June 6 (Bloomberg) -- The U.S. Securities and Exchange Commission, with a funding cut looming and a $48 million shortfall already straining its budget, is reducing hiring by 10 percent, the agency's Los Angeles office chief told his staff.

``Unfortunately, the budget crisis is real and severe,'' Randall Lee, the SEC's Pacific regional director, wrote in a May 25 memo to employees. ``This is going to be very difficult, and we will all have to make sacrifices for the foreseeable future.''

The 170-person Los Angeles office, whose investigations have included Global Crossing Ltd., Walt Disney Co. and Homestore Inc., stands to lose 16 employees to attrition, according to Lee's memo. He said it won't be because of ``reductions in force,'' a government euphemism for firings.

The budget will be among the first challenges for Republican Representative Christopher Cox of California, named on June 2 to succeed William Donaldson as SEC chairman. Under Donaldson, who's quitting June 30, the agency underestimated security and construction costs at offices in Washington, New York and Boston by $48 million, it said last month.

The Government Accountability Office, Congress's investigative arm, is probing the budget gap at the behest of Representative Frank Wolf, the Virginia Republican who heads the subcommittee that sets the SEC's funding. The subcommittee also has endorsed President George W. Bush's plan to reduce the SEC's budget by almost 3 percent for the fiscal year starting Oct. 1.

Lee confirmed that he wrote the memo and declined further comment.

80 Open Slots

Peter Derby, who runs operations and management at the SEC, said the agency doesn't get enough money from Congress to fill all its slots for new employees, so the hiring pullback will be less pronounced than Lee's memo suggests.

The SEC has funding to boost its payroll to 3,880 from 3,800 employees now, said Derby, one of Donaldson's senior aides. ``We have 80 people left to hire to hit our maximum cap,'' he said. ``We're going to hire them based on the strategic priorities of the agency.''

Another measure the SEC is taking to cut costs is curtailing all ``non-mission critical'' travel for the rest of this fiscal year, which ends in September, and for 2006.

Derby last month said the new travel policy won't affect the SEC's enforcement cases or its inspections of brokers and mutual funds. Lee's memo sheds more light on how it will work.

``Although travel for exams and cases should proceed, we are being asked to consider in each instance whether the travel expenses can feasibly be limited without harm, such as by reducing the number of participants, making day trips, and the like,'' Lee wrote. ``Nearly all travel for training, conferences and speeches will be canceled or postponed.''

Budget Cut

The SEC's rush to find economies contrasts with 2003 and 2004, when funding increases gave the agency so much money that Donaldson returned more than $150 million to the government.

Donaldson had asked the Bush administration for an increase in funding to $983 million for fiscal 2006, from $913 million this year. He got $888 million instead.

The SEC expects to incur the $48 million in extra construction and security costs during the rest of fiscal 2005 through the end of 2007.

Lee ended his memo saying he was ``confident, however, that we will weather this crisis just as we have weathered other crises.''

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net.

Last Updated: June 6, 2005 02:01 EDT