Capital gains: Spending on contracts and lobbying propels a wave of new wealth in D.C.
So much money to be had if you know where to look.
The avalanche of cash that made Washington rich in the last decade has transformed the culture of a once staid capital and created a new wave of well-heeled insiders.
The winners in the new Washington are not just the former senators, party consiglieri and four-star generals who have always profited from their connections. Now they are also the former bureaucrats, accountants and staff officers for whom unimagined riches are suddenly possible. They are the entrepreneurs attracted to the capital by its aura of prosperity and its super-educated workforce. They are the lawyers, lobbyists and executives who work for companies that barely had a presence in Washington before the boom.
During the past decade, the region added 21,000 households in the nation’s top 1 percent. No other metro area came close.
Two forces triggered the boom.
The share of money the government spent on weapons and other hardware shrank as service contracts nearly tripled in value. At the peak in 2010, companies based in Rep. James P. Moran’s congressional district in Northern Virginia reaped $43 billion in federal contracts — roughly as much as the state of Texas.
At the same time, big companies realized that a few million spent shaping legislation could produce windfall profits. They nearly doubled the cash they poured into the capital.
The signs of the new Washington are everywhere — from the Tiffany & Co. store that Fairfax County development officials boast is the most profitable in the country to the new Tesla dealership in Tysons Corner. Every morning on the Beltway, contractors, lobbyists and some of the country’s highest-paid lawyers sit in the nation’s worst traffic. Sports talk radio crackles with rants about the Redskins and the latest ads from Deltek, a firm that advises companies on “capture strategies” for winning government contracts. The radio signal doesn’t extend much beyond the Washington commute. It doesn’t have to. The ad barely makes sense to most Washingtonians, let alone those living outside the capital.
At Cafe Joe, a greasy spoon near the National Security Agency in suburban Maryland, software engineers with top-secret clearances merely have to look at the place mats under their fried eggs to find federal contractors trying to entice them away from their government jobs with six-figure salaries and stock options. The place-mat ads cost $250 a week. They are sold out through 2014.
The new money and jobs have raised Washington’s stature in the global economy. Tens of thousands of the nation’s best-educated workers have flocked here, some for contracting jobs, some simply to be part of the newly energized business climate. The money and brainpower have supercharged the region.
Now, with lawmakers struggling to shrink the nation’s debt and contract dollars declining, Washington is revving its economic engine. If it can run on its own — if all this new wealth and brainpower can innovate and produce beyond government work — the region may be able to sustain its growth.
Venture capital is already flowing in, and the thriving local economy continues to draw the nation’s best-trained workers. Essentially, Washington has been the beneficiary of a decade-long, taxpayer-funded stimulus package. “We could have been a dodo bird,” said Mark Muro, policy director at the Brookings Institution’s Metropolitan Policy Program. “Instead we are the center of the universe.”
Washington has long been a place where power outshone money, where companies tried to be discreet about their influence, where defense contractors knew not to wear watches that outshone the admirals’. The new Washington has lost some of those old inhibitions and has begun to resemble other global financial centers. Power still animates the city, but so increasingly does the pursuit of wealth.
Ulysese Jefferson was the kind of everyman only Washington could produce. He’d spent 30 years traveling the world fixing computers for the State Department. In 2002, he had a tidy pension, a split-level home in Laurel and about $5,000 in the bank. He was 64, a widower, and looking for something to keep him busy.
“I knew there was pressure to reduce the size of the federal workforce,” he said. “But someone still had to do the work. Obviously, they were going to turn to contractors.”
And who better to turn to than Jefferson? He knew the work and stayed in touch with dozens of State Department retirees. His goal was to win some State Department IT contracts and build a business that he could leave to his sons, both of whom were pretty good with computers. “I was never trying to make a fortune,” he said.
Nearly 10 years later, Jefferson sold his company to the contracting giant ManTech for $90 million.
Jefferson’s feat was accomplished during the post-9/11 period, when taxpayer money poured into the Washington area at rates that dwarfed those at any other time in the capital’s history.
By 2010, the government was spending $80 billion a year on contracts here, much of it driven by the wars in Iraq and Afghanistan. “The culture changed,” said Brett Lambert, the Pentagon’s former head of industrial base policy. “It was spend, spend, spend.”
It’s hard to say exactly how many of Washington’s households in the top 1 percent draw their incomes from the broad business of serving, supplying or influencing the government. But an analysis of tax data by the Economic Policy Institute shows that the area’s 1-percenters are most likely to be lawyers and executives, or people who work in management consulting or IT. Nearly 1 in 10 of those households is headed by a government worker.
Jefferson was a small player in the federal contracting scrum. Every morning he would scan his contractor badge and head for the State Department cafeteria. His sons, who often joined him, thought of their dad as the quintessential State Department man. He was a fastidious dresser, but never flashy. He wore reading glasses perched on the tip of his nose. Over coffee, he caught up with old colleagues, sharing stories of Africa, Afghanistan, Pakistan and China. These conversations were where he picked up his best leads.
Because Jefferson was part of a special program for minority-owned small businesses, he could receive small contracts without going through the months-long competitive bidding process. By 2005 his company, which he named Worldwide Information Network Systems (WINS), had picked up several million dollars in contracts and had a couple of dozen employees.
“What happened to me and my company was built on my relationships,” he said.
Most of his employees were State Department retirees who worked at government desks. Companies like Jefferson’s are known around the Beltway as “body shops” or, more derisively, as “butts-in-seats” businesses. Jefferson paid his employees about 30 to 40 percent more than they had made in the State Department.
The contract workers were supposed to be cheaper over the long run because they could be laid off when they were no longer needed. Instead, they often became permanent fixtures. Each year, Jefferson added more contracts with the State Department. He picked up work with the Justice and Commerce departments. By 2008 his company had about 120 employees and annual revenue of about $30 million. Jefferson took his workers on annual Potomac boat cruises and paid for a formal Christmas party in a hotel ballroom where he passed out $500 Tiffany and Gucci gift certificates as prizes.
Jefferson’s big breakthrough came at the Pentagon’s Defense Intelligence Agency. Unlike the cash-strapped State Department, the DIA was awash in war spending. Jefferson now had access to the insular world of military intelligence. He immediately moved his son Mark into DIA headquarters to oversee the company’s work there. Then, following a well-worn Washington path, he lured away one of the agency’s division managers, paying him $235,000 a year, a big raise over his government paycheck.
“Now there was someone from their family inside our company,” Jefferson said.
Since his firm lacked experience bidding for billion-dollar contracts, he hired an executive with a DIA background away from Booz Allen Hamilton. He paid her $256,000 a year.
In 2010, his company won a slot on a $6.6 billion DIA “contract vehicle,” one of the new insider currencies of Washington’s boom years. The vehicle was essentially a hunting license. Only the 11 winning firms would be allowed to bid for DIA computer work over the life of the five-year contract. Ten of the winning firms were based in the Washington area. The sole non-local winner, SAIC, was in the process of relocating its headquarters from the West Coast to Northern Virginia.
Immediately after his win, Jefferson began fielding calls from suitors for his company. He didn’t want to sell. But he did wonder how much it was worth. He and his sons, David and Mark, met at an Irish pub near Bowie to discuss the offers and the future.
“If I could ever build a $25 million company, that would be the most wonderful thing,” he told his sons.
David guessed it was already worth $25 million to $30 million. Mark said $50 million.
“Dad and I thought he was out to lunch,” David said.
The company’s revenue doubled to about $70 million in the first year after the DIA win. Jefferson now had more than 200 employees, and one big worry. His company no longer qualified for the small-business minority preference program and would have to compete with the world’s largest defense companies — Lockheed Martin, Northrop Grumman and Booz Allen — for work. Wealthy private-equity investors were in the mix now, too. They enticed former generals, admirals and Cabinet secretaries to join their companies’ advisory boards. Some of these firms’ boards packed more brass than the Joint Chiefs of Staff. How much star power would Jefferson need to compete?
“I would consider selling if I got an offer of $75 million,” he told his sons. He reluctantly agreed to shop the business.
The sale to ManTech was finalized in late 2011 . Jefferson’s closest friends said he seemed more sad than elated.
“How do you turn something like that down?” John Cabral, a friend and State Department employee, recalled telling him. “It is just too much money.”
Jefferson set aside about $1.5 million for bonuses that he paid to two dozen of his top employees. He bought houses for his five children (only two worked full time with the company) and established trusts for his 12 grandchildren. He gave tens of thousands of dollars to his church.
This fall he made one more purchase: a 24-seat skybox at FedEx Field. On a fall Sunday, there he is, an ordinary Washingtonian, borne by a wave of government spending to one of the city’s exclusive symbols of success.
The federal government wasn’t the only one pouring buckets of new money into Washington in the 2000s. Big business did it, too.
At a time when promising investments were hard to find, corporate America learned that lobbying was one of the most surefire ways of bolstering its bottom line.
Consider Boston Scientific, a powerhouse in the medical manufacturing industry. It develops medical devices, including cutting-edge heart stents, tubes that keep blood flowing through clogged or weak arteries. It discovered all sorts of new ways to boost profit margins by shaping federal policy.
Back in 2000, the company spent a mere $260,000 lobbying Congress, federal records show. Its lobbyists mostly talked to lawmakers about health care: medical manufacturing issues, Medicare reimbursement rates, the privacy of health records and congressional oversight of the Food and Drug Administration.
By the end of the decade, the company had broadened its horizons dramatically. “Government relations” now accounted for $2.6 million — a tenfold increase. On one quarterly disclosure report from 2010, Boston Scientific listed 35 pieces of legislation on which it was lobbying. They included proposals on patent reform, tax penalties for moving American jobs abroad, tax credits for research and development, rules for transporting lithium batteries, limits on workers’ ability to form labor unions and federal regulation of certain types of financial derivatives.
Brenda Becker understood that those bills could all mean millions of dollars for the company.
Before Boston Scientific tapped her as senior vice president of its government relations division in 2007, Becker had spent a lifetime around government: daughter of a former Michigan legislator, she’d started lobbying in her home state after college and quickly moved to Washington, where she spent 20 years advocating for Blue Cross Blue Shield.
She briefly worked in the George W. Bush administration, but her heart was in government relations: “I can’t imagine I would do anything else,” she said. “When I came on board, the thought was, let’s bring in someone who knows Washington, who understands Washington, who has a government affairs background . . . from a Boston Scientific standpoint, it’s an understanding that government has a hand in everything we do.”
One of Becker’s first initiatives was to explain to company executives how much money lobbying was saving them. She built spreadsheets and presentations for her bosses, attaching dollar figures. That battery-transportation rule, for example? It would have forced Boston Scientific’s sales staff to become certified in handling hazardous materials. By helping to kill it, her team saved the company between $50 million and $75 million, Becker said.
Government relations has become so important to the bottom line of a modern company, Becker said, that it should be a required course at business school. The numbers suggest she’s right. Companies spent about $3.5 billion annually on lobbying at the end of the last decade, a nearly 90 percent increase from 1999 after adjusting for inflation, political scientist Lee Drutman notes in a forthcoming book, “The Business of America Is Lobbying.”
Why the dramatic leap? Most big companies long shied away from lobbying outside a narrow band of issues. That started to change in the mid-1990s. Under a pro-business Congress, which invited their participation in policy debates, industry groups won big victories such as permanent normal trade relations with China and the deregulation of telecommunications, Drutman said. Corporate executives saw how those victories made them money, and they shed their inhibitions about playing in the world of government.
“A growing number of companies,” Drutman said, “became fully convinced that having a large-scale Washington presence was a good strategic decision.” Pages in the Washington lobbying directory have quadrupled since 1981, he said.
Legal services also boomed, fueled by the growing complexities of federal business regulations. The number of lawyers in the D.C. metro area increased by a third from 2000 to 2012, nearly twice as fast as the growth rate nationwide. And those lawyers have the highest mean salaries in the country, according to George Mason University’s Center for Regional Analysis.
The more companies spend on influence, the lower their effective tax rates and the higher their stock returns compared with competitors’, according to recent research. A company called Strategas has built an index to track the stock performance of the 50 companies that lobby the most; last year, that index outperformed the rest of the market by 30 percent.
Corporate spending here has declined amid Washington’s historic gridlock of the past few years, but very few companies are pulling back. “You know that if a company stopped lobbying, it would get creamed,” Drutman said. “That’s why companies don’t stop lobbying.”
After the boom
If Washington is going to thrive in an era of lean budgets, it will need to build an economy that is less dependent on federal spending. To see what that future might look like, meet William Crowell. More important, meet the people he’s betting on.
Crowell, 72, spent decades at the National Security Agency, where he rose to be the deputy director. When he retired in 1997, there were plenty of defense contractors waiting to pay him big bucks. Instead, Crowell accepted an offer from former defense secretary William J. Perry, an old friend, to join him in Silicon Valley, where he was teaching at Stanford University.
Perry helped him land a job as chief executive of Cylink, an early cybersecurity company.
“There is no way to describe how energizing it is to be around people who are always trying to invent something,” Crowell said.
In the years that followed, he served on the boards of a half-dozen other start-ups, including one that Hewlett-Packard acquired in 2010 for $1.5 billion. Crowell was suddenly wealthy.
Today he’s back in Washington, where he helps run a $100 million venture-capital fund that invests in start-up cybersecurity and big data analysis companies. Crowell was drawn back to Washington by one of the byproducts of the boom years: a smart, highly educated workforce — the foundation for most of the world’s successful economies.
Many of the coders at Crowell’s companies spent the past decade building top-secret systems to detailed government specs. They were like sous-chefs following someone else’s recipe. Now Crowell’s job is to help them build something innovative that the rest of the world wants to buy.
This is Washington’s problem in microcosm: The region started the 2000s with the nation’s best-educated workforce and added college grads at a faster clip than any major metro area. But it ranks a paltry 57th among major metro areas in patents per worker, according to an analysis by the Brookings Institution. As the government-related boom fades, Washington will need to improve on that score. Economists have found that two factors matter more than anything else when it comes to economic growth: high levels of patent production and of college graduates.
On a warm day this fall, Crowell checked in on two of his cybersecurity companies. His first stop was Lookingglass Cyber Solutions, a 30-person start-up. The company’s technology scans the Internet, collecting real-time intelligence on the most aggressive cyberattackers, and feeds the information to clients. Most of Lookingglass’s software engineers are refugees from big defense companies, where they earned significantly higher salaries. Lookingglass offered stock options and the promise of more creative work.
“It’s ponderous at the big companies,” said Jessie Link, 35, who started at General Dynamics. “You are locked in a box with no windows, building systems on behalf of the government.”
Lookingglass’s office resembles a messy college dorm room or a typical Silicon Valley start-up. There’s a drum set, stacks of video games, posters of teeny-bopper stars and, in the kitchen, a kit for brewing homemade beer.
Even at Lookingglass’s off-site board of directors meeting, Crowell is the only one wearing a tie. “I probably should have worn a T-shirt with something obscene on it,” he joked.
Crowell’s other start-up cybersecurity company, Centripetal Networks, manufactures a device that filters the Internet, blocking attackers after they’ve been identified, ideally by Lookingglass. His goal is to get the companies to work more closely together.
Crowell rushed from Lookingglass to a Centripetal board meeting. Centripetal got its start with about $1 million of research money from the Department of Homeland Security. Now the company is trying to sell its device, which packs the computing power of about 60 laptops, to big Internet service providers and the financial services industry.
Around the table at the Centripetal board meeting were traditional Washington players: former top officials from the CIA, the NSA and the Defense Intelligence Agency. There were also some newcomers, including the former chief executive of a Fortune 500 financial services company. The Centripetal chief executive, Steven Rogers, flashed a slide showing the results of a recent pilot his company ran with a global financial institution. A menacing red dot hovered over a map of China. “This dot represents 258,000 packets of data flowing out of the bank’s network to known bad guys,” he said.
For the next hour, the board debated how to convince skeptical executives that the threat posed by the red blob was real. “These are people who don’t want to know they have a problem,” Crowell said. He suggested giving away a free version of the Centripetal technology that would alert companies to attacks but wouldn’t block them.
“I prefer that when you give something away for free you get a taste, but that it doesn’t solve your problem,” Crowell said. Everyone agreed.
Crowell’s goal is to turn one of his start-ups into a “fundmaker,” a company that he can sell for more than $1 billion.
There are no guarantees that Washington can produce those kinds of wins. In the late 1990s, a surge of optimism spurred by the growth of Northern Virginia’s America Online failed to produce lasting growth. If the current government budget cuts don’t stick, the lure of easy federal contracting money could quash Washington’s nascent entrepreneurial spirit.
But there are signs of change: Washington is among the country’s leaders in venture-capital deals. The region’s business dynamism — a measure of how many new companies start and fail each year — is on the rise, suggesting a more entrepreneurial culture. One other sign is Crowell, a short man with neatly parted white hair and a $100 million investment fund, prowling Northern Virginia’s office parks, looking for a spark of innovation. He’s sure it’s there.
Julie Tate and Ted Mellnik contributed to this report.