Special report: On borrowed time: budget delays start to hurt

By Andy Sullivan

STATE COLLEGE, Pennsylvania (Reuters) - When they finally completed their new control tower last November, officials at University Park Airport hoped it would provide a needed safety upgrade.

The skies can get crowded on days when Penn State plays football, and the existing air traffic controllers stationed 200 miles away can't see down between the long corduroy ridges that bisect this swath of central Pennsylvania.

And there was that incident a few years back, when two commercial planes lined up at opposite ends of the runway and started rolling toward each other, primed for takeoff. A local set of eyes on the runway would help.

But several months after the $7 million tower passed its inspection, it remains empty. Money to hire the federal air traffic controllers is bottled up in Washington, hostage to the months-long budget standoff in Congress.

"I've got to be confident that it will be resolved. I don't see any way how a facility like this ... how we could come this far in seven and a half years and not have the funding," says airport director Bryan Rodgers, as he stares at computers that still have that out-of-the-box smell, with protective plastic still on their screens.

As the fiscal year nears its halfway point, the $3.7 trillion U.S. government is essentially running on automatic pilot. Republicans and Democrats have extended out last year's budget to keep the lights on as they battle over roughly $50 billion in proposed cuts.

With government agencies restricted to a budget that was put in place nearly two years ago, officials lack the authority to spend money on new projects.

For the most part, federal agencies have been tight-lipped about the impact of the budget standoff for fear of upsetting negotiations on Capitol Hill. Companies that do business with the government have also been reluctant to talk.

HOW IT CAME TO THIS

The stand-off means the Federal Aviation Authority can't sign off on new air traffic controllers for the airport here, and the university's nearby Applied Research Laboratory has had to lay off 13 engineers and reduce the hours of 20 more when anticipated funding from the Navy didn't materialize.

It also means delayed weapons purchases and fewer training exercises for military personnel. It is complicating the delicate transition from military to civilian authority in Iraq, and forcing NASA to continue developing a rocket it doesn't want. It could weaken the ability to forecast hurricanes in the years to come.

The end result is that the United States of America, the richest country in the world, handles its finances like a banana republic that doesn't know how much money it has in the bank, said Roy Meyers, a political science professor at the University of Maryland, Baltimore County.

"We pay very little attention to how the money's actually spent unless a scandal comes up," Meyers said. "The kind of scandal we're seeing right now is a scandal of opportunity costs, missed opportunities to do things efficiently."

Congress has jealously guarded its power to control how federal dollars are spent, yet it rarely delivers its instructions on time. Congress has passed all of its spending bills by the start of the fiscal year only four times since 1952, according to the Congressional Research Service. Reforms in 1974 aimed to buy more time to get the work done by pushing back the start of the fiscal year three months to October 1, but Congress's track record has not improved since then.

Some budget experts think stretching out the process to a two-year cycle might help, though others suggest it would just give lawmakers more license to procrastinate.

When lawmakers don't pass their budget bills on time, they usually opt to pass a stopgap spending bill, known as a continuing resolution, to keep the government running as they finish work on their appropriations bills. Since the 1997 fiscal year, the last time Congress completed its work on time, the government has operated under continuing resolutions that have averaged out to roughly four months each year.

The budget process this year has been more tangled than usual. Warning signs emerged in April 2010, when Democrats opted not to pass a budget blueprint broadly outlining spending priorities. Rank-and-file members, worn out from bruising battles on healthcare reform, climate change and financial reform, worried that Republicans would portray their "yes" votes as a sign that they were not concerned by budget deficits that have hovered around 10 percent of gross domestic product in recent years.

The House of Representatives eventually approved a watered-down version in July, months behind schedule, while the Senate did not pass one at all.

By the start of the fiscal year in October, the House had passed only two of the 12 appropriations bills that actually provide the money to the government. In the Senate, none had even come up for a vote. In the November elections, Republicans harnessed public anxiety over deficits by promising to slash domestic spending back to the levels that were in place before President Barack Obama took office. Voters responded by handing them control of the House and narrowing Democrats' margin of control in the Senate.

After the election, Democrats rolled all 12 spending bills into one massive package in the hope of locking in spending levels before the newly-elected Republicans came to town. But the measure died in the Senate as emboldened Republicans held out for deeper cuts.

Since then, the two parties have passed several continuing resolutions to keep the government running, with both sides accusing the other of reckless behavior and an unwillingness to negotiate. The latest plan, approved last week, keeps the government's lights on through April 8.

Most appropriations bills, packed with detail, run into hundreds of pages. The latest continuing resolution is 20 pages long.

Though the document may be simple, its effects are complex.

FUTURE ON HOLD

President Obama has identified scientific research as a key component in his effort to "win the future" and revitalize the U.S. economy, but billions of dollars worth of grants are falling by the wayside as science agencies have dialed back their spending.

Biologist Robert Steiner, for example, could be out in the cold this year. Since 1977, the University of Washington professor has relied on the National Institutes for Health to underwrite his work on reproductive development. The agency has so far withheld money for his latest grant request.

The division that has backed his work, the National Institute of Child Health and Human Development, funded the top 13 percent of qualified projects last year. Steiner was ranked in the 12th percentile this year, and funding seemed certain.

Yet NICHD officials have opted only to fund the top 11 percent of qualifying grants until Congress approves a permanent budget for the agency. After 34 years of continuous support, Steiner has just missed the cut.

With his current grant set to expire at the end of April, Steiner has started to see his research assistants and lab partners drift off in search of other projects with more secure funding -- taking their institutional knowledge with them.

He's searching for a home for hundreds of laboratory mice, especially those that have been bred over the course of years to answer a specific genetic question.

Over the past year, Steiner has put his most expensive -- and cutting-edge -- research on hold in an effort to conserve funds. A group of stem cells from the European Union remain in the deep freezer, waiting to be thawed out and grown into especially prized mice which could help develop knowledge that could lead to improved birth control and better understanding of reproductive disorders.

Steiner figures he can hold out for another six months or so before he has to turn off the lights.

"I have to believe that I'm going to have a laboratory," he said. "I can't go and face our laboratory meeting every week and say to our people, 'Jump ship.' I basically continue to believe that I won't get thrown under the bus somehow."

"I will be astonished, given our level of accomplishments, if something doesn't happen to fund us, but I guess that's just hope," he added.

"Scientifically, if you don't tackle the big problems you get forgotten pretty quickly because people aren't interested in the small problems -- they're interested in the larger, more important problems," he said. "But somehow Congress seems incapable of tackling the larger problems," he says.

Probably $15 billion worth of grants that otherwise would make the cut could go unfunded this year, according to Patrick Clemins, who tracks federal R&D spending for the American Association for the Advancement of Science.

With even established scientists like Steiner running into trouble, those working on the newest, most cutting-edge research are even less likely to win grants as officials ensure they can continue funding existing programs.

PENTAGON IS SPEAKING UP

Unlike many other agencies, the Pentagon has not been afraid to complain to lawmakers about the effects of the standoff. With a budget that reflects roughly 3 percent of the U.S. economy, the effects are already being felt.

Defense Secretary Robert Gates said in January that the lack of a budget was causing a "crisis on my doorstep" that could result in less time at sea for the Navy, fewer fighter jets in the air and delays in maintaining equipment.

"Frankly, that's how you hollow out a military even in wartime," he said.

Within a static budget, the Pentagon has had to find an additional $8 billion for pay raises, increased fuel costs and increased medical costs by diverting money that was earmarked for supplies and weapons programs, other Defense officials have told Congress.

Among the activities affected by the continuing resolution:

- The Navy has delayed construction on a Virginia-class submarine, a destroyer and an aircraft carrier.

- The Army has delayed purchasing more Chinook helicopters and postponed refurbishment of war-torn Humvees.

- The Army has stopped work on its Stryker mobile gun system.

- The Army lacks money to upgrade its Apache Longbow helicopters, but is forced to keep buying new Humvees that it does not want.

- A Pentagon freeze on civilian hiring has threatened the department's plans to step up oversight of its contracting.

- The Air Force had planned to purchase 48 MQ-9 Reaper drones for use in Afghanistan, but can't buy more than 24.

The Pentagon has already had to delay 75 projects, which could lead to higher costs when they resume.

"There's no question that we will spend more money for the same goods if we don't receive the money in a timely way," Deputy Defense Secretary William Lynn told the Senate Appropriations Committee on March 1.

The construction delays from Navy-related projects alone could cost the U.S. 10,000 jobs, Navy Secretary Ray Mabus told the Senate Armed Services Committee on March 8. It could take three years for the Navy's plans to get back on track, he said.

Top defense companies have warned that budget-related disruptions could drive up costs.

In Maine, General Dynamics' Bath Iron Works shipyard had expected to be well along the planning process by now for a new DDG-51 destroyer for the Navy. Though construction wouldn't begin for several years, the shipyard needs to begin figuring out which dry dock to reserve and which of its 5,600 workers to assign to a project that can take up to five years from order to delivery.

That planning process has become even more complex now that the project is in budgetary limbo, said shipyard spokesman Jim DeMartini. Another chunk of anticipated work overseeing maintenance and modernization efforts at other shipyards around the country has also been put on hold, he said.

"The more uncertain we are downstream about what kind of work we're going to have, the more difficult it becomes for us to put together a logical plan and execute to that plan," DeMartini said.

FROM NASA TO IRAQ AND THE SEC

From America's diplomats to prison guards, astronauts and financial regulators, other agencies too have felt the pinch.

The State Department has been forced to scale back its efforts in Iraq as it is preparing to take over responsibility for the U.S. presence there from the military.

State has been forced to trim staffing levels, reduce employee travel and cancel plans for an embassy branch office in Diyala province on the Iran/Iraq border, according to a March 1 report by the Commission on Wartime Contracting.

"When you are going forward with a mission as complex as this, not having the funding clearly available puts an additional uncertainty when we already face enormous challenges as we take over from a very complex military mission," a senior State Department official told Reuters.

"It does impact on morale because we would like to have support as we go forward for this very important goal," the official said, speaking on condition of anonymity.

The Justice Department has put a hiring freeze in place and has curtailed nonessential spending and may have to consider furloughs if the standoff persists, according to Attorney General Eric Holder.

In past years, budget-related hiring freezes have prevented the agency from hiring enough prison guards to keep up with a growing population of inmates, leading to overcrowding and dangerous conditions, according to a report by congressional investigators at the Government Accountability Office.

Similar issues could arise this year due to the budget standoff, Holder said recently.

"We're going to run into a wall at some point," Holder told a House Appropriations subcommittee on March 1.

The Department has completed construction of a new prison in Berlin, New Hampshire, but has been unable to open it due to the standoff, The New York Times said this week in a report confirmed by the U.S. Bureau of Prisons.

Past budget delays drove up the cost of the McDowell prison in West Virginia by $5.4 million, according to the GAO.

Financial regulators like the Securities and Exchange Commission and the Commodity Futures Trading Commission have complained that last year's budget does not give them the resources to carry out their expanded duties under the 2010 Dodd-Frank Act, which reformed oversight of the financial industry in the wake of the 2007-2009 crisis.

The budget uncertainties have backed NASA into a corner, with the retirement of the 30-year-old space shuttle program on track for this year, but no U.S. replacement vehicle available to ferry astronauts to and from the International Space Station. With plans to develop a private-sector shuttle in limbo, the United States is dependent on Russia for space station crew transportation.

The impasse also commits NASA to continue funding a moon exploration program that Obama and legislators already agreed to cancel. Meanwhile, NASA has not been able to start work on a heavy-lift rocket needed to carry people and cargo to destinations beyond the space station's 220-mile-high (354 km high) orbit.

The budget standoff has also forced the National Oceanic and Atmospheric Administration to delay the replacement of two weather satellites by a year, according to administrator Jane Lubchenco.

"What that means is that down the road we will inevitably have a gap where we will not have the ability to do severe storm warnings as we do today," Lubchenco told the House Science Committee on March 10.

Every dollar not spent on the program now will cost $3 to $5 down the road, she said.

Some agencies have been less willing to talk about the impact of the budget standoff.

"It's certainly very challenging not to know what your budget is ... there are a lot of important programs and activities where we are daily making decisions that do depend on having some additional certainty about the budget," FDA Commissioner Margaret Hamburg said, declining to provide specifics.

PRIVATE PAIN

The standoff may be felt most acutely by private firms that rely on the government for much of their business, from food suppliers to engineering and technology firms -- as well as the bureaucrats tasked with handling those contracts.

As federal agencies delay purchasing decisions until they know how much money they will get from Congress, a contracting process that normally takes an entire year will have to be compressed into a few frantic weeks after a budget is finally passed.

As purchasing managers scramble to get contracts in place, they will have less of a chance to ensure that they are getting the best price and the work will be done properly, industry officials say.

"It's going to be this giant train wreck in terms of procurement," said David Rinaldo, chief operating officer of Rock Creek Strategic Marketing, a communications firm. "You've got contracting officers that are ready to jump off the roof."

Large, publicly traded contractors like SAIC <SAI.N> and Booz Allen Hamilton <BAH.N> have already factored the continuing resolution, and the reduced business that goes with it, into their earnings outlook for the current year, said William Loomis, an analyst with Stifel Nicolaus who tracks the industry. While these companies have been meeting their earnings targets so far, they could begin to fall short if the budget standoff lasts into June, he said.

At that point, agencies may not have enough time to hand out their contracts at all, said one contracting industry official who spoke on condition of anonymity. Some federal agencies, especially those targeted by Republican budget cuts, may have already decided to shelve their plans until the next fiscal year, the official said.

While large contractors may have enough existing work to ride out the uncertainty, small businesses have a slimmer margin for error.

"The fact is, you're going to interrupt lives and you're going to have people going on the unemployment dole," said Neal Couture, executive director of the National Contract Management Association. (Additional reporting by Andrew Quinn and Lisa Richwine in Washington and Irene Klotz in Cape Canaveral, Florida; Editing by Jim Impoco and Claudia Parsons)