Budget Battles Keep Agencies Guessing

“I don’t want to throw darts or rocks at anybody,” said Gov. Neil Abercrombie, Democrat of Hawaii, at the National Governors Association convention last month in Milwaukee, venting his frustration over the budget uncertainty. “I just want to know what the hell the numbers are.”

The budget woes are afflicting, among others, state governments, American Indian tribes, military contractors and cancer research laboratories. Budget experts said that the short-term concerns over next year’s dollar figures were already hampering long-term planning and making government officials hesitant to commit to big projects or to hire needed employees.

“You’re eating away little by little at the infrastructure and effectiveness of government,” said Philip Joyce, a professor at the University of Maryland.

In an interview, Dr. Francis Collins, the director of the National Institutes of Health, called 2013 the “darkest ever” year for the agency, whose budget is at its lowest inflation-adjusted appropriations level in more than a decade. The agency has been awarding grants to an increasingly smaller sliver of applicants as well.

The stopgap measures that have kept the government running have further hobbled the agency, he added. “Continuing resolutions discourage you from trying something new and bold,” he said. “You’re supposed to tread water. And science is very badly served by that tread-water message.”

One researcher who said he had felt the impact of the budget wars is Steven Salzberg, the director of the Center for Computational Biology at Johns Hopkins University in Baltimore and a lauded biomedical researcher. Mr. Salzberg said that he had received about 20 percent less in federal funding than his peers had recommended for his work on the biological underpinnings of cancer and other diseases.

“Less science is getting done,” he said. “That means cures won’t emerge. Five years from now, when your aunt gets cancer and you can’t do anything for her, people won’t stop and think, ‘Jesus, if we only hadn’t had the sequester!’ ”

Shorter grant cycles have forced scientists to rush to get results, he said. Increasing competition for funding has left him and his peers spending more and more time on paperwork, and less and less time on laboratory work. Worst of all, he said, promising young scientists are becoming discouraged and leaving the field.

“The current budget wars are a more extreme or egregious version of what has been going on for a number of years,” Mr. Salzberg said. “They’re wreaking havoc on people’s research plans.”

A broad range of budget officials described similar headaches emanating from Washington. Sequestration has forced programs that normally expect flat or increasing financing to make sudden cuts. Many programs delayed those cuts, and are scrambling to make them now — in some cases with reduced staffs because of furloughs or hiring freezes.

A number of budget issues lingered unresolved during Congress’s long summer recess. Earlier this year, the House and the Senate passed spending bills for the 2014 fiscal year, which begins on Oct. 1, that were about $90 billion apart, but never settled on a final figure.

With lawmakers returning to Washington next week, Congress is expected to pass another stopgap bill, known as a continuing resolution, financing the government for a few more months, but it is unclear whether such funding will stay at current levels or shrink. And if the Republicans who control the House and the Democrats who hold sway in the Senate fail to come to a deal before October, many parts of the federal government could shut down.

The breakdown of the Congressional budgeting process this summer has compounded the problems. Officials said that they had received no word about budget figures from Congressional appropriators — because such numbers do not yet exist.

High & Low Finance: Independent Agencies, Sometimes in Name Only

He did not have to look very far to find Mr. Grundfest, who is now a law professor at Stanford. “At the time,” Mr. Grundfest recalled this week, “I was working in the Reagan White House as counsel and senior economist at the Council of Economic Advisers.”

Under the law, no more than three members of the S.E.C. can be from the same party, so the seat had to go to someone who was not a Republican. Mr. Grundfest was a registered Democrat. The fact that he was serving in a Republican administration did not disqualify him, and he easily won Senate confirmation.

This year, two new members of the S.E.C., one Democrat and one Republican, have been confirmed by the Senate and are about to be sworn in. They were each nominated by President Obama. But the reality appears to be that he did not really choose them.

Instead, they were effectively chosen by senior senators. Both the Republican, Michael S. Piwowar, and the Democrat, Kara M. Stein, were aides on the Senate Banking Committee. It appears that their former bosses, Senator Michael D. Crapo of Idaho, the ranking Republican on the committee, and Senator Jack Reed of Rhode Island, the former chairman of the Subcommittee on Securities, Insurance and Investment, were instrumental in their selection.

That helps to explain why the S.E.C. has in recent years splintered into factions far more than ever before. “They tend,” said Arthur Levitt, the chairman of the S.E.C. from 1993 to 2001, “to embrace the philosophy of their mentors.”

I asked the Democrat whom Mr. Grundfest replaced, Bevis Longstreth, how he was chosen. The answer had nothing to do with a senator. In 1981, Mr. Longstreth, a partner in Debevoise & Plimpton, a New York-based law firm, knew James A. Baker III, President Reagan’s chief of staff at the time, who shepherded his appointment through the process.

Another former commissioner recalled never having talked to anyone on Capitol Hill before being nominated.

Of course, members of Congress always had influence, and presidents have sought advice and engaged in horse trading. But Harvey Pitt, who worked on the S.E.C. staff from 1968 to 1978, rising to general counsel, said things had changed by the time he returned as chairman in 2001. By then, he said, presidents were expected to nominate the people chosen by the opposition party’s senior senators, unless there was something clearly wrong with the person.

Mr. Pitt said he thought that began on a more formal basis after the Republicans took control of Congress in 1994, when Bill Clinton was president.

Mr. Pitt, who was appointed chairman by President George W. Bush, said that his recommendations and approval were sought by the White House for prospective Republican commissioners, but that while he met with Democratic choices before they were nominated, he did not feel he — or the White House — had much leeway in choosing whether to appoint them.

Now, there is some evidence that the president generally gets to choose the chairmen of independent commissions, but the other majority members are picked on Capitol Hill.

The result has been that chairmen of commissions can find it difficult to accomplish anything. Last year, Mary L. Schapiro, the chairwoman of the S.E.C. at the time, tried and failed to push changes in money market funds through the commission in the face of strong opposition from the money market fund industry. She could not get the Republican votes, and one of the Democrats on the commission also refused to go along.

That infuriated other financial regulators. The Financial Stability Oversight Council, composed of 10 top regulators including the S.E.C. chairman, looked for ways to force actions it thought were needed to assure such funds would not need federal support during a crisis, as happened in 2008.

This year, under the new chairwoman, Mary Jo White, the commission voted unanimously to seek comment on two possible changes, saying it might adopt either or both of them. Those proposals were severely diluted from the original proposal, and the industry appears to be ready to accept some change.

What has happened to the S.E.C. appears to have happened, in varying degrees, at other regulatory agencies.

Such agencies are called “independent” agencies because they are required to have members from both parties, keeping them from being strictly accountable to the president, as cabinet members are.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Broad Audit of Chinese Government Agencies Set

HONG KONG — The National Audit Office of China said on Sunday that it would conduct a broad audit of debts incurred by government agencies, in the latest sign of Beijing’s concern that heavy borrowing by local governments and their affiliates might pose a broader threat to the economy.

The audit office issued a single-sentence statement saying that it had been instructed by the State Council, or cabinet, to carry out the audit.

Western economists have estimated total local government debt in China at $2 trillion to $3 trillion and rising.

China avoided most of the effects of the recent global financial crisis through a huge program of government spending financed by debt. The stimulus program has encompassed projects including a national grid of high-speed train routes and the construction of thousands of roads and bridges by municipalities, towns and villages.

In an interview last month with the Web site of People’s Daily, a deputy head of the fiscal audit section of the National Audit Office said that since last year, the outlook for the economy as a whole, and for government revenue in particular, has “not been too sunny.”

“Under these circumstances, how to avert financial risks is quite an urgent issue,” said the official, Ma Xiaofang. Those concerns have already prompted the office to audit 36 local governments this year, after a similar check in 2011, Mr. Ma said. “We must have more insight into problems, risks and hazards in local government debt management,” he said.

China has made periodic efforts over the years to assess the scope of local government debt, and Sunday’s statement by the National Audit Office was too terse to tell how comprehensive the latest effort would be. Bankruptcy proceedings started this month by Detroit surprised and alarmed many in China, however, prompting renewed concern about the financial health of Chinese cities and towns.

While the Chinese government has considerable unused borrowing capacity at the national level as well as $3 trillion in foreign exchange reserves, any move by the central government to bail out profligate local governments would be politically contentious.

Using the foreign exchange reserves to cover local government debts would also be extremely difficult for practical reasons. The central bank has financed those reserves mostly by borrowing from Chinese commercial banks and needs to be able to repay them.

Beijing imposes many restrictions on the ability of local governments to borrow. But local governments have been widely sidestepping them by setting up special financing entities that borrow for the governments.

Many local governments also own businesses and have used their political connections to help these businesses borrow from state-owned banks. This has further increased possible financial liabilities for the local governments themselves.

These governments’ revenues tend to be heavily dependent on the sale to developers of long-term leases for government land, which is then used for building apartments, factories, shopping malls and other projects.

Developers’ interest in these leases tends to be cyclical, soaring when the real estate market is strong and crashing when real estate prices fall. With Beijing trying to make housing more affordable for the last couple of years by limiting real estate speculation, developers have been more cautious about acquiring additional leases.

Many local governments have also guaranteed loans to borrowers in politically favored sectors like solar panel manufacturing. That allows the borrowers to obtain loans at low interest rates. But the local governments are exposed to huge losses if the borrowers default — a constant risk given the overcapacity and declining profit margins that bedevil many Chinese industries.

“These problems must attract serious attention, and there should be effective measures taken to strengthen management of local government debt,” Mr. Ma said.

U.S. Pushes Agencies to Free Up Spectrum

Without additional airwaves for consumer and business use, administration officials say, the “skyrocketing demand of consumer and broadband business users” for wireless service for smartphones, tablets and other devices will soon outgrow the supply.

For consumers, the initiative could allow cellphone and wireless broadband companies to eventually increase the reliability of their networks, meaning fewer dropped calls and shorter delays in loading video and other large files.

It also could create jobs, the administration says. It cites industry studies reporting that since 2007, more than 500,000 jobs have been created in what is known as the App Economy — the business of creating and selling applications and programs that take advantage of faster Internet speeds and more advanced devices.

The administration said it would invest $40 million in the next year and $60 million more over the next five years to find ways for government agencies to share lightly used airwaves that are under federal control with private wireless communications companies.

Mr. Obama directed federal agencies to make more capacity available by enhancing the efficiency of their spectrum use and to recommend ways of using financial or other incentives to increase sharing of airwaves by government agencies.

“The number of wireless devices is exploding, and that means increasing demands on the spectrum upon which they all rely,” Gene B. Sperling, director of the National Economic Council, said in a White House blog post on Friday. “The federal government helps manage that resource, and we know we can do a better job of unleashing innovation by ensuring more of it is shared, unlicensed for innovations like Wi-Fi, and better used by our departments and agencies.”

One roadblock to that seemingly unlimited growth potential, however, is the reluctance of some parts of the government to part with any of their vast holdings of the nation’s electromagnetic spectrum — the airwaves used by cellphone and wireless communications companies.

In 2010, Mr. Obama directed government agencies to work to free up 500 megahertz of spectrum from federal and private sector sources. Those efforts have been embraced by numerous federal departments, administration officials say.

But a few others, including the Defense Department, have expressed wariness not only at sharing or giving up any of their designated frequencies, but even at revealing the amount and location of airwaves they control. Doing so could compromise national security, Pentagon officials say.

An administration official cited one hypothetical example where an executive department might use a certain frequency for about 12 hours a week of training activities. One agency might be willing to confine its use to prescribed hours, and allow commercial users to share the airwaves at other times, while another department might say it needs the flexibility to be able to use the airwaves at any time.

The Defense Department has said it supports the president’s goals of freeing up spectrum, but noted that an increasingly electronically armed military had its own rising needs for spectrum. The administration emphasized that any new plans to free spectrum should not interfere with “mission-critical capabilities” of military and other government departments.

Nevertheless, the intransigency of some departments has frustrated lawmakers.

“I have long called for a thorough inventory of all public spectrum assets in order to gauge usage and improve efficiency, and have been frustrated by how this debate has dragged out over the past four years,” Senator Mark Warner, a Virginia Democrat, said Friday. “Federal agencies should have the spectrum they need to protect the public, but no one should be warehousing spectrum.”

The Commerce Department has identified more than 300 megahertz of spectrum controlled by the federal government that could be set aside for other uses. The remainder of the 500 megahertz defined as the goal by the administration would come from the so-called incentive auctions that were authorized as part of the 2012 Middle Class Tax Relief and Job Creation Act.

That law provided for the government to share the proceeds of auctions of newly cleared spectrum with television broadcasters who would willingly sell some or all of their spectrum licenses.

Perhaps the most interesting and highly charged recommendation in the president’s directive is one ordering recommendations for incentives that could be used to persuade government departments to share or give up spectrum.

A study released last year by a presidential advisory council on science and technology recommended that the government create a “synthetic” currency that could be used to entice federal agencies. The system would in effect increase an agency’s budget if it gave up or shared its airwaves.

Commissioner Jessica Rosenworcel of the Federal Communications Commission, who has also been advocating such a system since joining the agency in May 2012, about the time the advisory council’s report was released, said federal spectrum policy should be built “on carrots, not sticks.”

“Our traditional three-step process for reallocating federal spectrum — clearing federal users, relocating them, and then auctioning the cleared spectrum for new use — is reaching its limits,” she said. The new initiatives, however, “are a significant step toward meeting the country’s spectrum needs.”

U.S. Agencies to Develop Standards for Bed Rails

“Considering the number of deaths and injuries, we strongly believe all reasonable and timely efforts should be undertaken to address this hazard and protect the safety of the public,” the agencies wrote.

The standards were developed by ASTM International, which is an organization that develops and publishes voluntary technical standards for a wide range of products and which will oversee the committee.

A spokesman for Representative Edward J. Markey, Democrat of Massachusetts, who had called on the agencies to address bed rail deaths, said the congressman was disappointed.

“It’s a really tepid response,” said the spokesman, Eben Burnham-Snyder. “They issued voluntary standards for bed-rail manufacturers the last time and people still died. We’re not sure how this is going to be different.”

Gloria Black, who has campaigned for safer bed rails after her mother was killed in a 2006 accident, said the agencies’ action was a positive first step. “But they are still not addressing the serious problem of deaths and injuries that occur in hospital beds, only portable rails,” she said.

Bed rails are metal or plastic bars used on hospital beds and in home care to assist patients in pulling themselves up or helping them out of bed. They can also prevent people from rolling out of bed. But sometimes patients, particularly those with Alzheimer’s, can get confused and trapped between a bed rail and a mattress, which can lead to serious injury or even death.

After first being warned of the deaths in 1995, the F.D.A. in 1999 formed a working group made up of medical device makers, researchers and patient advocates. The agency considered requiring bed rail makers to add warning labels, but decided against it after they resisted. The agency said the added cost to small manufacturers and the difficulties of getting regulations through layers of government approval worked against tougher standards.

In 2006, the F.D.A. issued voluntary guidelines, instructing hospitals and nursing homes on the use of bed rails.

Last year, The New York Times reported that about 550 bed-rail-related deaths had occurred since 1995. In a review, the safety commission found 155 such deaths from January 2003 to last September. Most of those who died were 60 or older. Almost 37,000 people were injured in bed rail accidents and treated at hospital emergency rooms from 2003 to 2011, the agency said.

Credit Rating Agencies Settle Lawsuits Over Debt Vehicles

The lawsuits had accused Moody’s, a unit of Moody’s Corporation, and S.& P., a unit of McGraw-Hill Companies, of negligent misrepresentation over their activities regarding the Cheyne and Rhinebridge structured investment vehicles.

Morgan Stanley, which marketed both debt vehicles and helped structure the Rhinebridge one, also settled.

Settlement terms were not disclosed in the cases, which had been brought in 2008 and had sought more than $700 million of damages. Both lawsuits were dismissed with prejudice, meaning they cannot be brought again.

Spokesmen for Moody’s, McGraw-Hill and Morgan Stanley confirmed their companies’ settlements on Friday.

“This settlement allows us to put the significant legal defense and related costs, as well as the distraction, of these very protracted litigations behind us,” said a Moody’s spokesman, Michael Adler.

A spokesman for McGraw-Hill, Jason Feuchtwanger, said the company’s settlement involved no admission of wrongdoing.

Lawyers for the plaintiff investors did not immediately respond to several requests for comment.

A trial in the Cheyne case had been scheduled for May 6 before United States District Judge Shira Scheindlin in Manhattan, who oversaw both lawsuits.

Credit rating agencies have been accused by investors, regulators and politicians of inflating the ratings of risky mortgage-backed and structured securities in a bid to win new business.

Critics said these activities also fueled demand from investors who thought the ratings were objective, but prices collapsed once the risks materialized, helping incite the 2008 global financial crisis.

S.& P. still faces the Justice Department’s $5 billion civil fraud lawsuit filed in February over its ratings, the government’s first major postcrisis action against a credit rating agency. S.& P. is trying to dismiss that case.

Hard Budget Realities as Agencies Prepare to Detail Reductions

“Sequestration,” that arcane budget term consuming Washington in recent weeks, is about to move from political abstraction to objective reality for tens of millions of Americans. Barring an extremely unlikely last-minute deal, about $85 billion is set to be cut from military, domestic and certain health care programs beginning Friday.

Much of the government will be immune, only magnifying the cuts for the rest. If they are not reversed, federal spending at the discretion of Congress will eventually fall to a new five-decade low. Cuts of even larger size are scheduled to take effect every year over the next 10, signaling an era of government austerity.

By the end of this week, federal agencies will notify governors, private contractors, grant recipients and other stakeholders of the dollars they would be about to lose. As of March 1, the Treasury Department will immediately trim subsidies for clean energy projects, school construction, state and local infrastructure projects and some small-business health insurance subsidies.

Nearly two million people who have been out of work for more than six months could see unemployment payments drop by 11 percent in checks that arrive in late March or the first days of April, according to the White House budget office, an average of $132 a month. Doctors who treat Medicare patients will see cuts to their reimbursements.

If the stalemate in Washington continues, furloughs and layoffs will probably begin in April, starting largely in the 800,000-member civilian work force of the Defense Department and then rippling across the country, from meat inspectors in Iowa to teachers in rural New Mexico.

“If they hit me with a $3 million cut in March, I’m not sure what I’m going to do,” said Raymond R. Arsenault, the superintendent of the Gallup-McKinley County Schools, a district that serves primarily Navajo students on the Arizona-New Mexico border.

Mr. Arsenault’s school system would be hit much harder than most because 35 percent of his $100 million annual budget comes from federal education “impact aid” to offset the large tracts of land that are owned by Washington and therefore not subject to taxation. Of that, $3 million may be about to disappear.

The sequester involves trimming $85 billion from a $3.6 trillion annual federal budget, or about 2.4 percent. But the cuts will not affect Social Security or Medicaid, and the Medicare cuts total only about $11 billion in the 2013 fiscal year, which ends Sept. 30, according to calculations by the Bipartisan Policy Center.

Thus, entitlement spending, which poses the biggest long-term challenge to the federal budget, accounts for only a sliver of the cuts. That leaves more than $70 billion in cuts to be applied over the next seven months to the roughly two-fifths of the budget that is devoted to discretionary spending, including the military, education and dozens of other categories.

In a matter of weeks the cuts would cascade through the government, delaying snow removal on the Tioga Pass in Yosemite National Park, for example, and keeping an aircraft carrier battle group docked in Norfolk, Va., rather than steaming through the Persian Gulf.

“The cut is so big and over such a short period of time that there’s no way to avoid all the operational and program harms,” said Daniel I. Werfel, controller of the White House budget office.

These cuts would probably not be confined to 2013. Even if President Obama manages to persuade Congress to raise new revenue, he has said he would replace only half of the spending cuts with tax increases, in essence accepting a half-trillion dollars in cuts over 10 years. That would be on top of more than $1 trillion in cuts already enacted by the Budget Control Act, which created the sequester in 2011 as part of a deal to raise the country’s statutory borrowing limit.

A comprehensive deficit-reduction deal, which is currently moribund but is still both Congress and the White House’s stated goal, might mitigate the impact by including fast-growing programs like Medicare and Medicaid in the cuts. But belt-tightening, for now, appears to be the new normal.

Rating Agencies Watching Debt Ceiling Limit Again

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