Fiscal realities and Government contracting (Part 2): Understanding the purchasing connection

Posted on September 8, 2011

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The drop in real estate values and its impact on property taxes is easy to envision. But that’s just part of the problem. Deeper seated is linkage between housing construction, and the many ways that home sales and building activity affect state and local government revenues.

from the November 2010 Governing magazine article “The Housing Market’s Effect on Government Finance” by John E. Petersen


I have to say that one does not immediately nor for that matter naturally equate a declining housing market with changes in  government purchasing policy.  It is after all on the surface not a familiar pairing along the lines of salt and pepper or as the old song goes love and marriage.  In fact, it would be safe to say that on both the buyer as well as seller side of the transaction fence, such a consideration would not warrant any real cause and effect contemplation.

Of course such myopathy would be understandable given the fact that we have and often still do operate within a siloed view of the world in which the reactive origins of a spending freeze or buyer layoffs would elude even the most informed in our profession.

This being said, there is nonetheless a very real and imminent connection between a troubled housing market and purchasing that is worthy of our attention in that governments cannot spend (or continue to spend) money they do not have.

Plunging real estate values have devastating consequences for government finance.

While many may not have the patience for statistical analyses, Petersen does a great job at breaking down the important data to its most basic form, and in the process making it both accessible and understandable to the reader.

Simply put, in 2005 1.28 million new homes were sold at an average price of $290,000, for a total sales volume of $371 billion.  In 2010, the number of new home sales plunged to 288,000 at an average price of $244,300 or $70.3 billion in total sales.  A plunge as Petersen reported of 80 percent!

How does this tie into government procurement?

Putting aside the overall effect of the declining housing market on the general economy in terms of lost jobs and property foreclosures, in terms of today’s post it is the loss of tax revenues that are most noteworthy.

According to the Nelson A. Rockefeller Institute of Government, Petersen reports that state taxes in fiscal 2010 were about 17 percent below collections in 2008, and property taxes showed a year-to-year decline of about 1 percent.  Again, you cannot continue to spend money that you no longer have . . . even if you are a government entity.

Feds see biggest tax revenue drop since 1932 (MSNBC)

The interesting paradox here is that the many suppliers who, during the early days of the most recent economic meltdown, began to revisit public sector business as a means to replace declining private sector sales, may find that the somewhat cumbersome RFP process is the least troubling obstacle to doing business with a government.

This is especially true given the historic propensity on the part of government buyers to look at cost as being the sole criteria by which their job performance is being measured.  With less funds this Walmart roll back the prices mindset, is likely to have an even greater influence on the open bidding process.

It also means that suppliers will have to work that much harder to get the same piece of a diminishing revenue pie in earning what government contracting expert Judy Bradt referred to as a legitimate buyer preference.  An undertaking that is particularly challenging given that all levels of government will be looking to dramatically reduce costs in an attempt to balance budgets that are quite simply way out of control.  A reality it should be noted, that is not limited to the U.S.-based governments, as others are in the midst of pursuing similar fiscal strategies that in some instances have even the OECD (a long time advocate for government cutbacks) concerned that the spending cuts may be going too fast.

In the May 26th, 2011 Guardian.co.uk article Government spending cuts may be going too fast, OECD warns, the Organisation for Economic Co-operation and Development (OECD) indicated that there was “scope for slowing the pace,” of spending cuts being made by the UK government.  This directional shift in recommendations was based on the projected growth in the UK economy which, like the US economy, has to this point in time at least, been somewhat uneven at best.

In the end, the dynamics of the ill winds that is the current economic state of the union means that there are going to be considerable changes that will by necessity take place over the coming months and perhaps years.

Once the true financial picture has been accepted as a long-term fact versus being a temporary blip, then and only then can government purchasing be retooled to drive best value decision-making.  This includes shedding the illusionary belief that a purported level playing field is one of broad competition versus strategic purchasing based on meritorious supplier strengths.

In Part 3 of the series we will examine the changing role of the government procurement professional.

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