Budget cuts hit security checks for defense contractors WASHINGTON (Reuters) - A budget shortfall has forced a Pentagon security unit to sharply cut back on regular investigations used to update security clearances for defense contractor employees. In a little-noticed announcement posted on its website on June 7, the Defense Security Service said that "due to a funding shortfall," it has been obliged to suspend "most" routine re-investigations of defense contractor employers cleared at the "Top Secret" level, at least through the end of September. The announcement came two days before Edward Snowden went public in a video released by Britain's Guardian newspaper as the source of leaks about the U.S. government's top-secret surveillance of phone and Internet activity. Snowden was a contractor for Booz Allen Hamilton working as a systems administrator at a National Security Agency facility in Hawaii. The leaks have alarmed the U.S. intelligence community and have raised questions about whether the government is doing enough to vet individuals for security clearances. A Senate Homeland Security subcommittee has scheduled a hearing for Thursday to examine the security clearance process, at which Defense Security Service Director Stan Sims and other U.S. officials are scheduled to testify. A person familiar with the matter said that because Snowden worked as a government employee and contractor for the NSA and Central Intelligence Agency, his security clearances would have been handled by them, rather than the Defense Security Service. But the Defense Security Service announcement shows how the government has been forced to recently scale back its oversight of security clearances in general for contractors. A government source familiar with the matter said the policy change was related to automatic federal spending cuts known as sequestration that began earlier this year when Congress failed to agree on an alternative deficit reduction plan. If a scheduled reinvestigation is delayed or canceled due to the budget crunch, clearance holders will be allowed to hold their clearances, officials said. "Nothing will happen to them," said Cindy McGovern, a spokeswoman for the Defense Security Service. The security service is a Defense Department agency responsible for authorizing, and then paying for, background investigations which the government conducts to determine defense contractors' eligibility for security clearances. The agency itself does not investigate contractor personnel, but commissions investigations from the Office of Personnel Management. That agency then employs its own contractors to conduct investigations in the field. Under government rules, both government and contractor employees with clearances at the Top Secret level are supposed to be re-investigated every five years to ensure that problems have not cropped up in their finances, backgrounds or behavior. It is these routine re-investigations for Top Secret clearance holders that the Defense Security Service says it is being forced to suspend. McGovern said that, in general, budget restrictions will force personnel at the agency to cut back their working weeks, and hence their pay, to four days per week, starting in July. She declined to comment on the case of Snowden, who is believed to be hiding in Hong Kong and is under criminal investigation for the leaks. Snowden had a clearance for "Top Secret/Sensitive Compartmented Information." The Defense Security Service's announcement said that despite the budget crunch, five-year re-investigations will continue for "key management" contractor personnel as well as people needing access to "mission essential" information "directly supporting the Intelligence Community." Reporting By Mark Hosenball; Editing by Karey Van Hall and Tim Dobbyn