted 1 
year later would be less likely to be decertified as a result of this 
review, and would be decertified for reasons more typical to SBA's 
normal operations. 

[63] According to SBA officials, analysts only can record one reason 
for decertifying firms. If an analyst wants to record additional 
information, they must choose "other" and record in the comments 
section the reason for the decertification. 

[64] SBA provided a list of the 714 firms that received a 
recertification reminder in May 2014. 

[65] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[66] Difficult development areas are designated annually, typically in 
September or October, by the Secretary of HUD in accordance with 
Section 42(d)(5)(B)(iii) of the Internal Revenue Code, which applies 
to the LIHTC program. This section of the Internal Revenue Code 
defines difficult development areas as "any area designated by the 
Secretary of HUD as an area which has high construction, land, and 
utility costs relative to area median gross income." 

[67] Trust lands acquired by an Indian reservation or tribe after 
December 21, 2000, do not qualify as HUBZones, unless they are part of 
a former reservation, or they are contiguous to areas that were trust 
lands prior to December 21, 2000. 

[68] We were unable to identify the HUBZone locations for 573 firms, 
which are excluded from the counts. 

[69] [hyperlink, http://www.gao.gov/products/GAO-08-643]. 

[70] The unemployment rates in 2013 ranged from 2.9 percent (North 
Dakota) to 9.8 percent (Nevada), while the U.S. average was 7.4 
percent. SBA updates these designations each May using the previous 
year's unemployment rate. 

[71] Both the average and median state unemployment rates in 2013 were 
6.8 percent. 

[72] As discussed earlier, SBA uses a 5-year average median household 
income as one method to determine if a nonmetropolitan county 
qualifies as a HUBZone. 

[73] LIHTC provides tax credits for building and rehabilitating rental 
housing that is affordable to low-income households. The Internal 
Revenue Service and state housing finance agencies jointly administer 
the program. HUD is not an administering agency for the LIHTC program, 
but collects information on projects and tenants for its LIHTC 
database, the most comprehensive public source of information on LIHTC 
projects. 

[74] For purposes of the rule, all nonmetropolitan areas in a state 
are treated as if they constituted a single metropolitan area. See 26 
U.S.C §42(d)(5)(B)(ii)(III). As previously discussed, SBA reassesses 
the status of nonmetropolitan counties more frequently than it 
reassesses the status of census tracts. 

[75] As of June 2014, there were 17,012 qualified and redesignated 
census tracts. About 2,600 certified firms were located in these 
qualified or redesignated census tracts, as of June 2014. 

[76] With the release of 2010 Census data in October 2011, a large 
number of previously redesignated HUBZone areas lost their 
designation. Consequently, there were fewer qualified areas from which 
firms could apply and their employees could reside and be eligible for 
the program. 

[77] Withdrawing an application allows firms to modify their 
application in order to be eligible without waiting to reapply. Denied 
applicants or those that were decertified may reapply for 
certification 90 calendar days after the date of denial or 
decertification if they believe they have addressed the reasons for 
the denial or decertification and meet the eligibility requirements. 

[78] SBA officials explained that SBA cannot unilaterally withdraw an 
application but "closes" an application if a situation arises whereby 
the issue cannot be resolved in a short time. After a firm submits its 
electronic verification and can no longer make changes to its 
application, the firm can request that SBA withdraw the application on 
its behalf. 

[79] According to representatives from the HUBZone trade association, 
the number of firms participating in the program has been shrinking 
and the length of the certification process hampers SBA's ability to 
rebuild its HUBZone portfolio. Additionally, they told us that SBA no 
longer has sufficient staff to interact with interested parties that 
would like to obtain basic information about the program in advance of 
submitting an application, leading to many unqualified firms applying 
for the program and the inefficient use of staff time. 

[80] The average processing time reported by SBA also includes time to 
process applications that were withdrawn and denied. However, our 
analysis pertained only to applications that were approved. 

[81] We analyzed data from SBA's HCTS as of July 2014. HCTS contains 
information on firms that have applied to participate in the HUBZone 
program. 

[82] We analyzed data based on the firm's North American Industry 
Classification System codes (a classification system and data analysis 
tool developed by the federal government that groups businesses based 
on similarities in the processes they use to produce goods or 
services). 

[End of section] 

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