Citing a funding shortfall, the agency that issues employee security clearances for federal defense contractors is refusing to process any more applications until Congress raises its budget.

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The Defense Security Service, a branch of the Department of Defense based in Alexandria, Va., has "suspended processing industry requests for new personnel security investigations and periodic reinvestigations effective immediately," according to a statement.

Small defense contractors say the move could eventually force them to raise wages to retain current workers as the pool of security-cleared employees shrinks, boosting the cost of federal defense contracts.

This week, Rep. Tom Davis, R-Va., chairman of the Government Reform Committee, will head a congressional hearing into projected cost overruns at the agency.

Stopping the applications will have a "harmful effect on national security, threaten the jobs of defense contractors, and cost taxpayers money by creating a bidding war to employ those who already have clearances," Davis said in a statement.

On May 11, Congress passed a defense authorization bill that included an amendment to extend expiring security clearances until the moratorium is resolved.

The DSS, which has a budget of $261.9 million this year and a civilian staff of 582 employees, oversees about 800,000 private-sector workers at 11,000 facilities across the country, agency figures show.

Since it stopped taking new applications, the agency has accumulated a backlog of about 4,700 cases, according to DSS. In 2005, it processed about 140,000 cases.

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