What had been unclear was how neighborhoods with higher levels of wealth and private investment fell into the program, while more economically distressed communities received only a sliver of the benefits.
A new Washington Post analysis found that the HUBZone program’s use of outdated and unadjusted data allowed businesses in wealthy areas to qualify for more than $540 million in federal contracts meant for firms in underserved neighborhoods. Rather than improve inequalities, critics say, the program has exacerbated disparities, and they question whether its calculations fit the program’s mission.
The Post’s most recent analysis found that the program relied on 1999 data to designate poverty levels for 16 years, which did not account for the city’s economic expansion. Furthermore, poverty levels in some areas that received millions of dollars are inflated by a large number of college students, who are concentrated in more-
affluent areas but have little or no income.
The Small Business Administration, which operates the program, did not dispute The Post’s findings, but declined to comment further. Program officials earlier this year said the agency’s sole responsibility is to determine eligibility for small businesses based on an existing algorithm.
Outdated data used as D.C. boomed
For a neighborhood to be HUBZone-eligible — opening the door for its businesses to receive multimillion-dollar contracts with federal agencies — it must meet certain economic criteria, including a poverty rate of at least 25 percent, while 60 percent of households must have incomes that are half the region’s median income.
Census data indicates that most eligible areas in the District are concentrated in parts of Northeast and Southeast, areas the program was intended to boost through increased federal spending. But instead, most of the money flows into some of the city’s wealthiest areas.
The Chinatown neighborhood has reaped some of the largest benefits.
Two decades ago, the poverty rate in the census tract that includes Chinatown was 31 percent, allowing it to qualify as a HUBZone and giving businesses the option of pursuing federal contracts through the program. By 2010, Chinatown no longer met the requirements with a poverty rate of 5 percent, but in 2012 — as HUBZone boundaries were updated with 2010 Census data — it was allowed to remain a HUBZone during a three-year grace period.
Businesses there have the potential to make much more through multiyear contracts, even though Chinatown was dropped as a HUBZone four years ago. After the grace period ended, firms continued to earn millions from some of the program’s most lucrative contracts.
Chinatown businesses earned $151 million from the program in the past six years, more than any other HUBZone in the city, and accounted for about a quarter of the money District businesses have received in that time. The six Chinatown businesses that were paid after 2015 did not respond to requests for comment.
An additional $188 million was awarded to firms in tracts around Chinatown since 2013, even though they had not qualified for the program since then.
While there are thousands of HUBZones across the country — generally consisting of census tracts in urban areas and counties in rural areas — the District leads the nation in dollars received through the program since it began in 1999, followed by San Antonio, Miami, San Diego and New York.
Since 1999, federal agencies have entered contracts that obligate them to pay District firms about $2 billion, with companies pocketing about half that amount, so far, and slated to receive the rest as part of contracts that extend into the future. Of the $2 billion, Ward 2 — which includes well-to-do Georgetown, Foggy Bottom and downtown Washington — is set to receive more than $1.4 billion.
In poorer areas, such as those east of the Anacostia River, HUBZone opportunities have been slim.
Chijioke Ezekwe entered his engineering and project management business into the HUBZone program in 2014. He launched Construction Quality Engineers in Ward 8 — which contains some of the city’s most impoverished neighborhoods — with hopes that federal contracts would help fuel the firm’s growth. Five years later, he is waiting to land work through the program.
“In 2016, I took the plunge and started working for myself full time,” he said. “The results haven’t been what I expected.”
Ezekwe, who got a second job to make ends meet, said HUBZone has overlooked his firm because of its location. He hopes to return to his business full time by the end of the year.
The average unemployment rate of areas that have received HUBZone contracts in the District is 9 percent, according to 2017 Census Bureau data. Meanwhile, Wards 7 and 8 have poverty rates of 31 percent, while receiving a fraction of the federal dollars wealthier areas do.
The combined unemployment rate for those two wards is 20 percent, while the rest of the district sits at 6.4 percent, according to the most recent Census data.
The Post’s analysis shows that, much as it has in the District, outdated data has steered billions away from firms in areas across the country that the program is intended to benefit. From fiscal 2015 to fiscal 2019, HUBZone contracts sent about $2.3 billion, or more than 40 percent of HUBZone awards during that time, to areas that haven’t qualified for the program since 2013 — the result of multiyear contracts signed when those areas qualified, the analysis found.
Student influence on poverty levels
HUBZone eligibility is also influenced by a neighborhood’s college-student population. In the District, census tracts where university students make up at least one-fifth of the population tend to end up in the program by appearing more impoverished because of student income levels.
Take the three census tracts where George Washington University is located in the prosperous Foggy Bottom neighborhood.
Based on data from the Department of Housing and Urban Development, the area fell into a HUBZone by having a poverty rate of 45 percent. But removing college students from the equation drops the rate to 7 percent, well below the city’s average and the threshold for participating in the HUBZone program.
Similarly, the tract that includes American University in Northwest Washington shows a steep drop in its poverty rate once college students are removed.
The Post’s analysis shows that these four census tracts, of 179 in the District, would not have been included in the program if not for their college-student populations. But those areas received a disproportionate amount of HUBZone dollars: $200 million, or 14 percent of the money received by District firms in the program since 2000.
The top four HUBZone firms in those tracts earned $140 million through the program. The businesses did not respond to requests for comment.
Nationally, of the 2,430 census tracts that qualify for the program, about 900 fall below the 25 percent poverty rate threshold when college students are removed. More than $370 million has been awarded nationally in census tracts where college students contribute to poverty levels that meet HUBZone requirements.
Some of the nation’s largest and most prestigious universities are included in HUBZones, including the University of Texas, the University of Florida, Yale University, Columbia University, Stanford University and Vanderbilt University.
A 2013 Census Bureau report cautioned against the use of college students in studies that examine poverty.
“There are counties and places where the inclusion of off-campus college students has a stronger impact on poverty rates,” according to the 2013 report. “For some purposes, state and local planners may want to consider using an alternative poverty measure that excludes these students.”
Researchers Katherine Thornton and Timothy Smeeding, at the Institute for Research on Poverty at the University of Wisconsin, studied poverty levels in that state for a report two years ago. They excluded college students who were single and those with annual earnings of less than $5,000, saying those students can artificially raise poverty estimates.
“If you do not exclude them, you end up with lots of ‘high poverty areas’ in towns like Madison, Ann Arbor, Chapel Hill and Syracuse, to name but a few,” Smeeding said.
A one-size-fits-all approach
From the beginning, HUBZone was touted as a stimulus for rural areas and large cities that suffered from a lack of investment.
The legislation that created the program called for it to use the same data to identify communities in need as the Low-Income Housing Tax Credit program, created by the Tax Relief Act of 1986 as an incentive to increase the availability of low-income housing. The bill creating the HUBZone program was signed into law by President Bill Clinton in 1997.
HUBZone relies on the Department of Housing and Urban Development’s calculation of census data, which HUD uses to determine eligibility for the housing tax credit.
HUD’s calculations were designed to be a one-size-fits-all algorithm for its housing program, but the Small Business Administration adopted it for the HUBZone program. Michael Hollar, a senior economist at HUD, said the calculation was never intended to be used beyond that agency’s tax credit program.
“When viewing these from the perspective of the HUBZone program, it becomes apparent that poverty rate and the number of low-income households may not be the most appropriate measures for program eligibility,” he said.
Bill Shear, director of financial markets and community investment at the Government Accountability Office, has examined the HUBZone program for more than a decade. He noted that agencies often use existing data from other agencies when launching new programs.
“Like many things, it’s more complicated than trying to identify one entity that could be at fault for an outcome,” he said.
The HUBZone program was the brainchild of now-retired senator Kit Bond (R-Mo.), who chaired the Senate Small Business Committee from 1995 to 2001. He said that the program’s results in the District are disappointing but that the program is “worth keeping around.”
Rep. Nydia M. Velázquez (D-N.Y.), who chairs the House Committee on Small Business, said the findings show room for improvement.
“Just as with any program, it is up to both Congress and the agency to conduct proper oversight to prevent fraud, waste and abuse while also addressing inefficiencies caused by outdated policy,” she said in a statement. “I can assure you the committee will be conducting oversight.”
The HUBZone program has faced problems since its inception, including fraud cases that allowed firms to enter the program without meeting mandatory requirements. But lawmakers say they stand by it and the thousands of jobs it creates nationwide.
According to the SBA, contracts awarded to firms in HUBZones directly support 40,000 jobs. HUBZone businesses also must ensure that at least 35 percent of their employees reside in a HUBZone before bidding on a contract.
Over the years, Congress has cracked down on fraud and targeted firms that misrepresent their eligibility, aiming to keep HUBZone dollars in underserved areas.
In 2013, after noticing anomalies in some of its estimates, HUD updated its data and calculations. The changes allowed the agency to update its database and identify economic changes — subsequently supplying the HUBZone program with more-accurate information.
While a slew of changes and amendments have passed, the program still faces problems, according to a March report from the SBA’s inspector general office. The report found that more than $589,000 had gone to businesses nationwide in 2018 that were ineligible for the program.
The report goes on to say the HUBZone office has worked to address flaws, but concluded that the changes did not prevent ineligible firms from entering the program. In a 2018 performance report, the SBA vowed that revised HUBZone regulations would help to weed out fraud, waste and abuse.
Changes are unlikely before December 2021, when the program’s maps will be updated using 2020 Census data.
An earlier version of this story incorrectly stated that the combined unemployment rate for Wards 7 and 8 was 31 percent. The combined unemployment rate for the two wards in 20 percent, according to the most recent Census data. The poverty rate for Wards 7 and 8 is 31 percent.