The House Small Business Committee had a number of bones to pick with the Small Business Association’s HUBZone program, but one seemed to draw the ire of lawmakers more than any other.

On June 16, 2016, SBA announced that it would no longer use a 20 percent population cap when determining what census tracts could qualify as HUBZones. The population cap, SBA determined, was implemented by the Department of Housing and Urban Development specifically to inform the Internal Revenue Service’s applications of the Low-Income Housing Tax Credit.

The cap determined that only 20 percent of the population of a given area can considered qualified census tracts. That meant that areas that would otherwise qualify based on poverty rate and household income were not considered qualified.

In lifting the cap, SBA opened the HUBZone program to a number of new areas that qualified economically, but had been previously barred from participation due to full quotas. In Puerto Rico alone, HUBZones increased by about 200 percent, from 260 to 776.

Lawmakers repeatedly expressed concern that SBA made this change to the program without first consulting the committee, despite the specific language Congress used in the bill.

“What makes you all think the SBA is able to take this step without congressional action?” Committee Chairman Steve Chabot (R-Ohio) asked. “How can you do that on your own?”

In addition, some lawmakers were concerned that the new HUBZones would take away limited resources from ones that already exist.

“I think we have to be very careful that we allow the Congress to pass things, and not usurp article one authority, or any other article authority, and I think we’re doing that right now,” said Rep. Trent Kelly (R-Miss.). “Mr. Shoraka, do you not think that that’s what you’re doing, designating these assets and resources, that are limited, to the areas you think are most important?”

John Shoraka, Associate Administrator of Government Contracting and Business Development at SBA, repeatedly gave lawmakers the same answer when questioned about the decision to lift the 20 percent cap.

“I would have to refer to our Office of General Counsel who provided an opinion to my office with that respect,” Shoraka said. “We have shared it with the Hill, and in fact I think we’ve shared it with GAO as well. But the analysis that I’ve 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.”

But Kelly and other lawmakers remained unconvinced on the subject of SBA’s authority to make the changes, and expressed particular concern that this would redirect limited resources away from rural areas and toward urban populations.

“It sounds to me like, when you do away with the 20 percent rule, what you’ve effectively done is decide you get to say who gets help, and who doesn’t get help, and that is not the purpose,” Kelly said.

Bill Shear, director of the Government Accountability Office’s financial markets and community investment team, said they were concerned about the wrong thing, asking the wrong questions. The real question is the impact. While lawmakers asked after the fact if SBA could make the changes, Shear said what was troubling was that no one had asked beforehand whether SBA should make them.

“I can’t sit here and say that the new communities, whether they be counties or census tracts, are not deserving,” he said. “But what we’re looking for is some evaluation. Does SBA have authority? HUBZones have worse economic conditions in redesignated areas. What happens on the ground when you expand the program in this fashion? There should be some kind of informed analysis that goes behind an informed decision, regardless of authority.”

Another major concern is the certification system that SBA uses to determine whether a business qualifies for HUBZone. The program dictates certain specific requirements, including that the company must have its main office (the location where the majority of its employees work) located in a HUBZone. In addition, 35 percent of the company’s employees must live in a HUBZone, although not necessarily the one in which the business is located.

But a number of problems afflict the certification system. Shear outlined some specific issues with the technology that’s currently being used.

““It is very bad in terms of looking at queries – you can look at one firm at a time, but to do queries that you would want to have, like to establish a risk-based oversight system in terms of recertification, it has inadequacies there because it is so difficult to have queries of that,” he said. “And in terms of trying to evaluate impacts, looking at characteristics of firms, and how much they may be benefiting or not benefiting from participation in the program. It’s very difficult because of this data system.”

Shear did say that SBA was considering a new acquiring a new system, and that that would be a step forward.

Another issue with the certification system that troubled lawmakers was oversight and verification of the certification process.

“At one point in time, the certification process was so poorly overseen, that the GAO was able to certify fake businesses with principle locations at the Alamo and at a Starbucks down the street from the White House,” said Ranking Member Nydia Velazquez (D-N.Y.).

Shoraka acknowledged past issues with the certification process, but said that now the situation was exactly the opposite. SBA implemented a front-end certification process that businesses now refer to as “onerous” and an “overly burdensome requirement.”

He explained that many of the requirements, like the office location and worker residence requirements, were difficult for firms, especially small businesses, to maintain. That’s why, he said in response to a concern from Rep. Judy Chu (D-Calif.), 90 percent of HUBZone areas lack any certified businesses, and only 5600 businesses use the program nationwide.

“The challenge is, quite frankly, it’s a unique program,” Shoraka said. “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.”

He said part of the technological updates SBA is undertaking to improve HUBZone include an automated tracking system that will notify employers whether they are in compliance with program requirements.

The challenge to that, he said, is that much of the data HUBZone relies upon to determine such qualifications are updated monthly, while HUBZone changes are only issued annually. He said for the time being, until these issues can be resolved, SBA encourages businesses to work with district offices to determine and ensure that they remain in compliance.

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