Frederick N. Khedouri was misidentified in an article yesterday. He is a managing director of Bear Stearns & Co. (Published 4/26/90)

Thomas A. Scully, a lanky fellow with the face of a schoolboy, holds the unheralded title of associate director for programs in the Office of Management and Budget, a name worthy of a dutiful bean counter.

But the title is deceiving. As one of four appointed program aides working directly under Budget Director Richard G. Darman, Scully wields power that outstrips that of most Cabinet secretaries. During March, the 32-year-old Scully hammered out a deal on food stamps with key Senate staff aides, held the administration line on limiting food subsidies and killed a move to forgive delinquent graduate school loans.

Shuttling between the Old Executive Office Building and Capitol Hill, he tried to negotiate a compromise child-care bill that would placate top congressional Democrats as well as conservatives in the Republican Party. In between, he squeezed in time to review testimony to be given by Veterans Affairs officials and he mediated a dispute between the Agriculture Department and the Food and Drug Administration over who would regulate seafood inspection.

"The associate director is in a unique position to influence what government does," said John F. Cogan, a former associate director at the OMB who now teaches at Stanford Business School. "He is at the center of the hourglass of government. Everything goes through this little opening."

"It's incredible how much stuff you get into," said Robert Grady, 33, one of the other program associate directors, known in government circles as PADs.

Though influential, the OMB associate directors are relatively anonymous -- they never testify before Congress. Instead, they work behind the scenes. As one of the two leading Bush administration representatives in the Clean Air Act talks, Grady spent virtually the entire month of February locked in a room negotiating, line by line, the terms of the bill with senior senators, including Senate Majority Leader George Mitchell (D-Maine).

Absent from the Clean Air talks were the secretaries of the Commerce, Energy and Interior departments. Environmental Protection Agency chief William K. Reilly only came to the first couple of meetings, according to a Senate aide who attended the meetings. He added that White House domestic policy adviser Roger Porter and Grady "did all the talking." Although a Reilly deputy attended the talks, Grady was more than a budget scorekeeper; he played a premier role in setting environmental policy.

Created in 1921 as the Bureau of the Budget, the OMB originally was responsible only for the relatively technical task of preparing estimates of government spending. After it was moved from the Treasury to the Executive Office of the President by Franklin D. Roosevelt in 1939, the budget office and its 600 staff members grew into a powerful tool for exerting White House control over policy. It took on management functions in 1970 and, in 1973, the PADs were created to provide a layer of political appointees over the agency's career technical staff.

Especially in times of fiscal constraint, the OMB plays a crucial part in talks between the executive branch and Congress. In the Clean Air talks, for instance, the Bush administration insisted that the cost of the package to the economy come to less than $21 billion -- a cost analysis done by the OMB.

Hard financial times also give the OMB a central role in overseeing Cabinet departments and mediating disputes between agencies. An agency can't take a public position on pension reform, for example, without checking with Scully's office. Five people under Scully do nothing but keep track of the Labor Department. "We make sure everyone who works for the president is on the same wavelength," Scully said.

This often comes as a surprise to Cabinet secretaries new to the ways of Washington, and even Washington veterans sometimes chafe.

"They control everything I do," said Anthony J. Principi, deputy secretary of veterans affairs and a former congressional staff aide. "Sometimes it's tough to deal with the second-guessing. At times I feel I'm not managing my own department."

At the OMB, there are four associate directors for programs, each with a staff of 40 to 50 people. Grady is in charge of natural resources, environment, energy and science. Scully has the departments of Labor, Health and Human Services, Education, Veterans Affairs and 22 smaller agencies. Janet Hale, 40, a former official at the Department of Housing and Urban Development, deals with the Treasury, Transportation, Justice, and Commerce departments, as well as drug policy and the U.S. Postal Service. Robert Howard, 57, a career staff member at the OMB, oversees the Defense Department, though Darman keeps tight control over this area.

Darman looms large over all four associate directors and rules on the most important issues. The senior OMB staff has formal meetings with Darman on Mondays, Wednesdays and Fridays, and PADs have almost daily contact with Darman.

"We didn't clear every item on Clean Air, but we knew our strategy going into the negotiations," Grady said. One OMB staff member said that because of the extent of Darman's control, a gallery of photographs of OMB PADs should be full of photos of Darman. Moreover, the budget director is said not to suffer fools gladly. One associate director politely said that Darman "makes his wishes known in very few words. He understands things quickly and makes himself understood very quickly."

But the sheer magnitude of the job of managing a trillion-dollar budget makes it inevitable that any budget director must rely on the people working beneath him.

"Aside from Cabinet officers and perhaps one or two people on the West Wing staff, they are arguably the most powerful people in the civilian side of the government," said Fred Khedouri, who was a PAD when David Stockman was budget director. Khedouri now represents the investment banking company Bear Stearns Cos. in Washington.

"I had enormous latitude on any item less than $50 million," said Deborah Steelman, who served under budget director James C. Miller III during the Reagan administration. Steelman, a lawyer who is a member of a presidential commission on Social Security and health insurance policy, adds that she also had "darn good latitude on anything complicated. The more technical the subject, the more latitude you had."

Khedouri recalled, "Many times I found myself in meetings in the White House where I might be the least senior person, but I would be the only person who really had detailed knowledge of the issue. Knowledge is certainly the currency of power in those corridors."

Loyalty and a little political savvy don't hurt either. Even Scully, the most junior PAD, has some political experience. A native of Philadelphia, he worked as a volunteer for the 1979 Bush campaign while tending bar in Alexandria during his summer vacation from the University of Virginia. He later spent four years on the staff of Sen. Slade Gorton (R-Wash.) while attending Catholic University law school at night.

Scully then worked as one of the few Republicans with the law firm of Akin Gump Strauss Hauer & Feld. Describing himself as "a hard-core Bush fan," Scully joined the Bush campaign full time in 1988 after working at the Republican convention. Last year, he served as Darman's liaison on legislative affairs.

Hale is serving in her third post in the executive branch. After coming under scrutiny for her role as deputy assistant secretary for housing at HUD during the scandal-ridden tenure of HUD Secretary Samuel Pierce, Hale has tried to keep a low profile. From 1986 to 1988, she was assistant transportation secretary responsible for developing the department's $26 billion budget. She also served as the Transportation Department representative on the enforcement coordinating group of the Cabinet-level National Drug Policy Board, giving her a glimpse into the interagency battles she now helps settle.

Robert Howard, 57, is an anomaly among the four. Originally a physicist, Howard has spent more than 20 years working at the OMB on national security issues. The OMB works more closely with the Defense Department than any other department -- its staff actually moves to an office at the Pentagon to draw up budget guidelines. Moreover, Howard said, while many Cabinet secretaries play minor roles in policy, "there aren't any unimportant secretaries of defense -- ever." As a result, his latitude is "narrow."

Grady is at the other extreme, with his own connections to the White House. Grady grew up in New Jersey, the son of Irish Catholic Democrats who attended antiwar rallies during the Vietnam War. Partly because of their opposition to abortion, Grady's parents became Republicans.

After Grady finished at Harvard College in 1979, he went to work for former New Jersey representative Millicent Fenwick. Though Fenwick's political career fizzled after her unsuccessful run for the Senate in 1982, Grady made contacts with Bush backers. Fenwick was chairwoman of the 1980 Bush presidential campaign in New Jersey and Robert Teeter, later a Bush adviser, ran Fenwick's Senate campaign.

At age 24, Grady was hired as communications director to reverse the then-flagging fortunes of former New Jersey governor Thomas Kean. New contacts were made. Kean played tennis every Saturday with Nicholas F. Brady, now Treasury secretary and a Bush confidante. When Kean ran for reelection in 1985, he hired Teeter and Roger Ailes, who later ran Bush's 1988 campaign.

Grady went to Stanford Business School, then joined the Bush campaign in 1988. During the 90 days from Aug. 1 through Election Day, Grady wrote 60 speeches for Bush. He penned Bush's attack on Democratic candidate Michael Dukakis as being the Stealth candidate and wrote the speech Bush delivered in Boston Harbor accusing Dukakis of hypocrisy on environmental issues.

Dukakis supporters called the attack underhanded because cutbacks in federal funding had made it impossible for the state of Massachusetts to clean up the harbor. But Grady said Dukakis deserved the criticism: "It drove me crazy when Dukakis, who had once proposed dumping Massachusetts waste on the New Jersey shore, stood on our shore and pledged to stop ocean dumping."

After the election, Grady worked on the Bush transition team before joining the OMB. "I wanted a job with on-line responsibility and OMB is incredibly central to the process," Grady said. "As Mrs. Fenwick used to say, at least you have the illusion of being useful."

There are few other rewards. Because they guard the federal purse strings, OMB officials tend to make few friends in Washington. Alumni of the PAD jobs include Paul O'Neill, now chairman of Aluminum Co. of America; Timothy J. Muris, now a professor at George Mason University; Frank G. Zarb, former "energy czar" under president Gerald Ford and now chairman of the investment banking firm Smith Barney, Harris, Upham & Co. Inc., and Alton G. Keel Jr., deputy chairman for international banking at Riggs National Bank. "This town runs on not making enemies," said Steelman. "In that job, that was hard to do."

The Clean Air bill is one example. Many industrialists are unhappy about how much they'll have to pay to cut pollution, and some environmentalists are unhappy that the bill doesn't go further toward cleaning up the air.

Unfazed, Grady said, "The environmental community had always looked at the OMB as the bad guys trying to shut down the Environmental Protection Agency. There has been a total sea change on our attitude on the environment." Grady said he looks forward to attending the signing ceremony at the White House.

His will be one of the least familiar faces to the public at that ceremony. But to members of Congress and the Cabinet, it will be familiar.

PADs have always been in that position. When Khedouri was at the OMB, farm issues were part of his portfolio. Once, Khedouri and then-agriculture secretary John R. Block went to meet with then-Senate Majority Leader Howard H. Baker Jr. and Sen. Robert J. Dole (R-Kan.).

As they walked into the room, Dole looked at Khedouri and said, "Well, I'm glad to see they sent the real secretary of agriculture."