Storm Brewing Over Federal Per Diem Room Rates

The Washington, D.C.-based Government Services Administration (GSA), the federal arm of the government charged with setting per diem travel and lodging rates for government travelers, is currently re-evaluating its methodology for setting those rates. And, hoteliers across the country are literally on the edge of their seats as they await word of the new rates for the fiscal year 2013, which go into effect Oct. 1, 2012. If adopted, the new process would see already significantly reduced federal room rates plummet by as much as 30 percent in some markets, crippling business for those hotels that rely heavily on government business.

If you thought the hotel industry fought back hard against new ADA requirements, which went into effect earlier this year, and which the association considered prohibitive for some of its members (such as the requirement that all hotel pools be equipped with a lift chair for disabled guests), that battle pales in terms of ferocity. "The GSA has created a tempest," said Shawn McBurney, senior vice president of governmental affairs for the Washington, D.C.-based American Hotel & Lodging Association. "If they move ahead with this new methodology, despite all the adverse effects we have made clear to them, we will be screaming from the rooftops."

Per diem rates were first established in 2003, after an eight month study. At present, the GSA receives average daily rate data from Smith Travel Research on more than 12,000 U.S. hotels, not including those in the luxury or economy sectors, which is analyzed and reduced by 5 percent. Under the new methodology, however, the GSA would use only the
lowest average daily rates for the remaining industry sectors to determine its new per diem structure. "What they will be doing is creating an artificially low per diem rate," said McBurney. What's more, he noted, the GSA will end up shooting itself in the foot, because when federal travelers can't find room rates at the per diem allowed, they will be forced to stay further out from their meeting location, which means they will have to shell out more for transportation costs. (The Hotel Insider contacted the Society of Government Meeting Professionals, which numbers close to 4,000 strong, for comment, but at press time had not heard back from them.)

The GSA has been under intense investigation in recent months. Accusations of lavish spending during a 2010 Las Vegas conference resulted in the abrupt resignation of its chief, Martha Johnson, and the firing of two of her top deputies. The new per diem methodology process is part of the organization's attempt at reigning in ballooning government travel. In a statement, the GSA said it was reviewing per diem rates for fiscal year 2013, and it was "decreasing spending on agency travel in fiscal year 2013 by 30 percent compared to fiscal year 2010."

However, any decrease in federal per diem rates could not come at a worse time for government travelers, as hotel rates and occupancies are forecasted to continue to rise. According to Smith Travel Research, the average daily rate for the first five months of this year increased 4 percent, over the same period in 2011. In addition, with renovations and upgrades in full swing across the industry, rates are expected to keep inching up. That, coupled with the fact that very little new supply is being added to the room pool, means government travelers will find themselves doubly squeezed.

In June, during Marriott International's second quarter earnings report conference call, president and CEO Arne Sorenson said because of strong group bookings and increased corporate travel, the company was looking at setting rate increases in the "high single digit percentages." Sorenson also said Marriott would be closely monitoring the GSA as it considers making cuts to the per diem rates for the 2013 fiscal year. "Depending on how aggressive they are, they may be pricing at a level where [government travelers] will not be able to stay at full-service hotels, and they certainly will not be able to stay at full-service hotels in city centers," said Sorenson.

UPDATE: To the relief of the hotel community, the GSA has chosen to freeze the current rates for fiscal year 2013 (which go into effect Oct. 1, 2012). Read more about the decision here.