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Business Observer Wednesday, Nov. 25, 2009 10 years ago

Backward economics

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The productive trend toward regionalism is being undermined by the protectionism of local preference ordinances hoped to keep more tax dollars circulating within communities. The trade-off is higher costs and lower quality for public projects.
by: Jay Brady Government Editor

Ordinances giving preference to local contractors seeking government work have been sprouting like kudzu along the Gulf Coast.

But these laws are coming under increasing fire for being a local version of protectionism, reversing the trend toward regional approaches.

Critics contend they smother competition and limit the talent pool while raising the costs and lowering the quality of public projects.
The ordinances, popular with many local politicians and contractors, are meeting with increased opposition from purchasing administrators and economists, and even some politicians and contractors. Tampa Mayor Pam Iorio, for one, has been quoted calling the ordinances “parochial.”

So far, Collier, Lee, Charlotte, Sarasota, and Manatee counties have such laws on the books and Pasco County is considering it. Hillsborough County is looking into it as is its Aviation Authority. Cities have them too, including Sarasota and Palmetto, but the city of Tampa firmly rejected it and wants state help reining them in.

The ordinances generally add points to improve the bid of a contractor based in the community, putting contractors from elsewhere — often just in the next county — at a disadvantage. The politically attractive goal during the economic downturn is to keep local government tax dollars circulating locally.

Mark Perry, a professor of economics at the University of Michigan at Flint, now on sabbatical with the American Enterprise Institute, says, “From an economic standpoint it doesn't make any sense at all.” Perry refers to such protectionist practices — including “buy local” programs promoted by chambers of commerce — as “backward economics,” a play on the “Backyard Economics” discount card program.

Regional groups such as the Tampa Bay Area Regional Transportation Authority (TBARTA), the Tampa Bay Partnership and the new Southwest Florida Economic Development Partners boast about the efficiencies and productiveness of regional collaboration.

Yet, the local government agencies that support regional efforts are some of the same ones restraining competition with local preference ordinances.

But Stuart Rogel, president and chief executive officer of the Tampa Bay Partnership, sees both the philosophic conflict and the economic downside to local preference ordinances. “They work against the local business because it typically winds up that the community doesn't get the service or the quality they need,” he says. “Businesses don't work on jurisdictional lines, they work along market lines.”

Rogel's views have strong backing from not only the city of Tampa and Pinellas County, who have so far rejected the urge to embrace local preference, but also from Associated Builders and Contractors Florida Gulf Coast Chapter and the National Institute of Government Purchasing.

A 1995 NIGP resolution states the organization “is opposed to all types of preference law and practice and views it as an impediment to cost effective procurement of goods, services and construction in a free market enterprise system.”

And on Nov. 12, the Tampa City Council, persuaded by Associated Builders and Contractors' arguments, rejected pursuing a local preference ordinance. The council directed a resolution be drafted and sent to the state urging lawmakers to “break down barriers created by local preference” — in the words of city purchasing director Greg Spearman — and seek to discourage cities and counties from enacting local preference ordinances.

Mayor Pam Iorio, who didn't vote on the resolution, opposes local preference on the grounds that it sends the wrong message to out-of-town businesses that may someday relocate and makes the city look small and parochial, instead of global.

Regionalizing local
Arguably, no Gulf Coast public agencies have more global connections than the Hillsborough County Aviation Authority. Yet, after awarding an insurance contract this month to a large Chicago firm rated as the best qualified bidder ahead of two local companies, the authority asked its staff to look into drafting a local preference policy.

That came on the heels of an Oct. 15 letter to Tampa Bay local governments signed by Chairman Ken Hagan on behalf of the county commission. Hagan's letter states the commission is considering local presence as a factor in awarding contracts, and asks if there was “interest in creating a 'regional presence' criterion that would be incorporated by all Tampa Bay area governments in their procurement process.”

Interestingly, the oxymoronic regional approach to local protectionism is gaining steam, though “regional” seems to have nearly as many definitions as there are local preference ordinances.

Sarasota and Charlotte Counties each adopted a local preference ordinance in February. In July, Sarasota County amended its ordinance to allow businesses in the adjoining Manatee, Charlotte and DeSoto counties to be defined as a local business, but under relatively strict conditions tied to where minimum percentages of employees live and work.

Charlotte County then reciprocated to include Sarasota County in its local preference ordinance. Ironically, Charlotte's ordinance seems to fly in the face of the purchasing division's objectives of “wide competition” and a “competitive” procurement process.

Another head-scratcher is that Charlotte County's latest ordinance includes a “Whereas” clause stating, “the Board of County Commissioners of Charlotte County recognizes that the local Charlotte County economy is part of a larger regional economy.” But when it comes to its ordinance, other than the quasi-reciprocity with Sarasota County, it fails to recognize its other fellow members of the Southwest Florida Regional Planning Council (SWFRPC): Lee, Glades, Hendry and Collier counties.

But Charlotte also now treats DeSoto County companies as local. Two Charlotte officials contacted — a commissioner and a purchasing official — don't know why a reciprocal arrangement does not exist between Charlotte and Lee other than that Sarasota County asked Charlotte officials to adopt the reciprocity amendment.

DeSoto County also adopted a local preference ordinance in October that gives greater preference to companies based in the county, but also gives a second class citizen level of preference to “Regional Bidders” meaning companies from the adjacent counties of Sarasota, Hardee, Manatee, Highlands and Charlotte.

Manatee's local preference ordinance extends reciprocity to the five counties with which it shares boundaries, thus the extent of “local” competition is often determined by how many counties are adjoining.

On the other end of the spectrum, Lee and Collier counties set up an interlocal agreement to treat each other's companies as local businesses, but have so far ignored other counties.

Also eyebrow-raising is that Charlotte recently entered into an economic development partnership with Sarasota, Lee, and Collier counties. Hendry, Glades and DeSoto may also participate in the future.

Sarasota County finds itself in a somewhat unique situation geographically. It is the northernmost county of the Southwest Florida Economic Development Partners and the southernmost partner of the Tampa Bay Partnership. As such, its regional relationships through its membership in these organizations extend to 13 counties from Citrus to Collier.

Devilish details
The devil is in the details of the preference ordinances and purchasing manuals. These documents layout the rules for just how much preference local firms receive.

Firms meeting the widely varying definitions of “local” can receive anywhere from a 3% advantage to more than 12%. And in some cases, local companies get a second chance to outbid a non-local business that submitted the lowest price bid.

In Charlotte County, when a local business's bid is within 5% of the lowest price submitted by the non-local business, then the local business gets “the opportunity to submit, a best and final bid equal to or lower than the amount of the low bid previously submitted by the non-local business within five days of being notified ....”

DeSoto County followed suit with similar language but with more weight given to county-based firms over “Regional Bidders”. As such, it amounts to unequal reciprocity between Charlotte, DeSoto and Sarasota counties.

Collier County's ordinance doubles the percentage allowing the practice when the local business's bid is within 10% of the price submitted by the non-local business. Its ordinance refers to the practice as the “local price match option”.

This gives all the appearance of government-backed bid shopping — defined by one legal definitions source as “the practice of divulging a contractor's or subcontractor's bid to other prospective contractor(s) or subcontractor(s) before the award of a contract in order to secure a lower bid. Lowered bids may lead to cost cutting in the construction process, primarily in materials and labor, which may lower the quality of the work performed.”

Bid shopping is illegal in seven states, but not in Florida, according to an attorney with the Associated Builders and Contractors. If that's not enough to get the attention of state lawmakers, Tampa's resolution may put the legislative sausage maker in gear.

Legislative preference
Barton Malow Company's Nov. 18 protest of a $25 million construction contract awarded by Sarasota County on the basis of local preference may also draw legislators' notice.

The protest of the Baltimore Orioles' spring training stadium contract award may delay the project long enough to jeopardize the tight construction schedule.

Lakewood Ranch contractor Halfacre Construction maintains it's a 40% joint venture partner of Turner Construction, a mammoth New York City-based firm with a Tampa office that won a tie-breaker to snag the contract.

But according to the Barton Malow protest documents, Turner/Halfacre is not a legal joint venture and as such should not have been entitled to local business preference points.

Turner/Halfacre received 10 bonus points (+12.5%) putting it into a tie with Barton Malow, the only company to receive a perfect score from evaluators and the firm favored by the Orioles. For now, Turner/Halfacre gets the contract because a tie, as is typical with local preference, goes to the more local company. Barton Malow also argues that there is no legal authority for the local business preference to make and then break a tie.

Barton Malow, with an Orlando office, is partnering with Tampa general contractor Mathews Construction and two other subconsultants. But Mathews' participation didn't qualify its team as local despite having a Charlotte County office, and that's partly the basis of the protest. Mathews was treated by Barton Malow as a subcontractor but maintain that Mathews' and the other local subcontractors involved qualified the Barton Malow proposal to receive four points.

With all these issues surrounding local preference and Tampa's resolution calling for state action, it may end up both in court and in the lap of the Legislature's Policy and Steering Committee on Commerce and Industry and the Community Affairs Committee.

Both are chaired by Sen. Mike Bennett, R-Bradenton, an electrical contractor whose district includes parts of Manatee, Sarasota, DeSoto, Charlotte and Lee counties. That could spell the beginning of the end for local preference.

“I do not like local preference,” Bennett says. “The end result is it's not good for competition. It doesn't necessarily give the taxpayer the best bang for the buck. It does continue to spread. When one installs it, the rest install it. It can hurt the citizens and taxpayers around the state of Florida.”

Jay Brady covers state and local government issues. He can be reached at [email protected], or at 941-362-4848.

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