[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]




 
        ENSURING OPPORTUNITIES: OVERSIGHT OF THE HUBZONE PROGRAM

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                           SEPTEMBER 7, 2016

                               __________
                               
                               
                               

  [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                  
  
  
  
                               

            Small Business Committee Document Number 114-069
              Available via the GPO Website: www.fdsys.gov
              
              
              
              
              
              
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                         CHRIS GIBSON, New York
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        CARLOS CURBELO, Florida
                         CRESENT HARDY, Nevada
                         WARREN DAVIDSON, Ohio
               NYDIA VELAZQUEZ, New York, Ranking Member
                         YVETTE CLARK, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                       BRENDA LAWRENCE, Michigan
                       ALMA ADAMS, North Carolina
                      SETH MOULTON, Massachusetts

                   Kevin Fitzpatrick, Staff Director
                       Jan Oliver, Chief Counsel
                Adam Minehardt, Minority Staff Director
                
                
                
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Steve Chabot................................................     1
Hon. Nydia Velazquez.............................................     1

                               WITNESSES

Mr. William B. Shear, Director, Financial Markets and Community 
  Investment, United States Government Accountability Office, 
  Washington, DC.................................................     4
Mr. John Shoraka, Associate Administrator, Office of Government 
  Contracts and Business Development, United States Small 
  Business Administration, Washington, DC........................     6

                                APPENDIX

Prepared Statements:
    Mr. William B. Shear, Director, Financial Markets and 
      Community Investment, United States Government 
      Accountability Office, Washington, DC......................    27
    Mr. John Shoraka, Associate Administrator, Office of 
      Government Contracts and Business Development, United 
      States Small Business Administration, Washington, DC.......    42
Questions and Answers for the Record:
    Questions from Hon. Steve Chabot and Answers from Mr. William 
      B. Shear...................................................    47
    Questions from Hon. Steve Chabot and Answers from Mr. John 
      Shoraka....................................................    49
Additional Material for the Record:
    Allied Research Technology, Inc..............................    53
    Contemporary Graphic Solution (CGS)..........................    55
    Custom Software Systems, Inc. (CSS)..........................    56
    Fairfield Technologies Inc. (FTI)............................    58
    Fearless Solutions...........................................    60
    Ferguson Safety Products, Inc................................    61
    GCS - GeoControl Systems, Inc................................    62
    HUBZone Contractors National Council.........................    65
    ITC Defense Corp.............................................    75
    MINPACK......................................................    76
    Nyla Technology Solutions, Inc. (Nyla).......................    77
    Set-Aside Alert..............................................    79
    SBA..........................................................    82
    Storage Strategies, Inc. (SSI)...............................    88
    SupplyCore Inc...............................................    90
    Summit Technologies & Solutions, Inc. (Summit)...............    93
    Syntelligent Analytic Solutions, LLC (Syntelligent)..........    96
    The Data Entry Company (TDEC)................................    97
    Triangle Electric Corporation................................    98
    TEVET........................................................    99
    Work Force Now (WfN).........................................   100


        ENSURING OPPORTUNITIES: OVERSIGHT OF THE HUBZONE PROGRAM

                              ----------                              


                      WEDNESDAY, SEPTEMBER 7, 2016

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 11:00 a.m., in Room 
2360, Rayburn House Office Building. Hon. Steve Chabot 
[chairman of the Committee] presiding.
    Present: Representatives Chabot, Luetkemeyer, Hanna, 
Gibson, Brat, Knight, Curbelo, Hardy, Kelly, Velazquez, Chu, 
Hahn, Payne, Meng, Lawrence, Clarke, Adams, and Davidson.
    Chairman CHABOT. Good morning. The Committee will come to 
order.
    Before we begin today's hearing, I want to take a moment to 
remember one of our colleagues. On July 20th, our friend and 
fellow member of this Committee, Congressman Mark Takai passed 
away. Mark spent much of the past year undergoing treatment for 
cancer, but he still managed to serve his constituents with 
dedication and enthusiasm, and every time we saw him, he had a 
smile on his face. He was ranking member of the Subcommittee on 
Contracting and the Workforce where he did a lot of great work 
for the people and small businesses of Hawaii and for the whole 
country for that matter. His presence and aloha spirit will be 
greatly missed by all of us.
    And I would now like to yield to our ranking member, Ms. 
Velazquez.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman, for yielding and 
affording me a few minutes to remember our friend and 
colleague, Mark Takai.
    Mark was a valued member of this committee. As a 
subcommittee ranking member, he made numerous, valuable policy 
contributions in the area of contracting. Because of his 
tireless efforts, Native Hawaiian organizations are now 
eligible to participate in the HUBZone program. He was a strong 
advocate for working families, and he represented Hawaii with 
distinction. Perhaps most of all he will be remembered as a 
devoted father and husband and dedicated family member. I, 
personally, will remember his warmth, kindness, and friendship. 
I know we are all praying for and thinking of his wife, Sami, 
and his two children, Matthew and Kaila.
    I will now ask for a moment of silence in remembrance of 
our friend and distinguished member.
    Thank you again, Mr. Chairman, for the opportunity to 
speak. I yield back.
    Chairman CHABOT. Thank you very much, Ranking Member.
    And Mark Takai will be greatly missed and long remembered 
by, I think, all the members of this Committee and all of 
Congress.
    Today, our Committee will examine the historically 
underutilized business zones or HUBZone program. This program 
run by the SBA seeks to incentivize small business development 
in economically distressed areas by providing access to 
government contracting opportunities.
    We are pleased to welcome back to the Committee Mr. Bill 
Shear from the Government Accountability Office, GAO, and Mr. 
John Shoraka, from the Small Business Administration--the SBA.
    Since its inception nearly 20 years ago, the goal of the 
HUBZone program has been to boost economic growth and business 
development in the areas of this Nation that are most in need. 
If this goal is to be achieved, the program must operate in the 
most efficient and effective way possible.
    In the past few years, GAO has performed several reviews of 
the program to examine how it is working. Through these 
reviews, GAO had identified several areas where the program 
needs to improve. One of the chief concerns identified by GAO, 
a concern that this Committee shares, is making sure that the 
opportunities provided by the HUBZone program are being 
utilized by small businesses who actually qualify for the 
program. The sole-source contract awards and 10 percent 
evaluation preference provided to HUBZone firms are significant 
incentives to companies, encouraging them to locate and hire 
employees in areas of significant need. The HUBZone program 
cannot fulfill its mission if the opportunities provided by 
these incentives are being taken by companies that do not 
actually qualify for the program.
    In response to their concerns, GAO has put forward several 
recommendations. Among those recommendations are increased and 
improved communications between HUBZone firms and the SBA, as 
well as steps to make it easier to verify information from 
HUBZone firms. SBA has accepted some of these recommendations, 
but others have not been adopted. We are here to look at how 
the HUBZone program has adapted to those recommendations and to 
examine other ways the program could improve.
    It is crucial, however, that any efforts to alter or expand 
the program are made by working through Congress and with this 
Committee. Actions that could change how the program has been 
run or how effective the program will be must be done in the 
open with the public debate afforded by the people's branch.
    This Committee sees on a daily basis the tremendous impact 
small businesses can have in providing jobs and lifting the 
economic outlook of an entire community. The HUBZone program is 
intended to help these small businesses, but can only succeed 
if the program is run in a way that actually helps the areas 
most in need.
    We want to thank our witnesses for being with us here 
today. We are looking forward to their testimony and also 
asking questions. And I would now like to yield to the ranking 
member for her opening statement.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman, for holding today's 
hearing.
    Each year, the federal government buys over $400 billion in 
goods and services from businesses all over the country. 
Recognizing the benefit these contracts have on local 
communities in terms of economic development and job creation, 
Congress created a small business program aimed directly at 
helping regions with low employment and incomes. The 
Historically Underutilized Business Zone program provides 
federal assistance to firms located in economically distressed 
areas by lowering barriers for entry into the federal 
marketplace for these firms. Ideally, this will not only 
provide an incentive for selling goods and services to the 
government, but also create jobs and bring revenue to these 
struggling areas.
    However, since its implementation, the program has faced 
countless issues, from ensuring that only 35 businesses enter 
the program to overseeing that businesses maintain their 
eligibility, to even being able to present evidence that the 
program is meeting its mission. The SBA has lagged behind from 
the beginning admitting these basic tasks. In fact, at one 
point in time, the certification process was so poorly overseen 
that the GAO was able to certify fake businesses with principal 
locations at the Alamo and at a Starbucks down the street from 
the White House.
    While GAO's most recent report shows that there have been 
improvements in the upfront certification process, I am 
concerned SBA is not doing more to ensure that businesses are 
adhering to the program's requirements. The recertification 
process has, for the most part, become a self-certification 
with later follow-up from SBA. I am eager to hear from today's 
witnesses on how the program can be reformed to provide 
sufficient oversight for both initial certification and 
recertification.
    Unfortunately, the problems facing the HUBZone program do 
not end with certification. For many years, the program's 
portfolio consisted of businesses that were eligible only 
because of a grandfathering clause. Once this expired and other 
areas lost their HUBZone designation, close to 6,000 businesses 
were decertified. SBA's outreach efforts have been unsuccessful 
in getting new businesses to enter the program, and nearly 90 
percent of HUBZone areas do not have a business participating 
in the program. This low participation rate has resulted in the 
failure to meet the 3 percent prime and 3 percent 
subcontracting goals. In fact, the dollars in actions awarded 
through this program have continually decreased since fiscal 
year 2008, with only 71,000 actions worth $6.4 billion or 1.82 
percent of prime contracting dollars awarded to these firms in 
fiscal year 2015. Even then, the program was vastly 
underutilized as only 25 percent of these actions were awarded 
through a HUBZone set-aside or sole-source contract. It is 
clear that reforms are needed to get the HUBZone program on 
track, and today's hearing will provide information needed to 
guide this Committee as we formulate legislation to address 
these issues.
    Lastly, I would like to add that one of the primary 
responsibilities of this committee is to oversee the various 
programs run by the Small Business Administration. While we 
have evaluated many of the individual lending programs, we have 
yet to hold individual hearings on the small business 
contracting programs, and I hope today is just the first of 
many hearings held to assess these important programs.
    I want to thank the witnesses for being here today, and I 
look forward to gaining more insight as to how we can make the 
HUBZone program more effective in meetings its mission.
    Thank you, Mr. Chairman, and I yield back.
    Chairman CHABOT. Thank you very much. The ranking member 
yields back. And if members have opening statements, we would 
ask that they be submitted for the record.
    We have got a couple of veterans before us here today, so I 
do not have to take a long time explaining our rules. We 
operate by the 5-minute rule, as you both know, and there is a 
lighting system to assist you. The green light stays on for 4 
minutes; the yellow light, 1 minute; and then the red light 
will come on and we would ask you to wrap it up by then if at 
all possible. We will give you a little time if you need a 
little extra. Then we will stick to the 5 minutes ourselves in 
asking questions, and we will alternate back and forth between 
Republicans and Democrats.
    So I would now like to formally introduce our two witnesses 
here today just briefly. Our first witness today is Mr. William 
Shear, who is the Director of Financial Markets and Community 
Investment Team at the Government Accountability Office, the 
GAO. In this role, Mr. Shear has appeared before the Committee 
on a number of occasions, and so we welcome him back today.
    And our second witness is another familiar face, Mr. John 
Shoraka, who serves as the SBA's Associate Administrator for 
Government Contracts and Business Development Office. And 
included within this office is the office of the HUBZone 
program. So he is the person to talk with about this, and so we 
welcome you back again as well.
    And so without further ado, Mr. Shear, you are recognized 
for 5 minutes.

STATEMENTS OF WILLIAM B. SHEAR, DIRECTOR, FINANCIAL MARKETS AND 
 COMMUNITY INVESTMENT, UNITED STATES GOVERNMENT ACCOUNTABILITY 
   OFFICE; JOHN SHORAKA, ASSOCIATE ADMINISTRATOR, OFFICE OF 
 GOVERNMENT CONTRACTS AND BUSINESS DEVELOPMENT, UNITED STATES 
                 SMALL BUSINESS ADMINISTRATION

                 STATEMENT OF WILLIAM B. SHEAR

    Mr. SHEAR. Thank you. Chairman Chabot, Ranking Member 
Velazquez, and members of the Committee, I am pleased to be 
here today to discuss our work on SBA's HUBZone program.
    Congress established the HUBZone program to stimulate 
economic development in economically distressed communities. 
The program provides Federal contracting preferences to small 
businesses located in HUBZone-designated areas that also employ 
residents of the areas.
    My statement today is based on the key findings in our 
February 2015 report and SBA's oversight of the HUBZone program 
in our March 2016 follow-up report and SBA responses to our 
2015 recommendations.
    We met with SBA in July 2016 at SBA's request to discuss 
SBA's actions in response to our recommendations and again in 
August 2016 at our request to further discuss the status of SBA 
efforts in preparation for this hearing. In addition, we met 
with SBA officials, including John Shoraka yesterday, and 
further information was provided to us on some of the agency's 
recent actions.
    Specifically, this testimony discusses, first, how SBA 
communicates changes and HUBZone designations to firms; second, 
SBA's certification and recertification processes for firms; 
and third, how potential changes to designation criteria could 
affect HUBZones.
    First, with respect to how SBA communicates changes and 
HUBZone designations to firms, in 2015, we found that 
communications to firms about programmatic changes generally 
were not specific to affected firms. In response, SBA revised 
its approval letters to newly certified firms to include 
information about the consequences of redesignation. But as of 
August 2016, SBA had not yet implemented changes to help assure 
all currently certified firms would be notified of changes that 
could affect their program eligibility. SBA officials recently 
told us that the agency intended to develop a technology 
solution by spring of 2017 to help address GAO's 
recommendation.
    Second, with respect to SBA certification and 
recertification processes for firms, SBA requires all firms 
seeking certification to provide documentation to show they 
meet the eligibility requirements, and SBA also conducts site 
visits at selected firms. However, as we reported in 2015, SBA 
did not require firms seeking recertification to submit 
information to verify continued eligibility, and instead, 
generally relied on firms' attestations of continued 
eligibility. The SBA has made changes to its recertification 
processes, but had not fully addressed our recommendation to 
implement additional controls for recertification, including 
criteria for requesting and verifying firm information and 
guidance on using a risk-based approach to requesting and 
verifying firm information that are subject to recertification.
    Finally, in our 2015 report, we presented statistics on 
economic conditions in HUBZone-qualified, redesignated, and 
non-HUBZone census tracks, and non-metropolitan areas. We also 
evaluated potential changes to HUBZone designation criteria 
that could be designed to provide additional economic benefits 
to some communities. However, changes that benefit some 
communities also could, through competitive market processes, 
reduce activity by HUBZone firms in existing HUBZones.
    In my written statement, we have included examples based on 
adjusting criteria for unemployment rates and the potential 
impact of removing the limit on the number of areas that could 
qualify as HUBZones pursuant to the definition of qualified 
census tracks that was in effect at the time we issued our 
February 2015 report.
    Chairman Chabot and Ranking Member Velazquez, this 
concludes my prepared statement. I would be happy to answer any 
questions.
    Chairman CHABOT. Thank you very much.
    Mr. Shoraka, you are recognized for 5 minutes.

                   STATEMENT OF JOHN SHORAKA

    Mr. SHORAKA. Thank you. Chairman Chabot, Ranking Member 
Velazquez, and members of the full Committee, I appreciate the 
opportunity to testify here today.
    Before I begin, I would also like to acknowledge your 
former colleague, Mark Takai, Congressman Mark Takai of Hawaii, 
who served as ranking member of the Subcommittee on Contracting 
and the Workforce. Congressman Takai was a great partner with 
the Small Business Administration and his presence will be 
truly missed.
    Over the past 7 years, the administration, Congress, SBA, 
and Federal agencies have been successful in expanding Federal 
small business contracting opportunities through increased 
advocacy efforts and improved policies and regulations. As a 
result, the level of accountability has been raised across the 
Federal Government, allowing small businesses to continue to 
become more agile, innovative, and affordable providers of 
goods and services. This increased focus has resulted in over 
$640 billion in Federal contracting dollars being awarded to 
small businesses from fiscal year 2009 to 2015. Of that, $90.7 
billion was awarded in fiscal year 2015, which represents an 
incredible impact to the American economy and drives job 
creation and support for over 537,000 jobs.
    Through small business contracting, the Federal Government 
acts as a catalyst for small business growth, while supporting 
the economic security of the Nation. In 2015, for the third 
consecutive year, the Federal Government exceeded the 23 
percent small business prime contracting procurement goal, 
awarding 25.75 percent of eligible contracts to small 
businesses. This is the highest percentage recorded in history.
    Additionally, the Federal Government achieved the women-
owned small business goal of 5 percent for the first time in 
history and achieved the highest percentage ever of contracts 
awarded to small disadvantaged businesses, as well as service-
disabled veteran-owned small businesses.
    Over the last few years, the SBA's Office of Government 
Contracting and Business Development began a variety of 
streamlining efforts to enhance customer service and reduce the 
administrative burdens on small businesses. These ongoing 
efforts include significant improvements and reduced timelines 
in processing 8(a) and HUBZone applications, 8(a) mentor 
protege agreements, as well as overhauling the HUBZone, 8(a), 
and WSB programs' standard operating procedures.
    GCBD also invested in IT solutions to improve efficiencies 
for our interactions with small businesses. To ensure 
compliance with small business contracting regulations, 
Administrator Contreras-Sweet authorized the hiring of 10 
additional procurement center representatives, who have 
subsequently been hired. SBA has implemented over 25 provisions 
from the Small Business Jobs Act of 2010 and the National 
Defense Authorization Acts of 2013, 2014, 2015, and 2016, and 
is making great progress towards implementing the remaining 
provisions.
    Of note, the SBA issued a final rule expanding HUBZone 
eligibility in areas surrounding Base Realignment and Closure, 
BRAC, areas, qualified disaster areas, as well as allowing 
Native Hawaiian organizations to own HUBZone firms. We are 
working closely with the FAR Council to incorporate new 
regulations into the FAR as quickly as possible.
    Lastly, SBA issued a final rule implementing the new Small 
Business Mentor-Protege program, which was followed by 
Administrator Contreras-Sweet approving the new office 
structure and processes for the program. With these important 
steps, the new Small Business Mentor-Protege program is on 
track to begin accepting applications on the 1st of October.
    As we continue to support and improve contracting 
opportunities for small business, there are always 
opportunities to build on our strength and improve in certain 
areas. We are aware of the two open GAO recommendations and two 
OIG recommendations associated with the HUBZone program that we 
are actively working to resolve. In particular, we have 
maintained open communications and engagement with the GAO and 
believe we are nearing closure of these recommendations.
    In general, the HUBZone contracting program serves as an 
economic development tool that encourages small businesses to 
locate, invest, and hire employees from economically 
disadvantaged areas of the United States. As an agency, we work 
tirelessly to educate the small business and procurement 
communities about the HUBZone program in order to encourage 
firms to seek certification, help agency buyers utilize the 
program, and show economic development entities how the 
program's benefits can be used to attract small businesses to 
their areas.
    Despite limited resources, the program has been successful 
in its efforts to ensure its mission is achieved. For example, 
the HUBZone program has implemented a sustainable plan to 
process applications within a 90-day period. We have also 
successfully conducted site visits to 10 percent of the firms 
in the portfolio with 87 percent of those site visits finding 
firms that are in compliance. In addition, the program has 
increased education and outreach through the second year of the 
designation HUB initiative by visiting 15 cities and 
encouraging small businesses to seek Federal contracting 
opportunities.
    Moreover, the SBA recently conducted an in-depth analysis 
of the legislative and regulatory history of the program to 
determine if it had the authority to remove the 20 percent 
population cap to positively impact additional areas. Our 
analysis confirmed that the SBA did have the authority to 
remove the cap, and subsequently did so, increasing the number 
of census tracks in the HUBZone program. Due to the removal of 
the cap, Puerto Rico saw the largest increase of 516 new 
designated HUBZone areas.
    We are committed to continuous improvement in the HUBZone 
program, along with the SBA's other certification and 
contracting programs. Our goal is to remove unnecessary burdens 
placed on the small businesses that have no merit, as our 
mission is to ensure that responsible small businesses have the 
maximum practicable opportunity to compete for and win 
contracts with the Federal Government.
    In closing, I would like to recognize this Committee's 
commitment to small business and for being a partner in 
advancing positive small business practices across the Federal 
marketplace. I would also like to acknowledge the 
administration and Federal agencies for their dedication to 
providing meaningful contracting opportunities to the small 
business community. Led by Administrator Contreras-Sweet, we 
will continue to fight for small businesses and advocate on 
their behalf.
    Thank you for the opportunity to testify here today. I look 
forward to your questions.
    Chairman CHABOT. Thank you very much.
    I now recognize myself for 5 minutes to begin the 
questions.
    Before I ask my first question, I was just looking at our 
names and it just hit me: Shear, Shoraka, Chabot. It sounds 
like an impressive law firm or something, does it not? Or a new 
disease to be avoided or something. But in any event, I will 
get on to my questions.
    Mr. Shear, I will begin with you. Through your reviews, 
what have you seen as being the specific problems with the 
current HUBZone certification tracking system, and what would 
be some of the features of a new system that would correct 
these problems?
    Mr. SHEAR. We--and I will mention especially the 2015 
report--have had extensive experience with using the HUBZone 
certification tracking system itself, and I am very thankful to 
John and his staff for helping us conduct that analysis. It is 
this relational dataset that is really inadequate, not just in 
terms of how hard it was for us to go through these 
hypothetical scenarios and to look at certain characteristics 
of firms, but in terms of two things that are part of what SBA 
is trying to achieve. It is very bad in terms of conducting 
queries. An analyst can look at one firm at a time. But 
conducting queries across firms is problematic. One would want 
to conduct such quaries to do things such as establishing a 
risk-based oversight system for recertification. So it is 
inadequate because it is so difficult to conduct queries. And 
in terms of trying to evaluate impacts, looking at 
characteristics of firms and how much they may be benefitting 
or not benefitting from participation in the program, it is 
very difficult because of this data system. So I think that SBA 
is at least pointed in the direction of developing a new system 
is something that is a good idea.
    Chairman CHABOT. Okay. Thank you very much.
    Mr. Shoraka, I will turn to you now. When did discussions 
begin on the idea of ignoring the 20 percent cap for qualified 
census tracks?
    Mr. SHORAKA. Thank you for that question. As I mentioned in 
my testimony, sir, we began analyzing the potential impact of 
removing the cap I would say probably 6 to 9 months ago, and 
the discussion centered around the fact that the caps are 
included in the analysis by Housing and Urban Development for 
the purposes of the IRS. We found no statutory reason why those 
caps were included for the HUBZone program. Based on our 
general counsel's review of our statute and analysis that we 
had authority to move forward in removing the caps, we went 
ahead and did that because we would expand the program 
exponentially to deserving communities that could benefit from 
participating in the program. Specifically, I think the largest 
impact was in Puerto Rico, and obviously, this is an area that 
both the administration and the Hill is interested in helping.
    Chairman CHABOT. Let me follow up on my question, and you 
talk about expanding, and I agree. It could potentially 
dramatically expand the program. But going, blowing past the 20 
percent cap could result in potentially thousands of new 
HUBZones, and arguably perhaps weaken its effectiveness in 
perhaps some of the existing HUBZones themselves. And what 
makes you all think that the SBA is able to take this step 
without congressional action? How can you do that on your own?
    Mr. SHORAKA. I would have to defer to our Office of General 
Counsel, who provided an opinion to my office with that respect 
and we have shared it with the Hill. And in fact, I think we 
have shared it with GAO as well. But the analysis that, again, 
that I have seen with our recommendations from our general 
counsel is that the statute and the calculation performed by 
the HUD, when they put that 20 percent cap on it, is 
specifically for the purposes of the IRS and not for our 
purposes.
    Chairman CHABOT. Okay. Well, if you could get that to us, 
we would like to take a look at that. Thank you very much.
    Let me go back to you, Mr. Shear. Have there been other 
challenges within the HUBZone program that you have seen but 
have not had the time or opportunity yet to highlight today? 
Are there other things that you would want to point out?
    Mr. SHEAR. I think I would want to point out--I know this 
Committee is taking a leadership role in the legislation for 
Puerto Rico--I will paraphrase this, the Puerto Rico Economic 
Stabilization Act. The questions you are asking in the first 
mandate, which we plan to staff in the next month and proceed 
earnestly with, asks us to look at contracting activity in 
Puerto Rico. We will be looking at expansion in the HUBZone 
qualified areas and to try to bring analysis to try to look at 
what types of shifts are being brought about by expanding. We 
may also address, what are the impacts of contracting? Because 
we can look back to 2008 where after an error made in the 
HUBZone map for Puerto Rico was corrected, we identified it 
during our 2008 audit, much of Puerto Rico was classified as 
HUBZone in 2008 due to this error, and once it was corrected, a 
small part of Puerto Rico was in a HUBZone. So we would look at 
the opposite, so the opportunity to evaluate the reduction in 
HUBZone areas may be possible.
    And it is not just looking at number of HUBZone firms and 
HUBZone contracts; it is looking at HUBZones and small 
businesses and what dynamic is going on in that community in 
Puerto Rico to try to establish what the impact could be so 
that the Congress and SBA--I think we all want to make sure 
that informed choices are being made as far as bringing up the 
issue you had as far as could expanding cause some of the 
existing HUBZone areas to suffer. I think those are very 
important issues to look at. So I am glad that we can start 
that.
    Chairman CHABOT. Okay. Thank you very much. My time is 
expired. The ranking member is recognized for 5 minutes.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    Mr. Shear, let us go back again to what provided the path 
to lift the cap in Puerto Rico. It was an action of Congress. 
It was by passing PROMESA. So my question to you is has GAO 
analyzed whether or not SBA exceeded its authority when they 
removed the cap without congressional authorization? I think 
that is the question here.
    And then further, how a program that since the first GAO 
report in 2008, and then 2010, clearly demonstrated there were 
no oversight mechanisms in place at SBA to prevent the program 
from being abused. And we have seen the abuse mismanagement of 
the program and also the fact that there is an issue with the 
type of communication between SBA and the firms and the 
information that they provided. Have you analyzed that? I know 
you provided GAO with information regarding the opinion from 
your legal counsel. When did this happen? When did it happen?
    Mr. SHORAKA. When did we provide----
    Ms. VELAZQUEZ. The legal----
    Mr. SHORAKA. I think that was just recently, if I am not 
mistaken.
    Ms. VELAZQUEZ. Have you had any opportunity to analyze it?
    Mr. SHEAR. Yes. Can I go through starting with----
    Ms. VELAZQUEZ. Sure. Yes.
    Mr. SHEAR.--you asked a multi-part question and please help 
me through this. The first one is the question of the decision 
to lift the cap.
    Ms. VELAZQUEZ. Yes.
    Mr. SHEAR. When we started preparing for this hearing, and 
also starting to gear up to start our work in response to the 
first mandate dealing with Puerto Rico, we started looking for 
information about HUBZone and Puerto Rico, and that was roughly 
two weeks ago. And we identified the press release that on June 
15th, SBA had lifted the cap for Puerto Rico and that was kind 
of the headline. Then, when we read it, we saw that it was 
lifted nationwide. And our shock was that we had just had a 
meeting with SBA where we asked are there any other significant 
changes to the program? And this was never mentioned.
    Ms. VELAZQUEZ. Mr. Shoraka, do you consider that a big 
change when he asked you whether or not there had been any 
policy changes?
    Mr. SHORAKA. Ma'am, would consider the fact that we issued 
a press release, completely open discussion. This is nothing 
that we were----
    Ms. VELAZQUEZ. But you had a meeting. SBA had----
    Mr. SHORAKA. I do not know if I was in that particular 
meeting, but that is nothing that we have intended to hide from 
anybody, ma'am. We did a press release. We did events around 
the country. Our director of HUBZone, in fact, was in Puerto 
Rico, and discussed the impact to Puerto Rico with respect to 
the removal of the cap. This was all done in June, and quite 
frankly, it was done to make sure that our HUBZone program 
impacts the deserving communities that it should be impacting.
    Ms. VELAZQUEZ. I understand, and that is the intent of this 
committee, and this is why we are doing these type of hearings. 
But since 2008, you know that different investigations have 
been conducted, and ineligible firms have been participating 
within the program. And still, the oversight mechanisms and the 
metrics that are so needed for us to be able to fix the program 
have not been provided.
    Mr. SHORAKA. May I respond to that?
    Ms. VELAZQUEZ. Yes.
    Mr. SHORAKA. So as you are aware, a full front-end 
certification was put in place in 2009 and 2010, and because of 
that full front-end certification, I mean, we get sort of the 
discussion on both sides. Right? We get the question with 
respect to firms who oftentimes complain because of the time it 
takes to have them certified, and, quite frankly, it has to be 
a balancing act. So we have implemented a full front-end 
certification process that sometimes is considered overly 
onerous. And quite frankly, over the last several years, over 
the last 2 years, we have looked at how do we remove some of 
those burdens. Because in my opinion, our programs are targeted 
towards some of the most underserved communities, which a lot 
of times do not have the resources to be able to put 
applications together that are 2 pounds of paper. So we are 
looking for opportunities to reduce the burden on those firms, 
and it has to be a balancing act. Sometimes we increase risk, 
but we reduce the burden on our firms.
    Ms. VELAZQUEZ. As I mentioned in my opening statement, we 
are going to be looking at ways to improve the program that 
might need congressional action. So I just want to be on record 
asking that you provide the committee with the type of reforms 
you consider needed to make this program effective so that 
those deserving communities get the benefit of the HUBZone 
program.
    Thank you, Mr. Chairman. I yield back.
    Chairman CHABOT. Thank you. The gentlelady's time is 
expired.
    The gentleman from Missouri, Mr. Luetkemeyer, who is vice 
chairman of this Committee, is recognized for 5 minutes.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman.
    I want to follow up on the ranking member's comments about 
the 20 percent situation here.
    Mr. Shoraka, whenever you did this, are you continuing to 
fall under the same guidelines that HUD had with regards to 
percent of household incomes and that sort of stuff? You are 
just taking a community that normally would be restricted to 20 
percent but still falls under the guidelines of expanding it to 
30 percent or 40 percent. What is the largest that you have 
expanded to at this point?
    Mr. SHORAKA. So just to explain. Housing and Urban 
Development actually performs this analysis, and for the 
reasons of other programs, puts a 20 percent population 
concentration cap. What we have determined is that that cap is 
not relevant or goes to the intent of this program because it 
reduces the communities that can participate in this program, 
so we have actually removed that cap in our calculations. So we 
are not changing any of the calculations that Housing and Urban 
Development does and has done and continues to do for us. They 
put an additional cap for other program purposes, a 20 percent 
population cap. We take that away because we feel that it does 
not go to the intent of the HUBZone program.
    Mr. LUETKEMEYER. So what percentage of the community then 
are you allowing to participate in this program?
    Mr. SHORAKA. So it has----
    Mr. LUETKEMEYER. Originally, the program standard is 20 
percent of the community, right?
    Mr. SHORAKA. It is a population concentration cap. In other 
words, if more than 20 percent of the population is below the 
poverty line, then the cap is in place. And I can certainly get 
you specifics with response to how this has impacted the 
communities. What I mentioned in my testimony is that in Puerto 
Rico, we increased the HUBZone areas from 27 percent of the 
census tracks to close to 87 percent of the census tracks.
    Mr. LUETKEMEYER. Okay.
    Mr. SHORAKA. And we have the calculations by State, and I 
am happy to share that with you.
    Mr. LUETKEMEYER. Okay. So instead of taking 20 percent of 
the community, now you are taking 87 percent of the community 
in? It is a census track, right?
    Mr. SHORAKA. Correct.
    Mr. LUETKEMEYER. Okay. So what is your anticipated amount 
of extra workload that you are looking at here? Have you 
thought about that?
    Mr. SHORAKA. We, you know, one of the things--that is an 
excellent question.
    Mr. LUETKEMEYER. I am not against the competition here that 
this would encourage.
    Mr. SHORAKA. Right.
    Mr. LUETKEMEYER. What I am looking at is your ability to 
maintain control. Because Mr. Shear is going to come in here 2 
years from now and say, hey, these guys expanded the program; 
have no idea what is going on. They cannot go back and do 
visits because you are in here, you are limited to 10 percent 
or whatever, which is way too low in my mind. And then you are 
not able to control these things and suddenly we have 
ineligible businesses in this program which defeats the whole 
purpose of what is going on.
    Mr. SHORAKA. Yes. That is an excellent question, sir. Thank 
you.
    We actually have lost over a third of our portfolio because 
of the census track redesignations of the 2010 census. So we 
lost over two-thirds and we are down year about 5,000 firms in 
the portfolio where we were historically up around 8,000 or 
9,000. Since then, we have sort of leveled out at right under 
4,000 firms in the portfolio. What we have been attempting to 
do over the last 2 to 3 years is actually through our 
Destination Hub Initiative, trying to increase the number of 
firms. We have the capacity, and as Mr. Shear mentioned, we are 
developing the technology to be able to make sure that the 
deserving firms to participate in our program.
    Mr. LUETKEMEYER. My time is running out. I want Mr. Shear 
to comment on this.
    Mr. Shear, do you believe that this expansion is going to 
undermine the program from the standpoint of expanding it 
beyond what the intent of it was? Does it help businesses in 
this area to be able to compete? Question number one.
    Number two, have they got the controls in place yet or are 
they putting controls in place that you believe are going to be 
adequate to monitor this program, this expansion?
    Mr. SHEAR. Let me just try to do it real briefly.
    Mr. LUETKEMEYER. I have got 10 seconds left.
    Mr. SHEAR. Okay. Well, I will take more than 10 seconds if 
it is okay.
    But the first one, in terms of the expansion of the 
program, I cannot sit here and say that the new communities, 
whether they be counties or census tracks that comprise a 
community, in Puerto Rico are not deserving. But what we are 
looking for is some evaluation, even putting the legal issues 
aside, as far as what would the impact be here? Because of the 
things that I can point out from our analysis in our 2015 
report and in this testimony, that you do observe that HUBZones 
have worse economic conditions than in the redesignated areas, 
and as you expand, you are tending to move up the ladder to 
areas that might not be as economically depressed.
    Mr. LUETKEMEYER. That is the heart of my question. Are we 
undermining the purpose of HUBZone? I am not against it. I am 
just saying are we going too far?
    Mr. SHEAR. What we are looking for and what we are going to 
try to address in a mandate from this Committee with Puerto 
Rico, and we will probably look more broadly than Puerto Rico, 
but certainly for Puerto Rico as we have been mandated, is to 
look at the question as what happens on the ground when you 
expand the program in this fashion? There should be some type 
of informed analysis that goes behind an informed decision 
regardless of what the statutory authority is. And to us, an 
opposite question that we will be looking at in terms of our 
before and after analysis is what happened in 2008 when there 
was a sharp contraction in Puerto Rico. We will be looking, 
what were the impacts of that action? So we think that you 
really need informed consent here.
    As far as the oversight of the program, it expands the 
pieces but we are not in a position to say what happens as far 
as SBA's ability to oversee the program. It is clear that if 
you keep the number of site visits about the same, they will be 
a smaller percentage of your overall universe. But in addition 
to that kind of simple point, I do not think I have much to 
really offer on that point.
    Chairman CHABOT. The gentleman's time is expired.
    Mr. LUETKEMEYER. I appreciate the chairman's indulgence. 
Thank you.
    Chairman CHABOT. Thank you.
    The gentlelady from California, Ms. Chu, who is the ranking 
member of the Economic Growth, Tax, and Capital Access 
Subcommittee, is recognized for 5 minutes.
    Ms. CHU. Thank you, Mr. Chair.
    You know, on one hand, there are instances of these 
ineligible firms that have been certified for the HUBZone. On 
the other hand, there are these vast areas that do not have 
HUBZone certified firms operated within them. In fact, when 
researching this, I found that while my district has pockets of 
census tracks that would qualify for HUBZone status, there are 
only two HUBZone certified firms in the entire area. I 
understand that across the country there are only 5,600 
participants in the HUBZone program and nearly 90 percent of 
HUBZones do not have a single certified firm. So can you tell 
me, for the panel, can you tell us why you believe that the 
program is not being utilized in certain areas?
    Yes, please.
    Mr. SHORAKA. I think the HUBZone program is unique in many 
instances, right? So there are certain requirements that 
sometimes can be complicated for small businesses to maintain. 
One is their primary office has to be in a HUBZone. That means 
that most of their employees, the largest percentage of their 
employees, actually work out of that office. Another is that 35 
percent of their staff have to reside in the HUBZone. Maybe not 
that same HUBZone, but in a HUBZone. So oftentimes, when we 
have talked to firms, they have talked about the difficulty of 
being able to maintain those requirements, especially as they 
get contracts and they begin to grow. So the challenge is, 
quite frankly, it is a unique and different program. A lot of 
times firms will fall in and out of compliance with the 
program. And quite frankly, contracting officers have a 
hesitancy to use the program sometimes because of these unique 
differences.
    We have in the last several rules that we have promulgated, 
if that is the right word, I apologize, we have implemented 
measures to put the HUBZone program at the same level with our 
other programs. When it comes to--and this is kind of in the 
weeds--when it comes to nonmanufacturing rule waivers or when 
it comes to limitations on subcontracting, these were 
differences in the program that were not the same as the WOSB 
program or the service-disabled program.
    So I think it is twofold. One is, quite frankly, it is a 
unique and challenging program. So firms are sometimes 
reluctant to take advantage of it. I think we need more 
training with contracting officers to encourage them to take 
the program seriously. And lastly, I think this is a great 
opportunity to look at the statute to see where we can add some 
level of continuity or comfort or consistency with firms 
falling in and out of program requirements.
    Ms. CHU. Mr. Shear?
    Mr. SHEAR. I think you are asking an excellent question. I 
think John Shoraka gave a very good answer of the challenges 
HUBZone firms face and, therefore, what can affect their 
participation in the program.
    One of the things I would like to emphasize, which goes to 
our first recommendation, is the ability to communicate with 
firms and to provide firms information that makes it easier for 
them to navigate how changes in the program can affect their 
status. I think, we heard and we reached out to the HUBZone 
community as such, and we just found that it is kind of 
expecting too much of the firms with the current state there. 
So that is one thing that I would want to emphasize.
    The other thing I would want to emphasize is to be very 
mindful of a tradeoff when the solution that is offered is to 
allow firms to stay in the program that may no longer be 
eligible. We are very sympathetic with the idea that firms can 
be very challenged if based on short-term swings and economic 
conditions they are in and they are out and they are in, it is 
a concern of the program and it might be something that this 
Committee might want to look at more closely or, have SBA and 
GAO look at more closely. There is a challenge created. But 
what I would emphasize from our analysis of characteristics of 
HUBZone areas compared with those that have lost designation 
and those that are not HUBZones is that if you make the window 
too wide, you are undermining the purpose of the program, which 
is to serve the most economically depressed areas in our 
country.
    Chairman CHABOT. The gentlelady's time is expired.
    The gentleman from California, Mr. Knight, is recognized 
for 5 minutes.
    Mr. KNIGHT. Thank you, Mr. Chair.
    Some of the challenges with the HUBZone program were first 
identified by the GAO years ago and have persisted. From your 
knowledge of what SBA is now doing to address these challenges, 
do you believe they will be resolved soon? And can you tell us 
some of the methods that are being used to resolve these? Mr. 
Shear?
    Mr. SHEAR. Thank you.
    As I stated, certainly with the certification process, SBA 
has improved. When we started our audit in 2008, we concluded 
at the end that there was just a complete lack of internal 
control. But we had concluded that very early on, and we were 
the ones that reached out to our fraud investigators. So the 
program has definitely improved since that situation that we 
evaluated in 2008. What remains now I think is challenging. One 
is how to deal with firms that are dealing with the 
complexities of a program. It is trying to do something 
geographically where you are talking about a very dynamic 
environment. Businesses change over time and the economic 
conditions of census tracks and counties change over time. So I 
think that this idea of looking to a technology solution cannot 
solve these problems by themselves. But the idea is 
implementing better technology to address concerns about how to 
notify firms, how to conduct the recertification process, how 
to have risk-based approach to oversight. These things are very 
important.
    So, I mean, at GAO, we are very good at asking questions. 
We have observed that SBA has had trouble implementing 
technology. A number of years ago, we were all talking about 
One Track, which was going to be the solution for the 8(a) 
program and the HUBZone program, and it was not a successful 
investment. So our concerns are coming up with a real specific 
plan for how to use the technology, then what resources have to 
be used, have to be available from SBA for a more manual 
process even after the technology is in place. And I think 
those are the challenges that are out there.
    Mr. KNIGHT. And I understand that. I come from one of the 
fastest-growing areas in the country. And, in fact, we lead the 
country when our economy is expanding and we are growing at a 
good rate. Always reaching out and making sure of the new 
programs and making sure that we are giving the most 
information is one of the hardest things for either one of us 
who represents these areas or one of you who is trying to reach 
out to the firms or to the businesses. It is always the biggest 
challenge in making sure they are getting the right 
information.
    Can you tell me, over the last maybe 5 or 10 years, as the 
advent of new type of innovative ways to reach out, have you 
found one that has done more than others? Or have you found 
that just the same kind of walking, doing the site visits, 
doing all those types of things are still the most important 
thing?
    Mr. SHEAR. Part of it is that certainly using technology 
and electronic transmission can help, whether it be webinars 
from a training standpoint or whether it be sending 
notifications to firms that are meaningful about what they have 
to know to make sure they are compliant with a program and can 
manage it. So there has to be a mix there. But part of this I 
would say is really a manual process and requires some 
interaction. And this is where SBA's district offices, I think, 
would want to be involved in reaching out to the various parts 
of the country where HUBZones are present.
    Mr. KNIGHT. Thank you very much. I yield----
    Mr. SHORAKA. If I just may real quick on that----
    Mr. KNIGHT. Sure.
    Mr. SHORAKA. I think one of the things that we have done, 
in addition to sort of looking at SBA One and making sure that 
the new system that should be launched by March of 2017 
accounts for this communication, is to ensure that all new 
HUBZones, HUBZone firms, subscribe to the newsletter, which is 
put out regularly to inform them of changes in the designation. 
And it is a requirement, and I think this is absolutely 
correct. Not only do you have to monitor the HUBZones with 
respect to your principal office, but you have to monitor 
HUBZones with respect to your employees and where they reside. 
And so having an automated system to be able to do that for you 
and your staff, it would alleviate a lot of the burdens that 
are now manual.
    Chairman CHABOT. The gentleman's time is expired.
    The gentlelady from California, Ms. Hahn, is recognized for 
5 minutes.
    Ms. HAHN. Thank you, Mr. Chairman.
    And let me just start by saying thank you to you and the 
ranking member for taking a moment before we started today to 
remember our colleague, Mark Takai. I would consider him a 
friend of mine. He actually lived in my building here in D.C., 
and actually was on the same floor that I was, so I ran into 
him and his wife and his kids many times.
    One of my fondest members was during the cherry blossom 
season. I had been here for 5 years. I never had made it down 
to the Tidal Basin to actually see the cherry blossoms. He and 
his wife invited me to join them, so that was just like April, 
and I spent about an hour and a half with them down at the 
Tidal Basin. He took these great photos of me and I took great 
photos of him, and I am really going to miss Mark. In a short 
period of time here in Congress, he really made his mark and 
made a lot of friends. And it seemed like he got more done in 
like 18 months than I think a lot of people have in much longer 
careers. So we will miss him. But thanks for taking the time to 
honor him this morning.
    So I am going to talk about technology as well, Mr. 
Shoraka. Apparently, the map of the eligible HUBZones, it seems 
to have continuous problems. And even back in the Bush 
administration, GAO noted serious issues with the map and 
recommended that it be updated regularly to ensure its 
accuracy. So when my staff, my millennials accessed the map, 
they noticed it was really extremely difficult to use and not 
very high tech. When the map is zoomed out, it does not appear 
to show any eligible zones for Los Angeles County, where my 
district is located. You have to zoom in a considerable amount 
to see the zones in my district, and when the map is accessed 
using a smartphone, it is apparently even more difficult. So 
what can you tell me that SBA is doing to make this map more 
user-friendly, and do we have any plans on making it more of a 
mobile-friendly app, particularly for smartphone users?
    Mr. SHORAKA. Absolutely. Thank you, ma'am.
    You are absolutely correct. This is a technology that is 
outdated and has lived its life. We recently engaged a vendor 
not only to address the certification module, the HUBZone 
certification module, but also the mapping module. And they 
will begin work on it in earnest this month. And as I mentioned 
earlier, by March of 2017, we should have at least an initial 
module out on the program.
    What we try to do is with respect to changes in the program 
and changes in the maps, the data that is out there that 
changes either economic information or unemployment information 
sometimes is updated monthly, right? We collect that data and 
issue changes either to the qualified census track or the 
nonmetropolitan areas on an annual basis, and we do have a 
vendor that uploads this data and adjusts the maps. But as you 
have mentioned, it is an outdated map and it is not as user-
friendly as one would hope. And we are trying to address that 
in the next 6 to 9 months.
    Ms. HAHN. What is the timeline on that?
    Mr. SHORAKA. We hope to have, as I said, a revised mapping 
system and HUBZone certification system by March of 2017.
    Ms. HAHN. So it is one thing for it to be, you know, not 
user-friendly. It is another thing to actually cost someone 
their job, which is what happened to a business in my district. 
They had to let an employee go because the map showed the 
employee did not reside within the HUBZone and, therefore, the 
business was not going to meet their 35 percent residential 
requirement. Later, the business found this to be an error on 
the map. However, this was after the employee lost their job. 
So again, it is one thing for it to not be user-friendly; it is 
another thing for it to contain errors that actually would cost 
somebody their job. That was very disturbing when I found that 
out.
    Mr. SHORAKA. Thank you for bringing that to my attention, 
first off. But one is, you know, we always encourage the firms, 
as Mr. Shear has mentioned, to work with our local district 
offices in situations like that so they are absolutely sure 
what that data is. And the second is, as we update the maps, 
anytime there are changes, we also upload a much more manual 
process of spreadsheets that have census tracks and zip codes. 
So we direct businesses, small businesses to those as well to 
double-check the accuracy of the map. But I think this is 
something that we need to work with our district offices to 
make sure that we are available to the firms when there are 
questions.
    Ms. HAHN. Yeah, let us pay attention to this.
    Chairman CHABOT. The gentlelady's time has expired. Thank 
you.
    The gentleman from Mississippi, Mr. Kelly, is recognized 
for 5 minutes.
    Mr. KELLY. Thank you, Mr. Chairman. And thank both of you 
witnesses for being here.
    The whole purpose of the HUBZone is to spread this type of 
help to small businesses across the entirety. And although I am 
happy that Puerto Rico is getting a great share of this, I am 
more concerned with the counties in my Mississippi area that 
need it the most. But by expanding, you are taking away from 
the folks who I have that need it. So what it sounds to me like 
is the whole purpose is to spread the wealth so that not one 
area gets all the help. But it sounds to me like when you do 
away with the 20 percent rule, what you have effectively done 
is decide you get to say who gets help and who does not get 
help. And that is not the purpose.
    I am really concerned when Congress passes a law and they 
write in what they mean, that people interpret it that they do 
not think that is what Congress meant. And so you said that you 
have the numbers for other States and other areas that are 
affected, so Mr. Shoraka, I ask you, what is the effect in 
Mississippi in all four of my congressional districts, my first 
district and the other three districts in my State that need it 
the most?
    Mr. SHORAKA. Thank you, sir.
    Two points. One is I do not have the numbers for your 
district in front of me, but I certainly will share that with 
you after the hearing. There are an additional 2,015 census 
tracks that were qualified as HUBZones across the country. 
Every State saw an impact. It was not a pick or choose 
decision. The QCTs, which are by statute what we have to use, 
is what we continue to use. We are not stopping using the QCTs 
as put out by HUD. What we did was not include the additional 
step that they take to put the 20 percent cap on. There were 
significant impacts on all of the States, the most significant 
being Puerto Rico, but certainly, I know off the top of my head 
that there was an impact in Mississippi, but I do not know the 
exact numbers and we would be happy to share those with you, 
sir.
    Mr. KELLY. I wanted to say that Mark Takai, when I first 
got here--Mr. Chairman, thank you for having that moment of 
silence--when I first got here, he was a guy on the other side 
of the aisle from me, but we both have a common bond of serving 
in the National Guard; he in Hawaii and I in Mississippi. And 
one of the first things when I first got here as a new guy, he 
walked up to me and said aloha, and set up an office visit to 
take care of me, to make sure as a fellow battle buddy and 
guardsman and soldier that he took care of me. And what a 
gentleman. And I thank you for having that moment of silence, 
Mr. Chairman.
    The statutory definition of qualified census track is no 
more than 20 percent of a single metro area can be designated 
as a HUBZone. My concern is, like I said earlier, is that it is 
going to take away from the areas with the most need. There is 
only X-amount of resources that are allocated. So if you allow 
more than 20 percent, if you expand that area and you put more 
resources into one area and there is only X-amount of 
resources, that, by definition, means that you have to take it 
away.
    And one of the other things that I heard you say is that 
you did not think it was a big thing when Mr. Shear said you 
asked were there any other big things. And obviously, it is a 
big thing if you have a press conference. As a former DA, I did 
not hold a press conference when it was something that was 
small. I held press conferences for something that I deemed to 
be big. So the fact that you have a press conference, to me, by 
definition, says that it was big. And right after he asked you 
were there any other big changes, it was not responded to. I 
think we have to be very careful that we allow the Congress to 
pass things and not usurp Article 1 authority or any other 
article authority. And I think we are doing that right now to 
delegate.
    Mr. Shoraka, do you not think that that is what you are 
doing, is designating these assets and resources that are 
limited to the areas that you think are most important?
    Mr. SHORAKA. Sir, again, we would be happy to share with 
you the legal analysis that we received from our Office of 
General Counsel. Their opinion was that we did have the 
authority to not use the additional steps performed by HUB for 
other program purposes. It was not a picking or choosing of 
where the impact would be made. It had an impact on every 
State.
    And the other thing that I will point out is that we have 
had a situation where we have been trying to recruit additional 
firms into the program. Where we were at a portfolio of 8,000 
or 9,000, we are----
    Mr. KELLY. I am sorry, I have got 15 seconds and I want to 
get this thing in. Just the one thing I will caution you on, it 
is easier to serve urban areas because they are closer 
together, but the whole purpose of this is to serve rural 
areas, and it is harder and more expensive. So when you focus 
on one large urban area with a larger population, you leave out 
the people who need it the most, which are the rural areas.
    Thank you, Mr. Chairman. I yield back.
    Chairman CHABOT. Thank you. The gentleman's time is 
expired.
    The gentlelady from New York, Ms. Clarke, is recognized for 
5 minutes.
    I have been misinformed by my crack staff, so let me get 
the right one here.
    We will go to the gentlelady from North Carolina, Ms. 
Adams.
    Ms.ADAMS. Thank you, Mr. Chair. Thank you, Ranking Member 
Velazquez. I thank my colleague, Ms. Clarke, for making that 
notation.
    Gentlemen, thank you for being here, and I certainly want 
to add my words of commendation to the late Mark Takai. I lived 
in the same building as well and met him regularly in the 
mornings downstairs in the lobby as he was waiting to be picked 
up, and we had many conversations along the way. We are 
certainly going to miss him and his bright smile. But 
certainly, a tribute to all of the work that he did for the 
people that he served, and I just wanted to add my words of 
thanks and appreciation to him.
    The HUBZone program is critically important in encouraging 
small businesses to build and operate in economically 
disadvantaged communities across our country. I do have a few 
questions, and I want to start with Administrator Shoraka.
    If you could just walk us through the certification process 
for small businesses looking to become part of the HUBZone 
program, I would appreciate that.
    Mr. SHORAKA. As I mentioned before, there are a number of 
requirements to become HUBZone certified. And as a result, 
quite frankly, of the findings in 2008 and 2009 of GAO, the 
program did become a full front-end certification program. So 
the primary office for the HUBZone firm needs to be in a 
HUBZone area. And by that, that means that the largest 
percentage of staff work in that office. And then 35 percent of 
your employees need to also reside in a HUBZone area. Again, 
not the same HUBZone area, but in a designated HUBZone area.
    Ms.ADAMS. Okay. So what about the recertification process? 
If you could identify some of the inefficiencies that exist 
within the process.
    Mr. SHORAKA. Thank you. Thank you for that question.
    One of the things that we have identified, both in the 8(a) 
program and the HUBZone program, quite frankly, in making sure 
that we are customer-friendly, is the overly burdensome 
requirements in some of our recertification or annual review 
processes. So we did put a team together to look at how we are 
recertifying both 8(a) and HUBZone companies, and how can we 
reduce the burden on some of the smallest firms, some of the 
most deserving firms in the country.
    So one of the things that we did, and this is a discussion 
we have had with GAO, is to streamline the recertification 
process for the HUBZone and, quite frankly, for both, but for 
the HUBZone companies, so that they do not drop out of the 
program just because it is an overly burdensome process.
    Now, they recertify that they continue to meet the 
requirements of the program with the risk or at risk of 
perjuring themselves. So when they recertify, they sign at risk 
of perjuring themselves. When we find a bad actor, and we have 
done this a number of times, we have had more suspensions, 
debarments, and proposed suspensions and debarments in the last 
4 years than in the previous decade, when we find a bad actor, 
we move quickly to get them out of Federal contracting. But our 
intent is to make our programs as user-friendly as possible. 
When we talk about risk-based analysis, when we do our site 
visits, the 10 percent, we look at not just any firm in the 
HUBZone program; we look at who is receiving contracts. That is 
where the risks exist, right? They are receiving benefits. 
Benefits are flowing to a recipient. And as I am sure you would 
agree, we would want the benefits to flow to the intended 
recipients. Our site visits oftentimes are determined on where 
contracts are going. And again, those site visits have 
documented 87 percent of the firms meeting the requirements of 
the program.
    And lastly, I do not want to take too long, but lastly, we 
have the entire protest function. So if either a contracting 
officer or the SBA or an interested party, like the second 
runner-up in a contract, feels that that winner did not meet 
the requirements of being a HUBZone, they can file a protest, 
and that is when we will review all of the documentation to 
make sure that indeed they meet the requirements of the 
program.
    Ms.ADAMS. Thank you. And maybe, Mr. Shear, can someone 
speak to how the program services businesses in rural versus 
the urban areas and the challenges that exist there?
    Mr. SHEAR. It is a great question. And so for us, part of 
the concern, I agree with John Shoraka that the biggest element 
of risk in a program in certification/recertification are those 
that are getting contracts. But nonetheless, when you start 
talking about the inability to really provide specific 
information about designations that affect firms, it is not 
like we focused in on rural areas, but it was one place where 
we would just presume that in rural areas it is more difficult 
to deal with that situation.
    In terms of our work, looking at hypothetical changes, and 
part of this was concern from rural areas where unemployment 
areas are used to determine whether the area is eligible or not 
in these large counties is that we went through a scenario that 
said, well, what would happen if instead of using a 1-year 
unemployment rate for the 1 year, if we said let us look at the 
average unemployment rate over longer periods of time, that 
very much has a rural focus to it. So it is something that in 
rural areas it can be more problematic when you cannot give 
specific advice about whether your county is in is going to 
remain in the program.
    Ms.ADAMS. All right. Thank you, sir. I am out of time. I 
apologize, Mr. Chair.
    Chairman CHABOT. Thank you. Thank you, the gentlelady's 
time is expired.
    The gentleman from Ohio, Mr. Davidson, is recognized for 5 
minutes.
    Mr. DAVIDSON. Thank you, Mr. Chairman. Thank you all for 
being here. I have a couple basic questions on metrics.
    So how, Mr. Shoraka, how do you measure the success of the 
program?
    Mr. SHORAKA. I think for us right now, one of the--
obviously, the base metric is the percentage that we are held 
accountable to as the Federal Government, the 3 percent goal, 
which is the statutory goal on prime and subcontracts. And when 
you look at that, quite frankly, because of the firms that we 
lost, because of the redesignation of the census change in 
2010, we lost a third of the portfolio. And so when we came 
close to meeting that number in 2009, it has, quite frankly, 
been a challenge. We hit 1.82 percent last year, so that is an 
area that the Federal Government can improve on, and that is an 
area where we have done----
    Mr. DAVIDSON. So participation, I mean, simply 
participating in the program's success, what are the economic 
benefits of the program? I mean, clearly there are benefits to 
the firm that get the contracts, but are there costs to the 
firm? I mean, they are basically getting a 10 percent cost 
preference in contracting, so does that really result in the 
government paying 10 percent more for the things they buy from 
that 3 percent of firms? Or is there a cost or savings? Have 
you measured that?
    Mr. SHORAKA. That is an area that we, as an agency, have 
not looked at, quite frankly. And when Congresswoman Velazquez 
also talked about the impact to the communities, that is an 
area where we have had difficulty in being able to analyze are 
there a good number of firms, HUBZone firms, in this community? 
And what is the impact or the economic impact?
    Now, obviously, if an area was a HUBZone and then because 
of economic data no longer is a HUBZone, one would assume that 
good economic things have occurred, unemployment went down. But 
can we really correlate that to the HUBZone firms or the fact 
that that area was a HUBZone? That has been a difficult 
challenge for us to be able to determine.
    Mr. DAVIDSON. Thanks for that. And then how much does the 
HUBZone program cost to administer? Do you allocate cost in 
your budget in terms of what it costs?
    Mr. SHORAKA. If I am not mistaken, there is a $3 million or 
$2.8 million line item for the HUBZone program annually.
    Mr. DAVIDSON. And how many people are employed doing that?
    Mr. SHORAKA. Eighteen. Now, that is 18 that do the 
certification and the recertification. We obviously have 
district offices. We have 68 district offices around the 
country that help support and educate and, you know, do our 
outreach and recruiting, et cetera. So a portion of their time 
is dedicated to the HUBZone program. And that does not include, 
you know, our sister agencies and all their small business 
specialists, et cetera, that help to promote the HUBZone 
program.
    Mr. DAVIDSON. Mr. Shear, would you agree with those 
conclusions on metrics?
    Mr. SHEAR. It is a challenge to look at it. And so from our 
standpoint, how do you create benchmarks for what would happen 
with the absence of HUBZone activity? But nonetheless, after 
our 2008 report, somebody was hired at SBA. We provided a lot 
of our time just giving technical support as far as how you 
could evaluate the program. So it is trying to look at what are 
the characteristics of different communities that are both 
HUBZones and not HUBZones and trying to make some comparisons 
to try to benchmark and to see what is the economic impact of 
the HUBZone program and how might that be affected by how many 
HUBZones? Again, this basic question.
    Every community would like to be a HUBZone, but every time 
you add communities the question is what happens to the 
existing communities? So there are ways that we think that 
could be used to try to benchmark, and that is what we are 
going to be attempting to do with our Puerto Rico mandate. But 
it is a real challenge.
    Mr. DAVIDSON. Setting aside Puerto Rico, do you have a 
mandate to do this anywhere, Mr. Shoraka, to actually create--
because here is the concern, right? I disagree. Not every 
community would want to be a HUBZone. They want a good economy. 
They want good jobs and they want the opportunities that, by 
definition, make you not qualified as a HUBZone. So it is 
success to not be a HUBZone, frankly. But we are spending money 
because we want fewer HUBZones. You have found a way to 
increase more HUBZones or more places which flies in the eyes. 
So if we are spending the money, what are we getting in return? 
That is the thing that I think the American people want to 
know. And certainly, in our district where we do not have 
HUBZones, we want to know, hey, what are we getting? We are 
donating this for a good cause, right?
    Mr. SHORAKA. I think for our part this is a question, quite 
frankly, that we have around the 8(a) program as well. What is 
the impact of being in the program and how do we track your 
success or failure, quite frankly, through that program? The 
8(a) program is a 9-year business development program where we 
have requirements and, quite frankly, statutory requirements to 
be able to track certain metrics with respect to income and 
employment, et cetera.
    With the HUBZone program, as we move into SBA One, one of 
the things that we could be discussing on the Hill, quite 
frankly, is statutory authority to collect some of the metrics 
around number of employees, revenues, growth, et cetera, that 
then we can track a firm through their years in the program and 
be able to report back, much like we do or should do.
    Mr. DAVIDSON. Thank you. My time is expired. Thank you.
    Chairman CHABOT. Thank you. The gentleman's time has 
expired.
    The gentlelady from New York is recognized, Ms. Clarke.
    Ms. CLARKE. Thank you very much, Mr. Chairman. And I thank 
our ranking member.
    Before I begin, I would like to also thank you for the 
memoriam to our departed colleague, Mark Takai, and I would 
like to offer my condolences to his family, friends, and staff 
of Mr. Takai. He was a great man who I enjoyed working with. As 
Congresswoman Tulsi Gabbard stated in her remarks on the House 
floor yesterday, Mark Takai embodied the spirit of aloha, and I 
think we all were beneficiaries of that. And he will certainly 
be missed.
    But turning to the matter at hand, HUBZones are an 
important tool for revitalizing struggling communities. They 
incentivize investment in economically disadvantaged 
communities and provide residents of these communities with the 
means to support their families. In my district alone, more 
than 50 census tracks qualify as HUBZones in places like 
Flatbush and Marcus Garvey Village in Brownsville, Brooklyn. 
However, the program only works and is effective if firms are 
aware of their eligibility to participate and are recertified 
in a timely manner.
    So my question, Mr. Shoraka, is this. SBA has indicated 
that a lack of resources is a main obstacle for getting rid of 
the backlogs and allowing the agency to conduct a more in-depth 
recertification process. Can you give us an idea of how many 
new hires your department would need to run the HUBZone program 
efficiently and effectively and at the proper level for 
internal controls?
    Mr. SHORAKA. Thank you, ma'am. I appreciate the question.
    I think when we talk about obviously the number of 
resources or how many resources the HUBZone or, quite frankly, 
the SBA or my office, Government Contracting and Business 
Development, has, I think we always have--any Federal manager 
would argue that I may need more people to be able to get my 
job done. I think one of the things we have attempted to do is 
do our job smarter with systems and with technology. And so 
that is the direction we have moved forward in with respect to 
SBA One.
    And with respect to making sure firms are aware of the 
program and take advantage of the program, I think that is 
where, or at least in my opinion, that is where we need to 
double down on our outreach and education. So we have the 
Destination HUB then, that we have done over 15 events across 
the country. And one of the unique pieces of Destination HUB--
and if we have not done one in New York, we need to do one--is 
that we actually sit down with local economic development folks 
and encourage them to use the HUBZone program as an economic 
development tool, another tool in their toolkit or tool belt. 
And so I think it is the question of obviously I think every 
agency has a requirement in this environment to find ways to 
tighten their belt, but it is how do we leverage our resource 
partners, our Small Business Development Centers, our Women's 
Business Centers? How do we leverage our stakeholders, like the 
HUBZone Council and other partners, in making sure that the 
word gets out and training is done efficiently and effectively? 
With respect to number of employees that may or may not 
require, I think there would have to be a much more significant 
analysis with respect to what that number would be.
    Ms. CLARKE. I want to encourage you to make that analysis, 
simply because the program is a program that holds great 
promise. And to the extent that we can be targeted and 
effective in terms of identifying potential businesses that 
should be accessing it and making sure that there is no abuse 
on the other side because someone who is far more sophisticated 
knows how to work the system, that makes all the difference in 
the world. And if you do not have the wherewithal to do sort of 
that balancing act, then we miss the point of the HUBZone 
program completely. So I want to encourage you to do that 
analysis.
    Mr. Shear, there have been concerns raised regarding data 
used to determine HUBZone eligibility, and some have called for 
using different criteria to designate HUBZones. Has GAO looked 
at how changing the unemployment rate and median household 
income required to determine HUBZones may affect the success of 
the program?
    Mr. SHEAR. Yes. And thank you for the question.
    In our 2015 report, this was very much, brought forward by 
requesters for that work really wanting a focus on what types 
of changes could be made and what would be the effect on a 
number of HUBZones. So this is one where I referred earlier. I 
really appreciate John and his staff really helping us work 
with their data system, but we went through a number of 
scenarios. So the 2015 report that provides part of the basis 
for my statement and it can certainly provide the report for 
the record, it is GAO-15-234. In appendix 3, we go through a 
number of scenarios. What would happen, based on at that time 
if you had changed some of these provisions? So it is meant 
to--not to say there is a right way of doing it, but it gets 
into some of the concerns, like I just stated with respect to 
rural areas. What would happen if you went to a longer term 
unemployment rate to determine eligibility? Things like what 
would happen?
    One of the scenarios we went to at the time was lifting 
this 20 percent cap that is so much the focus, of this hearing 
and just other scenarios. What would be the impact of doing 
that on the number of HUBZones and just some of the 
consequences of that? And we are very mindful that when you 
shift around which areas get HUBZone status, that when you 
bring in new areas, it has implications for the existing areas, 
even those that remain in the program.
    Chairman CHABOT. The gentlelady's time is expired. Thank 
you.
    The gentleman from New Jersey, Mr. Payne, is recognized for 
5 minutes.
    Mr. PAYNE. Thank you, Mr. Chairman, and to our ranking 
member. I apologize for being delayed and I was not here for 
the commemoration of our colleague, and I would just like to 
add my sentiments as well.
    Mark Takai was a true gentleman and epitomized what a 
member of Congress should be and he will be sorely missed. And 
I just knew that he was ill and was going through treatment, 
but just still been shocked by the rapid demise of our 
colleague and still shocked by it. But he was a good man and I 
think that is one of the best things you could say about a 
person.
    Mr. Shoraka, we know the HUBZone programs have had issues 
around fraud. As we have seen, part of the issue may be the 
certification process. And, you know, since the certification 
process depends on documentation submitted by the participant 
businesses, what does the SBA use to verify the information and 
documentation they are receiving is indeed authentic? And how 
can the system be improved to curtail the fraud?
    Mr. SHORAKA. So we use various obviously third-party 
sources of data to ensure ownership, residency, et cetera. And 
there is various documentation that can be used to document 
principal office residence, like leases or ownership documents, 
et cetera, as well as corporate structures, ownership, and 
control. I think, again, one of the challenges that we want to 
make sure we balance is if we wanted to eliminate all risk in 
the program, we could turn off the spigot and accept no 
applications and we would not have any risk at all, but that is 
not what we want. We want to make sure that the program serves 
the intended recipients. And quite frankly, 99.9 percent of the 
program applicants are good actors. Unfortunately, we have .01 
percent of people who are bad actors and will always continue 
to be bad actors. But one of the things that I think is 
critical is that we manage towards the good actors with risk-
based analysis, as Mr. Shear has pointed to, to make sure that 
we do have backup to analyze the risk to the Federal Government 
with respect, again, to where the risks exist. The risk exists 
when the Federal Government is giving contracts to these small 
businesses.
    One last thing that I will point to is that with respect to 
the program and casting a broader net, we have done analysis 
that documents using the current formulas. That net is 
significantly smaller than the net was when the program was 
established. So I think that is another discussion that we have 
to have jointly with respect to what the intent of the program 
is. If we look at the analysis of when the program was put in 
place, the net that was cast is significantly broader than 
those formulas cast today.
    Mr. PAYNE. Okay. So you feel that the issue is .01?
    Mr. SHORAKA. With bad actors. I think there are always 
going to be bad actors.
    Mr. PAYNE. Oh, sure. I agree. I thought the issue was a 
little more, a little higher.
    Mr. SHORAKA. I think when you talk about, right, but when 
you talk about $96 billion into the hands of small businesses 
every year, and I am not sure what the GAO report, the exact 
numbers, but I know the numbers sound big, and obviously we 
want to address fraud when it is waste and abuse, but when you 
talk about $10 million as opposed to $96 billion into the hands 
of small businesses, that is a very small fraction.
    Mr. PAYNE. Okay, thank you.
    Mr. Shear, very quickly, you have been looking at this 
program for a number of years now. Why has the program remained 
to be susceptible to fraud?
    Mr. SHEAR. It is a very good question. I will first start 
out by something in my statement as far as, when we do our 
program audit and we are looking at what we call internal 
controls, that there has been improvement, particularly in the 
certification process. So the idea that when we looked in 2008, 
from the start we said this looks like a self-certification 
program. You know, from soup to nuts, it looks that way. So 
there has been improvement.
    Our concern, we have not found evidence of fraud, and we 
have not seen the susceptibility to fraud that we have reached 
out like we did in 2008 and said, you know, we have to have a 
fraud investigation here, but we do have concerns about the 
recertification process because there is a lot of moving parts: 
the characteristics of the businesses and the characteristics 
of the counties and census tracks that are defined as HUBZones. 
And so that is where our concern is.
    And when you have a lack of internal control, that is where 
our antennae tends to go up in terms of saying we are concerned 
about fraud. And it is hard to forget about fraud when we think 
of the experience we had, even though it was 8 years ago, the 
experience we had evaluating and conducting fraud 
investigations of this program. So we are always mindful of 
that.
    Mr. PAYNE. Okay, thank you. My time is expired. But the 
reason I asked the question is because the Committee has 
nothing but goodwill towards small businesses. It is our 
mission. But there are other members that always look for an 
issue around fraud to curtail the type of work that we are 
trying to do for small businesses. And with that I yield back.
    Chairman CHABOT. Thank you. The gentleman yields back. The 
gentleman's time is expired.
    We would like to thank both of our witnesses for being here 
with us today. I think the importance of the HUBZone program 
and the concerns that some members had are reflected by the 
heavy attendance that we saw really on both sides of the aisle 
here today with, I thought, a lot of good questions.
    The SBA's HUBZone program began with a goal of promoting 
economic growth by incentivizing small businesses to locate in 
areas most in need. This cannot be achieved, however, unless 
the program is properly managed and the benefits are not being 
taken up by nonqualified firms. The work GAO has done to 
identify specific ways in which the program should be improved 
has been invaluable. I thank this Committee and I would urge 
the SBA to take immediate steps to fully adopt all of the 
recommendations of the GAO. And we owe it to America's small 
businesses and America's taxpayers to ensure that the 
opportunities provided by the HUBZone program are utilized in 
the most efficient way possible.
    I would ask unanimous consent that members have 5 
legislative days to submit statements and supporting materials 
for the record.
    Without objection, so ordered.
    And if there is no further business to come before the 
Committee, we are adjourned. Thank you very much.
    [Whereupon, at 12:33 p.m., the Committee was adjourned.]
    
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