Washington area hotels are scrambling to book conferences not related to the federal government, such as this Capella University colloquium held at the Crystal City Hyatt in Arlington. (Jeffrey MacMillan/Capital Business)

It started with a muffin.

The lowly baked good, a staple of business breakfasts, became an unlikely symbol of government overindulgence when a government audit released in the fall of 2011 claimed that the Justice Department had spent $4,200 for 250 muffins at $16 a pop during a training conference at the Capital Hilton.

Nevermind that the report was later revised to show that the price had been closer to $14 and the tab included coffee, juice and fruit as well. The fallout has helped crumble an entire industry.

Area hotels say they have lost millions of dollars this year as federal agencies slash meeting-related budgets and cancel travel plans.

The U.S. government has cut more than $600 million in conference expenses in the past six months, as probes of extravagant spending keep coming.

A few months after “muffingate,” there were reports of a $82,300 General Services Administration meeting in Las Vegas that featured a clown and mind reader. Another investigation revealed that the Department of Veteran Affairs had spent more than $5 million on two conferences in Orlando.

In the weeks following the GSA scandal, the agency’s chief resigned and the federal government began cutting costs. President Obama asked agencies to whittle down conference spending by at least 30 percent. The government began canceling meetings and cutting travel plans, with hopes of cutting a total of $2 billion in conference-related costs by October 2013.

At the Hyatt Regency in Crystal City, government cancellations began rolling in almost immediately and have accounted for more than $1 million in lost business this year. Few agencies are booking meetings, and fewer yet are showing up, said General Manager Jean-Marc Dizard.

“It has been very hurtful for us,” Dizard said. Government agencies “prefer to pay the cancellation fee rather than pay for the conference or food or beverages.”

In August, the GSA said it had canceled 47 conferences and cut $11 million in related spending since April. The Labor Department is in the process of eliminating 100 conferences, and the State Department has announced that it will increasingly hold meetings in government facilities instead of hotels.

“It’s had a devastating impact,” said Erik Hansen of the U.S. Travel Association. “These types of across-the-board cuts and cancellations are having real economic impacts.”

As the Washington area braces for a possible “fiscal cliff,” the sweeping effects of conference-related spending cuts are a glimpse into just how big abrupt reductions in federal spending can ripple through the local economy.

The U.S. Army cut back on its participation at this year’s Association of the U.S. Army’s Annual Meeting & Exposition, held earlier this month at the Walter E. Washington Convention Center. (Jeffrey MacMillan/Capital Business)

To make up for the widespread loss of government business, hotels say they are increasingly wooing trade associations, nonprofits and corporations to fill meeting rooms. The Madison Hotel in Washington recently hired sales managers to focus on law firms and pharmaceutical companies. Other hotels have set their sights on education-related conferences or wedding receptions.

“We’re looking to the financial community, law firms, gas and oil, food services,” said Michael Snapkoski, director of sales for the Lansdowne Resort in Leesburg. “Anything not associated with the government seems to be doing okay.”

Cancellation impact

In the past year, the government has spent millions of dollars in cancellation fees, according to Steve Rudner, a lawyer who represents hotels in contract disputes.

The exact penalty agencies pay depends on many factors, he said — the size of the conference, for example, or the amount of advance noticed involved — but cancellation fees can easily total tens of thousands of dollars for one event.

“We’ve had instances where government cancellations have crippled hotels,” Rudner said. “And in those cases, at least there’s a way to get back some of that money.”

But now even that buffer may be eroding. Hotel managers say the government is increasingly negotiating contracts that do not have penalties for last-minute cancellations or unfilled rooms.

“What we’re seeing is a lack of commitment,” said John Rish, general manager of the Hilton Garden Inn in downtown Washington. “They’ll say, ‘We need a ballroom space. We want to have an event, but we can’t sign any cancellation clauses.’ When they do sign a contract, it’s a contract that has little-to-no teeth to it.”

When conferences do take place, spending on meals and audio-video equipment is often the first to go.

“We still have clients booking meetings but it’s no food, no beverages, just the space,” said Joi Hawkins, who handles government sales at The Madison. “After the GSA scandal, nobody wants to be the agency that ends up doing the wrong thing.”

Some hotels, including the Westin Arlington Gateway and the National Convention Center in Leesburg, have created new menus that accommodate the government’s price limits of $18 for lunch and $30 for dinner.

“There’s much more scrutiny now,” said Paul Zalocha, general manager of the Westin Arlington Gateway. “It’s all about staying within the government’s per diem.”

Higher-end hotels say they are being hit twice as hard: Not only is the government cutting back on conference spending, it is also trying to send a message of austerity.

At the W Hotel in Washington, General Manager Ed Baten says government-related conference sales are down about 40 percent from last year.

“When and where [the government] has meetings, they are choosing places that aren’t perceived as being opulent,” he said. “Even though we may have the exact same financial package as another hotel, the perception of the W Hotel is that it’s luxurious. So they end up going somewhere else.”

Government-related business used to bring in more than $1 million a month in revenue for the National Conference Center in Leesburg.

Now bookings have come to a standstill, General Manager Kurt Krause said.

“Since April, it has diminished to almost nothing,” he said.

Like many other hotel managers, Krause said he hasn’t had to lay off any employees yet — the turnover rate in the hospitality industry has made it easy to cut positions solely through attrition.

But many say they fear that may change if federal spending cuts become more severe.

“We’ve had to cut back on everything,” Krause said. “We’re reducing work hours, doing everything we can, but the federal government was 60 percent of our business. There’s not much else we can do.”

Contractors follow suit

There was a time when the Lansdowne Resort in Leesburg was filled with government contractors. Not so much anymore, said Snapkoski, the hotel’s sales director.

As the federal government tightens its purse strings, contractors are following suit. More than 10 government contracting conferences have been scrapped — some with less than a month’s notice — at the resort since the beginning of the year.

“Meetings are being cancelled all the time — some because of funding, others because of guilt,” Snapkoski said. “Contractors feel like it gives the wrong message to keep having meetings right now.”

Indeed, conference centers and hotels say they are seeing trickle-down effects of restricted government spending.

The U.S. Army, for example, spent more than $10 million a year at the Association of the U.S. Army’s Annual Meeting & Exposition in the District in 2010 and 2011. This year, the annual conference was a more staid affair: costs were limited to just over $1 million and traveling attendees to were capped at 400, down from about 2,500 last year, according to Army spokesman Mike Brady.

“It’s a unique year,” said AUSA spokesman David Liddle. “Everybody gets that there’s been a lot of pointing and some outrage at other entities.”

Even so, many hotel managers say they expect the spending cuts to carry into the new year, whether or not a new presidential administration takes over.

“There’s going to be even more self-censorship that’s going to happen,” said David Adler, founder of BizBash Media, a publication that specializes in the events industry. “We’re seeing people get cold feet with these meetings. They’re just not coming anymore.”